INTERSTATE HOTELS CO, S-1/A, 1996-12-06

INTERSTATE HOTELS CO
S-1/A, 1996-12-06
HOTELS & MOTELS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 6, 1996

REGISTRATION NO. 333-15507
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

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

AMENDMENT NO. 2
TO

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

INTERSTATE HOTELS COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
PENNSYLVANIA 7011 25-1788101
(State of incorporation) (Primary Standard (I.R.S. Employer
Industrial Classification Identification No.)
Code Number)
</TABLE>

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

FOSTER PLAZA TEN
680 ANDERSEN DRIVE
PITTSBURGH, PENNSYLVANIA 15220
(412) 937-0600
(Address and telephone number of Registrant's principal executive offices)
------------------------

MARVIN I. DROZ, ESQ.
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
FOSTER PLAZA TEN
680 ANDERSEN DRIVE
PITTSBURGH, PENNSYLVANIA 15220
(412) 937-0600
(Name, address and telephone number of agent for service)

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

Copies to:

<TABLE>
<S> <C>
ROBERT A. PROFUSEK, ESQ. PATRICK J. FOYE, ESQ.
DAVID J. LOWERY, ESQ. SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
JONES, DAY, REAVIS & POGUE 919 THIRD AVENUE
599 LEXINGTON AVENUE NEW YORK, NEW YORK 10022
NEW YORK, NEW YORK 10022 (212) 735-3000
(212) 326-3939
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this Registration Statement becomes effective.

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, check the following box. [ ]

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 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. [ ]
------------------------

THE REGISTRANT 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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

INTERSTATE HOTELS COMPANY
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K AND RULE 404

<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS BY CAPTION
----------------------- ---------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of
Prospectus............................. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus.......................... Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information, Risk Factors and
Ratio
of Earnings to Fixed Charges........... Prospectus Summary; Risk Factors
4. Use of Proceeds.......................... Prospectus Summary; Use of Proceeds;
Capitalization
5. Determination of Offering Price.......... Outside Front Cover Page of Prospectus;
Underwriting
6. Dilution................................. *
7. Selling Security Holders................. *
8. Plan of Distribution..................... Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to be
Registered............................. Prospectus Summary; Description of
Capital Stock
10. Interests of Named Experts and Counsel... *
11. Information with Respect to the
Registrant............................. Outside Front Cover Page of Prospectus;
Inside Front Cover Page of Prospectus;
Prospectus Summary; Risk Factors; The
Company; Recent Developments; Dividend
Policy; Price Range of Common Stock;
Capitalization; Selected Financial and
Other Data; Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Indebtedness of
the Company, Business and Properties;
Management; Principal Shareholders;
Certain Relationships and Related
Transactions; Description of Capital
Stock; Shares Eligible for Future Sale;
Underwriting
12. Disclosure of Commission Position on
Indemnification for Securities
Act Liabilities........................ *
</TABLE>

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

* Such item is inapplicable, or the answer thereto is in the negative, and is
omitted from the Prospectus.
<PAGE> 3

EXPLANATORY NOTE

This Registration Statement covers shares of Common Stock to be offered in
a public offering in the United States and Canada (the "U.S. Offering") and
shares of Common Stock to be offered in a concurrent public offering outside the
United States and Canada (the "International Offering"). The complete form of
prospectus relating to the U.S. Offering (the "U.S. Prospectus") follows
immediately after this explanatory note. The form of prospectus relating to the
International Offering (the "International Prospectus") will be identical in all
respects to the U.S. Prospectus, except that the International Prospectus
contains different front and back cover pages and the section titled
"Underwriting." The form of the U.S. Prospectus included herein is followed by
those pages to be used in the International Prospectus which differ from those
in the U.S. Prospectus. Each of such pages included herein is labeled "Alternate
Page for International Prospectus."
<PAGE> 4

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION OF THESE SECURITIES UNDER
THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED DECEMBER 6, 1996

PROSPECTUS
[LOGO]

4,000,000 SHARES
INTERSTATE HOTELS COMPANY

COMMON STOCK
------------------------
All of the shares of Common Stock of Interstate Hotels Company (the
"Company") are being offered by the Company. Of the 4,000,000 shares of Common
Stock offered, 3,400,000 shares are being offered hereby in the United States
and Canada by the U.S. Underwriters and 600,000 shares are being offered in a
concurrent offering outside the United States and Canada by the International
Underwriters. The offering price and aggregate underwriting discount per share
are identical for both offerings (the "Offering"). The Common Stock is listed on
the New York Stock Exchange (the "NYSE") under the trading symbol "IHC." On
November 12, 1996, the last reported sale price of the Common Stock on the NYSE
was $25 5/8 per share.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

<TABLE>
<CAPTION>
===========================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................... $ $ $
- -----------------------------------------------------------------------------------------------------------
Total(3).................................... $ $ $
===========================================================================================================
</TABLE>

(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."

(2) Before deducting expenses payable by the Company estimated at $ .

(3) The Company has granted the several U.S. Underwriters and the several
International Underwriters 30-day options to purchase up to an additional
510,000 and 90,000 shares of Common Stock, respectively, to cover
over-allotments. If all such shares of Common Stock are purchased, the total
Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters subject to
prior sale, when, as and if issued to and accepted by them, subject to approval
of certain legal matters by counsel to the Underwriters. The Underwriters
reserve the right to withdraw, cancel or modify such offer and to reject orders
in whole or in part. It is expected that delivery of the shares of Common Stock
will be made in New York City on or about , 1996.
------------------------
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
MORGAN STANLEY & CO.
INCORPORATED
SMITH BARNEY INC.
CREDIT LYONNAIS SECURITIES (USA) INC.
------------------------
The date of this Prospectus is , 1996.

<PAGE> 5
PORTFOLIO OF HOTELS
- ------------------------------------------------------------------------------

(AS OF OCTOBER 15, 1996)

Map of the continental United States, Mexico and the Caribbean denoting the
Company's headquarters, hotels owned at IPO, hotels acquired since the IPO and
managed/serviced hotels.

Map of Central America denoting a Managed/Serviced Hotel of the Company
Map of Russia denoting a Managed/Serviced Hotel of the Company
Map of Israel denoting a Managed/Serviced Hotel of the Company
Map of Thailand denoting a Managed/Serviced Hotel of the Company
Map of Hawaii denoting seven Managed/Serviced Hotels of the Company

IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 6

PHOTO

EMBASSY SUITES PHOENIX NORTH
PHOENIX, ARIZONA (OWNED)

PHOTO PHOTO
THE CHARLES HOTEL HOTEL TVERSKAYA
CAMBRIDGE, MASSACHUSETTS (MANAGED) MOSCOW, RUSSIA (MANAGED)

PHOTO

DON CESAR BEACH RESORT
ST. PETERSBURG BEACH, FLORIDA
(MANAGED WITH A MINORITY INTEREST)
<PAGE> 7

PHOTO

COLORADO SPRINGS, COLORADO (OWNED)

PHOTO PHOTO

DENVER HILTON SOUTH WESTIN RESORT MIAMI BEACH
GREENWOOD VILLAGE, COLORADO (OWNED) MIAMI BEACH, FLORIDA (OWNED)

PHOTO

RADISSON PLAZA HOTEL SAN JOSE AIRPORT
SAN JOSE, CALIFORNIA (OWNED)

PHOTO

WARNER CENTER AIRPORT
WOODLAND HILLS, CALIFORNIA (OWNED)
<PAGE> 8

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus. In this Prospectus, except as otherwise specified herein,
(i) the term the "Company" refers to Interstate Hotels Company, a Pennsylvania
corporation, its subsidiaries and its predecessors and certain of their
affiliates, (ii) all information assumes that the Underwriters' over-allotment
options will not be exercised, (iii) all statistics relating to the Company's
portfolio hotels are as of October 15, 1996, and (iv) all lodging industry
statistics (other than Company statistics) are from, or derived from,
information published or provided by Smith Travel Research, an independent
industry research organization. Smith Travel Research has not provided any form
of consultation, advice or counsel regarding the Offering contemplated hereby,
and Smith Travel Research is in no way associated with the Offering.

THE COMPANY

The Company is the largest independent hotel management company in the
United States based on total portfolio hotel revenues and number of guestrooms
and properties managed. The Company manages or performs related services for 161
hotels, with 36,631 rooms, located in 28 states in the United States and in the
District of Columbia, Canada, Mexico, Israel, the Caribbean, Thailand, Panama
and Russia. The Company owns or has a controlling interest in 23 of these
properties (the "Owned Hotels"), all of which are upscale or luxury hotels.

The Company completed its initial public offering (the "IPO") in June 1996
and acquired 14 Owned Hotels in connection therewith (the "IPO Acquisitions").
Since the IPO the Company has aggressively pursued acquisitions of new hotels
and management contracts, acquiring nine full service upscale or luxury hotels
containing a total of 2,223 rooms for a total acquisition cost, including
estimated closing costs, capital expenditures and initial working capital
("Total Acquisition Cost"), of $198.2 million (the "Post-IPO Acquisitions") and
entering into agreements to acquire two additional full service upscale hotels
containing a total of 655 rooms for a Total Acquisition Cost of $66.0 million.
The Company has also acquired a hotel management business consisting of
management contracts and leases covering 56 mid-scale and upper economy hotels
containing a total of 6,587 rooms. The Company believes that its competitive
advantages, including its ability to source acquisition opportunities, its
flexible branding strategy, the strength and depth of its management team, and
its ability to access additional capital, position it to take advantage of
continued growth opportunities as the lodging industry in the United States
continues to consolidate.

For the nine months ended September 30, 1996, 83.8% of the Company's net
management revenues were derived from upscale or luxury hotels and resorts,
including the Owned Hotels. The Company is the largest franchisee of upscale
hotels in the Marriott(R) system, owning, managing or providing services to 39
hotels, with 13,517 rooms, bearing the Marriott(R) flag. Consistent with the
Company's multiple branding strategy, the Company also manages hotels under many
other major full service brand names, including Doubletree(TM), Embassy
Suites(R), Hilton(TM), Holiday Inn(R), Radisson(TM), Sheraton(TM) and
Westin(TM), as well as under the Company's own Colony(R) trade name. Among the
well-known hotels managed by the Company are: The Charles Hotel at Harvard
Square in Cambridge, Massachusetts; the Don CeSar Beach Resort in St. Petersburg
Beach, Florida; the Hay-Adams Hotel in Washington, D.C.; the Westin Bonaventure
in Los Angeles, California; Marriott's Casa Marina Resort in Key West, Florida;
the Marriott at Sawgrass Resort in Ponte Vedra Beach, Florida; and the Westin
Resort Miami Beach (formerly the Doral Ocean Beach Resort) in Miami Beach,
Florida. The Company also operates in the mid-scale, upper economy and budget
segments of the lodging industry.

Since its founding in 1961 to own and operate a single motor lodge in
northwestern Pennsylvania, the Company has achieved consistent annual growth,
even through industry downturns. The total revenues of the hotels to which the
Company provided management or related services increased from $514 million in
1991 to almost $1.1 billion in 1995, an average annual compound growth rate of
19.7%, and were $982.5 million for the first nine months of 1996 as compared to
$779.2 million for the first nine months of 1995. Since 1991, the Company's
portfolio of hotels has increased from 49 to 161. The Company's management and
related revenues grew from $17.6 million in 1991 to $45.0 million in 1995, an
average annual compound growth rate of 26.5%, and were $35.8 million for the
first nine months of 1996 as compared to $32.9 million for the first nine months
of 1995. Pro forma total revenues for the Company's 23 Owned Hotels were $201.4
million for the first nine months of 1996 as compared to $184.4 million for the
first nine months of 1995. The Company's net

1
<PAGE> 9

income before income tax and extraordinary and non-recurring items increased at
an average annual compound growth rate of 69.8% from $1.9 million in 1991 to
$15.8 million in 1995, and was $22.3 million for the first nine months of 1996
as compared to $12.5 million for the first nine months of 1995.

The Company believes that its prospects for continuing sustainable growth
are enhanced by a number of competitive advantages, including: (i) a proven
ability to source management contract and property acquisition opportunities
resulting from the Company's large and geographically diverse hotel portfolio;
(ii) excellent relationships with hotel investors and owners due to the
Company's disciplined management techniques and its track record of improving
the profitability of the hotels it manages; (iii) the Company's flexible
branding strategy, which permits the Company to own and operate multiple hotels
under different brands within the same geographic market and to operate more
opportunistically within existing and new markets than hotel companies committed
to particular flags; (iv) the Company's corporate infrastructure and the
operational synergies resulting therefrom, which permit the Company to lower the
unit costs of its services and assure the implementation of quality management
systems on a Company-wide basis; (v) the strength and depth of its management
team, the senior members of which have an average tenure of 23 years in the
lodging industry and 12 years with the Company; (vi) the stability of the
Company's cash flow resulting from the Company's large portfolio of hotel
contracts and the Owned Hotels; and (vii) the Company's conservative
capitalization and ability to access additional equity and debt capital to
finance future growth on a cost-effective basis.

The Company's Owned Hotels consist of 23 geographically diverse upscale
hotels, containing an aggregate of 6,621 rooms and operating under the Embassy
Suites(R), Hilton(TM), Holiday Inn(R), Marriott(R), Radisson(TM) and Westin(TM)
trade names principally in major metropolitan markets such as Atlanta, Boston,
Chicago, Denver, Fort Lauderdale, Houston, Los Angeles, Miami, Philadelphia,
Phoenix and Washington, D.C. The Owned Hotels produced superior operating
results in the first nine months of 1996, achieving an average occupancy rate of
74.9%, an average daily rate ("ADR") of $93.79, and room revenue per available
room ("REVPAR") of $70.23, as compared to an average occupancy rate of 74.1%,
ADR of $86.25 and REVPAR of $63.90 for the first nine months of 1995. The
Company expects further improvement in the results of operations of the Owned
Hotels as the effects of the repositioning of certain of them, and the
application of the Company's practices to all of them, are realized.

The Company's principal executive offices are located at Foster Plaza Ten,
680 Andersen Drive, Pittsburgh, Pennsylvania 15220, and its telephone number is
(412) 937-0600.

RECENT DEVELOPMENTS

In June 1996, the Company completed its IPO, which included the sale of
approximately 12.5 million shares of Common Stock at $21.00 per share. The net
proceeds of the IPO of $240.5 million, together with the net proceeds of a new
term loan, were used to acquire the IPO Acquisitions and two Post-IPO
Acquisitions, to repay existing indebtedness and for general corporate purposes.
Since the IPO, significant developments have included the following:

Post-IPO Acquisitions. The Company has acquired nine full service upscale
or luxury hotels containing 2,223 total rooms. The Total Acquisition Cost of the
Post-IPO Acquisitions was $198.2 million. These hotels are operated under
franchise affiliations with Embassy Suites(R), Hilton(TM), Holiday Inn(R),
Marriott(R), Radisson(TM) and Westin(TM). The Company expects the operating
results of the Post-IPO Acquisitions to benefit from renovations, capital
expenditures and market repositionings, the estimated cost of which is included
in the Total Acquisition Cost. The Company believes that all of the Post-IPO
Acquisitions represent attractive investments because they (i) are located in
major metropolitan or growing secondary markets and are well located within
these markets, (ii) were acquired at an average cost of $88,235 per room
excluding initial working capital, which the Company believes represents at
least a 30% discount to replacement cost, and (iii) have attractive current
returns and potential for significant revenue and cash flow growth through

2
<PAGE> 10

rebranding, rehabilitating and/or repositioning of the hotels and application of
the Company's disciplined management techniques.

Pending Acquisitions. The Company has entered into agreements to purchase
the Burlington Radisson in Burlington, Vermont and the Washington Vista in
Washington, D.C. for a Total Acquisition Cost of $66.0 million (the "Pending
Acquisitions"). The Burlington Radisson is an upscale hotel containing 255 rooms
located in downtown Burlington on the waterfront of Lake Champlain. The
Washington Vista is an upscale hotel containing 400 rooms located in the heart
of Washington, D.C. The Company plans to reflag the hotel as a Westin(TM) as
part of its repositioning strategy for the hotel. The Company expects to
complete both of the Pending Acquisitions in the fourth quarter of this year. A
portion of the net proceeds of the Offering will be used to consummate the
Pending Acquisitions. The Company also has other acquisitions under letters of
intent which are subject to the satisfaction of due diligence and other
conditions to closing and is evaluating other hotels for acquisition.

Equity Inns Transaction. On November 15, 1996, the Company acquired for
1,957,895 shares of Common Stock the hotel management business affiliated with
Equity Inns, Inc., a publicly traded real estate investment trust ("Equity
Inns"). This business, which consists of management contracts for eight
mid-scale and upper economy hotels containing 776 rooms, and long-term leases
for 48 mid-scale and upper economy hotels containing 5,811 rooms owned by an
affiliate of Equity Inns, was conducted by Trust Management, Inc. ("Trust
Management") and Trust Leasing, Inc. ("Trust Leasing") prior to the closing of
the transaction (the "Equity Inns Transaction"). Of these hotels, 14 were
acquired or opened by Equity Inns in 1995 and 11 were acquired or opened by
Equity Inns in 1996. The pro forma statement of income data included herein give
effect to the results of operations of these hotels only from the date of
acquisition or opening by Equity Inns and not as of January 1, 1995. Equity Inns
is obligated through November 15, 2001 generally to offer the Company the right
to lease and manage any hotel acquired or developed by Equity Inns. Many of the
hotels managed and leased by the Company as a result of the Equity Inns
Transaction are quality mid-scale and upper economy service and extended stay
hotels. The hotels are operated under premium franchise brands including Hampton
Inns(TM), Residence Inn(TM), Holiday Inn(R), Comfort Inn(TM) and Homewood
Suites(TM). Upon consummation of the Equity Inns Transaction, the Company became
the largest franchisee and independent manager in the Hampton Inns(R) system,
providing services to 39 hotels, with 4,624 rooms, bearing the Hampton Inns(TM)
flag.

Financing Activities. In October 1996, the Company's existing bank credit
facilities were amended to (i) increase the acquisition facility (the
"Acquisition Facility") from $100 million to $200 million, (ii) increase the
term loan from $195 million to $295 million, and (iii) increase the Company's
permitted nonrecourse and subordinated indebtedness to fund acquisitions from
$50 million to $250 million.

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered by the Company
U.S. Offering............................. 3,400,000 shares
International Offering.................... 600,000 shares
Total................................ 4,000,000 shares (1)
Common Stock to be Outstanding after the
Offering.................................... 34,639,296 shares (1)(2)
Use of Proceeds............................... The net proceeds of the Offering, together
with cash on hand, will be used to finance the
Pending Acquisitions, to repay existing
indebtedness, to finance other possible
acquisitions and for general corporate purposes.
New York Stock Exchange symbol................ IHC
</TABLE>

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

(1) Does not include up to 600,000 shares of Common Stock subject to
over-allotment options granted to the Underwriters. See "Underwriting."

(2) Does not include 2,370,449 shares of Common Stock reserved for issuance
under the Company's equity incentive plans and 850,000 shares reserved for
issuance under other compensation plans. See "Management--Director
Compensation," "--Stock Option Grants" and "--Compensation Plans and
Arrangements."

3
<PAGE> 11

SUMMARY FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND HOTEL DATA)

The following table sets forth summary historical financial data of the
Company as of and for each of the years ended December 31, 1991, 1992, 1993,
1994 and 1995 and as of and for the nine months ended September 30, 1995 and
1996, summary pro forma financial data for the Company for the year ended
December 31, 1995 and as of and for the nine months ended September 30, 1996,
and certain other data. The summary financial data of the Company as of December
31, 1994 and 1995 and for each of the years ended December 31, 1993, 1994 and
1995 have been derived from audited combined financial statements of the Company
included elsewhere in this Prospectus. The summary financial data of the Company
as of December 31, 1991, 1992 and 1993 and for each of the years ended December
31, 1991 and 1992 have been derived from audited combined financial statements
of the Company which are not required to be included in this Prospectus. The
summary historical financial data of the Company as of and for the nine months
ended September 30, 1995 and 1996 have been derived from unaudited financial
statements of the Company and, in the opinion of the Company, reflect all
adjustments (which include normal recurring adjustments) necessary to present
fairly the information set forth therein. The interim results are not
necessarily indicative of fiscal year performance because of the impact of
seasonal and short-term variations. The summary financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the pro forma financial information and the
combined financial statements and notes thereto included elsewhere in this
Prospectus. See "Index to Financial Statements."

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------- --------------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995 (1) 1995 1996 1996 (1)
-------- -------- -------- -------- ---------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Lodging revenues..... $ -- $ -- $ -- $ -- $ -- $ 332,003 $ -- $ 57,983 $ 286,338
Management and
related fees (2)... 17,645 19,873 25,564 36,726 45,018 41,295 32,888 35,788 32,954
-------- -------- -------- -------- ---------- ---------- -------- -------- ----------
Total revenues..... 17,645 19,873 25,564 36,726 45,018 373,298 32,888 93,771 319,292
Expenses:
Lodging expenses..... -- -- -- -- -- 233,641 -- 38,875 185,965
Operating expenses
and other (3)...... 12,350 12,999 15,384 20,708 25,077 33,229 17,587 31,371 27,561
Lease expense........ -- -- -- -- -- 24,101 -- -- 28,883
Depreciation and
amortization....... 3,286 3,352 3,282 3,659 4,201 29,835 2,963 7,762 22,264
Interest, net........ 101 (98) (12) (30) (99) 27,640 (191) 5,315 19,607
-------- -------- -------- -------- ---------- ---------- -------- -------- ----------
Income before income
tax expense.......... 1,908 3,620 6,910 12,389 15,839 24,852 12,529 10,448 35,012
Income tax expense
(4).................. -- -- -- -- -- 9,444 -- 11,145 13,305
-------- -------- -------- -------- ---------- ---------- -------- -------- ----------
Income (loss) before
extraordinary item... 1,908 3,620 6,910 12,389 15,839 15,408 12,529 (697) 21,707
Extraordinary item
(5).................. -- -- -- -- -- -- -- (7,643) --
-------- -------- -------- -------- ---------- ---------- -------- -------- ----------
Net income (loss)...... $ 1,908 $ 3,620 $ 6,910 $ 12,389 $ 15,839 $ 15,408 $ 12,529 $ (8,340) $ 21,707
======== ======== ======== ======== ========= ========= ======== ======== =========
Pro forma net income
per common share
(6).................. $ .45 $ .64
========= =========
Pro forma common shares
outstanding (6)...... 34,178,704 34,178,704
========== ==========
BALANCE SHEET DATA
(AT PERIOD END):
Cash and cash
equivalents............ $ 2,997 $ 4,461 $ 4,520 $ 6,702 $ 14,035 $ 8,356 $ 24,300 $ 18,712
Total assets............. 25,146 24,270 24,436 30,741 61,401 37,571 591,817 750,742
Current portion of
long-term debt......... 2,092 576 600 673 363 362 6,421 9,021
Long-term debt, excluding
current portion........ 76 1,500 1,209 3,217 35,907 2,906 287,870 314,520
Total equity............. 18,360 16,685 16,627 18,858 9,256 20,805 248,053 377,728
</TABLE>

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<PAGE> 12

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

(1) The pro forma financial data give effect to all issuances of Common Stock
prior to and in connection with the IPO, the IPO Acquisitions, the Post-IPO
Acquisitions, the Pending Acquisitions, the Equity Inns Transaction and the
assumed issuance at $25 5/8 per share of 3,448,000 of the 4,000,000 shares
of Common Stock offered in this Offering, which represents the portion of
the Offering that would result in sufficient net proceeds, together with
cash on hand, to finance the Pending Acquisitions and to repay $24,100 of
indebtedness, as if all such transactions had occurred as of January 1,
1995, except that (i) the pro forma balance sheet data give effect to the
acquisition of the two Owned Hotels acquired since September 30, 1996, the
Pending Acquisitions and the assumed issuance of 3,448,000 shares of Common
Stock as if each had occurred on September 30, 1996 and (ii) the pro forma
statement of income data give effect to the results of operations of the 25
hotels acquired or opened by Equity Inns after January 1, 1995 as of their
respective dates of acquisition or opening and not as of January 1, 1995.
The pro forma financial data presented is not necessarily indicative of
what the actual financial position and results of operations of the Company
would have been as of and for the periods indicated, nor does it purport to
represent the Company's future financial position and results of
operations.

(2) Pro forma management and related fees are adjusted to reflect consolidation
of the Owned Hotels and the resultant pro forma elimination of $4,544 and
$3,438 of management and related fees actually derived from the Owned
Hotels in 1995 and the nine months ended September 30, 1996, respectively.

(3) Includes non-recurring, non-cash compensation of $11,896 for the nine
months ended September 30, 1996.

(4) Until immediately prior to the consummation of the IPO, the Company
operated as an S corporation and, accordingly, was not subject to federal
and certain state income taxes. The Company recorded income tax expense of
$6,261 to establish deferred income taxes as of the date of the Company's
change in tax status from an S corporation to a C corporation. The pro
forma statement of income data have been computed as if the Company had
been subject to federal and state income taxes, based on the applicable
statutory tax rates then in effect.

(5) Represents an extraordinary loss resulting from the early extinguishment of
indebtedness, net of a deferred tax benefit of $3,937.

(6) Based on 34,087,296 shares of Common Stock outstanding on a pro forma basis
after the Offering plus an additional 91,408 shares of Common Stock to
reflect the dilutive effect of outstanding options.

5
<PAGE> 13

(7) EBITDA represents earnings before interest, income taxes, depreciation and
amortization, minority interests and extraordinary item. Management
believes that EBITDA is a useful measure of operating performance because
it is industry practice to evaluate hotel properties based on operating
income before interest, depreciation and amortization, which is generally
equivalent to EBITDA, and EBITDA is unaffected by the debt and equity
structure of the property owner. EBITDA does not represent cash flow from
operations as defined by generally accepted accounting principles ("GAAP"),
is not necessarily indicative of cash available to fund all cash flow needs
and should not be considered as an alternative to net income under GAAP for
purposes of evaluating the Company's results of operations.

(8) Represents all hotels, including the Owned Hotels, to which the Company
provides management or related services.

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

(10) The comparable hotel data set consists of all of the hotels (35 hotels
containing a total of 12,771 rooms) managed continuously by the Company
from January 1, 1993 through September 30, 1996.

(11) Represents total rooms occupied by hotel guests on a paid basis divided by
total available rooms. Total available rooms represents the number of rooms
available for rent multiplied by the number of days in the reported period.

(12) Represents total room revenues divided by the total number of rooms
occupied by hotel guests on a paid basis.

(13) Represents room revenues divided by total available rooms.

(14) Represents gross operating profit divided by total revenues. "Gross
operating profit" represents total revenues less departmental expenses and
undistributed operating expenses, excluding management fees.

6
<PAGE> 14

RISK FACTORS

In addition to the other information contained in this Prospectus, the
following risks and investment considerations should be carefully considered
before purchasing shares of Common Stock offered hereby. Each of the following
factors may have a material adverse effect on the Company's operations,
financial results, financial condition, liquidity, market valuation or market
liquidity in future periods.

RISKS ASSOCIATED WITH THE LODGING INDUSTRY

The Company is subject to the risks inherent in the lodging industry. In
addition to the specific risks discussed below, these risks include changes in
general, regional and local economic conditions, overbuilding, varying levels of
demand for rooms and related services, changes in travel patterns, the recurring
need for renovation, refurbishment and improvement of hotel properties, changes
in governmental regulations that influence or determine wages, prices and
construction and maintenance costs, changes in interest rates, the availability
of financing and changes in real estate taxes and operating expenses.

COMPETITION FOR GUESTS

The lodging industry is highly competitive, and the Company's hotels
generally are located in areas that contain numerous competitive properties.
Competitive factors in the lodging industry include room rates, quality of
accommodations, name recognition, service levels and convenience of location
and, to a lesser extent, the quality and scope of other amenities, including
food and beverage facilities. Many of the properties with which the Company's
hotels compete for guests are part of or owned by entities that have
substantially greater financial or other resources than the Company.

RISKS ASSOCIATED WITH RAPID EXPANSION

Growth Risks. The Company's revenues and net income have grown
substantially during the past several years. Since consummation of the IPO, the
Company's portfolio of Owned Hotels has increased from 14 hotels to 23 hotels,
and the Company intends to continue to pursue a growth-oriented strategy for the
foreseeable future, but there can be no assurance that the Company will achieve
its growth objectives. The Company is subject to a variety of business risks
generally associated with growing companies. The Company's ability to
successfully pursue new growth opportunities will depend on a number of factors,
including, among others, the Company's ability to identify suitable growth
opportunities, finance acquisitions and integrate new hotels into its
operations, as well as the competitive climate and the availability and cost of
capital. While the Company believes that it will have sufficient resources to
pursue its strategy, this belief is premised in part on adequate cash being
generated from operations. The Company may in the future seek an additional
increase in the capital available to it under its Acquisition Facility or
otherwise obtain additional debt or equity financing, depending upon the amount
of capital required to pursue future growth opportunities or address other
needs, conditions in the capital markets and other factors. There can be no
assurance that such increase or additional financing will be available to the
Company on acceptable terms, if at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."

In addition, there can be no assurance that the Company will be able to
successfully integrate new hotels into its operations or that new hotels will
achieve revenue and profitability levels comparable to the Company's existing
portfolio hotels. Furthermore, the Company's expansion within its existing
markets could adversely affect the financial performance of its existing
portfolio hotels and expansion into new markets may present operating and
marketing challenges that are different from those currently encountered by the
Company in its existing markets. There can be no assurance that the Company will
anticipate all of the changing demands that expanding operations will impose on
the Company.

Acquisition and Development Risks. The Company expects to acquire
additional hotels in the future. Acquisitions entail the risk that investments
will fail to perform in accordance with expectations. In addition, the Company
intends to selectively develop new mid-scale and upper economy hotels in the
future. New project development is subject to a number of risks, including
market or site deterioration after acquisition and the possibility of
construction delays or cost overruns due to regulatory approvals, inclement
weather, labor or material shortages, work stoppages and the continued
availability of construction and permanent financing.

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<PAGE> 15

CERTAIN EFFECTS OF ACQUISITIONS

Since its IPO, the Company has acquired nine hotels. Under the purchase
method of accounting, the assets, liabilities and results of operations
associated with such acquisitions have been included in the Company's financial
position and results of operations since the respective dates thereof.
Accordingly, the financial position and results of operations of the Company as
of and for the nine months ended September 30, 1996 and subsequent dates and
periods are not comparable to the financial position and results of operations
of the Company as of and for prior dates and periods.

The pro forma financial information presented gives effect to the IPO, the
IPO Acquisitions, the Post-IPO Acquisitions, the Pending Acquisitions, the
Equity Inns Transaction, the issuance of 3,448,000 shares of Common Stock in
this Offering and certain other adjustments described herein as if such
transactions had been completed on prior dates. The pro forma information
presented is not necessarily indicative of what the actual financial position
and results of operations of the Company would have been as of and for the
periods indicated.

RISKS ASSOCIATED WITH OWNING OR LEASING REAL ESTATE

At October 15, 1996, the Company owned fee title or controlling partnership
interests in 23 of the 161 hotels it managed and operated 17 hotels under
leases, ten of which are long-term leases (not including hotels the Company
currently manages or leases as a result of the Equity Inns Transaction). In
addition, the Company's business strategy includes the acquisition of additional
hotels. Accordingly, the Company will be subject to varying degrees of risk
generally related to owning or leasing real estate. These risks include, among
others, changes in national, regional and local economic conditions, local real
estate market conditions, changes in interest rates and in the availability,
costs and terms of financing, liability for long-term lease obligations, the
potential for uninsured casualty and other losses, the impact of present or
future environmental legislation and compliance with environmental laws and
adverse changes in zoning laws and other regulations, many of which are beyond
the control of the Company. In addition, real estate investments are relatively
illiquid; therefore, the ability of the Company to vary its portfolio of owned
hotels in response to changes in economic and other conditions may be limited.

TERMS OF MANAGEMENT AGREEMENTS

On a pro forma basis net management revenues, including the Owned Hotels,
represented 6.9% of the Company's total revenues for the nine months ended
September 30, 1996. Hotel management agreements expire or are acquired,
terminated or renegotiated in the ordinary course of the Company's business.
Typically, the Company's hotel management agreements may be terminated for
various reasons, including default by the Company or sale of or foreclosure on
the underlying property. In addition, approximately one-third of the Company's
management agreements allow for termination without cause upon 30 to 90 days
notice. An additional 21 management agreements allow for termination without
cause upon 30 to 90 days notice with the payment of a termination fee. As of
October 15, 1996, the Company had management agreements with remaining terms of
less than five years for 103 of its 161 managed hotels. These 103 management
agreements accounted for $10.7 million, or 3.4%, of the Company's total pro
forma revenues for the nine months ended September 30, 1996. Sixteen of these
management agreements (which generated $2.4 million, or 0.8%, of the Company's
total pro forma revenues for the nine months ended September 30, 1996) are
subject to termination in 1997. Although the net number of hotel management
agreements to which the Company is a party has increased every year since 1987,
there can be no assurance that the Company will continue to obtain new
management agreements or that it will be able to renew or replace terminated or
expired management agreements, or that the terms of new or renegotiated
management agreements will be as favorable to the Company as the terms of prior
agreements.

In addition to the services called for under its management agreements, the
Company often provides purchasing services, equipment leasing services,
insurance and risk management services and other ancillary services to
third-party hotel owners. On a pro forma basis, 4.4% of the Company's total
revenues for the nine months ended September 30, 1996 were comprised of such
services. The costs for these management services are typically subject to
prospective approval by the hotel owners on an annual basis. Although the
Company believes that its charges for these services are generally competitive
with those provided by unrelated third

8
<PAGE> 16

parties, there can be no assurance that third-party hotel owners will not choose
to obtain such services from other providers.

COMPETITION FOR MANAGEMENT AGREEMENTS

The Company competes in the lodging industry with international, national,
regional and local hotel management companies, some of which have greater
financial or other resources than the Company. Competitive factors include
relationships with hotel owners and investors, the availability of capital,
financial performance, contract terms, brand name recognition, marketing
support, reservation system capacity and the willingness to provide funds in
connection with new management arrangements. In order for the Company to expand
its business by acquiring additional management agreements, the Company may be
required to offer more attractive terms to hotel owners than it has had to make
in the past or to make equity investments in hotel properties. Hotel owners in
many cases have been requesting lower base fees coupled with greater incentive
fees or seeking capital contributions from independent hotel management
companies in the form of loans or equity investments.

QUARTERLY FLUCTUATIONS IN OPERATING RESULTS

The lodging industry is seasonal in nature, with the second and third
calendar quarters generally accounting for a greater portion of annual revenues
than the first and fourth calendar quarters. Quarterly earnings may be adversely
affected by events beyond the Company's control, such as poor weather
conditions, economic factors and other considerations affecting travel. In
addition, the loss of one or several management agreements (which could involve
the write-off of capitalized acquisition costs in addition to the loss of future
revenues), the timing of achieving incremental revenues from additional hotels
and the realization of a gain or loss upon the sale of a hotel also may
adversely impact earnings comparisons.

RISK OF INCREASING LEVERAGE; RESTRICTIVE COVENANTS

Since its IPO, the Company has financed its acquisitions largely with
indebtedness obtained pursuant to the Company's Acquisition Facility, and
intends to finance future acquisitions with the proceeds of this Offering, the
Acquisition Facility or with other credit facilities obtained by the Company in
the future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." The credit agreement
with respect to the Acquisition Facility contains restrictive covenants,
including covenants limiting capital expenditures, incurrence of debt and sales
of assets and requiring the Company to achieve certain financial ratios, some of
which will become more restrictive over time. See "Indebtedness of the Company."
The Company's existing indebtedness incurred under the Acquisition Facility, as
well as its term indebtedness, is secured by mortgages on the Company's hotel
properties as well as other assets of the Company. Among other consequences, the
leverage of the Company and such restrictive covenants and other terms of the
Company's debt instruments could impair the Company's ability to obtain
additional financing in the future, to make acquisitions and to take advantage
of significant business opportunities that may arise. In addition, the Company's
leverage may increase its vulnerability to adverse general economic and lodging
industry conditions and to increased competitive pressures.

DIVIDEND POLICIES; RESTRICTIONS ON PAYMENT OF DIVIDENDS

The Company has not paid any dividends on the Common Stock since the IPO
and does not anticipate that it will pay any dividends in the foreseeable
future. The Acquisition Facility prohibits payment of dividends or other
distributions to shareholders. See "Dividend Policy."

CONFLICTS OF INTEREST

Milton Fine, the co-founder of the Company and its Chairman of the Board,
and individuals and entities affiliated with Mr. Fine (collectively, the "Fine
Family Shareholders") will beneficially own approximately 36.9% of the
outstanding Common Stock following consummation of the Offering. See "Principal
Shareholders." Certain of the Fine Family Shareholders also have ownership
interests in 12 hotels that are managed or leased but not owned by the Company.
Each of the Fine Family Shareholders has agreed not to transfer any of its
interests in any of these hotels (subject to certain permitted transfers)
without first complying with a right

9
<PAGE> 17

of first offer and a right of first refusal procedure in favor of the Company.
See "Certain Relationships and Related Transactions--Transactions with the Fine
Family Shareholders." Except for one management agreement pursuant to which the
Company waived its management fee for a period ending no later than November 30,
1998, the Company believes that its management agreements and leases for these
hotels are on terms no less favorable to the Company than those that could have
been obtained from unaffiliated third parties. These relationships, however,
coupled with the ownership of Common Stock by the Fine Family Shareholders and
representation on the Company's Board of Directors (the "Board") by certain of
the Fine Family Shareholders, could give rise to potential conflicts of
interest. The Company has implemented a policy requiring transactions between
the Company and related parties to be approved by a majority of disinterested
directors upon such disinterested directors' determination that the terms of the
transaction are no less favorable to the Company than those that could have been
obtained from unrelated third parties. There can be no assurance, however, that
this policy will always be successful in eliminating the influence of such
potential conflicts of interest. See "Management--Directors and Executive
Officers."

CONTROL BY PRINCIPAL SHAREHOLDERS

The Fine Family Shareholders are able to exert substantial influence over
the election of directors and the management and affairs of the Company and over
the outcome of any corporate transactions or other matters submitted to the
shareholders for approval, including mergers, consolidations and the sale of all
or substantially all of the Company's assets. Affiliates of Blackstone Real
Estate Advisors L.P. (collectively, "Blackstone") may also be able to exert
influence over these matters. Pursuant to a stockholders agreement (the
"Interstone Stockholders Agreement") between the Company and Blackstone, dated
June 25, 1996, so long as Blackstone owns 25% or more of the shares of Common
Stock issued to it on the date of the Interstone Stockholders Agreement, the
Fine Family Shareholders have agreed that they will vote all of their shares of
Common Stock for the election of a director candidate nominated by Blackstone,
and Blackstone has agreed to vote all of its shares of Common Stock for the
election of the director candidates nominated by the Board.

SUBSTANTIAL RELIANCE ON SENIOR MANAGEMENT

The Company will place substantial reliance on the lodging industry
knowledge and experience and the continued services of its senior management.
The Company's future success and its ability to manage future growth depends in
large part upon the efforts of these persons and on the Company's ability to
attract and retain these key executives and other highly qualified personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting and retaining such personnel.

GOVERNMENT REGULATION

The Company is subject to numerous foreign and U.S. federal, state and
local government laws, including those relating to the preparation and sale of
food and beverages (such as health and liquor license laws), accessibility for
disabled persons and general building and zoning requirements. Managers of
hotels are also subject to laws governing their relationship with hotel
employees, including minimum wage requirements, overtime, working conditions and
work permit requirements. Compliance with, or changes in, these laws, including
liquor license laws or increases in minimum wage rate requirements, reduces
revenues and profits of hotels owned, leased and managed by the Company and
could otherwise adversely affect the Company's operations. Although third-party
hotel owners are generally responsible for all costs, expenses and liabilities
incurred in connection with operating the hotels under the Company's management
agreements, including compliance with government laws, the Company may be
contingently liable for certain liabilities for which it does not maintain
insurance, including certain employment liabilities, environmental liabilities
and, in respect of properties in the United States, claims arising under the
Americans with Disabilities Act. The Company also is subject to various foreign
and U.S. federal, state and local environmental laws and regulations relating to
the environment and the handling of hazardous substances which may impose or
create significant potential environmental liabilities. Under the Company's
hotel management agreements, third-party hotel owners are generally responsible
for any environmental liabilities. However, under certain countries' laws,
including those of the United States, the Company also may be exposed to
environmental liabilities whether or not the third-party hotel owner is able to
satisfy such liabilities. In addition, the Company will be subject to any
environmental liabilities arising with respect to its owned hotels.

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<PAGE> 18

ANTI-TAKEOVER PROVISIONS

The Company's Articles of Incorporation and By-Laws, and Pennsylvania law,
include various provisions that could have the effect of making it more
difficult for a third party to acquire control of the Company. See "Description
of Capital Stock--Certain Corporate Governance Matters." In addition, the
Company's Articles of Incorporation grant the Board authority to issue up to
25,000,000 shares of preferred stock having such rights, preferences and
privileges as designated by the Board without shareholder approval. See
"Description of Capital Stock--Preferred Stock." The rights of holders of Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any shares of such preferred stock that may be issued in the future.

SHARES ELIGIBLE FOR FUTURE SALE

No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock (including shares issuable upon the exercise of stock
options), or the perception that such sales could occur, could adversely affect
prevailing market prices for the Common Stock. Upon consummation of the
Offering, the Company will have outstanding 34,639,296 shares of Common Stock.
Of these shares, 18,190,946 are "restricted securities" under Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"). The holders of
18,071,441 of these shares have registration rights with respect to future
registrations of the Common Stock beneficially owned by them. In connection with
the IPO, Blackstone agreed, subject to certain exceptions, not to offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock until
December 16, 1996 without the prior written consent of Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch"). In connection with this Offering,
the Company, each of its directors and executive officers who is a holder of
restricted securities and the Fine Family Shareholders have agreed, subject to
certain exceptions, not to offer, sell, contract to sell or otherwise dispose of
any such shares of Common Stock for a period of 90 days after the date of this
Prospectus without the prior written consent of Merrill Lynch. Trust Leasing and
Trust Management have agreed with the Company not to sell any of the Common
Stock acquired in connection with the Equity Inns Transaction until June 30,
1997 and not to sell more than 50% of such Common Stock until December 31, 1997.
See "Principal Shareholders," "Shares Eligible for Future Sale" and
"Underwriting."

11
<PAGE> 19

THE COMPANY

The Company completed its IPO in June 1996 and acquired 14 Owned Hotels in
connection therewith. Since the IPO the Company has aggressively pursued
acquisitions of new hotels and management contracts, acquiring nine full service
upscale or luxury hotels containing a total of 2,223 rooms for a Total
Acquisition Cost of $198.2 million and entering into agreements to acquire two
additional full service upscale hotels containing a total of 655 rooms for a
Total Acquisition Cost of $66.0 million. The Company has also acquired a hotel
management business consisting of management contracts and leases covering 56
mid-scale and upper economy hotels containing a total of 6,587 rooms. The
Company believes that its competitive advantages, including its ability to
source acquisition opportunities, its flexible branding strategy, the strength
and depth of its management team, and its ability to access additional capital,
position it to take advantage of continued growth opportunities as the lodging
industry in the United States continues to consolidate.

12
<PAGE> 20

RECENT DEVELOPMENTS

INITIAL PUBLIC OFFERING

POST-IPO ACQUISITIONS

Since its IPO, the Company has acquired nine full service upscale or luxury
Owned Hotels containing 2,223 total rooms. The Total Acquisition Cost of these
hotels was $198.2 million. These hotels are operated under franchise
affiliations with Embassy Suites(R), Hilton(TM), Holiday Inn(R), Marriott(R),
Radisson(TM) and Westin(TM). The Company expects the operating results of the
Post-IPO Acquisitions to benefit from renovations, capital expenditures and
market repositionings, the cost of which is included in the Total Acquisition
Cost. The Company believes that all of the Post-IPO Acquisitions represent
attractive investments because they (i) are located in major metropolitan or
growing secondary markets and are well-located within their markets, (ii) were
acquired at an average cost of $88,235 per room excluding initial working
capital, which the Company believes represents at least a 30% discount to
replacement cost, and (iii) have attractive current returns and potential for
significant revenue and cash flow growth through rebranding, rehabilitating,
and/or repositioning of the hotels and application of the Company's disciplined
management techniques. The following is a description of each of the Post-IPO
Acquisitions:

Boston Marriott Westborough. This four story, 223 room hotel, located
in Westborough, Massachusetts, was acquired for a Total Acquisition Cost of
$20.2 million, using proceeds from the IPO. The hotel, located at the
junction of Interstate 495 and U.S. Route 9, was built in 1985, and the
Company has managed the hotel since 1991.

Brentwood Holiday Inn. This nine story, 247 room hotel, located in
Brentwood, Tennessee, which is eight miles from Nashville, was acquired for
a Total Acquisition Cost of $20.9 million, using proceeds from the IPO. The
property was built in 1989 as a prototype Holiday Inn hotel and has
received the Holiday Inn Excellence Award in each of the past four years.

Roanoke Airport Marriott. This eight story, 320 room hotel, located
near the airport in Roanoke, Virginia, was acquired by the Company for a
Total Acquisition Cost of $25.3 million. The hotel was built in 1983 and
features one of the area's largest private meeting facilities, including a
high-tech conference theater.

Blacksburg Marriott. This two story, 148 room hotel, located across
the street from the Virginia Polytechnic Institute and State University in
Blacksburg, Virginia, was acquired by the Company for a Total Acquisition
Cost of $8.8 million. The Blacksburg Marriott was built in 1971, and the
Company

13
<PAGE> 21

plans to fully renovate every room in the hotel in 1997. The Company is
evaluating the branding strategy for this hotel and may reflag it in the
near future.

Embassy Suites Phoenix North. This hotel (formerly the Fountain
Suites), located in Phoenix, Arizona, consists of seven three-story
buildings and six two-story buildings containing a total of 314 two-room
suites. The hotel was built in 1985 and was acquired by the Company as an
independent hotel for a Total Acquisition Cost of $27.7 million. The
Company reflagged the hotel as an Embassy Suites(R) as part of its
repositioning strategy for the hotel.

Englewood Radisson. This nine story, 192 room hotel is located in
Englewood, New Jersey, which is four miles west of New York City near the
Meadowlands Sports Complex. The Englewood Radisson was acquired by the
Company for a Total Acquisition Cost of $13.5 million. The hotel was opened
in 1989 and has land available for future room expansion. The land on which
the Englewood Radisson is located is subject to a ground lease with a
remaining term of 90 years.

Radisson Plaza Hotel San Jose Airport. This five story, 185 room hotel
is located less than two miles from the San Jose, California International
Airport in the heart of Silicon Valley and was acquired by the Company for
a Total Acquisition Cost of $17.3 million. The hotel was built in 1985, and
the Company has managed it since December 1995.

Columbus Hilton. This four story, 177 room hotel is located in
Columbus, Georgia. The hotel was acquired by the Company for a Total
Acquisition Cost of $9.1 million. The hotel is located across the street
from the convention center and is regarded as the premier hotel in its
market. The Columbus Hilton was built around the original Empire Woodruff
Grist Mill, a red brick mill that began operations in 1861. A national
landmark, the original brick mill was restored and converted into part of
the hotel in 1982.

Westin Resort Miami Beach. This 18 story, 417 room hotel (formerly the
Doral Ocean Beach Resort) is located on three oceanfront acres in the
"Mid-Beach" portion of Miami Beach, Florida. The Company acquired the hotel
for a Total Acquisition Cost of $55.4 million. The Company is considering
converting existing ancillary space into additional guest rooms which has
been included in the Total Acquisition Cost. The Company reflagged this
hotel, which was built in 1963, as a Westin(TM) as part of its
repositioning strategy for the hotel.

PENDING ACQUISITIONS

The Company has entered into agreements to purchase the Burlington Radisson
in Burlington, Vermont and the Washington Vista in Washington, D.C. for a Total
Acquisition Cost of $66.0 million. Both of the Pending Acquisitions meet the
acquisition criteria applied to the Post-IPO Acquisitions.

Burlington Radisson. This eight story, 255 room upscale hotel is
located in Burlington, Vermont. The Burlington Radisson is the only hotel
that is located in downtown Burlington on the waterfront of Lake Champlain.
The Company has signed an agreement to acquire the hotel, which was built
in 1975, for a Total Acquisition Cost of $15.3 million.

Washington Vista. This 14 story, 400 room hotel is located in the
heart of Washington, D.C., within walking distance of many of the city's
famous landmarks and close to the national headquarters of many trade and
professional organizations. The Company has signed an agreement to acquire
the hotel, which was built in 1982, for a Total Acquisition Cost of $50.7
million. The Company plans to reflag the hotel as a Westin(TM) as part of
its repositioning strategy for the hotel.

The Company expects to complete both of the Pending Acquisitions in the
fourth quarter of this year. A portion of the net proceeds of the Offering will
be used to consummate the Pending Acquisitions. The Company also has other
acquisitions under letters of intent which are subject to the satisfaction of a
number of conditions to closing and is evaluating other hotels for acquisition.

EQUITY INNS TRANSACTION

On November 15, 1996, the Company acquired for 1,957,895 shares of Common
Stock the hotel management business affiliated with Equity Inns. This business,
which consists of management contracts for

14
<PAGE> 22

eight mid-scale and upper economy hotels containing 776 rooms, and long-term
leases for 48 mid-scale and upper economy hotels containing 5,811 rooms, was
conducted by Trust Management and Trust Leasing prior to the consummation of the
Equity Inns Transactions. Of these hotels, 14 were acquired or opened by Equity
Inns in 1995 and 11 were acquired or opened by Equity Inns in 1996. The pro
forma statement of income data included herein give effect to the results of
operations of these hotels only from the date of acquisition or opening by
Equity Inns and not as of January 1, 1995. In connection with the Equity Inns
Transaction, the Company assumed management of all of the leased hotels except
four hotels which were developed and will continue to be managed by Promus
Hotels, Inc. As described more fully below, the Company also acquired a right of
first offer under which it generally has the right through November 15, 2001 to
lease and manage any hotel acquired or developed by Equity Inns. Many of the
hotels managed and leased by the Company as a result of the Equity Inns
Transaction are quality mid-scale and upper economy hotels. These hotels are
operated under premium franchise brands including Hampton Inns(TM), Residence
Inn(TM), Holiday Inn(R), Comfort Inn(TM) and Homewood Suites(TM). Upon
consummation of the Equity Inns Transaction, the Company became the largest
franchisee and independent manager in the Hampton Inns(TM) system, providing
services to 39 hotels, with 4,624 rooms, bearing the Hampton Inns(TM) flag.

In connection with the Equity Inns Transaction, the Company and Equity Inns
granted to each other certain options and rights of first offer with respect to
future hotel opportunities over the five-year period following the closing.
Through November 15, 2001, Equity Inns is obligated generally to offer to the
Company the right to lease and manage any hotel property which is acquired or
developed by Equity Inns, except that Promus Hotels, Inc. has the right to
manage any future hotels which it sells to Equity Inns. During the same
five-year period, the Company is obligated generally to grant Equity Inns the
option to acquire all mid-scale, upper economy, economy or budget hotels which
the Company plans to develop and sell (excluding developments subject to a joint
venture or partnership agreement). All hotel properties so acquired by Equity
Inns would be leased back to a subsidiary of the Company on terms substantially
the same as those set forth below. In addition, through November 15, 2001, the
Company is obligated to offer to Equity Inns the right to acquire all limited
service, extended stay, upper economy and mid-scale hotels which the Company or
any wholly owned subsidiary owns as of the closing or subsequently acquires or
develops, in the event that the Company determines to sell such hotels. Any such
sale will be conditioned on Equity Inns' entering into a lease with a subsidiary
of the Company on terms substantially the same as set forth below. Finally, the
Company has agreed to refer to Equity Inns, through November 15, 2001, any
opportunities which are presented to the Company to acquire hotels in the
foregoing categories.

The Equity Inns Transaction was consummated initially through a new
partnership, Crossroads/ Memphis Partnership, L.P. ("Crossroads/Memphis"). Trust
Leasing and Trust Management contributed to Crossroads/Memphis all of the leases
with Equity Inns and the management contracts in exchange for a 50% limited
partnership interest in Crossroads/Memphis. Subsidiaries of the Company
contributed to Crossroads/ Memphis 1,957,895 newly issued shares of Common Stock
of the Company (the "Contributed Shares") in exchange for a 50% general and
limited partnership interest in Crossroads/Memphis. The Company's subsidiary
that serves as general partner has the sole right to manage and control
Crossroads/Memphis. Crossroads/Memphis has engaged affiliates of the Company to
manage the leased properties and perform the management contracts held by
Crossroads/Memphis. The leases with Equity Inns have a 15-year term, and
Crossroads/Memphis has an option to renew each lease for an additional five-year
term if certain performance standards are met. Crossroads/Memphis is required to
pay fixed monthly base rent together with quarterly percentage rent. The rent
formulas are fixed for the first ten years of the term and will be adjusted
thereafter. The Company has guaranteed Crossroads/Memphis' lease obligations to
Equity Inns.

Trust Leasing and Trust Management have the right to exchange their
partnership interests in Crossroads/Memphis at any time for Contributed Shares.
Upon exchange of all of the partnership interests, the Company will own 100% of
Crossroads/Memphis and Trust Leasing and Trust Management will own all of the
Contributed Shares. Upon exchange, the Contributed Shares will be subject to a
registration rights and shareholders agreement which, among other things, will
(i) grant demand and piggyback registration rights to Trust Management and Trust
Leasing and (ii) prohibit the holders from selling any of the Contributed Shares
until June 30, 1997 and from selling 50% or more of the Contributed Shares until
December 31, 1997.

15
<PAGE> 23

FINANCING ACTIVITIES

In October 1996, the Company's existing bank credit facilities were amended
to (i) increase the Acquisition Facility from $100 million to $200 million, (ii)
increase the term loan from $195 million to $295 million, and (iii) increase the
Company's permitted nonrecourse and subordinated indebtedness to fund
acquisitions from $50 million to $250 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Indebtedness of the Company."

PRICE RANGE OF COMMON STOCK

The Common Stock has traded on the NYSE since June 20, 1996 under the
symbol "IHC." The following table sets forth, for the periods indicated, the
high and low sales prices per share of Common Stock on the NYSE.

<TABLE>
<CAPTION>
PRICE
-----------------
PERIOD HIGH LOW
------ ---- ----
<S> <C> <C>
June 20, 1996 through June 30, 1996................................ $23 3/8 $ 21
Quarter ended September 30, 1996................................... 27 3/4 22 1/8
October 1, 1996 through December 5, 1996........................... 29 5/8 24 3/4
</TABLE>

The last reported sale price per share on the NYSE on December 5, 1996 was
$24 3/4. As of December 5, 1996, there were approximately 100 holders of record
of the Common Stock.

DIVIDEND POLICY

The Company has not paid any dividends on the Common Stock since its IPO
and does not anticipate paying any dividends following consummation of this
Offering. The Company intends to retain earnings to provide funds for the
continued growth and development of the Company's business. Further, the terms
of the Acquisition Facility prohibit the payment of dividends on the Common
Stock. Any determination to pay cash dividends in the future will be at the
discretion of the Board and will be dependent upon the Company's results of
operations, financial condition, contractual restrictions and other factors
deemed relevant by the Board.

USE OF PROCEEDS

The net proceeds to the Company from the Offering are estimated to be
approximately $96.7 million (approximately $111.3 million if the over-allotment
options are exercised in full), after giving effect to estimated underwriting
discounts and commissions and offering expenses payable by the Company. The net
proceeds from the Offering, together with cash on hand, will be used to finance
the Pending Acquisitions, to repay $24.1 million of indebtedness incurred to
finance one of the Post-IPO Acquisitions, to finance other possible acquisitions
and for general corporate purposes. The indebtedness to be repaid matures in
2003 and bears interest at a rate that varies, at the Company's option, in
relation to LIBOR. At November 1, 1996, the interest rate on such indebtedness
was approximately 7.5%. Pending final application of the net proceeds, the
Company will invest such proceeds in interest-bearing accounts and short-term,
interest-bearing securities.

16
<PAGE> 24

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
September 30, 1996 and as adjusted to give effect to, among other things, the
acquisition of the two Owned Hotels acquired since September 30, 1996, the
Pending Acquisitions and the Offering. The information below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the pro forma financial information and the
combined financial statements and notes thereto included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Total short-term borrowings and current portion of long-term
debt........................................................... $ 6,421 $ 9,021(1)
Total long-term debt, excluding current portion.................. 287,870 314,520(1)
Minority interests............................................... 5,756 5,756
Shareholders' equity:
Preferred Stock ($.01 par value, 25,000,000 shares
authorized, no shares issued and outstanding at September
30, 1996 and as adjusted)................................. -- --
Common Stock ($.01 par value, 75,000,000 shares authorized,
28,671,401 shares issued and outstanding at September 30,
1996; 34,639,296 shares issued and outstanding, as
adjusted)................................................. 287 346(2)
Additional paid-in capital.................................. 253,058 396,149(2)
Retained deficit............................................ (5,292) (5,292)
--------- ---------
Total shareholders' equity............................. 248,053 391,203
--------- ---------
Total capitalization.............................. $ 548,100 $ 720,500
========= =========
</TABLE>

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

(1) The difference between the historical and the as adjusted debt represents
indebtedness incurred to finance the two Post-IPO Acquisitions consummated
after September 30, 1996 that will continue to be outstanding following the
Offering.

(2) Includes 1,957,895 shares of Common Stock issued in connection with the
Equity Inns Transaction and 10,000 shares of restricted stock issued in
October 1996 pursuant to the Company's 1996 Equity Incentive Plan.

17
<PAGE> 25

SELECTED FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND HOTEL DATA)

The following table sets forth selected historical financial data of the
Company as of and for each of the years ended December 31, 1991, 1992, 1993,
1994 and 1995 and as of and for the nine months ended September 30, 1995 and
1996, selected pro forma financial data of the Company for the year ended
December 31, 1995 and as of and for the nine months ended September 30, 1996,
and certain other data. The selected financial data of the Company as of
December 31, 1994 and 1995 and for each of the years ended December 31, 1993,
1994 and 1995 have been derived from audited combined financial statements of
the Company included elsewhere in this Prospectus. The selected financial data
of the Company as of December 31, 1991, 1992 and 1993 and for each of the years
ended December 31, 1991 and 1992 have been derived from audited combined
financial statements of the Company which are not required to be included in
this Prospectus. The selected historical financial data of the Company as of and
for the nine months ended September 30, 1995 and 1996 have been derived from
unaudited financial statements of the Company and, in the opinion of the
Company, reflect all adjustments (which include normal recurring adjustments)
necessary to present fairly the information set forth therein. The interim
results are not necessarily indicative of fiscal year performance because of the
impact of seasonal and short-term variations. The selected financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the pro forma financial information and
the combined financial statements and notes thereto included elsewhere in this
Prospectus. See "Index to Financial Statements."

18
<PAGE> 26

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------------------------------ -------------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995 (1) 1995 1996 1996 (1)
-------- -------- -------- -------- ---------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Lodging revenues:
Rooms.................... $ -- $ -- $ -- $ -- $ -- $221,372 $ -- $ 37,351 $201,696
Food and beverage........ -- -- -- -- -- 91,696 -- 16,792 68,467
Other departmental....... -- -- -- -- -- 18,935 -- 3,840 16,175
Management and related
fees (2)................. 17,645 19,873 25,564 36,726 45,018 41,295 32,888 35,788 32,954
-------- -------- -------- -------- ---------- --------- -------- -------- --------
Total revenues......... 17,645 19,873 25,564 36,726 45,018 373,298 32,888 93,771 319,292
Lodging expenses:
Rooms.................... -- -- -- -- -- 55,574 -- 8,064 47,473
Food and beverage........ -- -- -- -- -- 69,285 -- 12,513 52,212
Other departmental....... -- -- -- -- -- 8,909 -- 1,680 6,061
Property costs........... -- -- -- -- -- 99,873 -- 16,618 80,219
General and
administrative........... 3,063 4,096 5,057 8,302 9,811 15,710 6,464 7,240 12,443
Payroll and related
benefits................. 8,856 8,803 10,321 12,420 15,469 17,115 11,123 12,564 13,734
Non-cash compensation
(3)...................... -- -- -- -- -- -- -- 11,896 --
Lease expense............. -- -- -- -- -- 24,101 -- -- 28,883
Depreciation and
amortization............. 3,286 3,352 3,282 3,659 4,201 29,835 2,963 7,762 22,264
-------- -------- -------- -------- ---------- --------- -------- -------- --------
Operating income.......... 2,440 3,622 6,904 12,345 15,537 52,896 12,338 15,434 56,003
Other (expense) income:
Interest, net............ (101) 98 12 30 99 (27,640) 191 (5,315) (19,607)
Other, net............... (431) (100) (6) 14 203 (404) -- 329 (1,384)
-------- -------- -------- -------- ---------- -------- -------- -------- --------
Income before income tax
expense.................. 1,908 3,620 6,910 12,389 15,839 24,852 12,529 10,448 35,012
Income tax expense (4).... -- -- -- -- -- 9,444 -- 11,145 13,305
-------- -------- -------- -------- ---------- -------- -------- -------- --------
Income (loss) before
extraordinary item....... 1,908 3,620 6,910 12,389 15,839 15,408 12,529 (697) 21,707
Extraordinary item (5).... -- -- -- -- -- -- -- (7,643) --
-------- -------- -------- -------- ---------- -------- -------- -------- --------
Net income (loss)......... $ 1,908 $ 3,620 $ 6,910 $ 12,389 $ 15,839 $ 15,408 $ 12,529 $ (8,340) $ 21,707
======== ======== ======== ======== ========== ======== ======== ======== ========
Pro forma net income per
common share (6)......... $ 0.45 $ 0.64
======== ========
Pro forma common
shares outstanding (6)... 34,178,704 34,178,704
========== ==========
BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash
equivalents.............. $ 2,997 $ 4,461 $ 4,520 $ 6,702 $ 14,035 $ 8,356 $ 24,300 $ 18,712
Total assets.............. 25,146 24,270 24,436 30,741 61,401 37,571 591,817 750,742
Current portion of
long-term debt........... 2,092 576 600 673 363 362 6,421 9,021
Long-term debt, excluding
current portion.......... 76 1,500 1,209 3,217 35,907 2,906 287,870 314,520
Total equity.............. 18,360 16,685 16,627 18,858 9,256 20,805 248,053 377,728
OTHER FINANCIAL DATA:
EBITDA (7)................ $ 5,295 $ 6,874 $ 10,180 $ 16,018 $ 19,930 $ 82,731 $ 15,301 $ 23,419 $ 78,279
Net cash provided by
operating activities..... 3,668 7,332 10,389 15,318 25,328 16,652 14,710 23,048
Net cash (used in)
investing activities..... (726) (481) (3,088) (3,852) (22,858) (3,794) (246,071) (364,464 )
Net cash (used in)
provided by financing
activities............... (2,571) (5,387) (7,242) (9,285) 4,863 (11,204) 241,626 330,306
TOTAL PORTFOLIO HOTEL
DATA: (8)
Total portfolio hotel
revenues................. $513,907 $584,344 $760,766 $858,986 $1,056,279 $779,242 $982,538
Number of hotels (9)...... 49 53 82 136 150 140 159
Number of rooms (9)....... 17,386 18,985 24,202 31,502 35,044 31,960 36,037
COMPARABLE HOTEL
OPERATING DATA: (10)
Occupancy percentage
(11)..................... 74.9% 75.4% 76.6% 78.1% 79.2%
ADR (12).................. $83.73 $86.96 $91.78 $92.00 $98.72
REVPAR (13)............... $62.74 $65.60 $70.31 $71.87 $78.16
Gross operating profit
margin (14).............. 28.2% 30.0% 31.5% 32.3% 33.9%
</TABLE>

19
<PAGE> 27

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

(1) The pro forma financial data give effect to all issuances of Common Stock
prior to or in connection with the IPO, the IPO Acquisitions, the Post-IPO
Acquisitions, the Pending Acquisitions, the Equity Inns Transaction and the
assumed issuance at $25 5/8 per share of 3,448,000 of the 4,000,000 shares
of Common Stock offered in this Offering, which represents the portion of
the Offering that would result in sufficient net proceeds, together with
cash on hand, to finance the Pending Acquisitions and to repay $24,100 of
indebtedness, as if all such transactions had occurred as of January 1,
1995, except that (i) the pro forma balance sheet data give effect to the
acquisition of the two Owned Hotels acquired since September 30, 1996, the
Pending Acquisitions and the assumed issuance of the 3,448,000 shares of
Common Stock as if each had occurred on September 30, 1996 and (ii) the pro
forma statement of income data give effect to the results of operations of
the 25 hotels acquired or opened by Equity Inns after January 1, 1995 as of
their respective dates of acquisition or opening and not as of January 1,
1995. The pro forma financial data presented is not necessarily indicative
of what the actual financial position and results of operations of the
Company would have been as of and for the periods indicated, nor does it
purport to represent the Company's future financial position and results of
operations.

(3) Represents a non-recurring expense.

(4) Until immediately prior to the consummation of the IPO, the Company
operated as an S corporation and, accordingly, was not subject to federal
and certain state income taxes. The Company recorded income tax expense of
$6,261 to establish deferred income taxes as of the date of the Company's
change of status from an S corporation to a C corporation. The pro forma
statement of income data have been computed as if the Company had been
subject to federal and state income taxes, based on the applicable
statutory tax rates then in effect.

(5) Represents an extraordinary loss resulting from the early extinguishment of
indebtedness, net of a deferred tax benefit of $3,937.

(7) EBITDA represents earnings before interest, income taxes, depreciation and
amortization, minority interests and extraordinary item. Management
believes that EBITDA is a useful measure of operating performance because
it is industry practice to evaluate hotel properties based on operating
income before interest, depreciation and amortization, which is generally
equivalent to EBITDA, and EBITDA is unaffected by the debt and equity
structure of the property owner. EBITDA does not represent cash flow from
operations as defined by GAAP, is not necessarily indicative of cash
available to fund all cash flow needs and should not be considered as an
alternative to net income under GAAP for purposes of evaluating the
Company's results of operations.

(8) Represents all hotels, including the Owned Hotels, to which the Company
provides management or related services.

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

(10) The comparable hotel data set consists of all of the hotels (35 hotels
containing a total of 12,771 rooms) managed continuously by the Company
from January 1, 1993 through September 30, 1996.

(12) Represents total room revenues divided by the total number of rooms
occupied by hotel guests on a paid basis.

(13) Represents room revenues divided by total available rooms.

20
<PAGE> 28

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

Certain statements contained herein and elsewhere in this Prospectus which
are not historical facts are forward-looking statements that involve risks and
uncertainties, including, but not limited to, the risks detailed in "Risk
Factors" and referenced elsewhere in this Prospectus. See "Forward-Looking
Information."

GENERAL

The following is management's discussion and analysis of the Company's
financial position and results of operations. In light of the transactions
referred to in "Certain Relationships and Related Transactions--The Organization
and Initial Public Offering," the assumed issuance of 3,448,000 of the 4,000,000
shares of Common Stock and the application of the net proceeds therefrom,
together with cash on hand, to finance the purchase of the Pending Acquisitions
and to repay $24.1 million of indebtedness, and the fact that the Owned Hotels
were purchased on varying dates since 1994, the following discussion and
analysis includes discussion and analysis of the Company's pro forma financial
position and results of operations in addition to historical data and should be
read in conjunction with the pro forma financial information included elsewhere
in this Prospectus. See "Index to Financial Statements."

The following table sets forth selected items from the statements of income
as a percent of total revenues and certain other selected data:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- --------------------------
PRO PRO
FORMA FORMA
1993 1994 1995 1995 1995 1996 1996
----- ----- ----- -------- ----- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Lodging expenses................. -- -- -- 62.6 -- 41.4 58.3
General and administrative....... 19.8 22.6 21.8 4.2 19.7 7.7 3.9
Payroll and related benefits..... 40.4 33.8 34.4 4.6 33.8 13.4 4.3
Non-cash compensation............ -- -- -- -- -- 12.7 --
Lease expense.................... -- -- -- 6.5 -- -- 9.0
Depreciation and amortization.... 12.8 10.0 9.3 8.0 9.0 8.3 7.0
----- ----- ----- -------- ----- ----- --------
Operating income............... 27.0 33.6 34.5 14.1 37.5 16.5 17.5
Other income (expense):
Interest, net.................. -- 0.1 0.2 (7.4) 0.6 (5.7) (6.1)
Other, net..................... -- -- 0.5 (0.1) -- 0.4 (0.4)
----- ----- ----- -------- ----- ----- --------
Income before income tax
expense........................ 27.0 33.7 35.2 6.6 38.1 11.2 11.0
Income tax expense............... -- -- -- 2.5 -- 11.9 4.2
----- ----- ----- -------- ----- ----- --------
Income (loss) before
extraordinary item.......... 27.0 33.7 35.2 4.1 38.1 (0.7) 6.8
Extraordinary item (1)......... -- -- -- -- -- (8.2) --
----- ----- ----- -------- ----- ----- --------
Net income (loss)........... 27.0% 33.7% 35.2% 4.1% 38.1% (8.9)% 6.8%
===== ===== ===== ======== ===== ===== ========
</TABLE>

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

(1) Represents an extraordinary loss resulting from the early extinguishment of
indebtedness, net of a deferred tax benefit.

The pro forma adjustments described below under "Pro Forma Nine Months
Ended September 30, 1996 Compared to Combined Nine Months Ended September 30,
1995" result primarily from the acquisition of the Owned Hotels, the Pending
Acquisitions and the Equity Inns Transaction (collectively, the "Pro Forma
Hotels"). The Owned Hotels consist of 23 geographically diverse upscale hotels,
containing an aggregate of 6,621 rooms and operating under the Embassy
Suites(R), Hilton(TM), Holiday Inn(R), Marriott(R), Radisson(TM), and Westin(TM)
trade names principally in major metropolitan markets such as Atlanta, Boston,
Chicago, Denver, Fort Lauderdale, Houston, Los Angeles, Miami, Philadelphia,
Phoenix and Washington, D.C. The Owned Hotels produced superior operating
results in the first nine months of 1996, achieving an average occupancy

21
<PAGE> 29

rate of 74.9%, ADR of $93.79, and REVPAR of $70.23, as compared to an average
occupancy rate of 74.1%, ADR of $86.25 and REVPAR of $63.90 for the first nine
months of 1995. The following is a list of the Owned Hotels as of October 15,
1996:

<TABLE>
<CAPTION>
NUMBER
HOTEL LOCATION OF ROOMS
------------------------------------------- ------------------- --------------
<S> <C> <C>
Embassy Suites Phoenix North (formerly Phoenix, AZ 314
Fountain Suites) (1)
Radisson Plaza Hotel San Jose Airport (1) San Jose, CA 185
Warner Center Marriott Woodland Hills, CA 463
Colorado Springs Marriott Colorado Springs, CO 310
Denver Hilton South Greenwood Village, CO 305
Ft. Lauderdale Airport Hilton Dania, FL 388
Westin Resort Miami Beach (formerly the Miami Beach, FL 417
Doral Ocean Beach Resort) (1)
Atlanta Marriott North Central Atlanta, GA 287
Columbus Hilton (1) Columbus, GA 177
Lisle Radisson Lisle, IL 242
Schaumburg Embassy Suites Schaumburg, IL 209
Boston Marriott Andover Andover, MA 293
Boston Marriott Westborough (1) Westborough, MA 223
Englewood Radisson Hotel (1) Englewood, NJ 192
Huntington Hilton Melville, NY 302
Marriott Suites at Valley Forge Valley Forge, PA 229
Philadelphia Marriott West West Conshohocken, PA 286
Brentwood Holiday Inn (1) Brentwood, TN 247
Houston Marriott North at Greenspoint Houston, TX 391
Blacksburg Marriott (1) Blacksburg, VA 148
Roanoke Airport Marriott (1) Roanoke, VA 320
Tysons Corner Marriott Tysons Corner, VA 390
Fort Magruder Inn and Conference Center Williamsburg, VA 303
------
6,621
======
</TABLE>

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

(1) Denotes a Post-IPO Acquisition.

The amounts referred to below as combined financial information
("combined") represent the historical financial results of operations of the
Company combined with the historical financial results of operations of the
Owned Hotels, with intercompany eliminations and without any pro forma
adjustments.

PRO FORMA NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO COMBINED NINE MONTHS
ENDED SEPTEMBER 30, 1995

Pro forma total revenues increased by $46.1 million, or 16.9%, from $273.2
million in the nine months ended September 30, 1995 to $319.3 million in the
nine months ended September 30, 1996. The most significant portion of this
increase related to pro forma lodging revenues, which consists of rooms, food
and beverage and other departmental revenues. Pro forma lodging revenues
increased by $43.1 million, or 17.7%, from $243.2 million in the nine months
ended September 30, 1995 to $286.3 million in the nine months ended September
30, 1996. The increase was due to the overall improvement in the operating
performance of the Pro Forma Hotels, which was attributed to a change in
franchise affiliations for certain of the Owned Hotels, fewer hotel renovations
in 1996 than in 1995 and an overall improvement in economic conditions in
certain geographic regions. This increase in lodging revenues was consistent
with the increase in the Pro Forma Hotels' room revenues of $37.0 million, or
22.5%, to $201.7 million in the nine months ended September 30, 1996. For the
Owned Hotels, the average room rate increased by 8.7%, from $86.25 during the
nine months ended September 30, 1995 to $93.79 during the nine months ended
September 30, 1996, and occupancy

22
<PAGE> 30

increased from 74.1% to 74.9%, respectively. This resulted in a 9.9% increase in
REVPAR to $70.23 during the nine months ended September 30, 1996. The Atlanta,
Chicago, Colorado Springs, Denver and the Philadelphia markets had the most
significant impact on average rate and occupancy growth. Pro forma management
and related fees increased by $3.0 million, or 9.8%, from $30.0 million in the
nine months ended September 30, 1995 to $33.0 million in the nine months ended
September 30, 1996 due primarily to the performance improvement of existing
managed hotels and incremental revenues associated with the net addition of new
hotels, many of which provide for incentive management fees and utilize the
Company's other contractual services. Such contractual services include
insurance services, purchasing and renovation services, MIS support, central
accounting, leasing, and training and relocation programs.

Pro forma lodging expenses, which consist of rooms, food and beverage,
property costs and other departmental expenses, increased by $15.8 million, or
9.3%, from $170.2 million in the nine months ended September 30, 1995 to $186.0
million in the nine months ended September 30, 1996. The pro forma operating
margin for the Pro Forma Hotels increased from 30.0% during the nine months
ended September 30, 1995 to 35.1% during the nine months ended September 30,
1996. The increase was attributed to the increase in revenues and the overall
improvement in operating performance and operating efficiencies of the Pro Forma
Hotels.

General and administrative expenses are associated with the management of
hotels and consist primarily of centralized management expenses such as
operations management, sales and marketing, finance and other hotel support
services, as well as general corporate expenses. Pro forma general and
administrative expenses increased by $1.2 million, or 10.8%, from $11.2 million
in the nine months ended September 30, 1995 to $12.4 million in the nine months
ended September 30, 1996. Pro forma general and administrative expenses as a
percentage of pro forma revenues decreased slightly to 3.9% during the nine
months ended September 30, 1996 compared to 4.1% during the nine months ended
September 30, 1995 as a result of operating leverage.

Pro forma payroll and related benefits expenses increased by $1.0 million,
or 8,6%, from $12.7 million in the nine months ended September 30, 1995 to $13.7
million in the nine months ended September 30, 1996. The increase was due
primarily to the addition of new employees related to the growth of the
Company's hotel management business. Pro forma payroll and related benefits
expenses as a percentage of pro forma revenues decreased to 4.3% during the nine
months ended September 30, 1996 compared to 4.6% in the nine months ended
September 30, 1995.

Pro forma depreciation and amortization increased by $2.6 million, or
13.0%, from $19.7 million in the nine months ended September 30, 1995 to $22.3
million in the nine months ended September 30, 1996.

Pro forma operating income increased by $14.5 million, or 35.1%, from $41.5
million in the nine months ended September 30, 1995 to $56.0 million in the nine
months ended September 30, 1996. Accordingly, pro forma operating margin
increased from 15.2% during the nine months ended September 30, 1995 to 17.5%
during the nine months ended September 30, 1996. As discussed above, the
improvement in the pro forma operating margin was attributed to the increase in
pro forma revenues and the overall decrease in pro forma operating expenses as a
percentage of pro forma revenues.

The pro forma income tax expense of $13.3 million in the nine months ended
September 30, 1996 and $7.4 million in the nine months ended September 30, 1995
was computed as if the Company were subject to federal and state income taxes
for the entire period, based on an effective tax rate of 38%.

As a result of the changes noted above, pro forma net income increased by
$7.4 million, or 51.9%, from $14.3 million in the nine months ended September
30, 1995 to $21.7 million in the nine months ended September 30, 1996.
Accordingly, pro forma net income margin increased from 5.2% during the nine
months ended September 30, 1995 to 6.8% during the nine months ended September
30, 1996.

HISTORICAL NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO HISTORICAL NINE
MONTHS ENDED SEPTEMBER 30, 1995

Total revenues increased by $60.9 million, or 185.1%, from $32.9 million in
the nine months ended September 30, 1995 to $93.8 million in the nine months
ended September 30, 1996. The most significant portion of this increase related
to lodging revenues, which increased by $58.0 million due to the operations of

23
<PAGE> 31

the Owned Hotels acquired through September 30, 1996. Net management fees
increased by $2.5 million, or 13.0%, from $19.4 million in the nine months ended
September 30, 1995 to $21.9 million in the nine months ended September 30, 1996
due to the addition of 35 new management contracts and increased revenues
associated with the performance improvement of existing managed hotels. The
increase in net management fees was partially offset by the loss of 28
management contracts primarily due to the divestiture of hotels by third-party
hotel owners. Other management-related fees increased slightly from $13.5
million in the nine months ended September 30, 1995 to $13.9 million in the nine
months ended September 30, 1996.

Lodging expenses were $38.9 million in the nine months ended September 30,
1996 due to the operations of the Owned Hotels acquired through September 30,
1996. The operating margin of the Owned Hotels acquired through September 30,
1996 was 33.0% during the nine months ended September 30, 1996.

General and administrative expenses increased by $0.7 million, or 12.0%,
from $6.5 million in the nine months ended September 30, 1995 to $7.2 million in
the nine months ended September 30, 1996. The increase was due primarily to
incremental expenses associated with the growth of the Company's business and
the acquisitions of the Owned Hotels. General and administrative expenses as a
percentage of revenues decreased to 7.7% during the nine months ended September
30, 1996 compared to 19.7% during the nine months ended September 30, 1995 as a
result of the operations of the Owned Hotels acquired through September 30,
1996.

Payroll and related benefit expenses increased by $1.5 million, or 13.0%,
from $11.1 million in the nine months ended September 30, 1995 to $12.6 million
in the nine months ended September 30, 1996. The increase was related to the
addition of corporate management and staff personnel as the Company's portfolio
of hotels for which it provides management and other services grew. Payroll and
related benefits expenses as a percentage of revenues decreased to 13.4% during
the nine months ended September 30, 1996 compared to 33.8% during the nine
months ended September 30, 1995 as a result of the operations of the Owned
Hotels acquired through September 30, 1996.

Non-cash compensation of $11.9 million in the nine months ended September
30, 1996 resulted from the issuance of 785,533 shares of restricted stock to
certain executives and key employees of the Company in consideration of the
cancellation of options issued by the Company's predecessor, Interstate Hotels
Corporation ("IHC"), in 1995.

Depreciation and amortization increased by $4.8 million, or 162.0%, from
$3.0 million in the nine months ended September 30, 1995 to $7.8 million in the
nine months ended September 30, 1996 due to the acquisitions of the Owned Hotels
through September 30, 1996.

Operating income (exclusive of non-cash compensation) increased by $15.0
million, or 121.5%, from $12.3 million in the nine months ended September 30,
1995 to $27.3 million in the nine months ended September 30, 1996. Operating
margin decreased from 37.5% during the nine month ended September 30, 1995 to
29.1% during the nine months ended September 30, 1996. This decrease in the
operating margin reflects the inclusion of the operating expenses of the Owned
Hotels acquired through September 30, 1996 which were not reflected in the
Company's results prior to their respective acquisition dates in 1996.

The Company had $0.2 million of interest income in the nine months ended
September 30, 1995 compared to $5.3 million of interest expense in the nine
months ended September 30, 1996 due primarily to additional borrowings related
to the Acquisition (as defined in "Certain Relationships and Related
Transactions--The Organization and Initial Public Offering").

Other, net of $0.3 million in the nine months ended September 30, 1996,
consisted primarily of minority interests.

Income tax expense of $11.1 million in the nine months ended September 30,
1996 was computed based on an effective tax rate of 38% and includes deferred
tax expense of $6.3 million which was recorded in June, 1996, coinciding with
the date IHC changed its tax status from a pass-through entity for tax purposes
to a C corporation.

An extraordinary loss of $7.6 million, net of a deferred tax benefit of
$3.9 million, in the nine months ended September 30, 1996 resulted from the
early extinguishment of certain indebtedness and was related to the write-off of
deferred financing fees, prepayment penalties and loan commitment fees.

24
<PAGE> 32

As a result of the changes noted above, a net loss of $8.3 million was
recorded in the nine months ended September 30, 1996 compared to net income of
$12.5 million in the nine months ended September 30, 1995.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEARS DECEMBER 31, 1994 AND 1993

Total revenues increased by $11.1 million, or 43.7%, from $36.7 million in
1993 to $45.0 million in 1994 and by $8.3 million, or 22.6%, from 1994 to $45.0
million in 1995. Net management fees increased by $3.1 million from 1993 to 1994
and $4.7 million from 1994 to 1995 due to the addition of 83 new management
contracts in 1994 and 43 new management contracts in 1995 and increased revenues
associated with existing managed hotels. These increases were partially offset
by the loss of 29 management contracts in each of 1994 and 1995 due primarily to
the divestiture of hotels by third-party owners. In 1994, $1.3 million, or 42%,
of the increase in net management fees resulted from increases in base
management fees, and $1.8 million, or 58%, of the increase resulted from
increases in incentive management fees due to performance improvement of
existing contracts and the increase in the number of new contracts that provide
for incentive management fees. In 1995, $3.1 million, or 66%, of the increase in
net management fees resulted from increases in base management fees, and $1.6
million, or 34%, of the increase resulted from increases in incentive management
fees. Purchasing and other fees increased by $4.0 million, or 115.0%, from 1993
to 1994 and $2.8 million, or 38.0%, from 1994 to 1995 due primarily to
incremental revenues related to additional franchise/marketing representation
fees related to the acquisition of the Colony portfolio in May 1994 ($0.8
million in 1994 and $0.7 million in 1995) (see "Business and Properties--The
Company's Portfolios") and incremental revenues related to the net addition of
new hotels, many of which utilize the Company's purchasing, project management
and other contractual services ($1.2 million in 1994 and $2.1 million in 1995).
Additionally, an increase of $2.0 million from 1993 to 1994 was associated with
the creation of training and relocation programs for managed hotels. Insurance
income increased by $4.1 million from 1993 to 1994 and by $0.7 million from 1994
to 1995 due partially to the net addition of new managed hotels that elected to
participate in the Company's insurance program and the addition in mid-1994 of a
health care financial indemnity policy to the coverage of the Company's
subsidiary, Northridge Insurance Company ("Northridge").

General and administrative expenses increased by $3.2 million, or 64.2%,
from $5.1 million in 1993 to $8.3 million in 1994 and by $1.5 million, or 18.2%,
from 1994 to $9.8 million in 1995. These increases were due primarily to
incremental expenses associated with the acquisition of the Colony portfolio
($0.8 million in 1994 and $1.3 million in 1995). Additionally, an increase of
$1.3 million from 1993 to 1994 was associated with the creation of training and
relocation programs for managed hotels. The remaining increases were attributed
to incremental expenses related to the growth of the Company's hotel management
business. General and administrative expenses as a percentage of revenues
decreased to 21.8% during 1995 compared to 22.6% in 1994. During 1993, general
and administrative expenses as a percentage of revenues were 19.8%.

Payroll and related benefits expenses increased by $2.1 million, or 20.3%,
from $10.3 million in 1993 to $12.4 million in 1994 and by $3.1 million, or
24.5%, from 1994 to $15.5 million in 1995. These increases were due primarily to
incremental expenses associated with the acquisition of the Colony portfolio and
the growth of the Crossroads portfolio ($0.9 million in 1994 and $1.5 million in
1995). See "Business and Properties-- The Company's Portfolios." An increase of
$1.3 million in 1995 related to an increase in incentive bonuses paid to certain
executive officers and development staff. The remaining increases were
attributed to incremental expenses related to the growth of the Company's hotel
management business and the new training and relocation programs. Payroll and
related benefits expenses as a percentage of revenues increased to 34.4% during
1995 compared to 33.8% in 1994. During 1993, payroll and related benefits
expenses as a percentage of revenues were 40.4%.

Operating income increased by $5.4 million, or 78.8%, from $6.9 million in
1993 to $12.3 million in 1994 and by $3.2 million, or 25.9%, from 1994 to $15.5
million in 1995. Operating margins were 27.0%, 33.6% and 34.5% in 1993, 1994 and
1995, respectively. The improvement in the operating margins was attributed to
the overall increase in revenues and improvements in operating expenses as
percentages of revenues.

As a result of the changes noted above, net income (exclusive of income tax
expense) was $6.9 million, $12.4 million and $15.8 million in 1993, 1994 and
1995, respectively, which represent increases of $5.5 million,

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<PAGE> 33

or 79.3%, from 1993 to 1994 and $3.4 million, or 27.8%, from 1994 to 1995. Net
income margins were 27.0%, 33.7% and 35.2% in 1993, 1994 and 1995, respectively.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal sources of liquidity are cash from operations and
borrowings under its credit facilities. Net cash provided by operations was
$14.7 million in the nine months ended September 30, 1996, compared to $16.7
million in the nine months ended September 30, 1995. The Company's cash and cash
equivalent assets were $24.3 million and $8.4 million at September 30, 1996 and
1995, respectively.

At September 30, 1996, the Company's total indebtedness was $294.3 million,
comprised of $193.8 million of term loans, $70.7 million of borrowings under the
Acquisition Facility, $29.3 million of mortgage indebtedness encumbering six
Owned Hotels owned by a partnership in which the Company owns a 75% interest and
representing the other partner's portion of such indebtedness, and $0.5 million
of notes payable in connection with the acquisition of Colony Hotels and
Resorts. In October 1996, $53.4 million of additional indebtedness was incurred
and the Company's credit facilities were amended by converting $100 million of
outstanding borrowings (including $29.3 million of the indebtedness incurred in
October 1996), which were incurred primarily to finance hotel acquisitions, to
term loans under the Company's credit facilities and increasing the Company's
revolving loan capacity under the Acquisition Facility from $100 million to $200
million. The Company also modified its credit facilities to increase the
Company's permitted nonrecourse indebtedness to fund acquisitions from $50
million to $100 million and to permit the Company to incur up to $150 million of
subordinated indebtedness. For a discussion of the Company's credit facilities
and other indebtedness, see "Indebtedness of the Company."

Management of the Company believes that, with respect to its current
operations, the Company's cash on hand and funds from operations will be
sufficient to cover its reasonably foreseeable working capital, ongoing capital
expenditure and debt service requirements. In the nine months ended September
30, 1996, the Company spent $2.7 million on capital expenditures at the Owned
Hotels. The Company's capital expenditure budget (before acquisitions) for 1997
is $12.3 million, which includes capital expenditures related to the Post-IPO
Acquisitions.

The Company intends to pursue a growth-oriented strategy involving, among
other things, the acquisition of interests in additional hotel properties and
hotel management companies, as well as the acquisition of additional management
contracts (which may from time to time require capital expenditures by the
Company). See "Business and Properties--Growth Strategy." The net proceeds of
this Offering will be used to finance the Pending Acquisitions, to repay
existing indebtedness, for other possible acquisitions and for general corporate
purposes. See "Use of Proceeds." Management believes that the net proceeds of
the Offering, the Acquisition Facility and cash provided by operations will be
sufficient to pursue the Company's acquisition strategy and to fund its other
presently foreseeable capital requirements. However, the Company believes that,
absent a presently unforeseen change, additional acquisition opportunities will
continue to exist for the foreseeable future and depending upon conditions in
the capital and other financial markets and other factors, the Company may from
time to time consider the issuance of debt or other securities, the proceeds of
which could be used to finance acquisitions, to refinance debt or for other
general corporate purposes.

SEASONALITY

The lodging industry is affected by normally recurring seasonal patterns.
At most of the Company's hotels, demand is higher in the second and third
quarters than during the remainder of the year. Demand also changes on different
days of the week, with Sunday having the lowest occupancy.

INFLATION

The effects of inflation, as measured by fluctuations in the consumer price
index, have not had a material impact on the Company's revenues or net income in
recent years.

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<PAGE> 34

INDEBTEDNESS OF THE COMPANY

As of September 30, 1996, on a pro forma basis after giving effect to the
Pending Acquisitions, the acquisition of the two Owned Hotels acquired since
September 30, 1996 and the Offering, the Company had outstanding indebtedness of
$323.5 million consisting of $293.7 million outstanding under its seven-year
term loan facility (the "Term Loan," and together with the Acquisition Facility,
the "Credit Facilities") with Credit Lyonnais, New York branch ("Credit
Lyonnais"), $29.3 million of mortgage indebtedness encumbering six Owned Hotels
owned by a partnership in which the Company owns a 75% interest and representing
the other partner's portion of such indebtedness (the Company's portion of such
indebtedness being included in the Term Loan) and $0.5 million outstanding under
a note relating to the acquisition of Colony Hotels and Resorts. As of September
30, 1996, on a pro forma basis, there was $200 million of borrowing capacity
under the Acquisition Facility and there were no outstanding borrowings under
the Acquisition Facility.

In connection with the IPO, the Company entered into a credit agreement
with Credit Lyonnais pursuant to which Credit Lyonnais provided a total of $295
million of financing, consisting of the seven-year, $100 million Acquisition
Facility and the $195 million Term Loan. In October 1996, the Acquisition
Facility was increased by converting the borrowings outstanding under the
Acquisition Facility ($100 million) to a term loan (together with the Term Loan,
the "Term Loans") and increasing the revolving loan capacity from $100 million
to $200 million. The Company also modified the Credit Facilities to increase the
Company's permitted nonrecourse indebtedness to fund acquisitions from $50
million to $100 million and to permit the Company to incur an additional $150
million of subordinated indebtedness from third-party lenders.

Amounts outstanding under the Credit Facilities bear interest, at the
Company's option, at the Base Rate (as defined) plus 1% or at a reserve-adjusted
Eurodollar rate for periods of one, two, three or six months, plus 2%. The Base
Rate is the higher of (i) the rate which Credit Lyonnais establishes from time
to time as its reference rate for short-term commercial loans in U.S. dollars
and (ii) the rate which is 0.5% in excess of the overnight cost of funds of
Credit Lyonnais. The Company is required to have in effect interest rate
protection agreements for $135 million of indebtedness under the Credit
Facilities. The Company presently has in effect interest rate protection
agreements for varying terms for the entire amount of the Term Loan and $100
million of the $200 million Acquisition Facility. These agreements cap the
Eurodollar rate at 6% on all the indebtedness subject to these agreements except
for $54 million of such indebtedness which is subject to an interest rate swap
agreement that fixes the Eurodollar rate at 5.8%

The Term Loans mature in 2003 and require scheduled quarterly principal
amortization payments over the seven-year term. The Acquisition Facility matures
in 2003 and will be reduced by quarterly commitment reductions totalling $10
million per quarter after the first five years.

The Credit Facilities contain customary covenants and certain financial
covenants, including, without limitation, the following: (a) the Company must
maintain, on a quarterly basis, a minimum annual EBITDA of $65 million in 1996,
$70 million in each of 1997 and 1998 and $75 million each year thereafter; (b)
the Company must maintain, on a quarterly basis, a consolidated net worth of (x)
$190 million plus (y) the aggregate of 80% of its consolidated net income, if
positive, for each fiscal quarter ending after the initial borrowing date (which
percentage reduces to 70% for each fiscal quarter after 1998) plus (z) 60% of
each increase to consolidated net worth resulting from each public offering of
Common Stock; (c) the Company must not permit its modified senior total
indebtedness leverage ratio (defined as the ratio of the Company's total
indebtedness (excluding up to $30 million in certain nonrecourse indebtedness
and $150 million in permitted subordinated indebtedness) to the Company's
EBITDA) to be greater than 4.50 to 1 at the end of each fiscal quarter of 1996
and 1997, 4.25 to 1 at the end of each fiscal quarter of 1998 and 1999, 4.00 to
1 at the end of each fiscal quarter of 2000 and 2001, 3.75 to 1 at the end of
each fiscal quarter of 2002, or 3.50 to 1 at the end of each fiscal quarter of
2003; (d) the Company must not permit its modified total indebtedness ratio
(defined as the ratio of the Company's total indebtedness (excluding up to $30
million in certain non-recourse indebtedness) to the Company's EBITDA) to be
greater than 5.25 to 1 at the end of the fourth quarter of 1996 and at the end
of each quarter of 1997, 5.00 to 1 at the end of each quarter of 1998 and 1999,
4.75 to 1 at the end of each quarter of 2000 and 2001, 4.50 to 1 at the end of
each quarter of 2002, and 4.25 to 1 at the end of each quarter until maturity;
(e) the Company must not permit its interest coverage ratio (defined as the
ratio of the Company's EBITDA to the Company's total interest expense on its
outstanding

27
<PAGE> 35

indebtedness) to be less than 2.50 to 1 at the end of each fiscal quarter of
1996 and 1997, or 2.75 to 1 at the end of each fiscal quarter thereafter; (f)
the Company must not permit its debt service coverage ratio (defined as the
ratio of the Company's EBITDA to the Company's total interest expense plus
scheduled principal payments on its outstanding indebtedness) to be less than
2.00 to 1 at the end of each fiscal quarter of 1996 and 1997, or 2.25 to 1 at
the end of each fiscal quarter thereafter; and (g) the Company must not permit
its adjusted debt service coverage ratio (defined as the ratio of the Company's
EBITDA plus lease expense to the Company's total interest expense, scheduled
principal payments on its outstanding indebtedness plus lease expense) to be
less than 1.50 to 1 at the end of any quarter. All of the foregoing tests are to
be made using data from the four consecutive fiscal quarters then last ended.

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<PAGE> 36

BUSINESS AND PROPERTIES

GROWTH STRATEGY

Proven Ability to Source Acquisitions. As a result of its experienced
management and the size and geographic diversity of its hotel portfolio, as well
as an in-depth knowledge of individual markets, the Company has access to
acquisition opportunities not available to all its competitors. Information
about acquisition opportunities is obtained through contacts at every level of
the Company, including hotel general managers, regional managers and senior
management. Industry association contacts also provide information about
potential acquisitions. In addition, management's knowledge of existing hotels
throughout the United States and personal relationships with numerous hotel
owners and operators provide the Company with extensive information regarding
acquisition opportunities. Of the nine Post-IPO Acquisitions, all but one of
such acquisition opportunities were identified through the Company's own
contacts and not through third-party brokers.

Relationships with Hotel Owners. The Company enjoys excellent
relationships with hotel investors and owners due to its disciplined management
techniques and track record of improving profitability of the hotels it manages.
These relationships provide a source of management contract and property
acquisition opportunities and help the Company to renew its management
contracts.

Flexibility Afforded by Multiple Branding. The Company is able to own and
operate hotels under a variety of brand names. This flexibility allows the
Company to own and operate multiple hotels under different brands within the
same geographic market and provides the Company with competitive and economic
advantages such as the ability optimally to position hotels within their local
markets, to provide a broad base of national reservation and marketing systems
and to pursue acquisitions within both its existing and new markets more freely
than hotel operating companies that are committed to particular flags. The
Company currently operates hotels under 21 different brand names, and the nine
Post-IPO Acquisitions bear six different flags.

Corporate Infrastructure and Operational Synergies. By virtue of providing
management and related services to 161 hotels, the Company achieves significant
synergies and economies of scale not available to many of its competitors. The
Company's management seeks to maintain a blend of centralized control over
strategic issues while encouraging decentralized decision-making with respect to
appropriate operational issues. All personnel, marketing, cash management and
other policies are formulated at the Company's central corporate offices and are
provided to its hotels. The Company's corporate offices also provide accounting,
legal, insurance and finance functions, institute management information systems
and coordinate the preparation of budgets. This centralization of control over
strategic matters allows the Company's hotels to be operated with fewer
employees and frees hotel management personnel to focus on matters having the
greatest impact on the performance of the particular hotel and on the quality of
its guests' hotel stays.

Strong Management Team. Collectively, the Company's senior management has
an average of 23 years of experience in the lodging industry and an average of
12 years with the Company. Following consummation

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<PAGE> 37

of the Offering, the nine members of the Company's senior management will
beneficially own an aggregate of 20.4% of the outstanding shares of Common
Stock. As a result, the interests of the Company's senior management will be
closely aligned with the interests of the Company's shareholders. See
"Management-- Compensation Plans and Arrangements."

Stable Cash Flow. The Company believes that it will have long-term
financial stability and significant sources of internal financing for future
growth as a result of its ownership of the Owned Hotels, its substantial
portfolio of hotel management agreements and its expected growth in its hotel
portfolio. On a pro forma basis, 68.8% of the Company's total revenues in the
nine months ended September 30, 1996 were generated from the Owned Hotels. The
Company also expects to generate stable cash flow from net management fees. As
of October 15, 1996, the Company had 35 management agreements (not including
management contracts with respect to the Owned Hotels) with remaining terms of
five years or more. These agreements generated net management fees of $7.6
million, constituting 2.4% of the Company's total pro forma revenues in the nine
months ended September 30, 1996. In addition, the Company has a favorable
renewal record for its management agreements, which has contributed to the
stability of the Company's cash flow. Since 1990, over 90% of the Company's
management agreements for upscale hotels have been renewed at expiration,
excluding management agreements covering properties that have been sold to
unaffiliated parties.

Access to Capital. The Company believes that in order to continue to
maximize the value of its shareholders' equity and to execute its growth
strategy, it is essential to implement and periodically review a diversified
financing strategy that (i) incorporates long-term, secured and unsecured
corporate debt, (ii) minimizes exposure to fluctuations of interest rates and
(iii) maintains maximum flexibility to manage the Company's short-term cash
needs. The Company believes that its capital structure will be conducive to and
will allow flexibility for the growth which the Company seeks to achieve. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Indebtedness of the Company."

BUSINESS STRATEGY

The Company attributes its steady growth to the disciplined pursuit of four
core strategies: (i) adding new hotels to the Company's portfolio of upscale and
luxury properties through acquisitions; (ii) adding new management contracts and
selectively acquiring hotel management businesses; (iii) maximizing the
profitability of the Company's acquired hotels by repositioning them within
their local markets and applying to them the Company's proven management
techniques; and (iv) providing superior, innovative hotel management services,
resulting in increased investment value for the hotel owner. As a result of
these strategies, the Company believes that it is well-positioned to take
advantage of strong industry trends. The Company believes that the United States
lodging industry will continue to experience an excess of demand growth over
supply growth in the upscale and luxury segments, which are the segments in
which the Company primarily operates.

Hotel Acquisitions and Selective New Construction. The Company anticipates
that it will be able to grow through the acquisition of hotels having attractive
economic prospects that are suitable for application of the Company's operating
strategies. The Company has acquired nine Owned Hotels since its IPO, and it
anticipates consummating the Pending Acquisitions in the fourth quarter of this
year. See "Recent Developments--Pending Acquisitions." The Company will continue
to seek to acquire well-located and constructed hotels at significant discounts
to replacement cost and at attractive returns with potential for cash flow
growth and long-term capital appreciation. In addition, the Company anticipates
that it may make partial investments in hotel properties through joint ventures
with strategic business partners or through equity contributions or secured
loans. The Company also believes that its extensive real estate and finance
industry contacts will continue to facilitate the Company's ability to identify,
evaluate and negotiate potential acquisition opportunities.

The Company intends to selectively develop new mid-scale and upper economy
hotels in the future. In particular, the Company will evaluate the competitive
environment, including market room and occupancy rates, site location and
marketing, financial and operating issues, as well as the opportunity to realize
operating efficiencies from the ownership of multiple hotels, in any market
under consideration for new development. The Company has entered into a
partnership agreement with a property developer to construct a 121 room

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<PAGE> 38

Courtyard by Marriott(R) near New Haven, Connecticut. Construction of the hotel
is expected to commence in November 1996 and be completed by September 1997. The
Company expects to acquire an approximate 54% interest in the partnership in
exchange for a contribution estimated to be approximately $2.4 million.

Addition of New Hotel Management Agreements. The increasing profitability
of the Company's hotel management business has been enhanced by its ability to
win new hotel management agreements and by the operating leverage inherent in
the hotel management business. Through the application of its proven operating
principles, the Company has achieved consistent annual growth, even through
industry downturns. Since 1990, over 90% of the Company's management agreements
for upscale hotels have been renewed at expiration, excluding management
agreements covering properties that have been sold to unaffiliated parties. The
Company has increased the net number of hotel management agreements in its
portfolio every year since 1987.

The following table demonstrates the significant growth since 1990 in the
net number of hotels under management of the Company:

<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996*
---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Hotels under management at beginning of year.... 30 39 49 53 82 136 150
Hotels added:
Interstate portfolio....................... 4 12 12 15 18 16 10
Crossroads portfolio....................... 5 3 2 28 33 21 18
Colony portfolio........................... -- -- -- -- 32 6 3
Hotels lost:
Interstate portfolio....................... -- (3) (6) (4) (10) (7) (2)
Crossroads portfolio....................... -- (2) (4) (10) (10) (17) (14)
Colony portfolio........................... -- -- -- -- (9) (5) (4)
---- ---- ---- ---- ---- ---- -----
Hotels under management at end of year.......... 39 49 53 82 136 150 161
==== ==== ==== ==== ==== ==== ====
</TABLE>

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

* Through October 15, 1996. Does not include hotels the Company manages as a
result of the Equity Inns Transaction. Includes the Owned Hotels.

Since its IPO, the Company has increased the net number of hotels under its
management from 154 at June 20, 1996 to 161 (including the Owned Hotels) at
October 15, 1996. Upon consummation of the Equity Inns Transaction, an
additional 52 management contracts were added to the Company's portfolio. See
"Recent Developments--Equity Inns Transaction." Through the efforts of its
internal business development staff, comprised of ten salespeople, the Company
will continue to seek to acquire new hotel management agreements and hotel
management companies that operate hotels suitable for integration into the
Company's portfolios. These individuals will continue to identify new business
by conducting comprehensive market studies, developing extensive call lists,
employing direct solicitation techniques and seeking referrals from third-party
owners of the Company's managed hotels.

The Company believes that it will continue to win new hotel management
agreements as a result of its reputation for integrity, its track record of
delivering superior financial returns for hotel owners and investors and its
willingness to structure key terms of hotel management agreements to satisfy
hotel owner objectives. In particular, the Company believes that its stable
relationships with institutional hotel investors will facilitate the Company's
growth by generating new hotel management agreements within the institutions'
existing hotel portfolios, as well as for hotels newly acquired by them.

The Company also believes that the operation of hotels in the United States
is highly fragmented, with many hotels being operated by managers who lack the
experience and expertise to operate, market and maintain such hotels profitably.
The Company believes that the industry will experience consolidation as existing
owners and operators continue to experience financial and operating difficulties
and sell or lease hotels to professional management companies such as the
Company.

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<PAGE> 39

By operating hotels in multiple segments of the lodging industry, the
Company increases its opportunities to compete for new hotel management
agreements. Although the Company remains committed to participating in each
segment of the lodging industry and, accordingly, will seek to add hotel
management agreements to each of its three portfolios as opportunities arise,
the Company believes that the greatest opportunities for expansion exist in the
luxury and upscale segments of the lodging industry. Many luxury and upscale
hotels have been underperforming and could greatly benefit from the Company's
strong management and proven operating strategies, without compromising the
quality and service expectations of the hotels' guests.

Improvement of Performance of Owned Hotels. The Company operates its
portfolio hotels efficiently by utilizing regional and centralized support
services to control costs, efficiently allocating resources and maintaining
consistently high quality services to guests. In addition, the Company believes
that significant opportunities exist to enhance the value of some of the Owned
Hotels, either through modest upgrading or through major renovation.

Improving Value for Hotel Owners. The Company has consistently generated
operating results superior to the hotel industry through a business philosophy
emphasizing the creation and enhancement of investment value for the hotel owner
and the employment of innovative management strategies designed to maximize
owner value. The Company's operating strategies involve specific procedures and
services designed to achieve revenue and asset value enhancement, cost control
and guest and employee satisfaction. After entering into a new hotel management
agreement or acquiring a new hotel, the Company implements an operating plan
based on a comprehensive operations and market-position study which identifies
key areas requiring immediate attention to ensure that resources are devoted to
the most critical areas first. Key areas may include such departments as rooms,
food and beverage, sales and marketing, general and administrative and
maintenance. The Company then develops a detailed action plan to implement the
new standards of operation. If necessary, certain departments are quickly and
aggressively streamlined to maximize efficiencies and reduce costs. The
Company's system of investigation, prioritization and immediate action is
designed to ensure that the hotel will achieve optimal performance as rapidly as
possible.

After implementation of initial improvements, the Company continues to seek
methods to increase revenue and operating cash flow from the hotels. Quality of
facilities and customer service is continually reviewed and emphasized by
management. As the Company gains experience with the operations of a particular
hotel, the marketing plan and budget for the hotel are refined to increase the
occupancy rate and ADR at the hotel, while maintaining effective cost controls.
In addition, regional and general managers are provided incentives through cash
bonuses to achieve revenue and operating goals.

OPERATIONS

The Company provides a wide variety of services to its portfolio hotels.
Such services include those traditionally provided by major hotel operating
companies, such as sales and marketing support, financial planning and
reporting, rooms, food and beverage and engineering services, human resources
and training programs and legal support, as well as certain specialized support
services, such as purchasing, project management, leasing and risk management.

The Company's services are provided by hotel personnel who are employed,
trained and supported by the Company's experienced corporate personnel. Most of
these services are provided by the Company in consideration of the management
fees payable to the Company, which are based upon a percentage of gross revenues
and/or operating profits. The Company's management agreements generally provide
for payment to the Company of a base fee equal to a specific percentage of the
hotel's gross revenues. The Company's base fees range from 1% to 6% of gross
revenues, with an average of approximately 2.4%. In addition, some of the
Company's contracts provide for payment of an incentive fee based on operating
profits or net operating cash flow if certain operating profit or cash flow
levels are achieved. The Company's incentive fees generally range from 10% to
20% of operating profits or net operating cash flow. For the nine months ended
September 30, 1996, on a pro forma basis, base fees represented approximately
84.5% of the Company's net management fees, and incentive fees represented the
remaining 15.5% of net management fees. Hotel owners are responsible for all
operating expenses, capital expenditures and working capital requirements
related to the managed hotels. The Company charges the third-party owners
incremental fees for providing purchasing,

32
<PAGE> 40

project management and equipment leasing services. The following is a brief
description of each of the services generally provided by the Company to its
managed hotels:

Purchasing. The Company assists its portfolio hotels with purchases of a
wide variety of goods and services, including perishable food, consumable
supplies, dry goods, linens, cable television systems, telephone systems,
advertising agency services, independent marketing services, consulting
services, printing services, furniture, fixtures and equipment. The Company's
purchasing service is a key element of its operating system and its ability to
improve the profitability of its portfolio hotels. As the largest independent
hotel management company in the United States, the Company has significant
leverage to negotiate competitive prices on goods and services from both local
and national vendors. As a result, the Company is able to pass along substantial
savings to its hotels. The purchasing services provided by the Company are
offered at a fee based on merchandise value.

Project Management. The Company assists and advises its portfolio hotels on
all aspects of renovation and reconstruction projects, including design,
budgeting, scheduling, purchasing, systems, materials and contracting. The
Company is actively involved in each stage of a project, from planning through
completion of construction. The project management services provided are offered
on a contracted fee basis.

Leasing. The Company offers equipment leasing services to its portfolio
hotels for furniture and office equipment such as computers, telephone equipment
and photocopiers. The Company generally leases such items for a term of three to
six years. The Company also provides some shorter-term rentals. The Company
offers equipment leasing services primarily as a convenience for its hotels. As
of October 15, 1996, the Company provided leasing services to 29 of the hotels
in the Company's portfolio.

Risk Management. Through its subsidiary, Northridge, the Company offers its
portfolio hotels reinsurance and risk management services. The Company purchases
insurance from major insurance carriers at attractive rates due to the Company's
high volume purchasing and exceptional claims history. The Company then provides
its hotels the opportunity to participate in the policy at prices and coverages
more advantageous than third-party hotel owners could otherwise obtain. As of
October 15, 1996, over 72.3% of the Company's managed properties participated in
its insurance program, which currently covers over $2.8 billion in insurable
values. In conjunction with its risk management services and in order to
minimize its operating liabilities, the Company sets policies regarding the
standards of operation to which all of its portfolio hotels and their employees
must adhere.

Sales and Marketing Support. The Company provides its portfolio hotels with
traditional sales and marketing support, as well as customized assistance, to
identify and attract potential business, leisure and convention guests.

Rooms Services. The Company assists its portfolio hotels in developing
quality standards and operating procedures for room operations, while focusing
on controlling expenses and maximizing profits. Such assistance includes:

- Developing the concept, design and staffing requirements for the front
office, housekeeping, property maintenance, laundry, valet,
telecommunications, garage and other guest services departments;

- Establishing quality standards for products and services and evaluating
performance against these standards;

- Conducting training conferences and workshops for rooms department
employees at all levels;

- Creating operating procedures, training manuals, reference guides and
training programs;

- Developing, maintaining and auditing front office software applications
and training staff in their proper usage; and

- Selecting equipment and supplies such as linens, guest room amenities and
uniforms.

Food and Beverage Services. The Company assists its portfolio hotels in
developing high quality, profitable food and beverage operations as well as
innovative approaches to food and beverage concepts and designs. Such assistance
includes:

- Providing educational and technical training materials and seminars on
how to improve the technical skills of employees;

33
<PAGE> 41

- Establishing quality levels and management guidelines for new and
existing food and beverage facilities in accordance with area market
expectations;

- Providing ongoing research and development of systems and equipment;

- Creating and implementing system-wide promotional programs to enhance
hotel revenues;

- Conducting business audits that analyze current financial performance
against industry norms, providing a detailed review of existing
procedures and programs and setting a plan for achieving goals in
business growth and cost containment; and

- Providing low cost access to the freshest and highest quality food
products and beverages available in the market.

Human Resources and Training Programs. The Company's human resources
department is responsible for designing the employee selection process, creating
competitive compensation programs and developing appropriate training programs
at all levels. The Company's human resources department has developed 26
training programs to introduce new employees to the Company's methods of
operation and to augment their skills. The training programs focus on such areas
as supervisory development, middle management training, career planning,
technical training and executive development. In addition, Company employees are
required to attend outside courses developed by a variety of managerial and
technical organizations both within and outside the industry.

Financial Planning and Reporting. The Company provides its portfolio hotels
with a wide variety of accounting, financial reporting and financial planning
services that assist the hotel owners in making informed decisions.

Management Information Systems. The Company provides its portfolio hotels
with access to key operating information and technologies as well as on-going
systems support. Access to key information enables the Company's hotels to set
operating objectives and measure their operating performance on a daily basis.

Engineering Services. The Company provides its portfolio hotels with
expertise in physical plant systems such as mechanical, plumbing, electrical,
fire and life safety and swimming pools.

Legal Support. The Company's in-house legal department provides its
portfolio hotels with legal support with respect to employment law issues,
liquor licensing and various vendor and service contract negotiations.

THE COMPANY'S PORTFOLIOS

The Company has achieved superior operating results as compared to other
hotel operating companies as a result of its ability to successfully manage a
highly diverse group of hotels and other properties, both in terms of their
geographic location and the segment of the lodging industry they serve. The
Company operates hotels throughout the United States and in Canada, Mexico,
Israel, the Caribbean, Thailand, Panama and Russia. The Company also manages
hotels in each segment of the lodging industry--luxury, upscale, mid-scale,
economy and budget. In addition, the Company operates hotels in diverse
geographic locations and market segments which makes the Company less
susceptible to unfavorable general and regional economic conditions.

To facilitate the management of its diverse portfolio of hotels, the
Company has divided its hotels among three separate portfolios--Interstate
(luxury and upscale), Crossroads (mid-scale, upper economy and budget) and
Colony (hotels and resorts, including condominium and timeshares)--as indicated
in the following table and as described more fully below.

<TABLE>
<CAPTION>
NUMBER NUMBER % OF 1996 NET
THE COMPANY'S PORTFOLIOS OF HOTELS OF ROOMS MANAGEMENT FEES(1)
---------------------------------- --------- -------- ------------------
<S> <C> <C> <C>
Interstate........................ 84 27,240 84%
Crossroads........................ 54 7,038 11
Colony............................ 23 2,353 5
--- ------ ---
Total........................ 161 36,631 100%
=== ====== ===
</TABLE>

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

(1) For the nine months ended September 30, 1996.

34
<PAGE> 42

Interstate Portfolio. Interstate, the original and largest of the Company's
three hotel management portfolios and the core of its hotel management business,
consists of luxury and upscale hotels, suites and resorts, comprised of 84
hotels with a total of 27,240 rooms at October 15, 1996. Among Interstate's top
performing hotels are the 20 Owned Hotels contained in this portfolio. These
Owned Hotels, which contain an aggregate of 6,049 rooms, produced superior
operating results in 1995 and the first nine months of 1996, achieving an
average occupancy rate of 73.4% and 75.1%, respectively, ADR of $87.39 and
$95.97, respectively, and REVPAR of $64.16 and $72.07, respectively, compared to
industry averages for upscale hotels of a 68.5% occupancy rate, ADR of $80.38,
and REVPAR of $55.06, for 1995. The Company expects further improvement in the
results of operations of the Owned Hotels as the effects of the repositioning of
certain of them are realized.

The Company manages many of the Interstate portfolio hotels under brand
names such as Colony(R), Doubletree(TM), Embassy Suites(R), Hilton(TM), Holiday
Inn(R), Marriott(R), Radisson(TM), Sheraton(TM) and Westin(TM). Among the
well-known hotels in the Interstate portfolio are: The Charles Hotel at Harvard
Square in Cambridge, Massachusetts; the Don CeSar Beach Resort in St. Petersburg
Beach, Florida; the Hay-Adams Hotel in Washington, D.C.; the Westin Bonaventure
in Los Angeles, California; Marriott's Casa Marina Resort in Key West, Florida;
the Marriott at Sawgrass Resort in Ponte Vedra Beach, Florida; and the Westin
Resort Miami Beach (formerly the Doral Ocean Beach Resort) in Miami Beach,
Florida. Interstate's hotels are geographically diversified, located in 23
states throughout the United States and in Canada.

Interstate's hotels serve a diverse customer base comprised of travelers
involved in business, leisure and convention and meeting activities. Business
travelers, which represent the largest and most profitable customer group for
Interstate's hotels, have increased as a proportion of total customers since
1991 due to the Company's strategic efforts to attract more business travelers
and the general improvement in the economy.

Interstate's hotels are typically large upscale hotels or resorts with high
volume food, catering and beverage operations and ample meeting space. These
hotels provide guests with high quality rooms, facilities and guest services
such as concierge services, room service, health clubs, business centers, voice
mail, in-room movies and other amenities. Many of the hotels in the Interstate
portfolio also provide quality leisure activities. For example, the Marriott at
Sawgrass Resort offers golfing privileges at the famous TPC Stadium golf course.

35
<PAGE> 43

The following table provides a complete listing of the hotels in the
Interstate portfolio as of October 15, 1996:

INTERSTATE PORTFOLIO HOTELS

<TABLE>
<CAPTION>
NUMBER
OF COMMENCEMENT
HOTEL LOCATION ROOMS DATE
----- -------- ----- ----
<S> <C> <C> <C>
Colony
Toronto Colony Hotel Toronto, Ontario 717 Dec. 93
Delta
Toronto Delta Meadowvale Mississauga, Ontario 374 Feb. 96
Doubletree
Doubletree Resort Surfside Clearwater Beach, FL 428 Dec. 94
Embassy Suites
Schaumburg Embassy Suites (1) Schaumburg, IL 209 Dec. 95
Embassy Suites Phoenix North (formerly
Fountain Suites) (1)(2) Phoenix, AZ 314 Aug. 96
Hilton
Denver Hilton South (1) Greenwood Village, CO 305 Dec. 94
Ft. Lauderdale Airport Hilton (1) Dania, FL 388 Dec. 95
Gaithersburg Hilton Gaithersburg, MD 301 June 93
Newark Hilton Gateway Newark, NJ 253 Sep. 95
Parsippany Hilton Parsippany, NJ 508 Sep. 91
Huntington Hilton (1) Melville, NY 302 Dec. 95
Holiday Inn and Crowne Plaza
San Francisco Holiday Inn Golden Gateway San Francisco, CA 498 Aug. 92
Seattle Crowne Plaza Seattle, WA 415 Dec. 92
Marriott
Marriott's Laguna Cliffs Resort Dana Point, CA 346 Oct. 94
San Diego Marriott Suites Downtown San Diego, CA 264 Jan. 90
San Diego Marriott Mission Valley (3) San Diego, CA 350 Dec. 88
San Francisco Marriott Fisherman's Wharf San Francisco, CA 255 Oct. 88
Warner Center Marriott (1) Woodland Hills, CA 463 Feb. 94
Colorado Springs Marriott (1) Colorado Springs, CO 310 Feb. 89
Trumbull Marriott (3) Trumbull, CT 321 Dec. 85
Boca Raton Marriott Boca Raton, FL 256 Aug. 87
Ft. Lauderdale Marriott North (3) Ft. Lauderdale, FL 321 Dec. 86
Marriott's Casa Marina Resort Key West, FL 312 Dec. 78
Marriott's Reach Resort (3) Key West, FL 149 Dec. 93
Orlando Airport Marriott Orlando, FL 484 Nov. 88
Orlando Marriott Orlando, FL 1,064 Nov. 88
Marriott at Sawgrass Resort Ponte Vedra Beach, FL 516 Aug. 88
Atlanta Marriott North Central (1) Atlanta, GA 287 Feb. 95
Boston Marriott Andover (1) Andover, MA 293 Dec. 95
Boston Marriott Westborough (1)(2) Westborough, MA 223 July 91
Minneapolis Marriott Southwest (3) Minnetonka, MN 320 Nov. 88
St. Louis Marriott West (3) St. Louis, MO 300 Jan. 92
Charlotte Marriott Executive Park Charlotte, NC 298 Sep. 83
Albany Marriott (3) Albany, NY 360 July 85
Syracuse Marriott East Syracuse, NY 250 July 77
</TABLE>

36
<PAGE> 44

<TABLE>
<CAPTION>
NUMBER
OF COMMENCEMENT
HOTEL LOCATION ROOMS DATE
----- -------- ------ ------------
<S> <C> <C> <C>
Cincinnati Marriott (3) Cincinnati, OH 352 Mar. 86
Harrisburg Marriott (3) Harrisburg, PA 348 June 80
Pittsburgh Marriott City Center (4) Pittsburgh, PA 400 July 96
Pittsburgh Airport Marriott (3) Pittsburgh, PA 314 Nov. 87
Pittsburgh Green Tree Marriott (3) Pittsburgh, PA 467 Nov. 72
Marriott Suites at Valley Forge (1) Valley Forge, PA 229 Dec. 95
Philadelphia Marriott West (1) West Conshohocken, PA 286 Oct. 91
Providence Marriott (3) Providence, RI 345 Nov. 75
Chattanooga Marriott Chattanooga, TN 343 Jan. 88
Memphis Marriott Memphis, TN 320 Oct. 87
Arlington Dallas Marriott Arlington, TX 310 Dec. 92
Houston Marriott North at Greenspoint (1) Houston, TX 391 May 88
Roanoke Airport Marriott (1)(2) Roanoke, VA 320 Aug. 96
Radisson
Manhattan Beach Radisson Plaza Hotel Manhattan Beach, CA 380 Jan. 91
Radisson Plaza Hotel San Jose Airport
(1)(2) San Jose, CA 185 Dec. 95
Lisle Radisson (1)(5) Lisle, IL 242 Nov. 93
Englewood Radisson Hotel (1)(2) Englewood, NJ 192 Sept. 96
Sheraton
Sheraton Biscayne Bay Miami, FL 598 Oct. 86
Westin
Westin Bonaventure Los Angeles, CA 1,369 Dec. 95
Westin Resort Miami Beach (formerly the
Doral Ocean Beach Resort) (1)(2) Miami Beach, FL 417 Oct. 96
Independent
Lexington Hotel Phoenix, AZ 180 Nov. 93
Pala Mesa Resort Fallbrook, CA 133 June 93
Colonial Inn La Jolla, CA 75 Sep. 94
Cliffs at Shell Beach Resort Shell Beach, CA 165 Oct. 94
Goodwin Hotel Hartford, CT 124 Jan. 92
Hay-Adams Hotel Washington, DC 143 June 95
Don CeSar Beach Resort (6) St. Petersburg Beach, FL 275 Dec. 92
The Charles Hotel at Harvard Square Cambridge, MA 296 Feb. 85
Harbor View Hotel Edgartown, MA 124 July 94
Kelley House Edgartown, MA 59 July 94
Harbor House Hotel Nantucket, MA 112 July 94
Wharf Cottages and Marina Nantucket, MA 23 July 94
White Elephant Inn Nantucket, MA 96 July 94
Mission Point Resort Mackinac, MI 235 July 94
The Inn at Great Neck Great Neck, NY 85 May 96
Waterford Hotel Oklahoma City, OK 197 Dec. 94
The Bellevue Hotel Philadelphia, PA 170 Dec. 94
Founders Inn and Conference Center Virginia Beach, VA 240 Nov. 95
Fort Magruder Inn and Conference Center
(1) Williamsburg, VA 303 Oct. 95
</TABLE>

37
<PAGE> 45

<TABLE>
<CAPTION>
NUMBER
OF COMMENCEMENT
HOTEL LOCATION ROOMS DATE
---- -------- ------- ------------
<S> <C> <C> <C>
Other Contracts (7)
Ritz Carlton Phoenix Phoenix, AZ 280 July 96
Hyatt Regency Burlingame San Francisco, CA 793 Jan. 96
Hartford Marriott Farmington Farmington, CT 381 Jan. 95
Crowne Plaza Westshore Tampa, FL 272 Jan. 93
Hyatt Charlotte South Park Charlotte, NC 262 Jan. 93
Charlotte Marriott City Center Charlotte, NC 431 Jan. 93
The Mayfair New York New York, NY 201 July 96
Hyatt Fairlakes Fairfax, VA 316 Jan. 93
Hyatt Dulles Herndon, VA 317 Jan. 93
Tysons Corner Marriott (1) Tysons Corner, VA 390 Dec. 95
------
Total Interstate Rooms 27,240
Total Interstate Hotels 84
</TABLE>

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

(1) Denotes an Owned Hotel.

(2) Denotes a Post-IPO Acquisition.

(3) An affiliate of Milton Fine (but not the Company) owns a minority interest
in this hotel.

(4) The Company owns an approximate 5% limited partnership interest in this
hotel.

(5) Includes an office center containing approximately 150,000 square feet.

(6) The Company owns an approximate 13% limited partnership interest in this
hotel.

(7) The Company provides certain services, such as asset management or
consulting services but not property management services, to these hotels.

Crossroads Portfolio. The Company's Crossroads portfolio consists primarily
of mid-scale, upper economy and budget hotels, motels and inns comprised of 54
hotels with a total of 7,038 rooms at October 15, 1996, excluding 48 hotels and
motels with a total of 5,811 rooms in which the Company acquired a 15-year
leasehold interest and management contracts for eight hotels with a total of 776
rooms in connection with the Equity Inns Transaction. See "Recent
Developments--Equity Inns Transaction." The Company established the Crossroads
portfolio in 1990 to broaden the scope of its hotel management business beyond
upscale hotels. In the nine months ended September 30, 1996, the Crossroads
portfolio accounted for approximately $2.7 million, or 11.4%, of the Company's
net management fees.

Crossroads manages hotels under brand names such as Best Western(TM),
Comfort Inn(TM), Courtyard by Marriott(R), Days Inn(TM), Fairfield Inn(TM),
Hilton(TM), Holiday Inn(R), Howard Johnson(TM), Marriott(R), Radisson(TM),
Ramada(TM), Sleep Inn(TM) and Super 8(TM) and also manages several independent
hotels. Crossroads' hotels are located in 18 states, primarily on the east and
west coasts. The hotels in the Crossroads portfolio appeal to value-oriented
business and leisure travelers. They are typically mid-scale and upper economy
hotels with limited food, catering and beverage operations and little or no
meeting space. Crossroads' hotels provide guests with modest rooms, facilities
and guest services. Amenities may include complimentary continental breakfasts,
pool facilities, facsimile services and cable television.

38
<PAGE> 46

The following table provides a complete listing of the hotels in the
Crossroads portfolio as of October 15, 1996 and does not include the hotels the
Company manages or leases as a result of the Equity Inns Transaction:

CROSSROADS PORTFOLIO HOTELS

<TABLE>
<CAPTION>
NUMBER
OF COMMENCEMENT
HOTEL LOCATION ROOMS DATE
----- -------- ------ ------------
<S> <C> <C> <C>
Best Western
Canton Best Western University Inn Canton, NY 102 Apr. 95
Comfort Inn
Comfort Inn Murray Hill Murray Hill, NY 128 Nov. 95
Courtyard by Marriott
Marina Del Rey Courtyard by Marriott Marina Del Rey, CA 276 May 95
Albany Courtyard by Marriott Albany, NY 78 Jan. 96
Days Inn
College Park Days Inn College Park, MD 68 Feb. 95
Chambersburg Days Inn Chambersburg, PA 107 May 94
Virginia Beach Days Inn Airport Virginia Beach, VA 148 Nov. 94
Fairfield Inn
Vicksburg Fairfield Inn Vicksburg, MS 81 July 95
Chambersburg Fairfield Inn Chambersburg, PA 74 Aug. 96
Hilton
Meadowlands Hilton Secaucus, NJ 295 Aug. 91
Columbus Hilton (1)(2) Columbus, GA 177 Oct. 96
Holiday Inn
Walnut Creek Holiday Inn Walnut Creek, CA 148 May 95
Ft. Lauderdale Beach Galleria Holiday Inn Ft. Lauderdale, FL 240 Dec. 94
Madeira Beach Holiday Inn Madeira Beach, FL 149 Dec. 94
Fort Wayne Holiday Inn Ft. Wayne, IN 147 Sep. 93
Brentwood Holiday Inn (1)(2) Brentwood, TN 247 July 96
Richmond Holiday Inn Richmond, VA 280 Aug. 94
Howard Johnson
Greenwich Howard Johnson Greenwich, CT 103 Sep. 93
Clearwater Central Howard Johnson Clearwater Beach, FL 193 Dec. 94
Ithaca Howard Johnson Ithaca, NY 72 Sep. 93
Latham Howard Johnson Latham, NY 146 Sep. 93
Utica Howard Johnson Utica, NY 147 Sep. 93
Marriott
Blacksburg Marriott (1)(2) Blacksburg, VA 148 Aug. 96
Radisson
Rochester Radisson Inn Rochester, NY 171 Sep. 93
Ramada
Santa Ana Ramada Grand Avenue Hotel Santa Ana, CA 182 Nov. 94
Ramada Inn Gulfview Clearwater Beach, FL 289 Dec. 94
Ft. Lauderdale Airport Ramada Inn Ft. Lauderdale, FL 298 Dec. 94
Niles Ramada Inn Niles, MI 127 Feb. 95
Bordentown Ramada Inn Bordentown, NJ 95 Feb. 95
</TABLE>

39
<PAGE> 47

<TABLE>
<CAPTION>
NUMBER
OF COMMENCEMENT
HOTEL LOCATION ROOMS DATE
----- -------- ------ ------------
<S> <C> <C> <C>
Super 8
Flagstaff Super 8 Motel Flagstaff, AZ 86 Dec. 94
Arcata Super 8 Motel Arcata, CA 62 Dec. 94
Indio Super 8 Motel Indio, CA 70 Dec. 94
Red Bluff Super 8 Motel Red Bluff, CA 72 Dec. 94
Mission Bay Super 8 Motel San Diego, CA 117 Apr. 96
Selma Super 8 Motel Selma, CA 40 Dec. 94
Willows Super 8 Motel Willows, CA 41 Dec. 94
Yucca Valley Super 8 Motel Yucca Valley, CA 48 Dec. 94
Rock Falls Super 8 Motel Rock Falls, IL 63 Apr. 94
Somerset Super 8 Motel Somerset, KY 63 Apr. 96
Poplar Bluff Super 8 Motel Poplar Bluff, MO 63 Apr. 96
Miner/Sikeston Super 8 Motel Sikeston, MO 63 Apr. 96
Sleep Inn
Destin Sleep Inn Destin, FL 77 Sep. 96
Sarasota Sleep Inn Sarasota, FL 80 Sep. 96
Tallahassee Sleep Inn Tallahassee, FL 79 Sep. 96
Ocean Springs Sleep Inn Ocean Springs, MS 78 Sep. 96
Independent
Mirage Springs Hotel and Casino Desert Hot Springs, CA 110 Mar. 96
Azure Tides Inn Sarasota-Lido Key, FL 59 Dec. 95
Mears Great Oak Landing Chestertown, MD 28 June 95
College Park Royal Pine Inn College Park, MD 114 Feb. 95
Government Hotel Charlotte, NC 195 Dec. 95
Brookstown Inn Winston-Salem, NC 71 July 94
Plainview Plaza Hotel Plainview, NY 182 Sep. 93
Virginia Beach Pavilion Towers Virginia Beach, VA 292 Dec. 95
Other Contracts (3)
Greensboro Ramada Inn Airport Greensboro, NC 169 Oct. 94
------
Total Crossroads Rooms 7,038
Total Crossroads Hotels 54
</TABLE>

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

(1) Denotes an Owned Hotel.

(2) Denotes a Post-IPO Acquisition.

(3) The Company provides certain services, such as accounting or consulting
services but not property management services, to this hotel.

Colony Portfolio. The Company's Colony portfolio consists of upscale and
mid-scale leisure hotels and resorts, condominiums and timeshares, comprised of
23 properties with a total of 2,353 rooms at October 15, 1996. The Company
purchased the assets of Colony Hotel and Resorts in May 1994 for $1 million,
payable in five equal annual installments through 1999. The portfolio of resorts
enabled the Company to expand its presence in the resort market and establish a
presence in the global market. In the nine months ended September 30, 1996, the
Colony portfolio accounted for approximately $1.1 million, or 4.8%, of the
Company's net management fees.

Colony operates most of its properties under the brand name "A Colony Hotel
and Resort." Colony's managed hotels and other properties are located in six
states (including vacation destinations such as Hawaii, Colorado and Vermont) as
well as Mexico, Israel, the Caribbean, Thailand, Panama and Russia.

40
<PAGE> 48

The properties in the Colony portfolio appeal primarily to leisure
travelers. They include upscale and mid-scale properties with a wide range of
room types, facilities and guest services. Most of Colony's properties provide
amenities such as golf, tennis, beach facilities and/or water or snow skiing,
depending on the location.

The following table provides a complete listing of the properties in the
Colony portfolio as of October 15, 1996:

COLONY PORTFOLIO PROPERTIES

<TABLE>
<CAPTION>
NUMBER
OF COMMENCEMENT
HOTEL LOCATION ROOMS DATE
----- -------- ------- ------------
<S> <C> <C> <C>
Hotels and Resorts
Hawaii Polo Inn (1) Honolulu, HI 72 June 94
Lawaii Beach Resort Koloa, Kauai, HI 171 June 94
Maui El Dorado Resort Lahaina, HI 102 June 96
Banyan Harbor Lihue, Kauai, HI 148 June 95
Alana Waikiki Hotel Waikiki Beach, HI 313 Feb. 96
Lake Lure Golf Resort Lake Lure, NC 47 June 94
Montauk Yacht Club Resort and Marina Montauk, NY 107 June 94
Stratton Village Lodge Stratton Mountain, VT 91 June 94
Stratton Mountain Inn Stratton Mountain, VT 119 June 94
Hotel Tverskaya Moscow, Russia 122 Sep. 95
Hotel Suites Central Park Panama City, Panama 68 July 96
Kamala Bay Terrace Phuket, Thailand 117 June 94
Vacation Villa Resorts
Ocotillo Lodge Palm Springs, CA 124 Nov. 95
Mountainside at Silvercreek Silvercreek, CO 120 June 94
Kona Bali Kai Resort Kailua-Kona, HI 66 June 94
Poipu Kai Resort Koloa, Kauai, HI 85 June 94
Golden Eagle Resort (1) Stowe, VT 89 June 94
Colony Tel Aviv Resort (1) Tel Aviv, Israel 80 June 94
San Felipe Marina and Spa (1) Baja, Mexico 52 June 94
Puerto Aventuras Beach Hotel Cancun, Mexico 30 Sep. 95
Point Pleasant St. Thomas, Virgin Islands 110 Sep. 95
Timothy Beach Resort St. Kitts, West Indies 60 June 94
Caribees Resort St. Lucia, West Indies 60 Oct. 95
------
Total Colony Rooms 2,353
Total Colony Properties 23
</TABLE>

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

(1) Denotes a property for which the Company provides only franchise and/or
marketing services.

41
<PAGE> 49

GEOGRAPHIC DIVERSIFICATION

The geographic distribution of the Company's hotel portfolio reflects the
Company's belief that geographic diversification helps to insulate its portfolio
from local market fluctuations that are typical for the lodging industry. The
following table summarizes certain information with respect to the distribution
of the Company's hotel portfolio as of October 15, 1996:

<TABLE>
<CAPTION>
% OF PRO FORMA 1996 % OF PRO FORMA
NUMBER NUMBER % OF MANAGEMENT 1996 OWNED
STATE/COUNTRY OF HOTELS OF ROOMS TOTAL ROOMS REVENUES (1) HOTEL REVENUES
- ----------------------------- --------- -------- ----------- -------------------- ------------------
<S> <C> <C> <C> <C> <C>
Florida (2) 22 6,944 19.0% 24.0% 12.5%
California (3) 25 6,566 17.9 16.8 11.0
Pennsylvania (4) 9 2,395 6.5 6.8 10.3
Massachusetts (5) 8 1,226 3.3 6.4 9.0
New York (6) 14 2,331 6.4 5.8 6.8
New Jersey (7) 5 1,343 3.7 4.1 2.7
Tennessee (8) 3 910 2.5 4.1 2.3
Canada 2 1,091 3.0 3.1 --
North Carolina 7 1,473 4.0 3.0 --
Missouri 3 426 1.2 2.6 --
Connecticut 4 929 2.5 2.5 --
Rhode Island 1 345 0.9 2.3 --
Washington 1 415 1.1 2.0 --
Virginia (9) 10 2,754 7.5 1.9 14.2
Russia 1 122 0.3 1.8 --
Ohio 1 352 1.0 1.7 --
Texas (10) 2 701 1.9 1.6 4.6
Hawaii 7 957 2.6 1.4 --
Maryland 4 511 1.4 1.4 --
Minnesota 1 320 0.9 1.2 --
Oklahoma 1 197 0.5 0.9 --
Arizona (11) 4 860 2.3 0.8 3.9
Michigan 2 362 1.0 0.7 --
Colorado (12) 3 735 2.0 0.5 9.1
District of Columbia 1 143 0.4 0.5 --
Vermont 3 299 0.8 0.4 --
Israel 1 80 0.2 0.3 --
Virgin Islands 1 110 0.3 0.3 --
Indiana 1 147 0.4 0.3 --
Mississippi 2 159 0.4 0.2 --
West Indies 2 120 0.3 0.2 --
Illinois (13) 3 514 1.4 0.2 7.3
Kentucky 1 63 0.2 0.1 --
Georgia (14) 2 464 1.3 -- 6.3
Thailand 1 117 0.3 * --
Mexico 2 82 0.2 * --
Panama 1 68 0.2 * --
--- ------ ----- ----- -----
Totals 161 36,631 100.0% 100.0% 100.0%
=== ====== ===== ===== =====
</TABLE>

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

* Less than 0.1%

(1) Represents the percentage of the Company's net management fees and asset
management fees for the nine months ended September 30, 1996, including the
Owned Hotels.

(2) Includes two Owned Hotels, containing 805 rooms.

(3) Includes two Owned Hotels, containing 648 rooms.

42
<PAGE> 50

(4) Includes two Owned Hotels, containing 515 rooms.

(5) Includes two Owned Hotels, containing 516 rooms.

(6) Includes one Owned Hotel, containing 302 rooms.

(7) Includes one Owned Hotel, containing 192 rooms.

(8) Includes one Owned Hotel, containing 247 rooms.

(9) Includes four Owned Hotels, containing 1,161 rooms.

(10) Includes one Owned Hotel, containing 391 rooms.

(11) Includes one Owned Hotel, containing 314 rooms.

(12) Includes two Owned Hotels, containing 615 rooms.

(13) Includes two Owned Hotels, containing 451 rooms.

(14) All hotels in this state are Owned Hotels, and management fees relating
thereto are eliminated on a pro forma basis.

NATIONAL FRANCHISE AFFILIATIONS

As an independent hotel operating company, the Company can choose the
franchises that will provide the greatest benefits to the hotels it manages.
Factors considered when selecting a franchise include brand recognition, access
to national reservations systems, national direct sales efforts, volume
purchasing agreements, and technical and business assistance. As of October 15,
1996, 134 hotels were operated under a national or regional franchise system.
Operating under multiple franchise systems provides the Company with further
diversification, less dependence on the continued popularity of one brand and
less vulnerability to new requirements of any individual franchise system. The
following chart summarizes certain information with respect to the franchise
affiliations of the hotels in the Company's portfolio as of October 15, 1996:

<TABLE>
<CAPTION>
NUMBER NUMBER % OF
FRANCHISE OF HOTELS OF ROOMS TOTAL ROOMS
- --------------------------------- --------- -------- ------------
<S> <C> <C> <C>
Marriott (1) 39 13,517 36.9%
Colony 24 3,070 8.4
Hilton (2) 8 2,529 6.9
Holiday Inn and Crowne Plaza (3) 9 2,396 6.5
Westin (4) 2 1,786 4.9
Hyatt 4 1,688 4.6
Radisson (5) 5 1,170 3.2
Ramada 6 1,160 3.2
Super 8 12 788 2.2
Howard Johnson 5 661 1.8
Sheraton 1 598 1.6
Embassy Suites (6) 2 523 1.4
Doubletree 1 428 1.2
Delta 1 374 1.0
Courtyard by Marriott 2 354 1.0
Days Inn 3 323 0.9
Sleep Inn 4 314 0.9
Ritz Carlton 1 280 0.8
Fairfield Inn 2 155 0.4
Comfort Inn 1 128 0.3
Best Western 1 102 0.3
Independent (7) 28 4,287 11.6
--- ------ -----
Totals 161 36,631 100.0%
=== ====== =====
</TABLE>

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

(1) Includes 11 Owned Hotels, containing 3,340 rooms.

(2) Includes four Owned Hotels, containing 1,172 rooms.

43
<PAGE> 51

(3) Includes one Owned Hotel, containing 247 rooms.

(4) Includes one Owned Hotel, containing 417 rooms.

(5) Includes three Owned Hotels, containing 619 rooms.

(6) Includes two Owned Hotels, containing 523 rooms.

(7) Includes one Owned Hotel, containing 303 rooms.

MANAGEMENT

The Company has a distinct corporate culture and management style, which
has evolved over the Company's 35 years of operation. The Company's management
seeks to maintain a blend of centralized control over strategic issues while
encouraging decentralized decision-making with respect to operational issues.
The Company believes that the operational details which determine the quality of
a guest's hotel stay are best managed by on-site hotel personnel.

The Company has a human resources department dedicated to designing the
employee selection process, creating competitive compensation programs and
developing appropriate training programs at all levels. The Company's human
resources department has developed 26 training programs to introduce new
employees to the Company's method of operation and to augment their managerial
skills. The training programs focus on such areas as supervisory development,
middle management training, career planning, technical training and executive
development. In addition, Company employees are required to attend outside
courses developed by a variety of managerial and technical organizations both
within and outside the industry.

The Company's executive officers supervise core departments such as
accounting, management information systems, marketing, central purchasing and
human resources. The corporate office utilizes information systems that track
each hotel's daily occupancy, average room rate and revenues from rooms and food
and beverage operations. By having the latest information available at all
times, management believes it is better able to respond to changes in each
market and control variable expenses to maximize the profitability of each
hotel. The Company's senior management has been with the Company for an average
of 12 years and has an average of 23 years of experience in the lodging
industry. See "Risk Factors--Substantial Reliance on Senior Management."
Following consummation of the Offering, the senior management will beneficially
own 20.4% of the outstanding shares of Common Stock. As a result, the interests
of the Company's senior management will be closely aligned with the interests of
the Company's shareholders. See "Management--Stock Option Grants" and
"--Compensation Plans and Arrangements."

The Company's hotel management business is organized generally around
geographic regions to ensure a close working relationship among individuals at
the Company's hotels and at its corporate offices. Each region is headed by a
Regional Vice President or a Regional Director of Operations who is responsible
for overseeing and monitoring the hotels in his or her respective region to
ensure that they are operating under the specific guidelines established by the
Company. Each Regional Vice President and Regional Director of Operations heads
a team that specializes in sales and marketing, operations and accounting. The
regional teams are responsible for ensuring that the on-site management
personnel adhere to the Company's policies, take full advantage of the Company's
corporate resources and achieve financial and operating targets. The Company's
five Regional Vice Presidents and eight Regional Directors of Operations have
been with the Company an average of seven years.

Each of the Company's hotels is managed by a General Manager and an
Executive Committee, which is comprised of the hotel department heads. In
addition to conducting the day-to-day operations of the hotel, the General
Manager and Executive Committee are responsible for developing and implementing
an accurate, timely and detailed annual budget, comprehensive marketing plan,
capital improvement program, human resources development program and short- and
long-term operating strategies. The General Manager and the Executive Committee
regularly review current activity and discuss overall performance and direction
of key areas of the hotel. The Company's 66 General Managers in the Company's
Interstate division have been with the Company an average of eight years.

44
<PAGE> 52

COMPETITION

The hotel management business is highly competitive. Some of the Company's
competitors may have substantially greater marketing and financial resources
than the Company. Competition among independent hotel management companies has
intensified in the past few years, and, as a result, hotel owners in many cases
have been requesting lower base fees coupled with greater incentive fees or
seeking capital contributions from independent hotel management companies in the
form of loans or equity investments. See "Risk Factors-- Competition for
Management Agreements."

PROPERTIES

The principal executive offices of the Company are located in Pittsburgh,
Pennsylvania and are occupied pursuant to a lease that expires December 31,
1997. The Company is currently renegotiating the term of this lease. In addition
to its executive offices, the Company leases office space in Scottsdale,
Arizona, Honolulu, Hawaii and Orlando, Florida. The Company believes that such
properties are sufficient to meet its present needs and does not anticipate any
difficulty in securing additional space, as needed, on terms acceptable to the
Company.

EMPLOYEES

The Company employs most of the employees at its owned, leased and managed
hotels as well as those at its corporate offices; however, third-party hotel
owners pay the wages and benefits for all the employees in their hotels. As of
October 15, 1996, the Company had approximately 19,500 employees, approximately
19,300 of whom were employees of specific hotels.

Eleven of the properties under the Company's management, employing
approximately 2,300 workers, are subject to labor union contracts. The Company
has not experienced any union strikes or other material labor disruptions.

GOVERNMENT REGULATION

The lodging industry in general, and the Company in particular, is subject
to extensive foreign and U.S. federal, state and local government regulations.
See "Risk Factors--Government Regulation." There are currently no material legal
or administrative proceedings pending against the Company with respect to any
regulatory matters, and the Company believes that it is in compliance in all
material respects with statutory and administrative regulations with respect to
its business.

ENVIRONMENTAL MATTERS

Under various foreign and U.S. 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. In certain jurisdictions,
liability may be imposed upon owners or operators of real properties for
personal injury associated with exposure to asbestos containing materials.
Environmental laws also may impose restrictions on the manner in which property
may be used or businesses may be operated, and these restrictions may result in
expenditures and require interruption of such businesses. In connection with its
current or previous operations or previous ownership of hotels, the Company may
be potentially liable for any of these costs under environmental laws and
related common law principles. The Company seeks to reduce its environmental
liability when it acquires hotels by conducting environmental audits of the
subject property. Although the Company currently is not aware of any material
environmental claims pending or threatened against it or any of its managed,
leased, owned or previously owned hotels, no assurance can be given that a
material environmental claim will not be asserted against, and ultimately result
in liability for, the Company. The cost of defending against, and ultimately
paying or settling, claims of liability or of remediating a contaminated
property could have a material adverse effect on the financial condition and
results of operations of the Company. See "Risk Factors--Government Regulation."

All of the Owned Hotels have undergone Phase I environmental assessments
(which generally provide a physical inspection and database search but not soil
or groundwater analyses) within the last 30 months. Phase

45
<PAGE> 53

I environmental assessments were conducted at some but not all of the hotels
that the Company leases as a result of the Equity Inns Transaction. Equity Inns
has agreed to indemnify the Company with respect to environmental liabilities
relating to the leased hotels. In addition, most of the Company's currently
owned, leased and managed hotels have been inspected to determine the presence
of asbestos containing materials ("ACMs"). While ACMs are present in certain of
the properties, operations and maintenance programs for maintaining such ACMs
have been or are in the process of being designed and implemented, or the ACMs
have been scheduled to be or have been abated, at such hotels. The Company
believes that the presence of ACMs in its owned, leased and managed hotels will
not have a material adverse effect on its financial condition and results of
operations; however, there can be no assurance that this will be the case.

LEGAL PROCEEDINGS

In the ordinary course of its business, the Company is named as defendant
in legal proceedings resulting from incidents at its hotels. The Company
maintains comprehensive liability insurance and also requires hotel owners to
maintain adequate insurance coverage. The Company believes such coverage to be
of a nature and amount sufficient to ensure that it is adequately protected from
any material financial loss as a result of such claims. In addition, the Company
generally is indemnified by third-party hotel owners for lawsuits and damages
against it in its capacity as hotel manager. The Company currently is not the
subject of any legal actions for which it is neither insured nor indemnified and
which the Company believes will individually or in the aggregate have a material
adverse effect on the Company's financial condition or results of operations,
nor to the Company's knowledge is any such litigation threatened.

INTELLECTUAL PROPERTY

Generally, the third-party owners of the Company's portfolio hotels, rather
than the Company, are parties to the franchise agreements to use the trade names
under which the hotels are operated. The Company is a party, however, to
franchise agreements with Marriott International, Inc., Hilton Inns, Inc.,
Promus Hotels, Inc., Radisson Hotels International, Inc., Holiday Inns, Inc. and
Westin Hotel Company. The Company's franchise agreements to use the Marriott(R),
Hilton(TM), Embassy Suites(R), Radisson(TM) and Westin(TM) trade names expire at
varying times generally ranging from 2000 to 2015. The Company has registered,
or has applied with the United States Patent Office for registration of, a
number of trademarks and service marks incorporating the word "Colony," as well
as many other trademarks and service marks used in the Company's business.

Below are trade names utilized by the Company's portfolio hotels pursuant
to license arrangements with national franchisors. Other hotels in the Company's
portfolio operate pursuant to license agreements with these and other
franchisors.

EMBASSY SUITES(R), HILTON(TM), HOLIDAY INN(R), MARRIOTT(R), RADISSON(TM)
AND WESTIN(TM) ARE TRADEMARKS OF THIRD PARTIES, EXCEPT AS DESCRIBED HEREIN NONE
OF WHICH IS AFFILIATED WITH THE COMPANY, WHICH HAVE NOT ENDORSED OR APPROVED THE
OFFERING OR ANY OF THE FINANCIAL RESULTS OF THE HOTELS SET FORTH IN THIS
PROSPECTUS. A GRANT OF ANY SUCH FRANCHISE LICENSE FOR CERTAIN OF THE COMPANY'S
PORTFOLIO HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN
EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY ANY SUCH FRANCHISOR OR LICENSOR
(OR ANY OF THEIR RESPECTIVE AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE
COMPANY OR THE COMMON STOCK OFFERED HEREBY.

46
<PAGE> 54

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The Company's directors and executive officers, and their ages and
positions with the Company as of the date of this Prospectus, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------ ---- ------------------------------------------------
<S> <C> <C>
Milton Fine 70 Chairman of the Board
W. Thomas Parrington,
Jr. 51 President, Chief Executive Officer and Director
J. William Richardson 49 Chief Financial Officer and Executive Vice
President, Finance and Administration
Robert L. Froman 50 Executive Vice President, Development
Thomas D. Reese 51 Executive Vice President, Operations
Marvin I. Droz 41 Senior Vice President and General Counsel
David J. Fine 32 Director
Michael J. Aranson 52 Director
R. Michael McCullough 57 Director
Thomas J. Saylak 36 Director
Steven J. Smith 56 Director
</TABLE>

Milton Fine co-founded the Company in 1961 and served as its Chief
Executive Officer until April 1996. Mr. Fine is a life trustee of the Carnegie
Institute and Chairman of the Board of the Carnegie Museum of Art. He is also a
member of the Board of Directors of the Andy Warhol Museum in Pittsburgh,
Pennsylvania.

W. Thomas Parrington, Jr. has been with the Company since 1981, serving as
Chief Executive Officer since April 1996, President and Director since 1994 and
as Chief Financial Officer prior thereto.

J. William Richardson has served as the Company's Chief Financial Officer
and Executive Vice President of Finance and Administration since 1994. Mr.
Richardson previously served as Controller and Treasurer of the Company since
1988.

Robert L. Froman has been with the Company since 1984, serving as Executive
Vice President of Development since 1986.

Thomas D. Reese has served as Executive Vice President of Operations since
joining the Company in October 1996. Prior to joining the Company, Mr. Reese was
Vice President of Marriott Hotels, Resorts and Suites from August 1992 to
October 1996 and general manager of the New York Marriott Marquis Hotel prior
thereto.

Marvin I. Droz has served as Senior Vice President and General Counsel
since joining the Company in 1990.

David J. Fine has been a Director of the Company since 1991. Mr. Fine is a
lawyer specializing in the areas of real estate finance and property
acquisition, development and disposition. From 1991 to 1996, Mr. Fine was an
attorney with Eckert, Seamans, Cherin & Mellott, and from 1990 to 1991, he was
an attorney with Gaston and Snow. David J. Fine is the son of Milton Fine.

Michael J. Aranson has been a Director of the Company since 1991 and is an
Officer and Director of Resource Investments, Inc., which functioned as a
private broker-dealer and investment advisory firm, which he co-founded, from
1975 through 1986. Mr. Aranson and his affiliated entities serve as a general
partner of 67 investment partnerships which own commercial real estate in 33
states.

R. Michael McCullough has been a Director of the Company since 1991. Mr.
McCullough is Senior Chairman of Booz, Allen & Hamilton, Inc., an international
management and technology consulting firm.

Thomas J. Saylak has been a Director of the Company since December 1995.
Mr. Saylak is a Senior Managing Director of The Blackstone Group L.P. Prior to
joining Blackstone in 1993, Mr. Saylak was a principal in Trammell Crow
Ventures, the real estate investment, banking and investment management unit of
the Trammell Crow Company, from 1987 to 1993.

47
<PAGE> 55

Steven J. Smith has been a Director of the Company since 1991 and has been
a management consultant since 1989.

Board Committees. The Board has established two directorate committees--a
compensation committee (the "Compensation Committee") and an audit review
committee (the "Audit Review Committee"). The Compensation Committee is
comprised of persons who are not full-time employees of the Company and are not
eligible to receive options or other rights under any employee stock or other
benefit plan (other than plans in which only directors may participate). The
Compensation Committee reviews executive salaries, administers the bonus,
incentive compensation and stock option plans of the Company and approves the
salaries and other benefits of the executive officers of the Company. In
addition, the Compensation Committee consults with the Company's management
regarding pension and other benefit plans and compensation policies and
practices of the Company. The Audit Review Committee reviews the professional
services provided by the Company's independent auditors and the independence of
such auditors from the management of the Company. The Audit Review Committee
also reviews the scope of the audit by the Company's independent auditors, the
annual financial statements of the Company, the Company's system of internal
accounting controls and such other matters with respect to the accounting,
auditing and financial reporting practices and procedures of the Company as it
finds appropriate or as are brought to its attention, and meets from time to
time with members of the Company's internal audit staff. All of the members of
the Audit Review Committee are directors who are not employed by the Company or
any of its affiliates.

Director Nomination Procedures. Nominations for election of directors by
the shareholders may be made by the Board or by any shareholder entitled to vote
in the election of directors generally. The Company's By-Laws require that
shareholders intending to nominate candidates for election as directors deliver
written notice thereof to the Secretary of the Company not later than 60 days in
advance of the meeting of shareholders; provided, however, that in the event
that the date of the meeting is not publicly announced by the Company by
inclusion in a report filed with the Securities and Exchange Commission (the
"Commission") or furnished to shareholders, or by mail, press release or
otherwise more than 75 days prior to the meeting, notice by the shareholders to
be timely must be delivered to the Secretary of the Company not later than the
close of business on the tenth day following the day on which such announcement
of the date of the meeting was so communicated. The Company's By-Laws further
require that the notice by the shareholder set forth certain information
concerning such shareholder and the shareholder's nominees, including their
names and addresses, a representation that the shareholder is entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice, the class and number of
shares of the Company's stock owned or beneficially owned by such shareholder, a
description of all arrangements or understandings between the shareholder and
each nominee, such other information as would be required to be included in a
proxy statement soliciting proxies for the election of the nominees of such
shareholder and the consent of each nominee to serve as a director of the
Company if so elected. The chairman of the meeting may refuse to acknowledge the
nomination of any person not made in compliance with these requirements.
Pursuant to the Interstone Stockholders Agreement, the Fine Family Shareholders
have agreed to vote their shares of Common Stock for a director designee
selected by Blackstone. See "Certain Relationships and Transactions--The
Organization and Initial Public Offering."

DIRECTOR COMPENSATION

Directors who are not also officers or employees of the Company ("Outside
Directors") are paid an annual retainer of $15,000 plus $750 for each Board
meeting attended. In addition, members of each directorate committee are paid
$500 ($650 in the case of the committee chairperson) for each committee meeting
attended on days on which the Board does not also meet. Outside Directors are
also be entitled to participate in the Company's Stock Option Plan for
Non-Employee Directors (the "Director Plan").

The Director Plan is administered by a committee (the "Director Plan
Committee") of the Board to be comprised of not less than two directors. The
Director Plan Committee has the power to interpret the Director Plan, to
determine all questions thereunder and to adopt and amend rules and regulations
for the administration of the Director Plan, except that the Director Plan
Committee has no authority, discretion or power to determine the terms or timing
of options to be granted under the Director Plan.

48
<PAGE> 56

Subject to adjustment as described below, the number of shares of Common
Stock issued or transferred, plus the number of shares covered by outstanding
options, under the Director Plan may not exceed 100,000. Shares of Common Stock
covered by an option which is cancelled or terminated will again be available to
be issued or to be the subject of a stock option granted under the Director
Plan. The Director Plan Committee will make or provide for adjustments to the
maximum number of shares issuable pursuant to the Director Plan, the number and
kind of shares of Common Stock or other securities that are covered by
outstanding options and the exercise price applicable to outstanding options as
the Director Plan Committee determines to be equitably required to prevent
dilution or expansion of the rights of optionees which would otherwise result
from any stock dividend, stock split, combination of shares, recapitalization or
other change in the capital structure of the Company, any merger, consolidation,
spin-off, split-off, spin-out, split-up, reorganization, partial or complete
liquidation or other distribution of assets, issuance of warrants or other
rights to purchase securities or any other corporate transaction or event (any
such transaction or event, an "Antidilution Event") which the Director Plan
Committee determines has or may have an effect similar to any of the foregoing.

Any person who becomes an Outside Director will automatically receive at
such time an option to purchase 5,000 shares of Common Stock at an exercise
price per share equal to the market value of a share of Common Stock on the date
the individual first becomes a director (the options described in this sentence
are hereinafter referred to as "Initial Options"). For purposes of the Director
Plan and the Company's Equity Incentive Plan, "fair market value" is the closing
sale price of the shares of Common Stock as reported on the Composite
Transactions Tape of the New York Stock Exchange on the date an Option is
granted or, if there were no sales on such date, on the most recent preceding
date on which sales occurred. Initial Options will become exercisable to the
extent of 34% of the shares covered thereby after the optionee continuously has
served as a director through the next annual shareholders' meeting immediately
following such grant date, and to the extent of an additional 33% of the shares
covered thereby in each of the next two successive years if the optionee has
continuously served as a director in such years. Notwithstanding the foregoing,
if an optionee dies or becomes disabled, all Initial Options held by such
optionee will become immediately exercisable to the extent the Initial Options
would have been exercisable had the optionee remained a director through the
date of the Company's next annual shareholders' meeting. To the extent
exercisable, each Initial Option will be exercisable in whole or in part.

On the date of the annual meeting of the Company's shareholders in each
year, commencing with the 1997 annual meeting, each Outside Director elected at
or continuing his or her term after such meeting automatically will be granted a
non-qualified option to purchase 5,000 shares of Common Stock at an exercise
price per share equal to the fair market value of a share of Common Stock on
such date ("Annual Option"). Annual Options become exercisable on the same basis
as Initial Options.

The exercise price of stock options granted under the Director Plan may be
paid in cash, shares of Common Stock held by the optionee for at least six
months or a combination thereof. The requirement of payment in cash will be
deemed to be satisfied if the optionee provides for a broker who is a member of
the National Association of Securities Dealers, Inc. ("NASD") to sell a
sufficient number of shares of Common Stock being purchased so that the net
sales proceeds equal, at least, the exercise price, and such broker agrees to
deliver the exercise price to the Company not later than the settlement date of
the sale. Shares of Common Stock issued pursuant to the Director Plan may be
authorized but unissued shares or treasury stock. Fractional shares will not be
issued in connection with the exercise of a stock option, and cash in lieu
thereof will be paid by the Company. Each Initial Option and Annual Option (each
an "Option") will terminate on the earliest to occur of (i) three months after
the optionee ceases to serve as a director of the Company for a reason other
than the optionee's death or disability, (ii) one year following the optionee's
death or disability, or (iii) five years from the date the Option becomes
exercisable. Options are not be transferable other than by will or the laws of
descent or distribution and are exercisable during the lifetime of the Optionee
only by the Optionee or, in the event of the Optionee's incapacity, by the
Optionee's guardian or legal representative acting in a fiduciary capacity.

The Board may at any time amend or terminate the Director Plan.
Notwithstanding the foregoing, (i) except for the adjustments described above,
without the approval of the shareholders of the Company, no such amendment will
increase the maximum number of shares covered by the Director Plan, materially

49
<PAGE> 57

modify the requirements as to eligibility for participation in the Director Plan
or otherwise cause the Director Plan or any grant made pursuant thereto to cease
to satisfy any applicable condition of Rule 16b-3 ("Rule 16b-3") under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); (ii) no such
amendment will cause any Director to fail to qualify as a "non-employee
director" within the meaning of Rule 16b-3; (iii) provisions relating to the
amount and price of securities to be awarded and the timing of awards under the
Director Plan will not be amended more than once every six months, other than to
comport with changes in the Code, the Employment Retirement Income Security Act
or the rules promulgated thereunder; and (iv) no amendment or termination will
adversely affect any outstanding award without the consent of the director
holding such award.

In general, (i) no income will be recognized by an Optionee at the time an
Option is granted and (ii) at the time of exercise of an Option, ordinary income
will be recognized by the Optionee in an amount equal to the difference between
the Option price paid for the shares and the fair market value of the shares on
the date of exercise. To the extent that an Optionee recognizes ordinary income
in the circumstances described above, the Company will be entitled to a
corresponding deduction provided that, among other things, the income meets the
test of reasonableness, is an ordinary and necessary business expense and is not
an "excess parachute payment" within the meaning of Section 280G of the Code.

Options under the Director Plan will be granted automatically. The number
of Initial Options and Annual Options to be granted will depend on the number of
Outside Directors elected to the Board and the timing of any such election. In
connection with the IPO, each of Messrs. Aranson, McCullough and Smith were
granted Initial Options to purchase 5,000 shares of Common Stock at an exercise
price of $21.00 per share. No Options may be granted under the Director Plan
after April 2006.

EXECUTIVE COMPENSATION

The following table sets forth certain information regarding the
compensation paid to Milton Fine, who served as Chairman of the Board and Chief
Executive Officer in 1995 but is presently Chairman of the Board, and each of
the four other most highly compensated executive officers of the Company in 1995
(collectively, the "Named Executive Officers"). The information in the table
gives effect to the ratio applied to the exchange of shares of common stock of
the Company's predecessor, IHC, for shares of Common Stock of the Company in the
Organization (as defined in "Certain Relationships and Transactions--The
Organization and Initial Public Offering").

50
<PAGE> 58

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS PAYOUTS COMPENSATION(1)
- ------------------------------ -------- -------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Milton Fine................... $159,896 $ -- -- $ -- $50,000
Chairman of the Board
W. Thomas Parrington, Jr...... 313,781 378,000 227,906 2,600 18,000
President and Chief
Executive
Officer (2)
J. William Richardson......... 216,608 259,929 136,744 3,250 15,000
Chief Financial Officer and
Executive Vice President,
Finance and Administration
Robert L. Froman.............. 225,163 181,666 136,744 -- --
Executive Vice President,
Development
Marvin I. Droz................ 174,720 200,928 91,163 -- --
Senior Vice President and
General Counsel
</TABLE>

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

(1) Consists entirely of fees paid for services as a director of the Company's
subsidiary, Northridge.

(2) Mr. Parrington was President and Chief Operating Officer during 1995.

STOCK OPTION GRANTS

The following table sets forth certain information with respect to the
options granted to the Named Executive Officers during 1995 (the "Prior
Options"), all of which were cancelled prior to and in anticipation of the IPO
as described below. The information gives effect to the ratio applied to the
exchange of shares of common stock of IHC for shares of Common Stock of the
Company in the Organization.

OPTION GRANTS IN FISCAL YEAR 1995

<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF OPTIONS POTENTIAL REALIZABLE VALUE AT ASSUMED
SECURITIES GRANTED TO ANNUAL RATES OF STOCK PRICE
UNDERLYING EMPLOYEES IN MARKET PRICE APPRECIATION FOR OPTION TERM
OPTIONS 1995 FISCAL EXERCISE OR AT DATE OF EXPIRATION -------------------------------------
NAME GRANTED YEAR BASE PRICE GRANT(1) DATE 0% 5% 10%
- ------------------- ---------- ------------ ----------- ------------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mr. Fine........... -- -- -- -- -- -- -- --
Mr. Parrington..... 227,906 25.5% $ 3.18 $10.65 2013 $1,702,458 $5,116,490 $12,769,573
Mr. Richardson..... 136,744 15.3 5.52 10.65 2013 701,497 2,749,922 7,341,785
Mr. Froman......... 136,744 15.3 4.39 10.65 2013 856,017 2,904,443 7,496,306
Mr. Droz........... 91,163 10.2 10.65 10.65 2013 -- 1,365,622 4,426,875
</TABLE>

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

(1) Market price has been determined based upon a valuation performed in 1995.

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<PAGE> 59

The following table sets forth information regarding the values of the
Prior Options at December 31, 1995. The information gives effect to the ratio
applied to the exchange of shares of common stock of IHC for shares of Common
Stock of the Company in the Organization.

OPTION VALUES AT DECEMBER 31, 1995

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED OPTIONS VALUE OF UNEXERCISED
AT IN-THE-MONEY OPTIONS
NAME DECEMBER 31, 1995(1) AT DECEMBER 31, 1995(1)(2)
- ------------------------------------------ -------------------- --------------------------
<S> <C> <C>
Milton Fine............................... -- --
W. Thomas Parrington, Jr. ................ 227,906 $1,702,458
J. William Richardson..................... 136,744 701,497
Robert L. Froman.......................... 136,744 856,017
Marvin I. Droz............................ 91,163 --
</TABLE>

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

(1) All Prior Options held by the Named Executive Officers at December 31, 1995
were unexercisable.

(2) Market price has been determined based upon a valuation performed in 1995.

Prior to and in anticipation of the IPO, the Prior Options were cancelled
in consideration of the issuance to the Named Executive Officers and certain
other employees of restricted stock of IHC that was exchanged for a total of
785,533 shares of Common Stock, as follows: Mr. Droz: 75,037 shares; Mr. Fine: 0
shares; Mr. Froman: 155,579 shares; Mr. Parrington: 264,034 shares; Mr.
Richardson: 143,286 shares; and all other employees: 147,597 shares.

Outstanding Options. Pursuant to the Company's Equity Incentive Plan, the
Company has granted stock options to purchase an aggregate of 1,043,000 shares
of Common Stock at exercise prices ranging from $21.00 to $26.75 per share. Each
of the options has a ten-year term and becomes exercisable as to one-third of
the shares covered thereby on each of the first three annual anniversaries of
the date of grant so long as the holder thereof remains a full-time employee of
the Company, except that the options become immediately exercisable in the event
of the holder's death, disability or termination of employment by the Company
for Cause (as defined) or in the event that any person or group (other than the
Fine Family) becomes the beneficial owner of more than 30% of the outstanding
shares of capital stock of the Company entitled generally to vote in the
election of directors ("Voting Stock") and, within 12 months after such
acquisition, there is a change in a majority of the members of the Board (any
such event, a "Change in Control"). Unexercised options terminate 30 calendar
days after the holder's termination of employment by the Company, except that
such period is 180 days in the event of disability and 360 days in the event of
death.

Decisions as to the awarding of stock options or other awards are within
the discretion of the Compensation Committee. In connection with year-end
compensation reviews, the Compensation Committee is presently considering
granting stock options to purchase, or other awards with respect to, up to
500,000 shares of Common Stock.

Set forth in the table below are the numbers of shares of Common Stock
underlying the stock options granted under the Equity Incentive Plan to (i) the
Named Executive Officers, (ii) all current executive

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<PAGE> 60

officers as a group, (iii) all current directors who are not executive officers
as a group, and (iv) all employees, including all current officers who are not
executive officers, as a group.

<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND POSITION UNDERLYING OPTIONS
------------------------------------------------------------ ------------------
<S> <C>
Milton Fine................................................. 150,000
Chairman of the Board
W. Thomas Parrington, Jr.................................... 200,000
President and Chief Executive Officer
J. William Richardson....................................... 93,750
Chief Financial Officer and
Executive Vice President,
Finance and Administration
Robert L. Froman............................................ 62,500
Executive Vice President,
Development
Marvin I. Droz.............................................. 62,500
Senior Vice President and
General Counsel
All executive officers, as a group.......................... 643,750
All directors who are not executive officers, as a group.... --
All employees, including officers who are not executive
officers, as a group........................................ 399,250
</TABLE>

COMPENSATION PLANS AND ARRANGEMENTS

Management Bonus Plan. The Company has established a Management Bonus Plan
under which all key management employees who are directly involved in the growth
and success of the Company and its subsidiaries, including the Named Executive
Officers, are eligible to receive bonuses based upon achievement of specified
targets and goals for the Company and the individual employee. Bonus awards may
not exceed 50% to 120% of the executive's annual base salary and 20% of each
executive's bonus award will be payable in the form of shares of Common Stock,
which will be subject to restrictions and forfeiture provisions similar to those
applicable to the Outstanding Restricted Stock. Subject to adjustment as
provided in the Management Bonus Plan, the number of shares that may be issued
or transferred under the Management Bonus Plan may not in the aggregate exceed
250,000 shares, which may be shares of original issuance or treasury shares or a
combination thereof. The Management Bonus Plan is administered by the
Compensation Committee or such other committee of the Board as the Board may
appoint.

Executive Loans. In 1996, the Company loaned $2.0 million and $1.0 million
to, respectively, Messrs. Parrington and Richardson (the "Executive Loans"). The
Executive Loans are fully recourse to the borrowers thereunder, mature on June
30, 2006 and bear interest at the adjusted federal rate. If the executive's
employment is terminated by the Company for cause or by the executive for any
reason other than death, disability or circumstances that would entitle the
executive to benefits under his or her change in control agreement (described
below), then the executive's loan would become due and payable in three equal
annual installments commencing with the first anniversary of the date of such
termination. If the executive's employment is terminated for any other reason,
the loan plus accrued interest would be forgiven. If the executive remains
employed by the Company, one-tenth of the principal amount of the Executive
Loans plus the interest for that year will be forgiven on June 30, 1997 and each
of the next nine annual anniversaries thereof.

Deferred Compensation Agreements. In connection with the termination of
certain prior benefit arrangements, each of Messrs. Parrington and Richardson
entered into a deferred compensation agreement. Pursuant to the deferred
compensation agreements, $561,000 and $702,000 will be deposited into a grantor
trust established by the Company for the benefit of, respectively, Messrs.
Parrington and Richardson. Such amounts plus accumulated earnings will be paid
out in ten semiannual payments beginning at the earlier of the

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<PAGE> 61

date of approved retirement from the Company or the attainment of age 60,
provided that the beneficiary thereof performs consulting services to the
Company and does not engage in any competitive activity. See "Certain
Relationships and Related Transactions--Transaction with Officers and Directors"
for a discussion of certain other loans by the Company.

Executive Retirement Plan. Each of the General Managers of the Company's
hotels which are employees of the Company and other employees of the Company
holding job classifications of Vice President or above, including the Named
Executive Officers (collectively, the "Participants"), is eligible to
participate in the Company's executive retirement plan (the "ERP"). The ERP is
intended to be a non-qualified and unfunded plan maintained primarily for the
purpose of providing deferred compensation for a select group of management or
highly compensated employees. Actual participation in the ERP is determined by
the ERP's administrative committee, which is appointed by the Board.

The Company annually contributes 8% of the Participant's base salary and
may make discretionary contributions of up to an additional 5% of the
Participant's base salary. These discretionary contributions are based on the
Company's net increase in earnings per share in a given year. In addition,
Participants are eligible to designate a portion (specified annually by the
Board or the Compensation Committee) of their cash bonus to be contributed to
the ERP.

The funds contributed by the Company or participants are held in a grantor
trust established by the Company. Unless the administrative committee determines
that the amounts contributed to the ERP on behalf of a participant ("Plan
Benefits") are payable earlier, in general a Participant receives his ERP Plan
Benefits one year after his retirement or termination of employment. Plan
Benefits are paid out in a lump sum and are taxable to the Participant as
ordinary income upon receipt.

Stock Purchase Plan. Each full-time employee who has completed 12
consecutive months of employment with the Company, including the Named Executive
Officers but excluding any employee whose customary employment is not for more
than 20 hours per week or more than five months per calendar year, is eligible
to participate in the Company's stock purchase plan (the "Stock Purchase Plan").
The Stock Purchase Plan is intended to satisfy the requirements of Section 423
of the Code. Under the Stock Purchase Plan, participating employees may elect to
authorize the Company to withhold a maximum of 8% of the participating
employee's salary, which amounts will be held in the participating employee's
account and used to purchase Common Stock on a semi-annual basis at a price
equal to a designated percentage from 85% to 100% of the average closing sales
price for Common Stock as reported on the Composite Transactions Tape of the New
York Stock Exchange (except as described below). The designated percentage will
be established semi-annually by the Compensation Committee, which is responsible
for the administration of the Stock Purchase Plan, except that for the period
ending December 31, 1996 the price will be the IPO price (subject to the
limitations described below).

The price paid by a participating employee under the Stock Purchase Plan
for shares of Common Stock may not be less than the lesser of (i) 85% of the
fair market value of such shares on the date of the regular offering of the
right to participate in such plan (the "offering date") and (ii) 85% of the fair
market price of such shares on the date the shares are purchased (the "purchase
date"). The fair market value of the shares available for purchase by a
participating employee (determined as of the offering date) generally may not
exceed $25,000 per calendar year.

Amounts withheld from a participating employee's salary in order to
purchase shares of Common Stock under the Stock Purchase Plan will be taxable as
part of the employee's compensation. However, the purchase of shares under the
Stock Purchase Plan will not itself be a taxable event even if the purchase
price for the shares is less than the fair market value of the shares on either
the offering date or the purchase date. (The difference between the fair market
value, on either the offering date or the purchase date, and the purchase price
is not taxable on the offering date or the purchase date.)

If a participating employee disposes of shares that were purchased under
the Stock Purchase Plan, and the purchase price was less than 100% of the fair
market value of the shares at the offering date, and such disposition is neither
within two years after the offering date nor within one year after the purchase
date (the "holding period"), then the employee will realize ordinary income to
the extent of the lesser of (i) the amount

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<PAGE> 62

by which the fair market value of the shares on the offering date exceeded the
purchase price and (ii) the amount by which the fair market value of the shares
at the time of disposition exceeds the price paid for the shares. Any further
gain, upon a sale of such shares, is taxed as a long-term capital gain. To the
extent the purchase price exceeded the amount realized by an employee upon the
sale of the shares, the employee will have a long-term capital loss.

If, during the holding period, an employee disposes of shares that were
purchased under the Stock Purchase Plan, and the purchase price was less than
100% of the fair market value of the shares at the offering date, then the full
amount of the excess of the fair market value of the shares on the purchase date
over the purchase price will be taxable as ordinary income in the year of sale
(regardless of the market price of the shares at the time of disposition), and
any profit above the amount of such excess upon a disposition by sale will be
taxable as a longterm or short-term capital gain (depending upon how long the
employee has held the shares). Any loss, after including the amount of the
excess of the fair market value of the shares on the purchase date over the
purchase price as ordinary income, will be treated as a capital loss.

If, during the holding period, a participating employee sells or disposes
of shares purchased under the Stock Purchase Plan, the Company will be entitled
to a deduction against ordinary income for the full amount of the compensation
that the employee must report as ordinary income. The Company will not be
entitled to any deduction if the employee sells the shares after the holding
period or dies while owning such shares.

If a participating employee dies prior to disposing of shares purchased
under the Stock Purchase Plan, the employee's tax return for the year of death
must include as ordinary income the lesser of (i) the amount by which the fair
market value of the shares on the offering date exceeded the purchase price or
(ii) the amount by which the fair market value of the shares at the time of
death exceeded the purchase price. If such an amount is required to be included
on the employee's tax return for the year of death, an estate tax deduction may
be available to the estate of the deceased employee.

Any dividends paid on shares purchased under the Stock Purchase Plan must
be reported as ordinary income in the year received.

Employees may resell Common Stock acquired under the Stock Purchase Plan
without restrictions; however, any "affiliate" who acquires Common Stock under
the Stock Purchase Plan may resell only upon compliance with Rule 144 under the
Securities Act, except that the two-year holding period requirement of Rule 144
will not apply. For this purpose, the term "affiliate" includes any
participating employee who directly, or through one or more intermediaries,
controls, or is controlled by, or is under common control with, the Company.

The Stock Purchase Plan reserves 500,000 shares of authorized but unissued
or reacquired Common Stock for purchase thereunder. The Stock Purchase Plan will
remain in effect until terminated at any time by the Board, except that such
termination will be subject to employees' rights to purchase shares in any
outstanding semi-annual offering period.

The Stock Purchase Plan may be amended from time to time by the Board. No
amendment will increase the aggregate number of shares of Common Stock that may
be issued and sold under the Stock Purchase Plan (except for authorizations
pursuant to the antidilution provisions of the Stock Purchase Plan) without
further approval by the Company's shareholders. Furthermore, no amendment that
would cause the Stock Purchase Plan to fail to meet the requirements of Section
423 of the Code will be adopted without shareholder approval.

Equity Incentive Plan. The Company's 1996 Equity Incentive Plan (the
"Equity Incentive Plan") is designed to attract and retain qualified officers
and other key employees of the Company. The Equity Incentive Plan authorizes the
grant of options to purchase shares of Common Stock ("Option Rights"), stock
appreciation rights ("Appreciation Rights"), restricted shares ("Restricted
Shares"), deferred shares ("Deferred Shares"), performance shares ("Performance
Shares") and performance units ("Performance Units"). The Compensation Committee
administers the Equity Incentive Plan and determines to whom Option Rights,
Appreciation Rights, Restricted Shares, Deferred Shares, Performance Shares and
Performance Units are to be granted and the terms and conditions, including the
number of shares and the period of exercisability, thereof.

55
<PAGE> 63

Subject to adjustment as provided in the Equity Incentive Plan, the number
of shares of Common Stock that may be issued or transferred and covered by
outstanding awards granted under the Equity Incentive Plan may not in the
aggregate exceed 2,400,000 shares, which may be shares of original issuance or
treasury shares or a combination thereof. Officers, including officers who are
members of the Board, and other key employees of and consultants to the Company
and its subsidiaries may be selected by the Compensation Committee to receive
benefits under the Equity Incentive Plan.

The Compensation Committee may grant Option Rights that entitle the
optionee to purchase shares of Common Stock at a price equal to or greater or
less than market value on the date of grant, and the Option Rights may be
conditioned on the achievement of specified performance objectives ("Management
Objectives"). Subject to adjustment as provided in the Equity Incentive Plan, no
participant shall be granted Option Rights and Appreciation Rights, in the
aggregate, for more than 100,000 shares during any calendar year. The
Compensation Committee may provide that the option price is payable at the time
of exercise (i) in cash, (ii) by the transfer to the Company of nonforfeitable,
nonrestricted shares of Common Stock that are already owned by the optionee,
(iii) with any other legal consideration the Compensation Committee may deem
appropriate, or (iv) by any combination of the foregoing methods of payment. Any
grant may provide for deferred payment of the option price from the proceeds of
sale through a broker on the date of exercise of some or all of the shares of
Common Stock to which the exercise relates. Any grant may provide for automatic
grant of reload option rights upon the exercise of Option Rights, including
reload option rights, for shares of Common Stock or any other noncash
consideration authorized under the Equity Incentive Plan, except that the term
of any reload option right shall not extend beyond the term of the Option Right
originally exercised. The Compensation Committee has the authority to specify at
the time Option Rights are granted that shares of Common Stock will not be
accepted in payment of the option price until they have been owned by the
optionee for a specified period; however, the Equity Incentive Plan does not
require any such holding period and would permit immediate sequential exchanges
of shares of Common Stock at the time of exercise of Option Rights. Option
Rights granted under the Equity Incentive Plan may be Option Rights that are
intended to qualify as "incentive stock options" within the meaning of Section
422 of the Code, or Option Rights that are not intended to so qualify. Any grant
may provide for the payment of dividend equivalents to the optionee on a
current, deferred or contingent basis or may provide that dividend equivalents
be credited against the option price. No Option Right may be exercised more than
ten years from the date of grant. Each grant must specify the period of
continuous employment with, or continuous engagement of consulting services by,
the Company or any subsidiary that is necessary before the Option Rights will
become exercisable and may provide for the earlier exercise of the Option Rights
in the event of a change of control of the Company or other similar transaction
or event. Successive grants may be made to the same optionee regardless of
whether Option Rights previously granted to him or her remain unexercised.

Appreciation Rights granted under the Equity Incentive Plan may be either
free-standing Appreciation Rights or Appreciation Rights that are granted in
tandem with Option Rights. An Appreciation Right represents the right to receive
from the Company the difference (the "Spread"), or a percentage thereof not in
excess of 100%, between the base price per share of Common Stock in the case of
a free-standing Appreciation Right, or the option price of the related Option
Right in the case of a tandem Appreciation Right, and the market value of the
Common Stock on the date of exercise of the Appreciation Right. Tandem
Appreciation Rights may only be exercised at a time when the related Option
Right is exercisable and the Spread is positive, and the exercise of a tandem
Appreciation Right requires the surrender of the related Option Right for
cancellation. A free-standing Appreciation Right must specify a base price,
which may be equal to or greater or less than the fair market value of a share
of Common Stock on the date of grant, must specify the period of continuous
employment, or continuous engagement of consulting services, that is necessary
before the Appreciation Right becomes exercisable (except that it may provide
for its earlier exercise in the event of a change in control of the Company or
other similar transaction or event) and may not be exercised more than ten years
from the date of grant. Any grant of Appreciation Rights may specify that the
amount payable by the Company upon exercise may be paid in cash, Common Stock or
a combination thereof and may either (i) grant to the recipient or retain in the
Compensation Committee the right to elect among those alternatives or (ii)
preclude the right of the participant to receive, and the Company to issue,
Common Stock or other equity securities in lieu of cash. In addition, any grant
may specify that the

56
<PAGE> 64

Appreciation Right may be exercised only in the event of a change in control of
the Company. Subject to adjustment as provided in the Equity Incentive Plan, no
participant shall be granted Option Rights and Appreciation Rights, in the
aggregate, for more than 100,000 shares during any calendar year. The
Compensation Committee may condition the award of Appreciation Rights on the
achievement of one or more Management Objectives and may provide with respect to
any grant of Appreciation Rights for the payment of dividend equivalents thereon
in cash or Common Stock on a current, deferred or contingent basis.

An award of Restricted Shares involves the immediate transfer by the
Company to a participant of ownership of a specific number of shares of Common
Stock in consideration of the performance of services. The participant is
entitled immediately to voting, dividend and other ownership rights in the
shares. The transfer may be made without additional consideration or for
consideration in an amount that is less than the market value of the shares on
the date of grant, as the Compensation Committee may determine. The Compensation
Committee may condition the award on the achievement of specified Management
Objectives. Restricted Shares must be subject to a "substantial risk of
forfeiture" within the meaning of Section 83 of the Code for a period to be
determined by the Compensation Committee. An example would be a provision that
the Restricted Shares would be forfeited if the participant ceased to serve the
Company as an officer or other salaried employee during a specified period of
years. In order to enforce these forfeiture provisions, the transferability of
Restricted Shares will be prohibited or restricted in a manner and to the extent
prescribed by the Compensation Committee for the period during which the
forfeiture provisions are to continue. The Compensation Committee may provide
for a shorter period during which the forfeiture provisions are to apply in the
event of a change in control of the Company or other similar transaction or
event.

An award of Deferred Shares constitutes an agreement by the Company to
deliver shares of Common Stock to the participant in the future in consideration
of the performance of services, subject to the fulfillment of such conditions
during the Deferral Period (as defined in the Equity Incentive Plan) as the
Compensation Committee may specify. During the Deferral Period, the participant
has no right to transfer any rights covered by the award and no right to vote
the shares covered by the award. On or after the date of any grant of Deferred
Shares, the Compensation Committee may authorize the payment of dividend
equivalents thereon on a current, deferred or contingent basis in either cash or
additional shares of Common Stock. Grants of Deferred Shares may be made without
additional consideration or for consideration in an amount that is less than the
market value of the shares on the date of grant. Deferred Shares must be subject
to a Deferral Period, as determined by the Compensation Committee on the date of
grant, except that the Compensation Committee may provide for a shorter Deferral
Period in the event of a change in control of the Company or other similar
transaction or event. The Compensation Committee may condition the award of
Deferred Shares on the achievement of one or more Management Objectives.

A Performance Share is the equivalent of one share of Common Stock, and a
Performance Unit is the equivalent of $1.00. A participant may be granted any
number of Performance Shares or Performance Units, which shall be specified in
any such grant. The participant will be given one or more Management Objectives
to meet within a specified period (the "Performance Period"). The specified
Performance Period may be subject to earlier termination in the event of a
change in control of the Company or other similar transaction or event. A
minimum level of acceptable achievement will also be established by the
Compensation Committee. If by the end of the Performance Period the participant
has achieved the specified Management Objectives, the participant will be deemed
to have fully earned the Performance Shares or Performance Units. If the
participant has not achieved the Management Objectives but has attained or
exceeded the predetermined minimum level of acceptable achievement, the
participant will be deemed to have partly earned the Performance Shares or
Performance Units in accordance with a predetermined formula. To the extent
earned, the Performance Shares or Performance Units will be paid to the
participant at the time and in the manner determined by the Compensation
Committee in cash, shares of Common Stock or any combination thereof. Management
Objectives may be described in terms of either Company-wide objectives or
objectives that are related to the performance of the division, subsidiary,
department or function within the Company or a subsidiary in which the
participant is employed or with respect to which the participant provides
consulting services. The Compensation Committee may adjust any Management
Objectives and the related minimum level of acceptable achievement if, in its
judgment, transactions or events have occurred after the date of grant

57
<PAGE> 65

that are unrelated to the participant's performance and result in distortion of
the Management Objectives or the related minimum level of acceptable
achievement.

No Option Right, Appreciation Right or other "derivative security" within
the meaning of Rule 16b-3 is transferable by a participant except by will or the
laws of descent and distribution. Option Rights and Appreciation Rights may not
be exercised during a participant's lifetime except by the participant or, in
the event of the participant's incapacity, by the participant's guardian or
legal representative acting in a fiduciary capacity on behalf of the participant
under state law and court supervision. Notwithstanding the foregoing, the
Compensation Committee, in its sole discretion, may provide for the
transferability of the particular awards under the Equity Incentive Plan so long
as such provisions will not disqualify the exemption for other awards under Rule
16b-3, if such rule is then applicable to awards under the plan. The
Compensation Committee may specify at the date of grant that all or any part of
the shares of Common Stock that are to be issued or transferred by the Company
upon the exercise of Option Rights or Appreciation Rights, upon the termination
of the Deferral Period applicable to Deferred Shares or upon payment under any
grant of Performance Shares or Performance Units, or are to be no longer subject
to the substantial risk of forfeiture and restrictions on transfer referred to
in the Equity Incentive Plan with respect to Restricted Shares, are subject to
further restrictions on transfer.

The maximum number of shares that may be issued or transferred under the
Equity Incentive Plan, the number of shares covered by outstanding Option Rights
or Appreciation Rights and the option prices or base prices per share applicable
thereto, and the number of shares covered by outstanding grants of Deferred
Shares and Performance Shares, are subject to adjustment in the event of stock
dividends, stock splits, combinations of shares, recapitalizations, mergers,
consolidations, spin-offs, reorganizations, liquidations, issuances of rights or
warrants, and similar transactions or events. In the event of any such
transaction or event, the Compensation Committee may in its discretion provide
in substitution for any or all outstanding awards under the Equity Incentive
Plan such alternative consideration as it may in good faith determine to be
equitable in the circumstances and may require the surrender of all awards so
replaced. The Compensation Committee may also, as it determines to be
appropriate in order to reflect any such transaction or event, make or provide
for such adjustments in the number of shares that may be issued or transferred
and covered by outstanding awards granted under the Equity Incentive Plan and
the number of shares permitted to be covered by Option Rights and Appreciation
Rights, granted to any one participant during any calendar year.

The Compensation Committee must consist of not less than two nonemployee
directors who are "non-employee directors" within the meaning of Rule 16b-3. In
connection with its administration of the Equity Incentive Plan, the
Compensation Committee is authorized to interpret the Equity Incentive Plan and
related agreements and other documents. The Compensation Committee may make
grants to participants under any or a combination of all of the various
categories of awards that are authorized under the Equity Incentive Plan and may
condition the grant of awards on the surrender or deferral by the participant of
the participant's right to receive a cash bonus or other compensation otherwise
payable by the Company or a subsidiary to the participant. The Equity Incentive
Plan may be amended from time to time by the Compensation Committee but, without
further approval by the shareholders of the Company, no such amendment may (i)
increase the aggregate number of shares of Common Stock that may be issued or
transferred and covered by outstanding awards or increase the number of shares
which may be granted to any participant in any calendar year or (ii) otherwise
cause Rule 16b-3 to cease to be applicable to the Equity Incentive Plan.

The following is a brief summary of certain of the federal income tax
consequences of certain transactions under the Equity Incentive Plan based on
federal income tax laws in effect on the date of this Prospectus. This summary
is not intended to be exhaustive and does not describe state or local tax
consequences.

In general: (i) no income will be recognized by an optionee at the time a
nonqualified Option Right is granted; (ii) at the time of exercise of a
nonqualified Option Right, ordinary income will be recognized by the optionee in
an amount equal to the difference between the option price paid for the shares
and the fair market value of the shares if they are nonrestricted on the date of
exercise; and (iii) at the time of sale of shares acquired pursuant to the
exercise of a nonqualified Option Right, any appreciation (or depreciation) in
the value of the shares after the date of exercise will be treated as either
short-term or long-term capital gain (or loss) depending on how long the shares
have been held. No income generally will be recognized by an

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optionee upon the grant or qualifying exercise of an incentive stock option.
However, for purposes of calculating the Optionee's alternative minimum tax, if
any, the difference between the fair market value of the shares of Common Stock
at exercise and the option exercise price constitutes an item of adjustment. If
shares of Common Stock are issued to an optionee pursuant to the exercise of an
incentive stock option and no disqualifying disposition of the shares is made by
the optionee within two years after the date of grant or within one year after
the transfer of the shares to the optionee, then upon the sale of the shares any
amount realized in excess of the option price will be taxed to the optionee as
long-term capital gain and any loss sustained will be a longterm capital loss.
If shares of Common Stock acquired upon the exercise of an incentive stock
option are disposed of prior to the expiration of either holding period
described above, the optionee generally will recognize ordinary income in the
year of disposition in an amount equal to any excess of the fair market value of
the shares at the time of exercise (or, if less, the amount realized on the
disposition of the shares in a sale or exchange) over the option price paid for
the shares. Any further gain (or loss) realized by the optionee generally will
be taxed as short-term or long-term gain (or loss) depending on the holding
period. No income will be recognized by a participant in connection with the
grant of an Appreciation Right. When the Appreciation Right is exercised, the
participant normally will be required to include as taxable ordinary income in
the year of exercise an amount equal to the amount of any cash, and the fair
market value of any nonrestricted shares of Common Stock, received pursuant to
the exercise. A recipient of Restricted Shares generally will be subject to tax
at ordinary income rates on the fair market value of the Restricted Shares
reduced by any amount paid by the recipient at such time as the shares are no
longer subject to a substantial risk of forfeiture or restrictions on transfer
for purposes of Section 83 of the Code. However, a recipient who so elects under
Section 83(b) of the Code within 30 days of the date of transfer of the shares
will have taxable ordinary income on the date of transfer of the shares equal to
the excess of the fair market value of the shares (determined without regard to
the risk of forfeiture or restrictions on transfer) over any purchase price paid
for the shares. If a Section 83(b) election has not been made, any dividends
received with respect to Restricted Shares that are subject at that time to a
substantial risk of forfeiture and restrictions on transfer generally will be
treated as compensation that is taxable as ordinary income to the recipient. No
income generally will be recognized upon the grant of Deferred Shares. The
recipient of a grant of Deferred Shares generally will be subject to tax at
ordinary income rates on the fair market value of nonrestricted shares of Common
Stock on the date that the Deferred Shares are transferred to him or her,
reduced by any amount paid by him or her, and the capital gains or loss holding
period for the Deferred Shares will also commence on that date. No income
generally will be recognized upon the grant of Performance Shares or Performance
Units. Upon payment in respect of the earn-out of Performance Shares or
Performance Units, the recipient generally will be required to include as
taxable ordinary income in the year of receipt an amount equal to the amount of
cash received and the fair market value of any nonrestricted shares of Common
Stock received.

To the extent that a participant recognizes ordinary income in the
circumstances described above, the Company or subsidiary for which the
participant performs services will be entitled to a corresponding deduction
provided that, among other things, (i) the income meets the test of
reasonableness, is an ordinary and necessary business expense and is not an
"excess parachute payment" within the meaning of Section 280G of the Code and is
not disallowed by the $1.0 million limitation on certain executive compensation
and (ii) any applicable reporting obligations are satisfied.

The total number of stock options or other awards that will be granted
under the Equity Incentive Plan in the future is not determinable at this time.
The Equity Incentive Plan is not intended to be the exclusive means by which the
Company may grant equity-based incentive awards, and the adoption thereof will
in no way limit the ability of the Company to grant equity-based awards outside
the Equity Incentive Plan.

EMPLOYMENT AND CHANGE-IN-CONTROL AGREEMENTS

Each of the Named Executive Officers is a party to an employment agreement
with the Company. Pursuant to the employment agreements, the Named Executive
Officer party thereto is entitled to the greater of either (i) the Named
Executive Officer's salary and bonus for the prior fiscal year or (ii) the
monthly payments which the Named Executive Officer is entitled to under the
executive's employment agreement for the remainder of the term of the agreement,
plus the continuation of health and other welfare benefits for the greater of
one year or the remainder of the term of the agreement, in the event that the
Named Executive

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Officer is terminated by the Company without Cause (as defined). In addition,
each of the Named Executive Officers is a party to a change-in-control agreement
that provides for the payment of such severance benefits and the provision of
such health and other benefits if the Named Executive's employment is terminated
by the Company, or by the Executive, following a Change in Control (as defined),
except that the severance benefits payable thereunder are based upon three times
the highest salary and bonus that the Executive received during any of the three
years preceding the year in which the Change in Control occurred and are reduced
dollar-for-dollar for salary and bonus payments made by the Company during any
period of continuation of employment following the Change in Control. In
addition, the amounts payable under the change-in-control agreements are
increased to compensate the Named Executive Officer for any excise tax payable
by the Company pursuant to Section 280G of the Code. The Named Executive
Officers are not obligated under the employment agreements or the
change-in-control agreements to mitigate damages by seeking alternative
employment; however, the Company's obligations to provide health and other
welfare benefits thereunder terminates if the Named Executive Officer obtains
other full-time employment within three years of such termination. Each Named
Executive Officer's employment agreement will terminate without further action
immediately prior to the payment of any severance benefits under the Named
Executive Officer's change-in-control agreement. The employment agreements and
the change-in-control agreements include provisions prohibiting the Named
Executive Officers from engaging in any Competitive Activity (as defined) for
two year after termination of employment and providing for the payment of legal
fees and expenses incurred in enforcing or defending such agreements.

All of the foregoing plans and agreements were approved by the Company's
shareholders and the Board prior to the IPO.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee was formed in June 1996 and currently is
composed of R. Michael McCullough (Chairman), Michael J. Aranson and Steven J.
Smith. Prior thereto, decisions regarding the compensation of officers were made
by the Board.

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PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of Common Stock on the date hereof and as adjusted to reflect the sale
of the shares of Common Stock offered hereby by (i) each person known by the
Company to own beneficially more than 5% of the Common Stock, (ii) each director
and Named Executive Officer of the Company, and (iii) all directors and
executive officers of the Company as a group. Unless indicated otherwise, the
address for each of the shareholders named in the table is Foster Plaza Ten, 680
Andersen Drive, Pittsburgh, Pennsylvania 15220. For purposes of the table, a
person or group of persons is deemed to have "beneficial ownership" of any
shares as of a given date which such person has the right to acquire within 60
days after such date.

<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OWNED
NUMBER --------------------
OF SHARES PRIOR TO AFTER
OWNED OFFERING OFFERING
----------- -------- --------
<S> <C> <C> <C>
Milton Fine (1)...................................... 6,218,640 20.3% 17.9%
Fine Family Trusts (2)............................... 12,782,940 41.7 36.9
Blackstone (3)....................................... 2,528,571 8.2 7.3
David J. Fine (4).................................... 6,571,800 21.4 19.0
W. Thomas Parrington, Jr. (5)........................ 305,660 1.0 *
J. William Richardson (6)............................ 170,403 * *
Robert L. Froman..................................... 196,072 * *
Marvin I. Droz (7)................................... 100,454 * *
Michael J. Aranson................................... 5,000 * *
R. Michael McCullough................................ 10,000 * *
Thomas J. Saylak..................................... -- -- --
Steven J. Smith...................................... 4,300 * *
Trust Leasing and Trust Management (8)............... 1,957,895 6.4 5.7
All directors and executive officers as a group (11
persons) (9)....................................... 13,592,329 44.3 39.2
</TABLE>

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

* Less than 1%.

(1) Includes 5,000 shares owned by Mr. Fine's wife, 2,500 shares owned by Mr.
Fine's wife in trust for her children and 6,211,140 of the 12,782,940 shares
beneficially owned by the Fine Family Trusts. Milton Fine disclaims
beneficial ownership of all of such shares.

(2) The "Fine Family Trusts" are comprised of five trusts: one of which Milton
Fine is the trustee and four of which David Fine is the trustee.

(3) Blackstone's address is 345 Park Avenue, New York, New York 10154.

(4) David Fine may be deemed to beneficially own 6,571,800 of the 12,782,940
shares beneficially owned by the Fine Family Trusts. David J. Fine disclaims
beneficial ownership of such shares.

(5) Includes 1,500 shares owned by Mr. Parrington's daughters.

(6) Includes 200 shares owned by Mr. Richardson's daughters.

(7) Includes 1,000 shares owned by Mr. Droz's wife.

(8) The address of Trust Leasing and Trust Management is 4735 Spottswood #102,
Memphis, Tennessee 38117.

(9) Includes 10,000 Restricted Shares, which are subject to certain risks of
forfeiture as described in "Management--Compensation Plans and
Arrangements--Equity Incentive Plan."

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

1995 REORGANIZATION

The Company was incorporated in April 1996 as a Pennsylvania corporation.
In 1995, the Company's predecessors consummated a series of transactions to
aggregate the hotel management businesses owned by the Fine Family Shareholders
into a single entity (the "1995 Reorganization"). As a result of the 1995
Reorganization, 59 separate corporations that were wholly owned by the Fine
Family Shareholders were merged with and into the Company's predecessor, IHC,
effective November 1, 1995, with IHC being the surviving corporation. Pursuant
to the Agreement and Plan of Merger entered into in connection with the 1995
Reorganization, IHC assumed liabilities aggregated approximately $7.4 million
incurred by Milton Fine and a $5.6 million liability incurred by the Fine Family
Trusts to purchase stock owned by a deceased shareholder of IHC. These
liabilities were satisfied in December 1995.

THE ORGANIZATION AND INITIAL PUBLIC OFFERING

The Company consummated its initial public offering of 11,000,000 shares of
its Common Stock on June 25, 1996 and of an additional 1,448,350 shares to cover
over-allotments on July 9, 1996. Prior to consummation of the IPO, the Fine
Family Shareholders owned all of the voting stock and approximately 92% of the
non-voting stock of IHC, with the remaining approximately 8% of the non-voting
stock in IHC owned by certain of IHC's officers (excluding Milton Fine). In
addition, the Fine Family Shareholders owned direct and indirect interests in
certain of the subsidiaries and affiliated companies of IHC including its
Crossroads, Colony and Northridge subsidiaries. The Fine Family Shareholders and
certain officers (excluding Milton Fine) and former employees of IHC also owned
interests in the Interstone partnerships with Blackstone (as described below),
which owned 14 Owned Hotels. Prior to consummation of the IPO, all of the
foregoing interests were contributed to the Company in exchange for Common Stock
of the Company. In addition, prior to the consummation of the IPO, the Company
and its affiliates effected the following transactions (collectively with the
foregoing transactions, the "Organization"): (i) all of the outstanding shares
of common stock of IHC were contributed to the Company by the Fine Family
Shareholders in exchange for Common Stock of the Company and (ii) the Company
issued shares of Common Stock to certain officers and employees of the Company
in exchange for restricted stock in IHC previously issued to them (see
"Management--Stock Option Grants"). As a result of the foregoing and the
Acquisition from Blackstone described below, the Company currently owns 100% of
IHC and its subsidiaries and all of the equity interests in the 14 Owned Hotels
acquired in partnership with Blackstone (excluding minority interests owned by
third parties in seven hotels). The Company issued 13,689,929 shares of Common
Stock in the Organization to the Fine Family Shareholders and certain officers
and current and former employees of the Company, all of which are restricted
securities under the Securities Act. See "Shares Eligible for Future Sale." In
addition, the Company entered into a registration rights agreement with each of
the existing shareholders of the Company prior to the IPO (collectively, the
"Original Shareholders") pursuant to which the Original Shareholders were
granted demand and piggyback registration rights. The Company has agreed to
indemnify the Original Shareholders against certain liabilities, including
liabilities under the Securities Act, incident to any such registration.

In March 1994, Milton Fine, as trustee, and certain officers and former
employees of IHC formed a partnership ("IHC/Interstone") which in turn formed a
series of partnerships (collectively, "Interstone I") with Blackstone to pursue
acquisitions of hotel properties. Interstone I acquired title to seven hotels
and a controlling interest in another hotel. IHC/Interstone contributed all of
its interests in Interstone I to the Company prior to consummation of the IPO,
and the Company purchased the equity interests of Blackstone in Interstone I in
connection with the IPO.

Following the completion of the Interstone I investment program, in
December 1995 IHC, the Fine Family Shareholders and certain officers of IHC
formed a partnership ("IHC/Interstone II"), which in turn formed another series
of partnerships with Blackstone (collectively, "Interstone II") to acquire a 75%
interest in a portfolio of six hotels owned by an institutional investor. Under
the Interstone II partnership agreements, certain major decisions may not be
taken without the prior consent of the institutional investor. The Fine Family
Shareholders and the officers of IHC contributed all of their interests in
Interstone II to the Company

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<PAGE> 70

prior to consummation of the IPO, and the Company purchased the interest of
Blackstone in Interstone II in connection with the IPO.

In connection with the formation of Interstone II, IHC and Blackstone
entered into an Option Agreement (the "Option Agreement") pursuant to which IHC
granted to Blackstone an option (the "Blackstone Option") to purchase a 20%
equity interest in a new company to be formed upon exercise of the Blackstone
Option to succeed the Company and upon payment by Blackstone of the exercise
price of $23.3 million. In connection with the IPO, Blackstone exercised the
Blackstone Option and paid the Company the $23.3 million exercise price.
Blackstone received $44.8 million of Common Stock based on the IPO price and the
Company paid one of the Blackstone entities a $233,000 arrangement fee for
services in negotiating and arranging the Blackstone Option.

Simultaneously with the completion of the Interstone II investment program,
in December 1995, IHC/ Interstone II and Blackstone formed a third series of
partnerships (collectively, "Interstone III") to acquire additional hotel
properties. IHC/Interstone II has committed up to $30.6 million for a 51%
interest therein, and Blackstone has committed up to $29.4 million for a 49%
interest therein. The capital commitments expire on December 31, 1997. All hotel
acquisition opportunities that meet the investment parameters for Interstone III
which come to the attention of the Company or Blackstone must be presented to
Interstone III unless the party identifying the acquisition opportunity
certifies that in its judgment the acquisition by Interstone III would not be
feasible, appropriate or practical. The Company made the foregoing certification
with respect to each of the Post-IPO Acquisitions and the Pending Acquisitions,
and no acquisitions have been made by Interstone III as of the date of this
Prospectus. All major decisions involving Interstone III are made jointly by the
Company and Blackstone. The Company and Blackstone each have a buy-sell option
commencing in December 1997. Interstone III will pay a 1% acquisition fee to the
partner introducing each hotel acquisition made by such partnerships.
IHC/Interstone II contributed all of its interests in Interstone III to the
Company in connection with the IPO.

In March 1996, the Company entered into an Agreement of Purchase and Sale
(the "Acquisition Agreement") to acquire all of Blackstone's interests in
Interstone I (excluding one Interstone I hotel, the Fort Magruder Hotel and
Conference Center) and Interstone II (collectively, the "Acquisition") for a
cash purchase price of approximately $125 million. Closing of the Acquisition
occurred immediately following the consummation of the IPO on June 25, 1996.

In connection with the execution of the Acquisition Agreement, the Company
also entered into a Contribution Agreement (the "Blackstone Contribution
Agreement") with certain affiliates of the Company and Blackstone pursuant to
which such affiliates agreed to contribute to the Company their interests in the
partnership (the "Fort Magruder Partnership") that owned the Fort Magruder Inn
and Conference Center in consideration of the issuance of $8.3 million of Common
Stock at the IPO price (the "Contribution"). Closing of the Contribution
occurred immediately prior to the closing of the Acquisition.

Pursuant to the Blackstone Contribution Agreement, the Company, Blackstone
and the Fine Family Shareholders executed the Interstone Stockholders Agreement
at the closing of the Acquisition and Contribution. Under the Interstone
Stockholders Agreement (i) Blackstone was granted tag along rights with respect
to certain shares of Common Stock by the Fine Family Shareholders, (ii)
Blackstone granted to the Fine Family Shareholders a right of first offer with
respect to certain sales of shares of Common Stock by Blackstone, (iii)
Blackstone was granted demand and piggyback registration rights, (iv) the Fine
Family Shareholders agreed to vote their shares of Common Stock for a director
designee of Blackstone, (v) Blackstone agreed to vote its shares of Common Stock
for the election of the director candidates nominated by the Board, and (vi)
Blackstone agreed not to sell or transfer its shares, subject to certain
exceptions, for a period of 180 days following the IPO.

TRANSACTIONS WITH THE FINE FAMILY SHAREHOLDERS

During 1993, 1994 and 1995, the Company received payments in the aggregate
amounts of approximately $5.8 million, $6.7 million and $7.9 million,
respectively, for management services provided to 13, 18 and 27 hotels,
respectively, in which the Fine Family Trusts had an ownership interest.
Accounts receivable of

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approximately $0.7 million, $0.9 million and $1.0 million were due from these
hotels at December 31, 1993, 1994 and 1995, respectively.

During 1993, 1994 and 1995, the Company advanced funds from time to time to
its shareholders, and received repayments of a portion of such advances. At
December 31, 1995, the outstanding amount of such advances to shareholders was
$1.6 million.

In March 1996, the Company made a distribution to its existing shareholders
in the aggregate amount of $30 million. The distribution was paid with
promissory notes payable on September 28, 1997 and bearing interest at 5% per
annum. These notes were repaid in connection with the IPO.

Certain of the Fine Family Shareholders own minority interests in 12 hotels
that are managed but not owned by the Company. Except for one management
agreement pursuant to which the Company waived its management fee for a period
ending no later than November 30, 1998, the Company believes that in each case
the terms on which these hotels are managed are at least as favorable to the
Company as those it could have obtained from unaffiliated persons. The Fine
Family Shareholders have granted to the Company a right of first offer and a
right of first refusal in connection with any proposed transfer of their
interests (subject to certain permitted transfers) in these hotels in
consideration of the Company's agreeing to continue to provide at no cost to the
Fine Family Shareholders certain accounting and administrative services of the
type which the Company is currently providing to the Fine Family Shareholders in
connection therewith.

TRANSACTIONS WITH OFFICERS AND DIRECTORS

See "Management--Compensation Plans and Arrangements--Executive Loans" for
a description of loans from the Company to Messrs. Parrington and Richardson.
The Company has made loans from time to time to its senior executives, including
each of the Named Executive Officers other than Mr. Fine. The maximum amount of
such loans to any executive was $210,000 during the three-year period since
January 1, 1993. Such loans are payable upon demand and, in general, do not bear
interest until such demand is made. The loans made to Messrs. Parrington and
Richardson are forgiven over time provided certain conditions are satisfied.

DESCRIPTION OF CAPITAL STOCK

GENERAL

The Company's Articles of Incorporation provide that the authorized capital
stock of the Company consists of 75,000,000 shares of Common Stock, par value
$.01 per share, and 25,000,000 shares of preferred stock, par value $.01 per
share ("Preferred Stock"). Upon consummation of the Offering, 34,639,296 shares
of Common Stock will be issued and outstanding (35,239,296 shares if the
over-allotment options are exercised in full), and no shares of Preferred Stock
will be issued or outstanding.

COMMON STOCK

The holders of Common Stock are entitled to one vote per each share owned
of record on all matters voted upon by shareholders. Subject to preferential
rights that may be applicable to any Preferred Stock outstanding, holders of
Common Stock are entitled to receive dividends if, as and when declared by the
Board out of funds legally available therefor. See "Dividend Policy." In the
event of a liquidation, dissolution or winding-up of the Company, holders of
Common Stock are entitled to share equally and ratably in the assets of the
Company, if any, remaining after the payment of all liabilities of the Company
and the liquidation preferences of any outstanding Preferred Stock. Holders of
the Common Stock have no preemptive rights and no rights to convert their Common
Stock to any other securities, and there are no redemption or sinking fund
provisions with respect to the Common Stock. The Company is subject to
provisions of the Pennsylvania Business Corporation Law (the "BCL") which
provide for cumulative voting.

PREFERRED STOCK

The Board has the authority to issue the authorized shares of Preferred
Stock in one or more series and to fix the designations, relative powers,
preferences, rights, qualifications, limitations and restrictions of all shares
of each such series, including without limitation dividend rates, conversion
rights, voting rights, redemption and sinking fund provisions, liquidation
preferences and the number of shares constituting each such series,

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without any further vote or action by the shareholders. The issuance of
Preferred Stock could decrease the amount of earnings and assets available for
distribution to holders of Common Stock or adversely affect the rights and
powers, including voting rights, of the holders of Common Stock. The issuance of
Preferred Stock also could have the effect of delaying, deferring or preventing
a change in control of the Company.

CERTAIN CORPORATE GOVERNANCE MATTERS

The Company's Articles of Incorporation and By-Laws provide, in general,
that (i) the number of directors of the Company will be fixed, within a
specified range, by a majority of the total number of the directors of the
Company(assuming no vacancies) or by the holders of at least 80% of the
Company's voting stock, (ii) shareholder action can be taken only at an annual
or special meeting of shareholders and not by written consent in lieu of a
meeting, (iii) except as described below, special meetings of shareholders may
be called only by the Chairman of the Board or by 80% of the total number of
directors of the Company (assuming no vacancies) and the business permitted to
be conducted at any such meeting is limited to that brought before the meeting
by the Company's Chairman of the Board or his specific designee or by 80% of the
total number of directors of the Company (assuming no vacancies), (iv) the
Chairman of the Board may be removed only by the holders of at least 80% of the
Company's voting stock, (v) directors of the Company may be removed only for
cause and (vi) the Board or the Chairman of the Board may postpone and
reschedule any previously scheduled annual or special meeting of shareholders.
The Company's By-Laws also require that shareholders desiring to bring any
business before an annual meeting of shareholders deliver written notice thereof
to the Secretary of the Company not later than 60 days in advance of the meeting
of shareholders; provided, however, that in the event that the date of the
meeting is not publicly announced by the Company by press release or inclusion
in a report filed with the Commission or furnished to shareholders more than 75
days prior to the meeting, notice by the shareholder to be timely must be
delivered to the Secretary of the Company not later than the close of business
on the tenth day following the day on which such announcement of the date of the
meeting was so communicated. The Company's By-Laws further require that the
notice by the shareholder set forth a description of the business to be brought
before the meeting and the reasons for conducting such business at the meeting
and certain information concerning the shareholder proposing such business and
the beneficial owner, if any, on whose behalf the proposal is made, including
their names and addresses, the class and number of shares of the Company that
are owned beneficially and of record by each of them and any material interest
of either of them in the business proposed to be brought before the meeting.
Upon the written request of the holders of not less than 25% of the Company's
voting stock or upon the request of the Chairman of the Board, the Board will be
required to call a meeting of shareholders for the purpose specified in such
written request and fix a record date for the determination of shareholders
entitled to notice of and to vote at such meeting (which record date may not be
later than 60 days after the date of receipt of notice of such meeting),
provided that (i) in the event that the Board calls an annual or special meeting
of shareholders to be held not later than 90 days after receipt of any such
written request, no separate special meeting of shareholder as so requested will
be required to be convened provided that the purposes of such annual or special
meeting called by the Board include (among others) the purposes specified in
such written request of the shareholders and (ii) unless otherwise determined by
the Chairman of the Board or vote of a majority of the members of the Board then
in office, action may not be taken at a special meeting of the shareholders in
respect of the removal of directors other than for cause, any change in the
number of directors or any other matter affecting the composition of the Board
or any directorate committee.

Under applicable provisions of Pennsylvania law, the approval of a
Pennsylvania company's board of directors, in addition to shareholder approval,
is required to adopt any amendment to the company's articles of incorporation,
but a company's by-laws may be amended either by action of its shareholders or,
if the company's articles of incorporation so provide, its board of directors.
The Company's Articles of Incorporation and By-Laws provide that except as
described below, the provisions summarized above and the provisions relating to
nomination procedures may not be amended by the shareholders, nor may any
provision inconsistent therewith be adopted by the shareholders, without the
affirmative vote of the holders of at least 80% of the Company's voting stock,
voting together as a single class, except that if any such action (other than
any direct or indirect amendments to the provision requiring that shareholder
action be taken at a meeting of shareholders rather than by written consent in
lieu of a meeting) is approved by the holders of a majority, but

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less than 80%, of the then-outstanding voting stock (in addition to any other
approvals required by law, including approval by the Board with respect to any
amendment to the Company's Articles of Incorporation), such action will be
effective as of one year from the date of adoption.

The foregoing provisions of the Company's Articles of Incorporation and
By-Laws may discourage or make more difficult the acquisition of control of the
Company by means of a tender offer, open market purchase, proxy contest or
otherwise. These provisions may have the effect of discouraging certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of the Company first to negotiate with the
Company. The Company's management believes that the foregoing measures provide
benefits to the Company and its shareholders by enhancing the Company's ability
to negotiate with the proponent of any unfriendly or unsolicited proposal to
take over or restructure the Company and that such benefits outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms.

The Company is subject to provisions of the BCL which require that a
merger, consolidation, share exchange or sale of assets between a public
corporation, or a subsidiary thereof, and a shareholder be approved by a
majority of voting shares outstanding other than those held by the "interested
shareholder" (which includes a shareholder who is a party to the proposed
transaction or who is treated differently from other shareholders) unless (i)
the transaction has been approved by a majority of the corporation's directors
who are not affiliated with the interested shareholder and first elected to the
board within 24 months of the vote to approve such transaction, or (ii) the
transaction results in the payment to all other shareholders of an amount not
less than the highest amount paid for the same class of shares by the interested
shareholder. In addition, subject to certain exceptions, a "business
combination" with a shareholder or group of shareholders beneficially owning
more than 20% of the voting power of a public corporation (excluding certain
shares) is prohibited for a five-year period following the date on which the
holder acquired the 20% or greater voting power and, unless certain other
conditions are satisfied, requires approval of a majority of voting shares
outstanding other than those held by such interested shareholder. Moreover, the
BCL provides that any profit realized from the disposition of an equity security
of a corporation by a shareholder who disposes of such security within 18 months
after obtaining control must be returned to the corporation. These and other
related BCL provisions may discourage open market purchases of a corporation's
stock or a non-negotiated tender or exchange offer for such stock and,
accordingly, may limit a shareholder's ability to realize a premium over the
market price of the Common Stock in connection with any such transaction.

Because of the length of time that the Fine Family Trusts have held
controlling interests in the Company, these statutory restrictions are not
applicable to such shareholders.

TRANSFER AGENT AND REGISTRAR

The Company has appointed ChaseMellon Shareholder Services as the transfer
agent and registrar for the Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE

Upon consummation of the Offering (assuming the over-allotment options are
not exercised), the Company will have 34,639,296 shares of Common Stock
outstanding. Of these shares, all of the shares of Common Stock sold in the IPO
are, and all of the Shares sold in this Offering will be, freely tradeable by
persons other than "affiliates" of the Company without restriction or limitation
under the Securities Act. The remaining 18,190,946 shares are "restricted
securities" within the meaning of Rule 144 under the Securities Act ("Restricted
Securities") and may not be sold in the absence of registration under the
Securities Act unless an exemption from registration is available, including the
exemption contained in Rule 144.

In general, under Rule 144, if two years have elapsed since the later of
the date of acquisition of Restricted Securities from the Company or any
"affiliate" of the Company, as that term is defined under the Securities Act,
the acquiror or subsequent holder thereof is entitled to sell within any
three-month period a number of shares that does not exceed the greater of 1% of
the Common Stock then outstanding or the average weekly trading volume of the
Common Stock during the four calendar weeks preceding the date on which notice
of the sale is filed with the Commission. Sales under Rule 144 are also subject
to certain manner

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<PAGE> 74

of sale provisions, notice requirements and the availability of current public
information about the Company. If three years have elapsed since the date of
acquisition of Restricted Securities from the Company or from any "affiliate" of
the Company, and the acquiror or subsequent holder thereof is deemed not to have
been an affiliate of the Company at any time during the 90 days preceding a
sale, such person would be entitled to sell such shares in the public market
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements. In
connection with the IPO, Blackstone agreed, subject to certain exceptions, not
to offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock until December 16, 1996 without the prior written consent of Merrill
Lynch. In connection with this Offering, the Company, each of its directors and
executive officers who is a holder of Common Stock and the Fine Family
Shareholders have agreed, subject to certain exceptions, not to offer, sell,
contract to sell or otherwise dispose of any such shares of Common Stock for a
period of 90 days after the date of this Prospectus without the prior written
consent of Merrill Lynch. Trust Leasing and Trust Management have agreed not to
sell any of the Common Stock acquired in connection with the Equity Inns
Transaction until June 30, 1997 and not to sell more than 50% of such Common
Stock until December 31, 1997.

The Company can make no predictions as to the effect, if any, that future
sales of Restricted Securities, or the availability of such Restricted
Securities for sale, or the issuance of shares of Common Stock upon the exercise
of options or otherwise, or the perception that such sales or exercises could
occur, will have on the market price prevailing from time to time. Sales of
substantial amounts of Restricted Securities in the public market could have an
adverse effect on the market price of the Common Stock.

In connection with the Acquisition, the Organization, and the Equity Inns
Transaction, the Company granted Blackstone, the Original Shareholders, and
Trust Leasing and Trust Management, respectively, certain registration rights
with respect to the Common Stock. See "Certain Relationships and Transactions--
The Organization and Initial Public Offering" and "Recent Developments--Equity
Inns Transaction."

TAXATION

The following is a general discussion of certain material U.S. federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a "Non-U.S. Holder." A "Non-U.S. Holder" is any person other than (i) a
citizen or resident of the United States, (ii) a corporation or partnership
created or organized in the United States or under the laws of the United States
or of any state thereof or (iii) an estate or trust whose income is includable
in gross income for U.S. federal income tax purposes regardless of its source.

This discussion is based on the Internal Revenue Code of 1986, as amended
(the "Code"), and administrative interpretations as of the date hereof, all of
which may be changed either retroactively or prospectively. This discussion does
not address all aspects of U.S. federal income and estate taxation that may be
relevant to Non-U.S. Holders and, in particular, does not address consequences
that may apply in light of their particular circumstances. In addition, the
discussion does not address any tax consequences arising under the laws of any
state, local or foreign taxing jurisdiction.

Prospective investors should consult their tax advisors with respect to the
particular tax consequences to them of owning and disposing of Common Stock.

DIVIDENDS

Subject to the discussion below, dividends paid to a Non-U.S. Holder of
Common Stock generally will be subject to withholding tax at a 30% rate or such
lower rate as may be specified by an applicable income tax treaty. For purposes
of determining whether tax is to be withheld at a 30% rate or at a reduced
treaty rate, the Company ordinarily will presume that dividends paid to an
address in a foreign country are paid to a resident of such country absent
knowledge that such presumption is not warranted.

There will be no withholding tax on dividends that are effectively
connected with the Non-U.S. Holder's conduct of a trade or business within the
United States provided such holder provides a valid Internal Revenue Service
(the "IRS") Form 4224 to the payor. Instead, the effectively connected dividends
will be subject to regular U.S. income tax generally in the same manner as if
the Non-U.S. Holder were a U.S. resident. A non-U.S. corporation receiving
effectively connected dividends also may be subject to an additional "branch
profits

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<PAGE> 75

tax" which is imposed, under certain circumstances, at a rate of 30% (or such
lower rate as may be specified by an applicable treaty) of the non-U.S.
corporation's effectively connected earnings and profits, subject to certain
adjustments.

Proposed regulations were issued by the IRS in April 1996 that would, if
and when finalized, substantially modify the existing rules for withholding of
tax on payments of certain types of income (including dividends) to foreign
persons. These proposals ("Proposed Regulations") would, subject to certain
exceptions and transition rules, be effective for payments made after December
31, 1997, regardless of the date of issuance of the instrument with respect to
which those payments are made. There can be no assurance that the Proposed
Regulations will be finalized (whether before or after their proposed effective
date) or, if they are finalized, that they will not be materially modified from
their current form.

Among the provisions of the Proposed Regulations is a proposal that would
require a Non-U.S. Holder of common stock to certify its residence in a country
with which the United States has an income tax treaty in order to claim the
benefit of a reduced rate of withholding tax under such treaty on dividends paid
with respect to such common stock. In addition, the Proposed Regulations would,
if finalized in their current form, make other changes to the existing
procedures relating to withholding of tax on dividends. Prospective investors
are urged to consult their tax advisors with respect to the possible impact of
the Proposed Regulations on their particular situations.

In addition, under a 1984 proposed regulation (which never entered into
force), in order to claim the benefits of a tax treaty, a Non-U.S. Holder of
Common Stock would have been required to demonstrate entitlement to such
benefits by filing certain forms including a statement from a designated
governmental body of the treaty country. The administrative document whereby the
IRS issued the Proposed Regulations also removes that 1984 proposed regulation.

GAIN ON DISPOSITION OF COMMON STOCK

A Non-U.S. Holder generally will be subject to U.S. federal income tax with
respect to gain realized on a sale or other disposition of Common Stock only if
(i) the gain is effectively connected with a trade or business of such holder in
the United States, (ii) in the case of certain Non-U.S. Holders who are
non-resident alien individuals and hold the Common Stock as a capital asset,
such individuals are present in the United States for 183 or more days in the
taxable year of the disposition or (iii) subject to the exception below, the
Company is or has been a "United States real property holding corporation"
within the meaning of Section 897(c)(2) of the Code at any time within the
shorter of the five-year period preceding such disposition or such holder's
holding period. The Company believes it currently is and will likely remain a
U.S. real property holding corporation. However, gain realized on a disposition
of Common Stock by a Non-U.S. Holder that is not deemed to own more than five
percent of the Common Stock during such period will not be subject to U.S.
federal income tax under the rule described in clause (iii) of this paragraph,
provided that the Common Stock is "regularly traded" (within the meaning of
Section 897(c)(3) of the Code) on an established securities market located in
the United States at the time of disposition. If a Non-U.S. Holder is deemed to
own more than five percent of the Common Stock at any time during the shorter of
the five-year period preceding such disposition or such holder's holding period,
such Non-U.S. Holder may be subject to U.S. federal income tax upon a
disposition of shares of such stock and is urged to consult its tax advisor.

BACKUP WITHHOLDING AND REPORTING REQUIREMENTS

The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to, and the tax withheld with respect to, each Non-U.S.
Holder. These reporting requirements apply regardless of whether withholding was
reduced or eliminated by an applicable income tax treaty. Copies of this
information also may be made available under the provisions of a specific treaty
or agreement with the tax authorities in the country in which the Non-U.S.
Holder resides or is established.

United States backup withholding (which generally is imposed at the rate of
31% on certain payments to persons that fail to furnish the information required
under the United States information reporting requirements) and information
reporting generally will not apply to dividends paid on Common Stock to a
Non-U.S. Holder at an address outside the United States.

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<PAGE> 76

The payment of proceeds from the disposition of Common Stock to or through
a United States office of a broker will be subject to information reporting and
backup withholding unless the owner, under penalties of perjury, certifies,
among other things, its status as a Non-U.S. Holder, or otherwise establishes an
exemption. The payment of proceeds from the disposition of Common Stock to or
through a non-U.S. office of a non-U.S. broker generally will not be subject to
backup withholding and information reporting, except as noted below. In the case
of proceeds from a disposition of Common Stock paid to or through a non-United
States office of a broker that is (i) a United States person, (ii) a "controlled
foreign corporation" for United States federal income tax purposes or (iii) a
foreign person 50% or more of whose gross income from certain periods is
effectively connected with a United States trade or business, (a) backup
withholding will not apply unless such broker has actual knowledge that the
owner is not a Non-U.S. Holder, and (b) information reporting will apply unless
the broker has documentary evidence in its files that the owner is a Non-U.S.
Holder (and the broker has no actual knowledge to the contrary).

Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the IRS.

In addition, the Proposed Regulations would, if finalized in their current
form, modify the foregoing rules to conform them to the rules proposed therein
with respect to withholding tax on dividends. Prospective investors are urged to
consult their tax advisors with respect to the possible impact of these
provisions of the Proposed Regulations on their particular situations.

FEDERAL ESTATE TAX

An individual who is not a citizen or resident (as defined for U.S. federal
estate tax purposes) of the United States at the time of death and who is
treated as the owner of Common Stock, or that has made certain lifetime
transfers of an interest in the Common Stock, will be required to include the
value thereof in his or her gross estate for U.S. federal estate tax purposes
and may be subject to U.S. federal estate tax unless an applicable estate tax
treaty provides otherwise.

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<PAGE> 77

UNDERWRITING

The U.S. Underwriters named below (the "U.S. Underwriters"), acting through
their U.S. representatives, Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), Montgomery Securities, Morgan Stanley & Co. Incorporated,
Smith Barney Inc. and Credit Lyonnais Securities (USA) Inc. (the "U.S.
Representatives"), have severally agreed, subject to the terms and conditions of
a U.S. Purchase Agreement with the Company (the "U.S. Purchase Agreement"), to
purchase from the Company the number of shares of Common Stock set forth
opposite their respective names. The U.S. Underwriters are committed to purchase
all of such shares if any are purchased. Under certain circumstances, the
commitments of non-defaulting U.S. Underwriters may be increased as set forth in
the U.S. Purchase Agreement.

<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITERS OF SHARES
----------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................
Montgomery Securities....................................................
Morgan Stanley & Co. Incorporated........................................
Smith Barney Inc. .......................................................
Credit Lyonnais Securities (USA) Inc. ...................................
---------
Total....................................................... 3,400,000
=========
</TABLE>

The Company has also entered into a purchase agreement (the "International
Purchase Agreement") with certain underwriters outside the United States (the
"International Underwriters" and, together with the U.S. Underwriters, the
"Underwriters") for whom Merrill Lynch International, Credit Lyonnais
Securities, Montgomery Securities, Morgan Stanley & Co. International Limited
and Smith Barney Inc. are acting as International representatives (the
"International Representatives"). Subject to the terms and conditions set forth
in the International Purchase Agreement, and concurrently with the sale of
3,400,000 shares of Common Stock to the U.S. Underwriters pursuant to the U.S.
Purchase Agreement, the Company has agreed to sell to the International
Underwriters, and the International Underwriters have severally agreed to
purchase, an aggregate of 600,000 shares of Common Stock. Under certain
circumstances under the International Purchase Agreement, the commitments of
non-defaulting International Underwriters may be increased. The public offering
price per share and the total underwriting discount per share will be identical
under the U.S. Purchase Agreement and the International Purchase Agreement.

In the U.S. Purchase Agreement and the International Purchase Agreement,
the several U.S. Underwriters and the several International Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such agreement if any of the shares of Common Stock being sold pursuant to
each such agreement are purchased. Sales of Common Stock to be purchased by the
U.S. Underwriters in the U.S. Offering and the International Underwriters in the
International Offering are conditioned upon one another.

The Company has granted the U.S. Underwriters an option exercisable for 30
days after the date hereof to purchase up to an additional 510,000 shares at the
public offering price per share, less the underwriting discount, solely to cover
over-allotments, if any. To the extent that the U.S. Underwriters exercise this
option, each U.S. Underwriter will be obligated, subject to certain conditions,
to purchase the number of additional shares of Common Stock proportionate to
such U.S. Underwriter's initial amount reflected in the foregoing table.
Additionally, the Company has granted the International Underwriters an option
exercisable for 30 days after the date hereof to purchase up to an additional
90,000 shares at the public offering price per share, less the underwriting
discount, solely to cover over-allotments, if any, on terms similar to those
granted to the U.S. Underwriters.

The U.S. Underwriters propose initially to offer the shares to the public
at the public offering price set forth on the cover page of this Prospectus and
to certain selected dealers at such price less a concession not in excess of
$ per share, and the U.S. Underwriters may allow, and such dealers may
reallow, a discount not in excess of $ per share to certain other dealers.
After the completion of the Offering, the offering price, concession and
discount may be changed.

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<PAGE> 78

The U.S. Underwriters and the International Underwriters have entered into
an intersyndicate agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Pursuant to the Intersyndicate Agreement,
sales may be made between the International Underwriters and the U.S.
Underwriters of such number of shares of Common Stock as may be mutually agreed.
The price of any Common Stock so sold shall be the public offering price, less
an amount not greater than the selling concession.

Under the terms of the Intersyndicate Agreement, the International
Underwriters and any dealer to whom they sell Common Stock will not offer to
sell or sell Common Stock to persons who are U.S. or Canadian persons or to
persons they believe intend to resell to persons who are U.S. or Canadian
persons, and the U.S. Underwriters and any dealer to whom they sell Common Stock
will not offer to sell or sell Common Stock to non-U.S. or non-Canadian persons
or to persons they believe intend to resell to non-U.S. or non-Canadian persons,
except, in each case, for transactions pursuant to such agreement.

The U.S. Representatives and the International Representatives acted as
representatives of the Underwriters in the IPO and received customary
underwriting compensation in connection therewith.

The Company and each of its directors and executive officers who is a
holder of Common Stock and the Fine Family Shareholders have agreed not to sell
or otherwise dispose of any shares of Common Stock (other than shares purchased
pursuant to the Offering or in the open market) or securities convertible into
or exercisable for Common Stock without the prior written consent of Merrill
Lynch for a period of 90 days after the date of this Prospectus. See "Shares
Eligible for Future Sale."

The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.

In the Purchase Agreement, the Company has agreed to indemnify the several
Underwriters against certain civil liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriters may be required to
make in respect thereof.

If requested by the Company, the Underwriters will reserve up to 100,000
shares of Common Stock for sale at the public offering price to certain
employees, customers, vendors and business associates of the Company who have
expressed an interest in purchasing shares of Common Stock. The number of shares
of Common Stock available to the general public will be reduced to the extent
these persons purchase the reserved shares of Common Stock. Any reserved shares
of Common Stock that are not so purchased by such persons at the closing of the
Offering will be offered by the Underwriters to the general public on the same
terms as the other Common Stock offered by this Prospectus.

Each International Underwriter has represented and agreed that (i) it has
not offered or sold, and will not offer or sell, in the United Kingdom by means
of any document, any shares of the Common Stock other than to persons whose
ordinary business it is to buy or sell shares or debentures, whether as
principal or agent (except under circumstances which do not constitute an offer
to the public within the meaning of the Public Offers of Securities Regulations
1995), (ii) it has complied and will comply with all applicable provisions of
the Financial Services Act of 1986 with respect to anything done by it in
relation to the Common Stock in, from or otherwise involving the United Kingdom,
and (iii) it has only issued or passed on, and will only issue or pass on in the
United Kingdom, any document received by it in connection with the issue of the
Common Stock to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995
or is a person to whom such document may otherwise lawfully be issued or passed
on.

Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the offering price set forth on the cover page hereof.

LEGAL MATTERS

Certain legal matters with respect to the Common Stock offered hereby will
be passed upon for the Company by Jones, Day, Reavis & Pogue, New York, New
York. Certain legal matters in connection with this Offering will be passed upon
for the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New
York.

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<PAGE> 79

EXPERTS

The Consolidated Financial Statements of Interstate Hotels Company and
Predecessor Entity as of December 31, 1994 and 1995 and for the years ended
December 31, 1993, 1994 and 1995; the Combined Financial Statements of
Interstone I Property Partnerships and Predecessor Entities as of December 31,
1994 and 1995 and for the years ended December 31, 1993, 1994 and 1995; the
Combined Financial Statements of Interstone/CGL Partners, L.P. and Predecessor
Entity as of December 31, 1994, December 14, 1995 and December 31, 1995 and for
the years ended December 31, 1993 and 1994, for the period from January 1, 1995
to December 14, 1995 and for the period from December 15, 1995 to December 31,
1995; the Financial Statements of Boston Marriott Westborough Hotel as of
December 31, 1994 and 1995 and for the years ended December 31, 1993, 1994 and
1995; the Combined Financial Statements of Carter Associates and Carter
Associates, Inc. as of December 31, 1995 and for the year ended December 31,
1995; the Financial Statements of OBR Limited, L.P. as of December 31, 1995 and
for the year ended December 31, 1995; and the Combined Financial Statements of
Trust Management, Inc. and Trust Leasing, Inc. as of December 31, 1995 and for
the year ended December 31, 1995 included in this Prospectus have been included
herein in reliance on the reports of Coopers & Lybrand L.L.P., independent
accountants, given on their authority as experts in accounting and auditing.

The Financial Statements of Fountain Suites Hotel as of December 31, 1995
and for the year ended December 31, 1995 included in this Prospectus have been
included herein in reliance on the reports of Pannell Kerr Forster, independent
accountants, given on their authority as experts in accounting and auditing.

FORWARD-LOOKING INFORMATION

This Prospectus contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of the Company's
management as well as assumptions made by and information currently available to
the Company's management. When used in this Prospectus, words such as
"anticipate," "believe," "estimate," "expect," "intend" and similar expressions,
as they relate to the Company or the Company's management, identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions, relating to the operations and results of
operations of the Company, the Company's rapid expansion, the ownership and
leasing of real estate, competition from other hospitality companies, changes in
economic cycles, as well as the other factors described in this Prospectus.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results or outcomes may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended.

AVAILABLE INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus, which is a part of the Registration Statement, omits
certain information contained in the Registration Statement, and reference is
made to the Registration Statement and the exhibits thereto for further
information with respect to the Company and the Common Stock offered hereby.
Statements contained herein concerning the provisions of any documents are not
necessarily complete, and in each instance reference is made to the copy of such
document filed as an exhibit to the Registration Statement. Each such statement
is qualified in its entirety by such reference. The Registration Statement,
including exhibits filed therewith, may be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and will also be available for inspection
and copying at the regional offices of the Commission located at 7 World Trade
Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
may also be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 upon payment of the fees prescribed
by the Commission. The Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission and that is located at
http://www.sec.gov. The Common Stock is listed on the New

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<PAGE> 80

York Stock Exchange. Reports and other information concerning the Company may be
inspected and copied at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.

The Company is required to file reports and other information with the
Commission pursuant to the Securities Exchange Act of 1934. The Company intends
to furnish its shareholders annual reports containing consolidated financial
statements certified by its independent accountants and quarterly reports
containing unaudited condensed consolidated financial statements for each of the
first three quarters of each fiscal year.

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<PAGE> 81

INTERSTATE HOTELS COMPANY

INDEX TO PRO FORMA FINANCIAL DATA AND FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PRO FORMA FINANCIAL DATA
Pro Forma Financial Data Summary.................................................. F-3
Pro Forma Balance Sheet as of September 30, 1996 (unaudited)...................... F-4
Pro Forma Statement of Income for the year ended December 31, 1995 (unaudited).... F-5
Pro Forma Statement of Income for the nine months ended September 30, 1996
(unaudited).................................................................... F-6
Notes to Pro Forma Financial Data................................................. F-7
INTERSTATE HOTELS COMPANY AND PREDECESSOR ENTITY
Report of Independent Accountants................................................. F-13
Consolidated Balance Sheets as of December 31, 1994 and 1995 and September 30,
1996 (unaudited)............................................................... F-14
Consolidated Statements of Income for the years ended December 31, 1993, 1994 and
1995 and the nine months ended September 30, 1995 and 1996 (unaudited)......... F-15
Consolidated Statements of Changes in Equity for the years ended December 31,
1993, 1994 and 1995 and the nine months ended September 30, 1996 (unaudited)... F-16
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995 and the nine months ended September 30, 1995 and 1996 (unaudited)..... F-17
Notes to Consolidated Financial Statements........................................ F-18
INTERSTONE I PROPERTY PARTNERSHIPS AND PREDECESSOR ENTITIES
Report of Independent Accountants................................................. F-34
Combined Balance Sheets as of December 31, 1994 and 1995.......................... F-35
Combined Statements of Operations and Owners' Equity for the years ended December
31, 1993, 1994 and 1995 and for the nine months ended September 30, 1995 and
for the period from January 1, 1996 through June 24, 1996 (unaudited).......... F-36
Combined Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995 and for the nine months ended September 30, 1995 and for the period from
January 1, 1996 through June 24, 1996 (unaudited).............................. F-37
Notes to Combined Financial Statements............................................ F-38
INTERSTONE/CGL PARTNERS, L.P. AND PREDECESSOR ENTITY
Report of Independent Accountants................................................. F-48
Combined Balance Sheets as of December 31, 1994, December 14, 1995 and December
31, 1995....................................................................... F-49
Combined Statements of Operations and Predecessor's Equity and Partners' Capital
for the years ended December 31, 1993 and 1994, for the period from January 1,
1995 to December 14, 1995, for the period from December 15, 1995 to December
31, 1995 and for the nine months ended September 30, 1995 and for the period
from January 1, 1996 through June 24, 1996 (unaudited)......................... F-50
Combined Statements of Cash Flows for the years ended December 31, 1993 and 1994,
for the period from January 1, 1995 to December 14, 1995 and for the period
from December 15, 1995 to December 31, 1995 and for the nine months ended
September 30, 1995 and for the period from January 1, 1996 through June 24,
1996 (unaudited)............................................................... F-51
Notes to Combined Financial Statements............................................ F-52
BOSTON MARRIOTT WESTBOROUGH HOTEL
Report of Independent Accountants................................................. F-60
Balance Sheets as of December 31, 1994 and 1995................................... F-61
</TABLE>

F-1
<PAGE> 82

PAGE
-----
<S> <C>
Statements of Operations and Equity for the years ended December 31, 1993, 1994
and 1995 and for the nine months ended September 30, 1995 and for the period
from January 1, 1996 through July 1, 1996 (unaudited).......................... F-62
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and
for the nine months ended September 30, 1995 and for the period from January 1,
1996 through July 1, 1996 (unaudited).......................................... F-63
Notes to Financial Statements..................................................... F-64
CARTER ASSOCIATES AND CARTER ASSOCIATES, INC.
Report of Independent Accountants................................................. F-68
Combined Balance Sheet as of December 31, 1995.................................... F-69
Combined Statements of Operations and Partners' Deficit for the year ended
December 31, 1995, for the nine months ended September 30, 1995 and for the
seven months ended July 31, 1996 (unaudited)................................... F-70
Combined Statements of Cash Flows for the year ended December 31, 1995, for the
nine months ended September 30, 1995 and for the seven months ended July 31,
1996 (unaudited)............................................................... F-71
Notes to Financial Statements..................................................... F-72
OBR LIMITED, L.P. D/B/A DORAL OCEAN BEACH RESORT
Report of Independent Accountants................................................. F-77
Balance Sheets as of December 31, 1995 and September 30, 1996 (unaudited)......... F-78
Statements of Operations and Owners' Equity for the year ended December 31, 1995
and for the nine months ended September 30, 1995 and 1996 (unaudited).......... F-79
Statements of Cash Flows for the year ended December 31, 1995 and for the nine
months ended September 30, 1995 and 1996 (unaudited)........................... F-80
Notes to Financial Statements..................................................... F-81
TRUST MANAGEMENT, INC. AND TRUST LEASING, INC.
Report of Independent Accountants................................................. F-87
Combined Balance Sheets as of December 31, 1995 and September 30, 1996
(unaudited).................................................................... F-88
Combined Statements of Operations for the year ended December 31, 1995 and for the
nine months ended September 30, 1995 and 1996 (unaudited)...................... F-89
Combined Statements of Shareholder's Equity for the year ended December 31, 1995
and for the nine months ended September 30, 1996 (unaudited)................... F-90
Combined Statements of Cash Flows for the year ended December 31, 1996 and for the
nine months ended September 30, 1995 and 1996 (unaudited)...................... F-91
Notes to Combined Financial Statements............................................ F-92
FOUNTAIN SUITES HOTEL
Independent Auditor's Report...................................................... F-98
Hotel Balance Sheet for the year ended December 31, 1995.......................... F-99
Statements of Hotel Operations and Hotel Equity for the year ended December 31,
1995, for the nine months ended September 30, 1995 and for the period from
January 1, 1996 to August 29, 1996 (unaudited)................................. F-100
Statements of Hotel Cash Flows for the year ended December 31, 1995, for the nine
months ended September 30, 1995 and for the period from January 1, 1996 to
August 29, 1996 (unaudited).................................................... F-101
Notes to Financial Statements..................................................... F-102
</TABLE>

F-2
<PAGE> 83

PRO FORMA FINANCIAL DATA

The following unaudited Pro Forma Balance Sheet of the Company as of
September 30, 1996 presents, in "The Company Pro Forma" column, the financial
position of the Company as if a portion of the Offering, as described in "Note
1 -- Basis of Presentation," and the acquisitions of the two Owned Hotels
acquired since September 30, 1996, the Pending Acquisitions and the Equity Inns
Transaction had occurred as of September 30, 1996. The unaudited Pro Forma
Statements of Income of the Company for the year ended December 31, 1995 and the
nine months ended September 30, 1996 present, in "The Company Pro Forma" column,
the results of operations of the Company as if a portion of the Offering, as
described in "Note 1 -- Basis of Presentation," all issuances of Common Stock
prior to or in connection with the IPO, the IPO Acquisitions, the Post-IPO
Acquisitions, the Pending Acquisitions and the Equity Inns Transaction had
occurred as of January 1, 1995, except that the Pro Forma Statements of Income
data give effect to the results of operations of hotels acquired or opened by
Equity Inns after January 1, 1995 as of their respective dates of acquisition or
opening and not as of January 1, 1995. The adjustments required to reflect such
transactions are set forth in the "Pro Forma Adjustments" columns and are
discussed in the accompanying notes.

The unaudited Pro Forma Balance Sheet and Statements of Income of the
Company are presented for informational purposes only and may not reflect the
future results of operations and financial position or what the results of
operations and financial position of the Company would have been had such
transactions occurred as of the dates indicated. The unaudited pro forma
financial data and notes thereto should be read in conjunction with the
financial statements and notes thereto contained elsewhere in this Prospectus.
See "Index to Financial Statements."

F-3
<PAGE> 84

INTERSTATE HOTELS COMPANY

PRO FORMA BALANCE SHEET(2)
SEPTEMBER 30, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
---------

ASSETS

<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------------
THE FINANCING, THE
COMPANY OFFERING COMPANY
HISTORICAL ACQUISITIONS AND OTHER PRO FORMA
---------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 24,300 $ (112,420)(a) $ 106,832(g) $ 18,712
Accounts receivable.......................... 23,582 -- -- 23,582
Net investment in direct financing leases.... 657 -- -- 657
Deferred income taxes........................ 5,076 -- -- 5,076
Prepaid expenses and other assets............ 4,117 (1,250)(b) -- 2,867
--------- ----------- --------- ---------
Total current assets...................... 57,732 (113,670) 106,832 50,894
Restricted cash................................ 10,532 -- -- 10,532
Property and equipment, net.................... 496,723 113,670(c) -- 610,393
Investments in contracts....................... 3,154 -- -- 3,154
Investments in hotel real estate............... 5,222 -- -- 5,222
Officers and employees notes receivable........ 4,509 -- -- 4,509
Net investment in direct financing leases...... 1,572 -- -- 1,572
Other assets................................... 12,373 46,500(d) 5,593(h) 64,466
--------- ----------- --------- ---------
Total assets.............................. $ 591,817 $ 46,500 $ 112,425 $ 750,742
========= =========== ========= =========

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable -- trade.................... 6,184 -- -- 6,184
Accounts payable -- health trust............. 3,116 -- -- 3,116
Accrued payroll and related costs............ 9,444 -- -- 9,444
Income taxes payable......................... 2,373 -- -- 2,373
Other accrued liabilities.................... 19,116 -- -- 19,116
Current portion of long term debt............ 6,421 -- 2,600(i) 9,021
--------- ----------- --------- ---------
Total current liabilities................. 46,654 -- 2,600 49,254
Long-term debt................................. 287,870 -- 26,650(j) 314,520
Deferred income taxes.......................... 2,271 -- -- 2,271
Other liabilities.............................. 1,213 -- -- 1,213
--------- ----------- --------- ---------
Total liabilities......................... 338,008 -- 29,250 367,258
Minority interests............................. 5,756 -- -- 5,756
Equity:
Common Stock................................. 287 19(e) 34(k) 340
Paid-in capital.............................. 253,058 46,481(f) 83,141(l) 382,680
Accumulated deficit.......................... (5,292) -- -- (5,292)
--------- ----------- --------- ---------
Total equity.............................. 248,053 46,500 83,175 377,728
--------- ----------- --------- ---------
Total liabilities and equity.............. $ 591,817 $ 46,500 $ 112,425 $ 750,742
========= =========== ========= =========
</TABLE>

The accompanying notes are an integral part of this Pro Forma Balance Sheet

F-4
<PAGE> 85

INTERSTATE HOTELS COMPANY

PRO FORMA STATEMENT OF INCOME (3)
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------------
THE FINANCING, THE
COMPANY INTERSTONE I INTERSTONE/CGL OFFERING COMPANY
HISTORICAL HISTORICAL HISTORICAL ACQUISITIONS AND OTHER PRO FORMA
---------- ------------ -------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Lodging revenues:
Rooms............................... $ -- $ 53,451 $ 48,203 $119,718(a) $ -- $ 221,372
Food and beverage................... -- 35,352 24,746 31,598(a) -- 91,696
Other departmental.................. -- 7,141 4,138 7,656(a) -- 18,935
Management and related fees........... 45,018 -- -- 821(a) (4,544)(e) 41,295
-------- -------- -------- -------- --------- ----------
Total revenues.................... 45,018 95,944 77,087 159,793 (4,544) 373,298
Lodging expenses:
Rooms............................... -- 13,160 11,367 31,047(b) -- 55,574
Food and beverage................... -- 26,046 18,261 24,978(b) -- 69,285
Other departmental.................. -- 3,042 2,257 3,610(b) -- 8,909
Property costs...................... -- 33,574 28,370 47,749(b) (9,820)(f) 99,873
General and administrative............ 9,811 686 654 4,458(b) 101(g) 15,710
Payroll and related benefits.......... 15,469 -- -- 2,296(b) (650)(h) 17,115
Non-cash compensation................. -- -- -- -- --(i) --
Lease expense......................... -- -- -- 24,101(c) -- 24,101
Depreciation and amortization......... 4,201 10,251 7,455 12,121(d) (4,193)(j) 29,835
-------- -------- -------- -------- --------- ----------
29,481 86,759 68,364 150,360 (14,562) 320,402
-------- -------- -------- -------- --------- ----------
Operating income.................. 15,537 9,185 8,723 9,433 10,018 52,896
Other (income) expense:
Interest, net....................... (99) 9,605 460 -- 17,674(k) 27,640
Other, net.......................... (203) 589 -- -- 18(l) 404
-------- -------- -------- -------- --------- ----------
(302) 10,194 460 -- 17,692 28,044
-------- -------- -------- -------- --------- ----------
Income (loss) before income tax
expense......................... 15,839 (1,009) 8,263 9,433 (7,674) 24,852
Income tax expense.................... -- -- 3,607 -- 5,837(m) 9,444
-------- -------- -------- -------- --------- ----------
Net income (loss)................. $ 15,839 $ (1,009) $ 4,656 $ 9,433 $ (13,511) $ 15,408
======== ======== ======== ======== ========= ==========
Pro forma net income per common
share............................... $ 0.45
==========
Pro forma common shares outstanding... 34,178,704
==========
</TABLE>

The accompanying notes are an integral part of this Pro Forma Statement of
Income.

F-5
<PAGE> 86

INTERSTATE HOTELS COMPANY

PRO FORMA STATEMENT OF INCOME (3)
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------------
THE FINANCING, THE
COMPANY INTERSTONE I INTERSTONE/CGL OFFERING COMPANY
HISTORICAL HISTORICAL HISTORICAL ACQUISITIONS AND OTHER PRO FORMA
------- ------------ -------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Lodging revenues:
Rooms................................ $37,351 $ 27,926 $ 25,355 $111,064(a) $ -- $ 201,696
Food and beverage.................... 16,792 18,372 12,273 21,030(a) -- 68,467
Other departmental................... 3,840 3,619 2,235 6,481(a) -- 16,175
Management and related fees............ 35,788 -- -- 604(a) (3,438)(e) 32,954
------ ------ ------ ------- ------- ----------
Total revenues.................... 93,771 49,917 39,863 139,179 (3,438) 319,292
Lodging expenses:
Rooms................................ 8,064 6,524 5,606 27,279(b) -- 47,473
Food and beverage.................... 12,513 13,066 8,907 17,726(b) -- 52,212
Other departmental................... 1,680 1,631 1,129 1,621(b) -- 6,061
Property costs....................... 16,618 16,869 13,150 38,675(b) (5,093)(f) 80,219
General and administrative............. 7,240 558 759 4,556(b) (670)(g) 12,443
Payroll and related benefits........... 12,564 -- -- 1,872(b) (702)(h) 13,734
Non cash compensation.................. 11,896 -- -- -- (11,896)(i) --
Lease expense.......................... -- -- -- 28,883(c) -- 28,883
Depreciation and amortization.......... 7,762 5,283 4,256 8,428(d) (3,465)(j) 22,264
------ ------ ------ ------- ------- ----------
78,337 43,931 33,807 129,040 (21,826) 263,289
------ ------ ------ ------- ------- ----------
Operating income................... 15,434 5,986 6,056 10,139 18,388 56,003
Other (income) expense:
Interest, net........................ 5,315 4,737 4,965 -- 4,590(k) 19,607
Other, net........................... (329 ) -- -- -- 1,713(l) 1,384
------ ------ ------ ------- ------- ----------
4,986.. 4,737 4,965 -- 6,303 20,991
------ ------ ------ ------- ------- ----------
Income before income tax expense... 10,448 1,249 1,091 10,139 12,085 35,012
Income tax expense..................... 11,145 -- -- -- 2,160(m) 13,305
------ ------ ------ ------- ------- ----------
Net income (loss).................. $ (697 ) $ 1,249 $ 1,091 $ 10,139 $ 9,925 $ 21,707
====== ====== ====== ======= ======= ==========
Pro forma net income per common
share................................ $ .64
----------
----------
Pro forma common shares outstanding.... 34,178,704
----------
----------
</TABLE>

The accompanying notes are an integral part of this Pro Forma Statement of
Income.

F-6
<PAGE> 87

INTERSTATE HOTELS COMPANY

NOTES TO PRO FORMA FINANCIAL DATA
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)

NOTE 1. BASIS OF PRESENTATION

The pro forma financial statements have been prepared assuming the issuance
of 3,448,000 shares of Common Stock at an offering price of $25 5/8 per share,
which, net of estimated underwriting discounts and offering expenses payable by
the Company, would result in sufficient net proceeds, together with cash on
hand, to finance the Pending Acquisitions and to repay $24,100 of acquisition
draws. These shares are assumed to have been issued, the hotels acquired, and
the debt repaid, at the beginning of the periods presented, and thus interest
expense attributable to such debt has been eliminated. The acquisitions of the
Columbus Hilton, Westin Resort Miami Beach, Burlington Radisson, Washington
Vista and assets related to the Equity Inns Transaction have been accounted for
using the purchase method of accounting.

NOTE 2. PRO FORMA BALANCE SHEET ADJUSTMENTS

ACQUISITIONS

<TABLE>
<S> <C> <C>
(a) Adjustments to reflect the net decrease in cash and cash equivalents:
Purchase of Columbus Hilton from an unrelated third party............... $ (8,200)(1)
Purchase of Westin Resort Miami Beach, net of $1,000 deposit paid in
September, 1996, from an unrelated third party..................... (43,000)(1)
Purchase of Burlington Radisson, net of $250 deposit paid in September,
1996, from an unrelated third party................................ (13,750)(1)
Purchase of Washington Vista from an unrelated third party.............. (47,470)(1)
---------
$(112,420)
=========
(b) Adjustment to reflect the net decrease in other current assets:
Elimination of $1,000 deposit paid in September, 1996 for the Westin
Resort Miami Beach................................................. $ (1,000)(1)
Elimination of $250 deposit paid in September, 1996 for the Burlington
Radisson........................................................... (250)(1)
$ (1,250)
(c) Adjustment to reflect the net increase in fixed assets:
Purchase of Columbus Hilton from an unrelated third party............... $ 8,200(1)
Purchase of Westin Resort Miami Beach from an unrelated third party..... 44,000(1)
Purchase of Burlington Radisson from an unrelated third party........... 14,000(1)
Purchase of Washington Vista from an unrelated third party.............. 47,470(1)
---------
$ 113,670
=========

(d) Adjustment to reflect the net increase in other assets:
Intangible assets related to the purchase of leases, management
contracts and goodwill related to the Equity Inns Transaction...... $ 46,500(2)
=========
(e) Adjustment to reflect increase in Common Stock outstanding for shares
issued pursuant to the Equity Inns Transaction..................... $ 19(2)
=========
</TABLE>

F-7
<PAGE> 88

NOTES TO PRO FORMA FINANCIAL DATA--CONTINUED
---------

NOTE 2. PRO FORMA BALANCE SHEET ADJUSTMENTS--CONTINUED

<TABLE>
<S> <C> <C>
(f) Adjustments to reflect the net increase in paid-in capital:
Acquisition of leases, management contracts and goodwill related to the
Equity Inns Transaction in exchange for 1,957,895 shares of Common
Stock.............................................................. $ 46,500(2)
Increase in Common Stock outstanding for shares issued pursuant to the
Equity Inns Transaction............................................ (19)(2)
---------
$ 46,481
=========
</TABLE>

FINANCING, OFFERING AND OTHER

<TABLE>
<S> <C> <C>
(g) Adjustments to reflect the net increase in cash and cash equivalents:
Proceeds from issuance of 3,448,000 shares of Common Stock
at $25 5/8 per share................................................ $ 88,372(3)
Proceeds from borrowings under the amended Term Loan..................... 29,250(4)
Payment of estimated fees and expenses related to the issuance of
Common Stock........................................................ (5,197)(3)
Payment of estimated fees and expenses related to borrowings from the
amended Term Loan, the amended Acquisition Facility and the new debt
rate hedge.......................................................... (5,593)(4)
--------
$106,832
========
(h) Adjustment to reflect the net increase in other assets:
Deferred loan costs paid for the amended Term Loan and the amended
Acquisition Facility................................................ $ 5,593(4)
========
(i) Adjustment to reflect the net increase in the current portion of
long-term debt as a
result of debt restructuring............................................. $ 2,600(4)
========
(j) Adjustments to reflect the net increase in long-term debt as a result of
debt
restructuring............................................................ $ 26,650(4)
========
(k) Adjustment to reflect increase in Common Stock outstanding related to the
Offering............................................................ $ 34(3)
========
(l) Adjustments to reflect the net increase in paid in capital:
Proceeds from issuance of 3,448,000 shares Common Stock at $25 5/8 per
share............................................................... $ 88,372(3)
Payment of estimated fees and expenses related to the issuance of
Common Stock........................................................ (5,197)(3)
Increase in Common Stock outstanding related to the Offering............. (34)(3)
--------
$ 83,141
========
</TABLE>

The detail supporting the pro forma balance sheet as of September 30, 1996
reflect four self-balancing entries which are identified in (1) through (4)
below and reflect the following:

(1) Record purchase of four hotels from unrelated third parties, net of deposits
paid.

(2) Issuance of 1,957,895 shares of Common Stock in connection with the Equity
Inns Transaction. The stock price assumed was $23.75 per share, representing
the approximate trading price at the date the Company reached an agreement
with the seller and announced the purchase.

F-8
<PAGE> 89

NOTES TO PRO FORMA FINANCIAL DATA--CONTINUED
---------

NOTE 2. PRO FORMA BALANCE SHEET ADJUSTMENTS--CONTINUED
(3) Record issuance of 3,448,000 shares of Common Stock at $25 5/8 per share,
net of related estimated expenses.

(4) Record debt financing from the amended Term Loan, net of payment of
estimated fees and expenses related to the amended Term Loan and the amended
Acquisition Facility.

NOTE 3. PRO FORMA STATEMENT OF INCOME ADJUSTMENTS

ACQUISITIONS

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -----------------
<C> <S> <C> <C>
(a) Adjustments to reflect the addition of pro forma revenues
for the Post-IPO Acquisitions, Pending Acquisitions and
the Equity Inns Transaction for the period prior to
ownership by the Company:
Lodging revenues:
Rooms....................................................... $119,718 $ 111,064
Food and beverage........................................... 31,598 21,030
Other departmental.......................................... 7,656 6,481
Management and related fees................................. 821 604
-------- ---------
$159,793 $ 139,179
======== =========
(b) Adjustments to reflect addition of pro forma operating
expenses for the Post-IPO Acquisitions, Pending
Acquisitions and the Equity Inns Transaction for the
period prior to ownership by the Company:
Lodging expenses:
Rooms....................................................... $ 31,047 $ 27,279
Food and beverage........................................... 24,978 17,726
Other departmental.......................................... 3,610 1,621
Property costs.............................................. 47,749 38,675
General and administrative.................................. 4,458 4,556
Payroll..................................................... 2,296 1,872
-------- ---------
$114,138 $ 91,729
======== =========
(c) Adjustment to reflect the pro forma lease expense related to
the acquisition of leases related to the Equity Inns
Transaction............................................... $ 24,101 $ 28,883
======== =========
(d) Adjustment to reflect the pro forma depreciation and
amortization expense related to the Post-IPO Acquisitions,
Pending Acquisitions and the Equity Inns Transaction for
the period prior to ownership by the Company*............. $ 12,121 $ 8,428
======== =========
FINANCING, OFFERING AND OTHER

(e) Adjustments to reflect net decrease in management and
related fee revenues:
Pro forma adjustment to reflect management of the Owned
Hotels
for the period prior to ownership by the Company........ $ 4,209 $ 1,758
Elimination of pro forma management fees for the Owned
Hotels
for the period prior to ownership by the Company........ (7,486) (4,443)
</TABLE>

F-9
<PAGE> 90

NOTES TO PRO FORMA FINANCIAL DATA--CONTINUED
---------

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------- --------
<C> <S> <C> <C>

NOTE 3. PRO FORMA STATEMENT OF INCOME ADJUSTMENTS--CONTINUED
Elimination of purchasing fees capitalized by the Owned
Hotels
for the period prior to ownership by the Company........ (360) (103)
Elimination of purchasing fees expensed by the Owned Hotels
for
the period prior to ownership by the Company............ (61) (17)
Elimination of insurance premiums paid to the Company from
the Owned Hotels for the period prior to ownership by
the Company............................................. (846) (633)
-------- ---------
$ (4,544) $ (3,438)
======== =========
(f) Adjustments to reflect net decrease in property costs of the
Owned Hotels:
Pro forma net increase in management fee expense for
Interstone I properties as a result of new management
contracts.............................................. $ 490 $ --
Pro forma net decrease in management fee expense for
Interstone/CGL properties as a result of new management
contracts.............................................. (1,917) --
Elimination of pro forma management fees for the Owned
Hotels for the period prior to ownership............... (7,486) (4,443)
Elimination of insurance premiums paid by the Owned Hotels
to IHC for the period prior to ownership............... (846) (633)
Elimination of purchasing fees expensed by the Owned
Hotels for the period prior to ownership............... (61) (17)
-------- ---------
$ (9,820) $ (5,093)
======== =========
(g) Adjustment to reflect net increase (decrease) in general and
administrative expense:
Increase in general and administrative expenses related to
managing and administering a publicly held company..... $ 1,000 $ 500
Elimination of corporate overhead allocations from the
prior owner of the Interstone/CGL properties........... (622) --
Elimination of asset management fees of Interstone/CGL
Partners, L.P. to an unrelated partner................. -- (262)
Elimination of relocation costs of management funded by
the previous partners of the Owned Hotels.............. (277) (908)
-------- ---------
$ 101 $ (670)
======== =========
(h) Adjustment to reflect the decrease in compensation paid to
seller/ principal in the Equity Inns Transaction**........ $ (650) $ (702)
======== =========
(i) Adjustment to reflect the elimination of non-recurring,
non-cash compensation associated with the IPO............. $ -- $ (11,896)
======== =========
(j) Adjustment to reflect the net decrease in depreciation and
amortization:
Pro forma depreciation and amortization expense of the
Interstone I properties for the period prior to
ownership*............................................. $ 7,535 $ 3,759
Pro forma depreciation and amortization expense of the
Interstone/CGL properties for the period prior to
ownership*............................................. 6,026 2,976
Elimination of amortization of loan costs of the original
Term Loan and Acquisition Facility..................... -- (501)
</TABLE>

F-10
<PAGE> 91

NOTES TO PRO FORMA FINANCIAL DATA--CONTINUED
---------

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------- --------
NOTE 3. PRO FORMA STATEMENT OF INCOME ADJUSTMENTS--CONTINUED
<C> <S> <C> <C>
Elimination of historical depreciation and amortization
expense of the Interstone I properties................. (10,251) (5,283)
Elimination of historical depreciation and amortization
expense of the Interstone/CGL properties............... (7,455) (4,256)
Elimination of amortization of loan costs of the Company
related to indebtedness repaid......................... (36) (152)
Elimination of depreciation expense related to purchasing
fees capitalized prior to ownership.................... (12) (8)
-------- ---------
$ (4,193) $ (3,465)
======== =========
(k) Adjustments to reflect the net increase in interest expense:
Pro forma interest expense related to amended Term
Loan***................................................... $ 22,066 $ 11,862
Pro forma interest expense related to the unused commitment
fee
on the amended Acquisition Facility****................. 750 477
Pro forma interest expense related to the Interstone/CGL
Loan*****............................................... 2,248 1,122
Pro forma amortization of loan costs related to the amended
Term
Loan and amended Acquisition Facility................... 3,239 2,433
Elimination of interest expense of the Company related to
indebtedness repaid..................................... (564) (1,602)
Elimination of interest expense of the Interstone I
properties
related to indebtedness repaid.......................... (9,605) (4,737)
Elimination of interest expense of the Interstone/CGL
properties
related to indebtedness repaid.......................... (460) (4,965)
-------- ---------
$ 17,674 $ 4,590
======== =========
(l) Adjustment to reflect the net increase in other expenses:
Elimination of equity earnings in Interstone/CGL
Partners, L.P. for the period prior to the IPO.......... $ (154) $ 210
Pro forma adjustment to minority interest in earnings of
Interstone/CGL Partners, L.P............................ 404 1,517
Elimination of minority interest acquired by the Company.... 11 (14)
Elimination of gain on settlement of debt obligations
assumed
by the Company in connection with the 1995
reorganization............................................ 346 --
Elimination of losses recognized by the Interstone I
properties
related to a 1995 debt refinancing...................... (589) --
-------- ---------
$ 18 $ 1,713
======== =========
</TABLE>

F-11
<PAGE> 92

NOTES TO PRO FORMA FINANCIAL DATA--CONTINUED
---------

NOTE 3. PRO FORMA STATEMENT OF INCOME ADJUSTMENTS--CONTINUED

<TABLE>
<C> <S> <C> <C>
(m) Adjustment to record the income tax expense associated with
operating corporation using an effective income tax rate
of 38%. The pro forma consolidated statement of income
does not include the initial recording of deferred income
tax expense related to the change in tax status. This
amount was recorded by the Company subsequent to the
closing of the IPO.
Elimination of historical income tax expense................ $ -- $ (11,145)
Income tax expense at an effective rate of 38%.............. 9,444 13,305
Elimination of income tax expense recorded by previous
corporate owner of the Interstone/CGL properties..... (3,607) --
-------- ---------
$ 5,837 $ 2,160
======== =========
</TABLE>

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

* Pro forma depreciation expense is calculated on the straight-line method
over the estimated useful life of the asset. (Pro forma depreciation
expense for buildings and improvements is calculated over a period of 10
to 40 years, and pro forma depreciation expense for furniture and
fixtures is calculated over a period of 5 to 10 years.) Pro forma
amortization of deferred expenses is calculated on the straight-line
method over the estimated useful life of the asset. (Pro forma
amortization for franchise fees is calculated over a period of 8 to 25
years, and a non-compete agreement is calculated over a period of 5
years. Amortization of intangibles related to the Equity Inns transaction
are amortized over periods ranging from 5 to 25 years).

** Prior to the transaction, a portion of earnings were distributed to the
seller/principal in the form of compensation. Subsequent to the
transaction, the compensation will no longer be paid.

*** Interest on the $293,750 Term Loan is assumed in two tranches: $54 million
swapped at 7.8% and the remainder floating at LIBOR (5.5%) plus 2%.
Principal amortizes at $1,250/quarter after the first quarter.
Principal amortizes at $1,900/quarter after the second and third quarters.
Principal amortizes at $3,800/quarter after the fourth quarter.
Also assumed is a $50 agency fee.

**** The interest for the unused commitment fee is 3/8 of 1% on the available
debt remaining on the new acquisition line.

***** Interest on the $29,250 Interstone/CGL loan is assumed in two tranches:
$18,000 is swapped at 7.8% and the remainder is floating at LIBOR (5.5%)
plus 2%.

F-12
<PAGE> 93

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors
Interstate Hotels Company:

We have audited the accompanying consolidated balance sheets of Interstate
Hotels Company and Predecessor Entity (the Company) as of December 31, 1994 and
1995, and the related consolidated statements of income, changes in equity and
cash flows for the three years in the period ended December 31, 1995. These
consolidated financial statements 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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
the Company as of December 31, 1994 and 1995, and the consolidated results of
their operations, changes in equity and cash flows for the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.

/s/COOPERS & LYBRAND L.L.P.

Pittsburgh, Pennsylvania
April 10, 1996, except for the
third paragraph of Note 9,
as to which the date is
April 22, 1996, except for the first
paragraph of Note 1, as to which the
date is June 25, 1996 and except for
Note 17, as to which the date is
November 15, 1996

F-13
<PAGE> 94

INTERSTATE HOTELS COMPANY AND PREDECESSOR ENTITY

CONSOLIDATED BALANCE SHEETS
---------

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- SEPTEMBER 30,
1994 1995 1996
----------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 6,701,518 $ 14,034,622 $ 24,299,981
Accounts receivable (Note 13)........................ 8,276,693 10,653,952 23,581,853
Net investment in direct financing leases (Note 4)... 242,818 399,266 657,104
Deferred income taxes................................ -- -- 5,076,316
Prepaid expenses and other assets.................... 55,182 312,642 4,117,467
----------- ------------ -------------
Total current assets............................ 15,276,211 25,400,482 57,732,721
Restricted cash (Notes 14 and 15)...................... 1,285,674 2,096,213 10,532,251
Property and equipment, net (Note 5)................... 1,913,704 1,894,149 496,722,523
Investments in contracts, net of accumulated
amortization of $13,790,408 and $16,933,107 at
December 31, 1994 and 1995, respectively, and
$19,321,011 at September 30, 1996.................... 8,752,174 5,860,972 3,153,690
Investments in hotel real estate (Note 6).............. -- 12,884,150 5,221,563
Officers and employees notes receivable................ 1,370,537 1,219,313 4,508,529
Affiliates notes receivable............................ 879,944 8,717,662 --
Net investment in direct financing leases (Note 4)..... 681,611 836,010 1,571,619
Other assets........................................... 581,228 2,492,041 12,374,143
----------- ------------ -------------
Total assets.................................. $30,741,083 $ 61,400,992 $ 591,817,039
=========== ============ ============
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable:
Trade.............................................. 1,116,329 925,085 6,183,647
Health Trust (Note 11)............................. 539,436 5,505,207 3,115,907
Affiliates (Note 3)................................ 1,220,000 -- --
Accrued payroll and related benefits................. 2,757,565 3,026,235 9,444,115
Income taxes payable................................. -- -- 2,372,844
Other accrued liabilities............................ 2,359,074 5,546,201 19,116,413
Current portion of long-term debt.................... 672,792 362,735 6,421,003
----------- ------------ -------------
Total current liabilities....................... 8,665,196 15,365,463 46,653,929
Long-term debt (Note 7)................................ 3,217,436 35,907,225 287,869,994
Deferred income taxes.................................. -- -- 2,271,496
Other liabilities...................................... -- -- 1,212,968
----------- ------------ -------------
Total liabilities............................... 11,882,632 51,272,688 338,008,387
----------- ------------ -------------
Minority interests (Note 6)............................ -- 871,910 5,755,875
Commitments and contingencies (Note 14)
Equity:
Common stock (Note 8)................................ 41,600 2,780 286,714
Paid-in capital...................................... 17,880,302 26,883,017 253,058,067
Partners' capital.................................... 3,878,442 -- --
Unearned compensation (Note 9)....................... -- (3,262,853) --
Accumulated deficit.................................. (738,739) (12,736,889) (5,292,004)
Receivable from stockholders (Note 13)............... (2,203,154) (1,629,661) --
----------- ------------ -------------
Total equity.................................... 18,858,451 9,256,394 248,052,777
----------- ------------ -------------
Total liabilities and equity.................. $30,741,083 $ 61,400,992 $ 591,817,039
=========== ============ =============
</TABLE>

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

F-14
<PAGE> 95

INTERSTATE HOTELS COMPANY AND PREDECESSOR ENTITY

CONSOLIDATED STATEMENTS OF INCOME
---------

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Lodging revenues:
Rooms......................... $ -- $ -- $ -- $ -- $37,350,457
Food and beverage............. -- -- -- -- 16,792,039
Other departmental............ -- -- -- -- 3,840,427
Net management fees............. 19,229,463 22,284,511 27,022,051 19,356,440 21,871,786
Other management-related fees... 6,334,512 14,441,550 17,996,293 13,531,948 13,916,397
----------- ----------- ----------- ----------- -----------
25,563,975 36,726,061 45,018,344 32,888,388 93,771,106
----------- ----------- ----------- ----------- -----------
Lodging expenses:
Rooms......................... -- -- -- -- 8,063,904
Food and beverage............. -- -- -- -- 12,512,715
Other departmental............ -- -- -- -- 1,680,237
Property costs................ -- -- -- -- 16,617,693
General and administrative...... 5,056,803 8,301,244 9,811,303 6,464,273 7,239,883
Payroll and related benefits.... 10,320,729 12,420,248 15,468,422 11,122,732 12,564,277
Non-cash compensation........... -- -- -- -- 11,895,970
Depreciation and amortization... 3,282,044 3,659,132 4,201,266 2,963,351 7,762,073
----------- ----------- ----------- ----------- -----------
18,659,576 24,380,624 29,480,991 20,550,356 78,336,752
----------- ----------- ----------- ----------- -----------
Operating income........... 6,904,399 12,345,437 15,537,353 12,338,032 15,434,354
Other income (expense):
Interest, net................. 11,794 30,459 99,160 190,849 (5,314,858)
Other, net.................... (5,761) 13,547 202,801 -- 328,773
----------- ----------- ----------- ----------- -----------
Income before income tax
expense.................. 6,910,432 12,389,443 15,839,314 12,528,881 10,448,269
Income tax expense (Note 17).... -- -- -- -- 11,145,061
----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary items...... 6,910,432 12,389,443 15,839,314 12,528,881 (696,792)
Extraordinary loss from early
extinguishment of debt, net of
deferred tax benefit of
$3,937,118.................... -- -- -- -- (7,642,641)
----------- ----------- ----------- ----------- -----------
Net income (loss).......... $ 6,910,432 $12,389,443 $15,839,314 $12,528,881 $(8,339,433)
=========== =========== =========== =========== ===========
</TABLE>

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

F-15
<PAGE> 96

INTERSTATE HOTELS COMPANY AND PREDECESSOR ENTITY

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
---------

<TABLE>
<CAPTION>
RECEIVABLE
COMMON PAID-IN PARTNERS' UNEARNED ACCUMULATED FROM
STOCK CAPITAL CAPITAL COMPENSATION DEFICIT STOCKHOLDERS TOTAL
-------- ------------ ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1992........................ $ 34,000 $ 17,756,802 $ 1,009,680 $ -- $ (269,403 ) $(1,846,080 ) $ 16,684,999
Common stock of newly
established entities...... 22,700 -- -- -- -- -- 22,700
Additional capital
contributions............. -- 99,400 -- -- -- -- 99,400
Partners' capital
contributions............. -- -- 1,000 -- -- -- 1,000
Net increase in receivable
from stockholders......... -- -- -- -- -- (1,133,320 ) (1,133,320)
Distributions paid.......... -- -- (1,690,000) -- (4,268,646 ) -- (5,958,646)
Net income.................. -- -- 2,641,353 -- 4,269,079 -- 6,910,432
-------- ------------ ----------- ----------- ------------ ----------- ------------
Balance at December 31,
1993........................ 56,700 17,856,202 1,962,033 -- (268,970 ) (2,979,400 ) 16,626,565
Effect of
recapitalization.......... (21,500) 21,500 -- -- -- -- --
Common stock of newly
established entities...... 6,400 -- -- -- -- -- 6,400
Additional capital
contributions............. -- 2,600 -- -- -- -- 2,600
Net decrease in receivable
from stockholders......... -- -- -- -- -- 776,246 776,246
Distributions paid.......... -- -- (4,955,600) -- (5,987,203 ) -- (10,942,803)
Net income.................. -- -- 6,872,009 -- 5,517,434 -- 12,389,443
-------- ------------ ----------- ----------- ------------ ----------- ------------
Balance at December 31,
1994........................ 41,600 17,880,302 3,878,442 -- (738,739 ) (2,203,154 ) 18,858,451
Effect of Reorganization.... (41,583) 4,520,025 (4,478,442) -- -- -- --
Assumption of liability by
principal stockholder..... -- 1,220,000 -- -- -- -- 1,220,000
Common stock of newly
established entities...... 2,600 -- -- -- -- -- 2,600
Partners' capital
contributions............. -- -- 600,000 -- -- -- 600,000
Stock options granted....... 163 3,262,690 -- (3,262,853 ) -- -- --
Assumption of stockholders'
liability................. -- -- -- -- (12,994,923 ) -- (12,994,923)
Net decrease in receivable
from stockholders......... -- -- -- -- -- 573,493 573,493
Distributions paid.......... -- -- -- -- (14,842,541 ) -- (14,842,541)
Net income.................. -- -- -- -- 15,839,314 -- 15,839,314
-------- ------------ ----------- ----------- ------------ ----------- ------------
Balance at December 31,
1995........................ 2,780 26,883,017 -- (3,262,853 ) (12,736,889 ) (1,629,661 ) 9,256,394
Unearned compensation
recognized................ -- -- -- -- 93,420 -- 93,420
Return of stock options
issued in 1995............ (163) (3,262,690) -- 3,262,853 -- -- --
Restricted stock issued..... 7,855 11,775,140 -- -- -- -- 11,782,995
Net decrease in receivable
from stockholders......... -- -- -- -- -- 1,629,661 1,629,661
Dividends and capital
distributions............. -- (35,395,467) -- -- (4,334,263 ) -- (39,729,730)
Contribution of Predecessor
Entity net assets for
common stock.............. 126,474 (20,151,635) -- -- 20,025,161 -- --
Issuance of common stock to
purchase hotel............ 3,952 9,602,724 -- -- -- -- 9,606,676
Issuance of common stock,
net of offering
expenses.................. 145,816 263,606,978 -- -- -- -- 263,752,794
Net loss.................... -- -- -- -- (8,339,433 ) -- (8,339,433)
-------- ------------ ----------- ----------- ------------ ----------- ------------
Balance at September 30, 1996
(unaudited)................. $286,714 $253,058,067 $ -- $ -- $(5,292,004 ) $ -- $248,052,777
======== ============ =========== =========== ============ =========== ============
</TABLE>

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

F-16
<PAGE> 97

INTERSTATE HOTELS COMPANY AND PREDECESSOR ENTITY

CONSOLIDATED STATEMENTS OF CASH FLOWS

---------

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- -----------------------------
1993 1994 1995 1995 1996
----------- ------------ ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $ 6,910,432 $ 12,389,443 $ 15,839,314 $ 12,528,881 $ (8,339,433)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................. 3,282,044 3,659,132 4,201,266 2,963,351 7,762,073
Minority interests' share of equity loss from
investment in hotel real estate............. -- -- (10,421) -- (106,023)
Write-off of deferred financing fees.......... -- -- -- -- 6,231,264
Non-cash compensation......................... -- -- -- -- 11,895,970
Deferred income taxes......................... -- -- -- -- 1,835,099
Other......................................... (5,710) (53,771) (297,923) (68,250) (340,463)
Cash (used) provided by assets and liabilities:
Accounts receivable........................... (489,170) (2,652,129) (2,377,259) (3,712,604) (3,348,043)
Prepaid expenses and other assets............. 48,989 (16,878) (257,460) (564,251) (3,486,813)
Accounts payable.............................. 108,806 915,261 4,774,527 3,170,284 (2,565,532)
Income taxes payable.......................... -- -- -- -- 2,372,844
Accrued liabilities........................... 533,892 1,076,703 3,455,797 2,334,793 2,799,196
----------- ------------ ------------ ------------ -------------
Net cash provided by operating activities... 10,389,283 15,317,761 25,327,841 16,652,204 14,710,139
----------- ------------ ------------ ------------ -------------
Cash flows from investing activities:
Investments in contracts........................ (352,000) (2,138,921) (941,817) (245,895) (80,623)
Investments in hotel real estate................ -- -- (13,038,153) -- (5,146,563)
Change in notes receivable, net................. (1,478,595) 528,694 (7,686,494) (1,915,068) (3,289,216)
Acquisition of hotels, net of cash received..... -- -- -- -- (236,672,875)
Purchase of property and equipment, net......... (716,007) (607,354) (438,165) (364,795) (1,147,860)
Purchase of assets to be leased................. (236,380) (874,697) (606,115) (565,386) (1,446,698)
Payments received under capital leases.......... 26,759 204,688 387,807 260,388 563,278
Change in restricted cash....................... (205,308) (813,572) (810,539) (994,776) (1,987,351)
Other........................................... (126,558) (150,364) 275,658 31,775 3,136,875
----------- ------------ ------------ ------------ -------------
Net cash used in investing activities....... (3,088,089) (3,851,526) (22,857,818) (3,793,757) (246,071,033)
----------- ------------ ------------ ------------ -------------
Cash flows from financing activities:
Proceeds from long-term debt.................... 1,625,000 3,548,000 35,000,000 -- 265,750,000
Repayment of long-term debt..................... (1,892,739) (2,641,990) (15,265,191) (622,268) (241,689,127)
Financing costs paid............................ (5,000) (33,518) (2,087,611) -- (9,348,804)
Proceeds from issuance of common stock, net..... -- -- -- -- 263,752,794
Minority interests.............................. -- -- 882,331 -- (1,735,818)
Capital contributions........................... 123,100 9,000 602,600 600,000 --
Funds advanced to stockholders.................. (1,704,136) (1,688,754) (3,244,661) (7,950,158) (6,422,834)
Repayment of funds advanced to stockholders..... 570,816 2,465,000 3,818,154 2,493,154 8,052,495
Repayment of notes payable to stockholders...... -- -- -- -- (30,000,000)
Dividends and capital distributions paid........ (5,958,646) (10,942,803) (14,842,541) (5,725,190) (6,732,453)
----------- ------------ ------------ ------------ -------------
Net cash (used in) provided by financing
activities................................ (7,241,605) (9,285,065) 4,863,081 (11,204,462) 241,626,253
----------- ------------ ------------ ------------ -------------
Net increase in cash and cash equivalents......... 59,589 2,181,170 7,333,104 1,653,985 10,265,359
Cash and cash equivalents at beginning of
period.......................................... 4,460,759 4,520,348 6,701,518 6,701,518 14,034,622
----------- ------------ ------------ ------------ -------------
Cash and cash equivalents at end of period........ $ 4,520,348 $ 6,701,518 $ 14,034,622 $ 8,355,503 $ 24,299,981
=========== ============ ============ ============ =============
Supplemental disclosure of cash flow information:
Cash paid for interest.......................... $ 240,136 $ 261,151 $ 507,398 $ 244,032 $ 5,956,745
=========== ============ ============ ============ =============
Supplemental disclosure of non-cash investing and
financing activities:
Notes payable issued to acquire contracts....... -- $ 1,175,568 -- -- --
=========== ============ ============ ============ =============
Assumption of liability by principal
stockholder................................... -- -- $ 1,220,000 -- --
=========== ============ ============ ============ =============
Assumption of stockholders' liability........... -- -- $ 12,994,923 -- --
=========== ============ ============ ============ =============
Unearned compensation related to stock
options....................................... -- -- $ 3,262,853 -- $ (3,262,853)
=========== ============ ============ ============ =============
Notes payable issued to stockholders............ -- -- -- -- $ 30,000,000
=========== ============ ============ ============ =============
Issuance of common stock to purchase hotel...... -- -- -- -- $ 9,606,676
=========== ============ ============ ============ =============
</TABLE>

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

F-17
<PAGE> 98

INTERSTATE HOTELS COMPANY AND PREDECESSOR ENTITY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION:

Interstate Hotels Company was formed on April 19, 1996 pursuant to a plan
to pursue an initial public offering (the Initial Offering) of common stock
(refer to Note 17). On June 25, 1996, Interstate Hotels Company's predecessor,
Interstate Hotels Corporation and Affiliates (IHC or the Predecessor Entity),
contributed all of the outstanding shares of common stock of IHC to Interstate
Hotels Company in exchange for equal shares of common stock of Interstate Hotels
Company. Also in conjunction with the Initial Offering, certain other affiliates
which owned interests in 13 hotels (the Owned Hotels) and certain executives of
IHC, who also owned interests in the Owned Hotels, contributed their interests
to Interstate Hotels Company in exchange for common stock. As a result,
Interstate Hotels Company owns 100% of its subsidiaries (consisting of the
Predecessor Entity) and all of the interests in the Owned Hotels (excluding
minority equity interests in seven of the hotels), all of which is herein
defined as the Company. The contributions of common stock of IHC and other
interests to Interstate Hotels Company were accounted for in a manner similar to
that used in pooling-of-interests accounting. The accompanying financial
statements of Interstate Hotels Company include the results of operations for
the Predecessor Entity for the period prior to the consummation of the Initial
Offering and the results of operations for the Company, which includes the
results of operations for the Owned Hotels for the period subsequent to June 25,
1996.

The Company provides management and other services principally to hotels.
The Predecessor Entity's financial statements combine the accounts of IHC and
IHC Member Corporation (IHC Member), which were under common control and
ownership prior to the Initial Offering. The Predecessor Entity's combined
financial statements also include the following wholly-owned subsidiaries:
Crossroads Hospitality Company, L.L.C. (Crossroads), Colony Hotels and Resorts
Company (Colony), Continental Design and Supplies Company, L.L.C. (CDS), Hilltop
Equipment Leasing Company, L.P. (Hilltop), Northridge Insurance Company
(Northridge) and the majority-owned consolidated investment in IHC/Interstone
Partnership II, L.P. (IHC/IPII).

IHC, Crossroads and Colony operate properties and collect management fees
pursuant to management agreements with the respective owners of the hotels. It
is the responsibility of IHC, Crossroads and Colony to manage the assets,
collect the revenues and pay the operating expenses and other liabilities of the
respective properties in accordance with the management agreements. In addition,
franchise, accounting and other operating fees are earned for certain properties
as stipulated in the respective agreements. These fees are included in other
management-related fees in the Company's consolidated statements of income. The
consolidated statements of income include only the income earned by the Company
from the operation of the respective properties (refer to Note 10). The
properties' operating assets, liabilities, income and expenses are included in
the owners' financial statements.

CDS, Hilltop and Northridge provide various services to properties operated
by IHC, Crossroads and Colony. CDS provides the hotels with certain purchasing
and project management services and earns fees based on a percentage of the
price of equipment purchased and hotel gift shop revenues. Fees earned by CDS
are included in other management-related fees in the Company's consolidated
statements of income.

Hilltop provides office, computer and telephone equipment under capital and
operating leases to certain hotels with noncancelable terms ranging from one to
sixty months. Rental income earned by Hilltop is included in other
management-related fees in the Company's consolidated statements of income.

Northridge provides reinsurance to major insurance carriers solely in
connection with the insurance that those carriers provide to the properties
managed by the Company. Northridge also provides direct insurance coverage to
the Company in connection with its self-insured health care program. Income
earned by Northridge is included in other management-related fees in the
Company's consolidated statements of income.

F-18
<PAGE> 99

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------

1. BASIS OF PRESENTATION--CONTINUED
IHC/IPII owns an interest in an affiliated partnership that owns six
hotels, five of which are managed by the Company (refer to Note 6).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Combination and Consolidation:

The consolidated financial statements of the Company include the accounts
of the entities described in Note 1. All transactions and intercompany balances
among the entities are eliminated.

The principal stockholder of the Company has an ownership interest in
certain hotels and related entities managed by the Company (refer to Note 13).
These entities are not included in the Company's consolidated financial
statements.

Use of Estimates:

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

Cash and Cash Equivalents:

For purposes of the consolidated statements of cash flows, all
unrestricted, highly liquid investments purchased with a remaining maturity of
three months or less are considered to be cash equivalents. Substantially all
cash and cash equivalents are maintained at a limited number of financial
institutions. No collateral or other security is provided on cash deposits,
other than $100,000 of deposits for each financial institution insured by the
Federal Deposit Insurance Corporation.

Leases:

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

Property and Equipment:

Property and equipment are recorded at cost and are depreciated on the
straight-line method over their estimated useful lives. Expenditures for
maintenance and repairs are expensed as incurred. The cost and related
accumulated depreciation applicable to property no longer in service or sold are
eliminated from the accounts and any gain or loss thereon is included in
operations.

Investments in Contracts:

Investments in contracts consists of the allocated costs arising from the
purchase and change in control of the Company in 1989 and amounts paid to obtain
management and other contracts. Investments in contracts are being amortized
over the average life of the contracts ranging from three to ten years.

F-19
<PAGE> 100

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Investments in Hotel Real Estate:

The Company accounts for investments in hotel real estate as follows:

- Majority-owned hotels: The Company consolidates all majority-owned
interests in hotels.

- Less than majority-owned: The Company accounts for investments in less
than 50% but greater than 20% owned entities in which it can exert
significant influence on the equity method of accounting. The Company
accounts for all other investments on the cost method.

Other Assets:

Other assets in 1995 include financing fees of approximately $2,075,000,
which are being amortized over the term of the related indebtedness of 84
months. Other assets as of September 30, 1996 include approximately $8,714,000
of financing fees.

Revenue Recognition:

The Owned Hotels recognize revenue from their rooms, catering, gift shop
and restaurant facilities as earned on the close of each business day. Net
management fees and other management-related fees are recognized when earned.
Hotels managed under short-term operating leases with certain lessee and lessor
cancellation clauses are treated as management contracts, with the fees earned
from these leases recognized when earned.

Reimbursable Expenses:

The Company is reimbursed for costs associated with providing data
processing, sales and marketing and employee training services to managed
hotels. These revenues are included in other management-related fees and the
corresponding costs are included in general and administrative and payroll and
related benefits on the consolidated statements of income.

Insurance:

Insurance premiums are recorded as income on a pro-rata basis over the life
of the related policies, as appropriate, with the portion applicable to the
unexpired terms of the policies in force recorded as unearned premium reserves.
Losses are provided for reported claims, claims incurred but not reported and
claim settlement expense at each balance sheet date. Such losses are based on
management's best estimate of the ultimate cost of settlement of claims. Actual
liabilities may differ from estimated amounts. Any changes in estimates are
reflected in current earnings.

Income Tax Status:

Prior to the Reorganization on November 1, 1995 discussed in Note 3, the
entities that comprise the Predecessor Entity elected to be treated as either S
Corporations or limited partnerships. Similar elections were made, where
possible, for state income tax purposes.

After the Reorganization, the S Corporation status of Colony was terminated
and for the period subsequent to November 29, 1995 Colony is treated as a C
Corporation for federal and state income tax purposes. All of the other entities
included in IHC were S Corporations, limited liability companies or partnerships
until the Initial Offering, which were generally all treated as pass-through
entities for tax purposes.

F-20
<PAGE> 101

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Accordingly, the majority of all federal and state income tax liabilities
and benefits are borne by the respective stockholders or partners. State and
local income tax liabilities and benefits borne by IHC are not significant and
are included in the consolidated statements of income for the three years in the
period ended December 31, 1995.

Pursuant to the Initial Offering, IHC terminated its status as an S
Corporation (refer to Note 17). Accordingly, the Company is subject to federal
and state income taxes. Deferred income taxes are recorded using the liability
method. Under this method, deferred tax liabilities and assets are provided for
the differences between the financial statement and the tax basis of assets and
liabilities using enacted tax rates in effect for the years in which the
differences are expected to reverse.

Reclassifications:

Certain amounts in the 1993, 1994 and 1995 consolidated financial
statements have been reclassified to conform to the presentation adopted in the
September 30, 1996 unaudited consolidated financial statements.

Unaudited Financial Statements:

The unaudited consolidated balance sheet as of September 30, 1996 and the
unaudited consolidated statements of income, changes in equity and cash flows
for the nine months ended September 30, 1995 and 1996, in the opinion of
management, have been prepared on the same basis as the audited consolidated
financial statements and include all significant adjustments (consisting
primarily of normal recurring adjustments) considered necessary for a fair
presentation of the results of these interim periods. The data disclosed in
these notes to the consolidated financial statements for these periods are also
unaudited. Operating results for the nine-month period ended September 30, 1996
is not necessarily indicative of the results for the entire year.

3. REORGANIZATION:

On November 1, 1995, IHC underwent a capital restructuring (the
Reorganization) in order to eliminate duplicative administrative and accounting
expenses, among other things. Pursuant to the Reorganization, IHC merged a
number of companies and created subsidiaries for certain other entities which
were all under common control. The Reorganization was accounted for in a manner
similar to that used in pooling-of-interests accounting. Additionally,
concurrent with the Reorganization, IHC assumed a $12,995,000 obligation of its
principal stockholder that was accounted for as a distribution of capital. IHC
also recorded a contribution of capital when indebtedness in the amount of
$1,220,000 that was owed to an affiliate was assumed by the principal
stockholder.

4. NET INVESTMENT IN DIRECT FINANCING LEASES:

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

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Total future minimum lease payments
receivable.................................... $1,212,082 $1,611,815 $ 2,946,402
Less unearned income............................ 287,653 376,539 717,679
----------- ----------- -----------
924,429 1,235,276 2,228,723
Less current portion............................ 242,818 399,266 657,104
---------- ---------- -----------
$ 681,611 $ 836,010 $ 1,571,619
========== ========== ===========
</TABLE>

F-21
<PAGE> 102

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------

4. NET INVESTMENT IN DIRECT FINANCING LEASES--CONTINUED
Future minimum lease payments to be received under these leases for each of
the years ending December 31 are as follows:

5. PROPERTY AND EQUIPMENT:

Property and equipment consisted of the following:

DECEMBER 31,
----------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Land........................................... $ -- $ -- $ 43,384,731
Buildings and improvements..................... 656,590 678,142 403,677,499
Furniture, fixtures and equipment.............. 3,367,231 3,775,677 89,591,710
---------- ---------- -------------
4,023,821 4,453,819 536,653,940
Less accumulated depreciation.................. 2,110,117 2,559,670 39,931,417
---------- ---------- -------------
$1,913,704 $1,894,149 $ 496,722,523
========== ========== =============
</TABLE>

6. INVESTMENTS IN HOTEL REAL ESTATE:

As of December 31, 1995, IHC/IPII is owned 93.23% by the Company, with the
remaining 6.77% owned by a limited partnership consisting of certain officers of
the Company. This minority partnership contributed $882,331 to IHC/IPII for
their interest, which is reflected as minority interests in the Company's
consolidated balance sheets. IHC/IPII made a $13,038,000 investment on December
15, 1995 for a 20.45% interest in Interstone/CGL Partners, L.P. (CGL). The
following represents the summarized financial information of CGL:

<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Assets:
Current............................................................ $ 7,822,863
Noncurrent......................................................... 171,741,811
------------
Total assets............................................... 179,564,674
Liabilities:
Current............................................................ 4,636,254
Other long-term liabilities........................................ 1,212,968
Long-term debt, including current portion.......................... 120,000,000
------------
Total liabilities.......................................... 125,849,222
------------
Net assets................................................. 53,715,452
Less ownership interest of others.................................... 40,831,302
------------
Investments in hotel real estate..................................... $ 12,884,150
============
</TABLE>

F-22
<PAGE> 103

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------

6. INVESTMENTS IN HOTEL REAL ESTATE--CONTINUED

<TABLE>
<CAPTION>
DECEMBER 15
(INCEPTION) TO
DECEMBER 31, 1995
-----------------
<S> <C>
Hotel operations:
Operating revenues......................................................... $ 2,484,498
Operating costs and expenses............................................... 1,386,137
-----------
Operating profit........................................................... 1,098,361
Other expenses............................................................. 1,025,197
-----------
Hotel income before partnership expenses..................................... 73,164
Partnership expenses:
Depreciation and amortization.............................................. 366,181
Interest................................................................... 460,000
-----------
826,181
-----------
Net loss..................................................................... (753,017)
-----------
Ownership interest of others................................................. (599,014)
-----------
Equity loss of investment in hotel real estate............................... $ (154,003)
===========
</TABLE>

7. LONG-TERM DEBT:

Long-term debt consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------ 1996
1994 1995 ----------------
---------- ----------- (UNAUDITED)
REFER TO NOTE 17
<S> <C> <C> <C>
Term Loan and Revolving Credit Facility................ $ -- $ -- $264,500,000
CGL Loan............................................... -- -- 29,250,000
IHC 1995 revolving credit and term loan facility....... -- 35,000,000 --
IHC 1994 revolving credit and term loan facility....... 1,948,000 -- --
Colony note payable.................................... 875,568 703,300 540,997
Bank notes payable..................................... 766,660 566,660 --
Note payable........................................... 300,000 -- --
---------- ----------- ------------
3,890,228 36,269,960 294,290,997
Less current portion................................... 672,792 362,735 6,421,003
---------- ----------- ------------
$3,217,436 $35,907,225 $287,869,994
========== =========== ============
</TABLE>

On December 13, 1995, IHC entered into a $35,000,000 Term Loan agreement
and a $15,000,000 Revolving Credit Facility (collectively, the Loan Agreement).
The Term Loan is separated into four seven-year notes and one six-year note. The
notes are payable in four quarterly installments of $1,750,000 beginning March
13, 2000, four quarterly installments of $2,625,000 beginning March 13, 2001 and
four quarterly installments of $4,375,000 beginning March 13, 2002. The Loan
Agreement provides for a 1% prepayment penalty in the first year. The Loan
Agreement also provides for mandatory prepayments to be made commencing with the
year ending December 31, 1998 based on excess cash flow, as defined in the
agreement.

Interest is payable subject to IHC's election of the Base Rate Option or
the Eurodollar Rate Option. The Base Rate Option is the lender's prime rate plus
1.75% for the seven-year notes and prime plus 1.5% for the six-year note. The
Euro Rate Option is LIBOR plus 3.25% for the seven-year notes and LIBOR plus 3%
for

F-23
<PAGE> 104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------

7. LONG-TERM DEBT--CONTINUED
the six-year note. IHC elected the Eurodollar Rate Option to be in effect at
December 31, 1995, which was equal to 9.125% and 8.875% for the seven-year notes
and the six-year note, respectively.

A portion of the proceeds from the Term Loan was used to repay the
outstanding balance of the IHC 1994 revolving credit and term loan facility. The
proceeds were also used to retire the $12,995,000 obligation assumed pursuant to
the Reorganization (Note 3), fund the $13,038,000 equity investment in hotel
real estate (Note 6) and lend $7,380,000 to an uncombined affiliate (Note 13).
Included in other income on the Company's consolidated statements of income is a
$350,000 gain resulting from the settlement of the $12,995,000 obligation
assumed from the principal stockholder.

On December 13, 1998, the outstanding balance under the Revolving Credit
Facility will convert to a term loan and will be payable in eight equal
quarterly installments beginning March 13, 1999. No amounts were outstanding
under the Revolving Credit Facility at December 31, 1995. Interest is payable
subject to IHC's election of the Base Rate Option (prime plus 1%) or the
Eurodollar Rate Option (LIBOR plus 2.5%). The available borrowings under the
Revolving Credit Facility are reduced by the letters of credit outstanding (Note
14), which at no time may exceed $2,500,000. At December 31, 1995, the
borrowings available amounted to approximately $14,513,000. A nonrefundable
commitment fee equal to .375% of the unused portion of the Revolving Credit
Facility is payable quarterly. Additionally, letter of credit fees equal to
2.25% of the outstanding letters of credit and an annual agent's fee of $40,000
are payable quarterly.

The Loan Agreement contains certain restrictive covenants, including the
maintenance of certain financial ratios, restrictions on the payment of
dividends, limitations on additional indebtedness and certain other reporting
requirements. The stockholders have pledged all of the stock and substantially
all of the assets of the Company as collateral for the Loan Agreement.

In 1993, the Company entered into a loan agreement with a bank. The
agreement provided for aggregate borrowings of $1,000,000 in the form of two
separate notes. One note for $500,000 was borrowed in 1993 and is payable in 60
equal monthly installments plus interest at 7.77%. The second note for $500,000
was borrowed in 1994 and is payable in 60 equal monthly installments plus
interest at 9.08%.

On May 31, 1994, Colony entered into a $1,000,000 non-interest bearing note
with Radisson Hotels International, Inc. in connection with the acquisition of
management and other service contracts. The note is payable in five annual
installments of $200,000 beginning January 1, 1995. At December 31, 1995, the
present value of the interest-free note was $703,300.

On July 12, 1994, IHC entered into a $300,000 7% note payable in connection
with the acquisition of management contracts. The note was paid on July 8, 1995.

Statement of Financial Accounting Standards No. 107 requires disclosure
about the fair value of financial instruments. Based on interest rates currently
available, management believes that the carrying amount of all long-term debt is
a reasonable estimation of fair value.

Aggregate scheduled maturities of long-term debt for each of the five years
ending December 31 and thereafter are as follows:

<TABLE>
<S> <C>
1996............................................................ $ 362,735
1997............................................................ 371,344
1998............................................................ 297,068
1999............................................................ 238,813
2000............................................................ 7,000,000
Thereafter...................................................... 28,000,000
-----------
$36,269,960
===========
</TABLE>

F-24
<PAGE> 105

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------

8. COMMON STOCK:

Common stock at December 31, 1995 consisted of the following:

<TABLE>
<CAPTION>
CLASS "A" CLASS "B"
NUMBER OF SHARES NUMBER OF SHARES
------------------------ ------------------------
PAR ISSUED AND ISSUED AND TOTAL
COMPANY VALUE AUTHORIZED OUTSTANDING AUTHORIZED OUTSTANDING AMOUNT
- ------------------------ ----------- ---------- ----------- ---------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
IHC..................... $ .01 5,000 1,471 495,000 164,326 $1,658
IHC Member.............. .01 1,000 100 49,000 12,075 122
Other entities.......... .01 - 1.00 11,000 1,000 49,000 39,600 1,000
------ ----- ------- ------- ------
17,000 2,571 593,000 216,001 $2,780
====== ===== ======= ======= ======
</TABLE>

The Reorganization discussed in Note 3 resulted in the reclassification of
$41,583 between common stock and paid-in capital and the reclassification of
$4,478,442 between partners' capital and paid-in capital. The above changes have
been reflected in the 1995 consolidated financial statements.

In 1994, IHC recapitalized certain companies and created two classes of
common stock. Both classes are identical in all respects, including a ratable
share of all dividends and other distributions, except for voting rights.
Holders of Class "A" Common Stock are entitled to one vote per share, while
Class "B" Common Stock is non-voting. The recapitalization resulted in the
reclassification of $21,500 between common stock and paid-in capital, which was
reflected in the 1994 consolidated financial statements.

The Blackstone Option:

In October 1995, IHC and Blackstone Real Estate Partners, L.P. (Blackstone)
entered into an Option Agreement (the Option Agreement) pursuant to which IHC
granted to Blackstone an option (the Blackstone Option) to purchase a 20% equity
interest in a new company to be formed to succeed IHC and certain of its
affiliates and upon payment by Blackstone of the exercise price of $23.3
million. The Blackstone Option was exercisable upon the occurrence of certain
events, including the filing by the Company with the Securities and Exchange
Commission of a registration statement relating to an underwritten initial
public offering of shares of its common stock. In connection with the execution
of the Blackstone Acquisition Agreement discussed in Note 17, Blackstone
exercised the Blackstone Option conditioned upon the consummation of the
proposed Initial Offering. Upon the closing of the Blackstone Option, Blackstone
will receive $44.8 million of common stock based on the Initial Offering price,
and the Company will pay Blackstone a $233,000 arrangement fee.

9. STOCK OPTIONS:

In December 1995, IHC granted stock options pursuant to a Stock Option Plan
adopted on the same date to certain officers to purchase shares of common stock.
The exercise price for 7,143 of the options was determined based on an
independent market valuation to be fair market value of the stock on the date of
the grant and the exercise price for 9,137 of the options was below fair market
value. The Stock Option Plan also provides for a reserve for future issuance of
332 options. The options are exercisable in installments over an eight-year
period commencing on the earlier of the optionee's attaining age 60 or 10 years
from the date of the grant. No options were exercisable at December 31, 1995.
The officers must continue in the employment of the Company or serve as
consultants to the Company and not compete against the Company in order for the
options to vest. The unearned compensation related to the stock options granted
is being charged to expense over the vesting period using the market value at
the issuance date.

F-25
<PAGE> 106

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------

9. STOCK OPTIONS--CONTINUED
Transactions involving stock options are summarized as follows:

<TABLE>
<CAPTION>
RANGE OF
OPTION PRICE
OPTION PRICE GRANTED AT
NUMBER OF GRANTED AT BELOW FAIR
OPTIONS FAIR VALUE VALUE
--------- ------------ ------------
<S> <C> <C> <C>
Outstanding, December 31, 1994....................... -- -- --
Granted.............................................. 16,280 $585 $174 - 303
Exercised............................................ -- -- --
Canceled............................................. -- -- --
------
Outstanding, December 31, 1995....................... 16,280
======
</TABLE>

On April 22, 1996, IHC agreed to cancel the stock options granted under the
Stock Option Plan adopted in December 1995 in consideration of the Company's
agreement to issue to the option holders an aggregate of 8,492 shares of
restricted stock of the Company. The restricted stock will be subject to
restrictions on transfer and rights of repurchase in the event of the employee's
death, disability or termination of employment prior to the consummation of the
Company's initial public offering (refer to Note 17). As a result of the
cancellation of the stock options and issuance of the restricted stock at no
cost to the recipients, the Company will reverse the amortized unearned
compensation related to the stock options and record compensation expense of
approximately $9.5 million, based on a fair value of $1,123 per share for the
Company's common stock (refer to Note 17).

10. NET MANAGEMENT FEES:

The Company's management agreements have initial terms that range from one
month to 50 years, expire through the year 2044 and generally are cancelable
under certain conditions. In addition, certain agreements are renewable for
successive terms of one to ten years.

The management agreements specify the base fees to be earned, which are
generally based on percentages of gross revenues. In certain cases, incentive
fees are earned based on profitability as defined by the management agreements.
The net management fees earned were as follows:

F-26
<PAGE> 107

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------

11. EMPLOYEE BENEFITS:

The Company participates in the following employee benefit plans:

The IHC Employee Health and Welfare Plan (and related Health Trust)
provides employees of the Company, including hotels under management, with
group health insurance benefits. The Company is self-insured for certain
benefits, subject to certain individual claim and aggregate maximum
liability limits. For the period January 1, 1993 through July 31, 1994, the
Company and each Company-covered hotel paid premiums to the Health Trust
based on the estimated conventional premiums. Effective August 1, 1994,
each Company-covered hotel pays the premiums directly to the Company and
the Company funds the Health Trust. The Company is responsible for any
underfunding of the Health Trust and receives an insurance premium as
discussed in Note 15. The employee portion of the premiums continues to be
paid directly to the Health Trust. These premiums may be prospectively
adjusted to consider actual claims experience. The Company paid and
expensed amounts to the Health Trust related to coverage for employees at
its corporate offices of approximately $346,000 in 1993 and $217,000 in
1994. Amounts paid to the Health Trust since August 1, 1994 have been
eliminated against the insurance income recorded by the Company as
discussed in Note 15. Premiums for employees at the hotels managed by the
Company are borne by the respective hotels. The Health Trust is exempt from
federal income tax under Section 501(c)(9) of the Internal Revenue Code as
a voluntary employees' beneficiary association.

The Company maintains defined contribution savings plans for all
employees of the Company. Eligibility for participation in the plans is
based on the employee's attainment of 21 years of age and on the completion
of one year of service with the Company. Employer contributions are based
on a percentage of employee contributions. Participants may make voluntary
contributions to the plans of up to 6% of their compensation, as defined.
The Company incurred expenses related to employees at its corporate offices
of approximately $99,000 in 1993, $110,000 in 1994 and $124,000 in 1995.

12. DEFERRED COMPENSATION AGREEMENTS:

In December 1995, the Company entered into deferred compensation agreements
with two officers. The agreements provide for the officers to receive certain
future annual payments for an eight year period commencing the earlier of age 60
or 10 years from the date of the agreement. The officers must continue in the
employment of the Company or serve as consultants to the Company and not compete
against the Company in order for the future payments to be earned.

Certain key employees are awarded other deferred compensation based on
performance. Expense recorded for these awards amounted to approximately
$257,000 in 1993, $259,000 in 1994 and $224,000 in 1995.

13. RELATED PARTY TRANSACTIONS:

Income and Accounts Receivable:

Of the total income from managed hotels, approximately $5,793,000 in 1993,
$6,678,000 in 1994 and $7,886,000 in 1995, respectively, were earned from hotels
in which the principal stockholder of the Company has an ownership interest.
Accounts receivable of approximately $946,000 and $1,028,000 at December 31,
1994 and 1995, respectively were due from these hotels.

Notes Receivable:

Included in notes receivable from affiliates is a note to IHC/Interstone
Partnership, L.P. (IHC/IPLP), an uncombined affiliate of IHC. On December 13,
1995, IHC/IPLP borrowed $7,380,000 from IHC. The note is payable in four
quarterly installments of $369,000 beginning March 13, 2000, four quarterly

F-27
<PAGE> 108

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------

13. RELATED PARTY TRANSACTIONS--CONTINUED
installments of $400,000 beginning March 13, 2001 and four quarterly
installments of $1,076,000 beginning March 13, 2002. The note bears interest at
the rate in effect selected by IHC for the Loan Agreement discussed in Note 7.

Receivable from Stockholders:

The Company advanced approximately $1,133,000 (net of repayments of
approximately $571,000) in 1993, received approximately $776,000 (net of
advances of approximately $1,689,000) in 1994 and received approximately
$573,000 (net of advances of approximately $3,245,000) in 1995 from the
stockholders of the Company. Such advances have no specific repayment terms and
have been classified as a reduction of equity in the consolidated balance
sheets.

Principal Stockholder's Obligation:

In 1989, the principal stockholder purchased the remaining ownership
interest in the Company from a deceased stockholder's estate for approximately
$20,388,000. The purchase was financed through a cash payment of $1,010,064 and
the issuance of two notes in the amount of $17,078,158 and $2,300,000,
respectively. The notes accrued interest at 8.5% and were payable in quarterly
principal and interest payments through 2002. Pursuant to the Reorganization
discussed in Note 3, the Company assumed the remaining obligation under the
notes of approximately $12,995,000, which was accounted for as a capital
distribution. The remaining balance on the notes was paid in December 1995
(refer to Note 7).

Administrative Fee Agreements:

Certain management contracts provide for the payment of administrative fees
to related parties for services rendered and to be rendered in connection with
the development and management of the various hotel facilities. The fees are
based on a percentage of the management fees earned from the operation of the
respective hotel properties.

Administrative fee expenses to related parties included in Note 10 amounted
to $430,000 in 1993, $398,000 in 1994 and $439,000 in 1995. Amounts payable on
these fees are included in accounts payable in the consolidated balance sheets
and amounted to $59,000 and $111,000 at December 31, 1994 and 1995,
respectively.

14. COMMITMENTS AND CONTINGENCIES:

The Company accounts for the leases of office space (the office leases
expire through 1999) and certain office equipment (the equipment leases expire
through 1998) as operating leases. Total rental expense amounted to
approximately $685,000 in 1993, $739,000 in 1994 and $912,000 in 1995. The
following is a schedule of future minimum lease payments under these leases:

The Company is required to pay a proportional share of real estate taxes
and operating expenses based on terms specified in one of the office space
leases. This additional rental payment amounted to $110,000 in 1993, $117,000 in
1994 and $132,000 in 1995.

F-28
<PAGE> 109

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------

14. COMMITMENTS AND CONTINGENCIES--CONTINUED
The Company has made guarantees through the issuance of letters of credit
for affiliated entities regarding the payment of certain liabilities of:
Interstate/Ft. Lauderdale Associates, Ltd., the owner of the Ft. Lauderdale
Marriott North Hotel, in the amount of $77,000, IHC in the amount of $400,000
and CDS in the amount of $10,000. The Company also entered into two formal
agreements in 1995 that guarantee the obligation under a letter of credit issued
by affiliated partnerships (Interstone/Atlanta Partnership, L.P.,
Interstone/Colorado Springs Partnership, L.P., Interstone/Conshohocken
Partnership, L.P., Interstone/Denver Partnership, L.P. and Interstone/Lisle
Partnership, L.P.) that have ownership interests in five hotels managed by IHC
in the amount of $1,250,000, as well as IHC's obligation to the owner of the
Dana Point Resort for certain financial performance thresholds as defined in the
management agreement in the amount of $1,000,000. The obligation to the owner of
the Dana Point Resort also requires IHC to maintain $500,000 in escrow, which is
included in restricted cash in the Company's consolidated balance sheets. The
Company also provides certain financial guarantees to the lessors of hotels
managed under lease agreements which operate in a manner similar to management
agreements. Presently, management does not expect to incur any claims against
these letters of credit and guarantees.

As discussed in Note 8, the exercise of the Blackstone Option is
conditioned upon the consummation of the proposed Initial Offering. On November
27, 1996, if the Initial Offering is not consummated, the Company has the right
to call the Blackstone Option, and Blackstone has the right to require the
Company to purchase the Blackstone Option for a cash payment to Blackstone of
$10,500,000. If the Initial Offering is not consummated, the Company will record
an expense no later than November 27, 1996 for any cash payment required to
purchase the Blackstone Option.

Additionally, the Company has employment contracts with five executives
which provide for payments of two times the individual's salary and bonus for
the prior fiscal year or the remaining salary due under the terms of the
contracts in the event the employee is terminated without cause or if there is a
change-in-control of the Company.

In the ordinary course of business various lawsuits, claims and proceedings
have been or may be instituted or asserted against the Company. Based on
currently available facts, management believes that the disposition of matters
that are pending or asserted will not have a material adverse effect on the
financial position, results of operations or liquidity of the Company.

15. INSURANCE:

The Company provides certain insurance coverage to hotels under terms of
the various management contracts. This insurance is generally arranged through a
third party carrier. Northridge reinsures a portion of the coverage from this
third party primary insurer. The policies provide for layers of coverage with
minimum deductibles and annual aggregate limits. The policies are for coverage
relating to innkeepers' losses (general/comprehensive liability), wrongful
employment practices, garage keeper's legal liability, replacement cost
automobile losses, and real and personal property and business interruption
insurance. All policies are short-duration contracts and expire through August
1, 1996.

The Company is liable for any deficiencies in the IHC Employee Health and
Welfare Plan (and related Health Trust), which provides employees of the Company
with group health insurance benefits (Note 11). The Company has a Financial
Indemnity Liability Policy with Northridge which indemnifies the Company for its
obligations for the deficiency in the related Health Trust from between $900,000
and $4,000,000. The premiums for this coverage received from the properties
managed by the Company, net of intercompany amounts paid for employees at the
Company's corporate offices, are recorded as direct premiums written. There was
no deficiency in the related Health Trust at December 31, 1995.

F-29
<PAGE> 110

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------

15. INSURANCE--CONTINUED
Included in partners' capital is $1,285,674 and $1,596,213 at December 31,
1994 and 1995, respectively, of capital restricted under applicable government
insurance regulations. The corresponding asset associated with restricted
capital is included in restricted cash in the consolidated balance sheets. All
other accounts of Northridge are classified with assets and liabilities of a
similar nature in the consolidated balance sheets.

The consolidated statements of income include the insurance income earned
and related insurance expenses incurred by Northridge. The insurance expenses
incurred by Northridge totaled approximately $344,000, $617,000 and $1,089,000
for the years ended December 31, 1993, 1994 and 1995, respectively. The
insurance income earned has been included in other management-related fees in
the accompanying consolidated statements of income and is comprised of the
following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Reinsurance premiums written......................... $2,360,509 $3,428,371 $4,981,063
Direct premiums written.............................. -- 2,581,100 2,477,150
Reinsurance premiums ceded........................... -- -- (422,136)
Change in unearned premiums reserve.................. (235,998) 41,511 (61,693)
Loss sharing premiums................................ 731,233 910,044 697,713
---------- ---------- ----------
Insurance income..................................... $2,855,744 $6,961,026 $7,672,097
========== ========== ==========
</TABLE>

16. CONCENTRATION OF OPERATIONS:

The Company provides services principally to hotels. These hotels are
located in 28 states, the District of Columbia, Canada, Mexico, Israel, the
Caribbean, Thailand, Panama and Russia, with the largest concentration of hotels
in the states of Florida and California. These hotels are operated under a
number of franchisers, most predominantly, Marriott International, Inc.

17. SUBSEQUENT EVENTS:

In June 1996, the Company completed the Initial Offering of 11,000,000
shares of its common stock at a price of $21 per share. In July 1996, the
underwriters of the Company's Initial Offering exercised their over-allotment
options and purchased an additional 1,448,350 shares of common stock at $21 per
share from the Company. After underwriting discounts, commissions and other
Initial Offering expenses, net proceeds to the Company were $211,850,865 from
the Initial Offering and $28,601,929 from the exercise of the over-allotment
options. The Company used a significant portion of the proceeds of the Initial
Offering to repay certain debt obligations and to fund hotel acquisitions. The
number of shares of common stock, outstanding at September 30, 1996 was
28,671,401.

In October 1996, the Company's Board of Directors authorized management to
pursue an offering of additional shares of common stock.

The following transactions were consummated prior to or concurrently with
the consummation of the Initial Offering:

Exercise of the Blackstone Option: In October 1995, IHC granted
Blackstone the Blackstone Option to purchase an equity interest in a new
company to be formed to succeed IHC for an exercise price of $23,300,000.
In connection with the Initial Offering, Blackstone exercised the
Blackstone Option and received 2,133,333 shares of common stock of the
Company.

Acquisition of the Blackstone Hotel Interests: In March 1996, a
subsidiary of the Company entered into a purchase and sale agreement to
acquire all of Blackstone's interests in thirteen of the Owned

F-30
<PAGE> 111

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------

17. SUBSEQUENT EVENTS--CONTINUED
Hotels (the Blackstone Acquisition). In connection with the Initial
Offering, the Blackstone Acquisition was consummated for a cash purchase
price of $124,400,000. In addition to the Blackstone Acquisition,
Blackstone also contributed their interest in one hotel in consideration
for $8,300,000 of common stock of the Company. Additionally, the principal
stockholders of IHC contributed their equity interests in the Owned Hotels
to the Company in exchange for common stock of the Company concurrent with
the Initial Offering. The Blackstone Acquisition has been accounted for
using the purchase method of accounting except that carryover basis was
used for 9.3% of the acquired interests. The contributions of interests in
the Owned Hotels in exchange for common stock of the Company have been
accounted for using carryover basis.

Host Funding Transaction: In April 1996, Crossroads purchased 60,000
shares of common stock of Host Funding, Inc. (Host), a hotel real estate
investment trust, in connection with Host's initial public offering. In
connection therewith, Crossroads entered into long-term leases with Host to
lease five Super 8 Motels owned by Host, which are cancelable under certain
conditions specified in the lease agreements. Rental payments under each
lease consist of base rent, payable quarterly, which is based upon revenues
received from the operation of the leased hotels, plus a payment based on
gross revenues of the hotel after required rental payments. The annual
total base rent for each hotel varies from $112,000 to $265,000. Crossroads
will receive a base management fee of 6% of gross revenues for each hotel.
Additionally, Crossroads has agreed to pledge all of its shares of Host
common stock to collateralize their performance under the leases during the
first three years of their term. Thereafter, the number of shares required
to be pledged declines during the remaining term of the leases.

Long-Term Debt:

Effective June 25, 1996, the Company entered into a $195,000,000 Term Loan
and a $100,000,000 Revolving Credit Facility (collectively, the Credit
Facilities). The Term Loan is payable over seven years in accelerating quarterly
installments beginning September 26, 1996 and includes certain mandatory
prepayment provisions. All remaining unpaid accrued interest and principal on
the Term Loan will be due June 26, 2003. The Revolving Credit Facility provides
for borrowings under letters of credit, revolving loans for working capital and
acquisition loans to be used to finance additional hotel acquisitions. As of
September 30, 1996, the Company had used $70,750,000 of the Revolving Credit
Facility.

The proceeds from the Term Loan were used to refinance certain indebtedness
of the Company and to pay fees and expenses incurred in connection with the
Credit Facilities. Proceeds from the Term Loan in the amount of $90,000,000 were
used to purchase a subordinated participation interest in the $119,250,000
mortgage indebtedness of Interstone/CGL, a subsidiary of the Company (CGL Loan).
As of September 30, 1996, on a consolidated basis, the Company had outstanding,
in addition to the Term Loan, $29,250,000 of the CGL Loan. The CGL Loan requires
no principal payments until the indebtedness matures on June 25, 2003. All other
terms of the CGL Loan, including interest and covenants, are identical to the
Credit Facilities.

In October 1996, the Company entered into an amendment to the Credit
Facilities that converts the outstanding borrowings under $100,000,000 Revolving
Credit Facility to the Term Loan. Additionally, the Company extended the
Revolving Credit Facility to provide for a total borrowing capacity of up to
$200,000,000.

Non-Cash Compensation:

Prior to the Initial Offering, the Company issued 785,533 shares of
restricted stock to certain executives and employees to replace certain prior
options issued by IHC in 1995 (refer to Note 9). The restricted shares were
valued based on the estimated value of the common stock of the Company at the
time the restricted stock was issued. The issuance of the restricted stock
resulted in a one-time charge of $11,895,970 which is

F-31
<PAGE> 112

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------

17. SUBSEQUENT EVENTS--CONTINUED
classified as non-cash compensation expense in the accompanying unaudited
consolidated statements of operations as of September 30, 1996.

Income Taxes:

IHC was organized as S corporations, partnerships and limited liability
companies for federal and state income tax purposes until the Initial Offering.
Accordingly, IHC was not subject to income tax, as all taxable income or loss of
IHC was reported on the tax return of its shareholders or owners. As a result of
the change in IHC's tax status to a C corporation effective with the
consummation of the Initial Offering, the Company recorded income tax expense
amounting to $6,261,483 to establish deferred taxes existing as of the date of
the change in tax status. The difference between the Company's effective income
tax rate and statutory federal income tax rate for the nine-month period ended
September 30, 1996 results mainly from the change in tax entity and from state
income taxes.

Extraordinary Items:

In June 1996, the Company recorded an extraordinary loss amounting to
$7,642,641, net of a deferred tax benefit of $3,937,118, as a result of the
early extinguishment of certain debt. The extraordinary loss related principally
to the write-off of deferred financing fees, prepayment penalties and loan
commitment fees.

Acquisition of Additional Hotels:

In February 1996, the Company signed a letter of intent to purchase an
approximately 13% partnership interest in the Don CeSar Beach Resort, a resort
currently managed by the Company. The purchase was consummated in June 1996. The
Company also acquired a 5% partnership interest in the Pittsburgh City Center
Marriott in June 1996. Both acquisitions have been accounted for under the cost
method of accounting and are included in investments in hotel real estate in the
Company's consolidated balance sheet as of September 30, 1996.

As of November 15, 1996, the Company has acquired nine additional hotels
since the Initial Offering for an aggregate purchase price of approximately
$176,200,000. These separate acquisitions include: The Boston Marriott
Westborough, the Brentwood Holiday Inn, the Blacksburg Marriott, the Roanoke
Airport Marriott, the Embassy Suites Phoenix North (formerly Fountain Suites),
the Englewood Radisson Hotel, the Radisson Plaza Hotel San Jose Airport, the
Westin Resort Miami Beach (formerly Doral Ocean Beach Resort) and the Columbus
Hilton.

On November 15, 1996, the Company acquired for 1,957,895 shares of Common
Stock the hotel management business affiliated with Equity Inns. This business
consists of eight management contracts and 48 long-term leases. The Company is
currently in the process of finalizing plans to purchase two additional hotels.
The aggregate purchase price for these two purchases is $62,000,000.

Capital Distribution:

In March 1996, the Company made a capital distribution by issuing notes
payable to the Stockholders of IHC in the aggregate amount of $30,000,000. Such
notes were repaid in June 1996 with proceeds from the Initial Offering.

18. NEW ACCOUNTING PRONOUNCEMENTS:

In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of." The
new standard is effective for fiscal year 1996. Management believes that the
implementation of the standard will not have a material effect on its
consolidated financial statements.

F-32
<PAGE> 113

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
---------

18. NEW ACCOUNTING PRONOUNCEMENTS--CONTINUED
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation." The new standard, which is effective for fiscal year 1996,
requires the Company to adopt either a recognition method or a disclosure-only
approach of accounting for stock based employee compensation plans. Management
intends to adopt the disclosure-only approach and, as such, does not believe
that the implementation of the standard will have a material effect on its
consolidated financial statements.

F-33
<PAGE> 114

REPORT OF INDEPENDENT ACCOUNTANTS

To the Partners
Interstone I Property Partnerships:

We have audited the accompanying combined balance sheets of Interstone I
Property Partnerships (the Partnerships) and Predecessor Entities (as defined in
Note 1) as of December 31, 1994 and 1995 and the related combined statements of
operations and owners' equity and cash flows for each of the three years in the
period ended December 31, 1995. These combined financial statements are the
responsibility of the Partnerships' and Predecessor Entities' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.

As discussed in Note 1, the combined financial statements of the
Predecessor Entities have been prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion in
a Registration Statement of Interstate Hotels Company and are not intended to be
a complete presentation of the Predecessor Entities.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Interstone
I Property Partnerships and Predecessor Entities as of December 31, 1994 and
1995 and the combined results of their operations and cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.

/S/ COOPERS & LYBRAND L.L.P.

Pittsburgh, Pennsylvania
April 10, 1996 except for paragraph 2 of Note 1,
as to which the date is June 25, 1996

F-34
<PAGE> 115

INTERSTONE I PROPERTY PARTNERSHIPS
AND PREDECESSOR ENTITIES

COMBINED BALANCE SHEETS
---------

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1994 1995
ASSETS ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 7,547,516 $ 9,659,554
Restricted cash (Note 2)...................................... 685,149 508,459
Accounts receivable........................................... 3,725,508 4,341,929
Due from affiliates........................................... 626,387 --
Inventories (Note 4).......................................... 715,673 651,548
Prepaid expenses and other assets............................. 546,563 644,209
------------ ------------
Total current assets..................................... 13,846,796 15,805,699
Restricted cash (Note 2)
Property and equipment........................................ 3,724,731 1,337,293
Renovations................................................... 758,396 3,347,593
Property and equipment, net (Notes 1, 5 and 7).................. 139,535,123 150,597,558
Deferred expenses (Note 6)...................................... 934,857 3,108,961
------------ ------------
Total assets............................................. $158,799,903 $174,197,104
============ ============
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable.............................................. 3,940,977 3,033,068
Accrued liabilities:
Real estate taxes.......................................... 1,308,662 1,948,622
Salaries and benefits...................................... 2,199,684 2,716,995
Royalties and fees (Note 3)................................ 136,236 337,430
Management fees (Note 3)................................... 103,157 207,013
Other...................................................... 3,205,713 2,865,170
Customer deposits............................................. 535,858 504,171
Interest payable.............................................. 649,425 1,022,845
Due to affiliates............................................. 648,437 --
Current portion of long-term debt (Note 7).................... 44,766,516 1,417,217
------------ ------------
Total current liabilities................................ 57,494,665 14,052,531
Long-term debt (Note 7)......................................... 74,381,625 113,719,504
Deferred taxes.................................................. 126,500 --
------------ ------------
Total liabilities........................................ 132,002,790 127,772,035
Commitments and contingencies (Note 14)
Owners' equity.................................................. 26,797,113 46,425,069
------------ ------------
Total liabilities and owners' equity.................. $158,799,903 $174,197,104
============ ============
</TABLE>

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

F-35
<PAGE> 116

INTERSTONE I PROPERTY PARTNERSHIPS
AND PREDECESSOR ENTITIES
COMBINED STATEMENTS OF OPERATIONS AND OWNERS' EQUITY
---------

<TABLE>
<CAPTION>
NINE MONTHS JANUARY 1
YEAR ENDED DECEMBER 31, ENDED TO
----------------------------------------- SEPTEMBER 30, JUNE 24,
1993 1994 1995 1995 1996
----------- ------------ ------------ ------------- ------------
(NOTE 1)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Rooms......................... $29,965,305 $ 40,612,704 $ 53,450,530 $ 40,676,193 $ 27,926,526
Food and beverage............. 22,298,100 28,314,060 35,351,678 25,081,020 18,371,706
Telephone..................... 1,390,266 1,790,750 2,501,378 1,902,524 957,847
Gift shop and other........... 1,323,639 1,739,119 2,089,690 1,446,081 1,257,958
Office building lease......... -- 1,163,712 2,550,325 1,832,203 1,403,415
----------- ------------ ------------ ------------- ------------
54,977,310 73,620,345 95,943,601 70,938,021 49,917,452
Departmental costs and
expenses...................... 28,026,057 34,481,202 42,247,524 30,572,669 21,221,268
----------- ------------ ------------ ------------- ------------
Departmental income
(Note 8)................. 26,951,253 39,139,143 53,696,077 40,365,352 28,696,184
----------- ------------ ------------ ------------- ------------
Other expenses (Note 3):
Administration and general.... 4,649,691 6,481,683 9,210,839 6,078,954 4,536,844
Management fees............... 1,031,121 1,506,734 2,234,306 1,640,237 1,375,096
Royalties..................... 1,455,729 2,124,273 2,551,021 1,904,727 1,426,785
Advertising and sales......... 3,398,061 4,413,912 6,079,721 4,640,791 3,222,426
Repairs and maintenance....... 2,734,284 3,580,133 4,545,730 3,428,428 2,013,727
Heat, power and light......... 2,901,874 3,742,593 4,549,014 3,399,997 2,104,178
Insurance and taxes........... 2,236,296 2,797,763 4,403,629 6,003,872 2,189,893
Depreciation and
amortization............... 6,877,251 7,840,428 10,250,714 7,294,841 5,282,514
Other......................... 231,023 288,489 1,275,986 317,490 558,446
----------- ------------ ------------ ------------- ------------
25,515,330 32,776,008 45,100,960 34,709,337 22,709,909
----------- ------------ ------------ ------------- ------------
1,435,923 6,363,135 8,595,117 5,656,015 5,986,275
Interest expense (Note 7)....... 6,381,912 7,852,173 9,605,070 5,249,295 4,737,465
----------- ------------ ------------ ------------- ------------
(Loss) income before
extraordinary items...... (4,945,989) (1,489,038) (1,009,953) 406,720 1,248,810
Extraordinary
items-extinguishments of debt
(Note 7)...................... 25,795,725 18,381,077 -- -- --
----------- ------------ ------------ ------------- ------------
Net income (loss).......... 20,849,736 16,892,039 (1,009,953) 406,720 1,248,810
Owners' equity:
Beginning of year............. (22,131,943) (1,192,017) 26,797,113 26,797,113 46,425,069
Capital contributions......... 156,386 40,431,885 45,273,069 34,102,046 555,521
Capital distributions......... (66,196) (17,901) (29,486,579) (27,151,601) (5,377,009)
Elimination of predecessor
entities' equity........... -- (29,316,893) 4,851,419 (13,313,338) --
Transfer of Partnership
interest................... -- -- -- -- (42,852,391)
----------- ------------ ------------ ------------- ------------
End of period......... $(1,192,017) $ 26,797,113 $ 46,425,069 $ 20,840,940 $ --
=========== ============ ============ ============= ============
</TABLE>

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

F-36
<PAGE> 117

INTERSTONE I PROPERTY PARTNERSHIPS
AND PREDECESSOR ENTITIES
COMBINED STATEMENTS OF CASH FLOWS
---------

<TABLE>
<CAPTION>
NINE MONTHS
ENDED JANUARY 1
YEAR ENDED DECEMBER 31, SEPTEMBER TO
------------------------------------------ 30, JUNE 24,
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................... $ 20,849,736 $ 16,892,039 $ (1,009,953) $ 406,720 $ 1,248,810
Adjustments to reconcile net income
(loss) to
cash provided by operations
Gain on extinguishments of debt...... (25,795,725) (18,381,077) -- -- --
Interest expense financed by term
debt............................... 422,197 -- -- -- --
Depreciation and amortization........ 6,877,251 7,840,428 10,250,714 7,294,841 5,282,514
Loss on disposal of assets........... 318,191 227,927 167,103 623,539 --
Deferred interest on mortgages....... 943,400 938,495 1,070,260 -- --
Change in deferred income taxes...... (11,700) (22,100) 14,400 -- --
Changes in assets and liabilities:
Accounts receivable.................. 374,838 (1,202,856) (1,042,981) (2,207,916) (2,416,814)
Inventories.......................... (151,830) 53,451 46,924 23,396 124,174
Prepaid expenses and other assets.... 278,031 213,266 (221,975) (656,744) (812,841)
Due from affiliates.................. -- -- -- 364,267 (555,521)
Accounts payable..................... (582,208) 1,760,765 (483,874) 281,215 1,250,178
Accrued liabilities.................. 573,382 747,324 2,963,723 (367,226) (558,441)
Customer deposits.................... 64,218 101,483 (31,687) 41,379 (64,671)
------------ ------------ ------------ ------------ -----------
Net cash flows provided by
operating activities............ 4,159,781 9,169,145 11,722,654 5,803,471 3,497,388
------------ ------------ ------------ ------------ -----------
Cash flows from investing activities:
Step-up in basis........................ -- -- -- (9,333,031) --
Funds restricted for future acquisition
of furniture, fixtures and
equipment............................ (887,040) (3,905,387) (4,533,117) (3,112,385) (3,540,489)
Acquisition of property and equipment... (2,471,662) (2,234,879) (6,402,351) (6,377,072) (4,046,287)
Restricted funds used to purchase
property and equipment............... 181,509 451,022 3,964,646 241,798 4,422,103
Cash paid for deferred expenses......... (112,092) -- (1,242,300) -- --
Proceeds from sale of assets............ 125,849 19,772 1,006,937 -- --
Acquisitions, net of cash acquired...... -- (56,210,897) (52,887,935) -- --
------------ ------------ ------------ ------------ -----------
Net cash used in investing
activities...................... (3,163,436) (61,880,369) (60,094,120) (18,580,690) (3,164,673)
------------ ------------ ------------ ------------ -----------
Cash flows from financing activities:
Step-up in basis........................ -- -- -- 20,697,266 --
Proceeds from long-term debt............ 20,116,368 54,418,832 100,983,134 31,175,202 --
Payments on long-term debt (21,056,662) (5,126,112) (70,482,677) (22,759,380) (426,557)
Cash paid for financing fees............ -- (533,483) (786,708) (2,057,674) --
Change in funds restricted for escrow
reserve.............................. (53,055) (364,386) (894,541) 349,151 --
Advances from partners.................. -- -- 400,000 -- --
Transfer of Partnership interest........ -- -- -- -- (4,744,222)
Capital contributions................... 156,386 9,357,372 45,899,456 8,027,687 555,521
Capital distributions................... (66,196) (17,901) (24,635,160) (15,206,472) (5,377,011)
Elimination of Predecessor Entity....... -- -- -- (6,879,380) --
------------ ------------ ------------ ------------ -----------
Net cash (used in) provided by
financing activities............... (903,159) 57,734,322 50,483,504 13,346,400 (9,992,269)
------------ ------------ ------------ ------------ -----------
Net increase (decrease) in cash and cash
equivalents............................. 93,186 5,023,098 2,112,038 569,181 (9,659,554)
Cash and cash equivalents at beginning of
period.................................. 2,431,232 2,524,418 7,547,516 7,547,516 9,659,554
------------ ------------ ------------ ------------ -----------
Cash and cash equivalents at end of
period.................................. $ 2,524,418 $ 7,547,516 $ 9,659,554 $ 8,116,697 $ --
============ ============ ============ ============ ===========
</TABLE>

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

F-37
<PAGE> 118

INTERSTONE I PROPERTY PARTNERSHIPS
AND PREDECESSOR ENTITIES

NOTES TO COMBINED FINANCIAL STATEMENTS
---------

1. BASIS OF PRESENTATION:

The accompanying combined financial statements are comprised of nine
limited partnerships (Interstone I or Partnerships) and Predecessor Entities,
which at December 31, 1995, are affiliates through common ownership. At December
31, 1995, the Partnerships are owned, either directly or indirectly, 75% by
Blackstone Real Estate Partners L.P. (Blackstone) and 25% by Milt Fine, the
principal stockholder of Interstate Hotels Corporation (IHC), and other IHC
executives. The Partnerships' assets consist of eight full-service operating
hotel properties, (collectively, the Hotels).

In conjunction with the Initial Public Offering (IPO) of Interstate Hotels
Company (the Company), interest in the above partnerships was acquired by IHC
Member Corporation (an affiliate of the partners and the Company) on June 25,
1996. Therefore these financial statements include the unaudited results of
operations for the Partnerships from January 1, 1996 through June 24, 1996.

The following details the Partnerships and Predecessor Entities and the
respective properties included in the combined financial statements:

Interstone/Houston Partnership, L.P. (Houston) was formed effective
March 4, 1994. Effective March 7, 1994, Houston acquired the Houston
Marriott North at Greenspoint for $21,000,000.

Interstone/Lisle Partnership, L.P. (Lisle) was formed effective July
8, 1994, when it acquired the Radisson Hotel Lisle and the Lisle Executive
Center in Lisle, Illinois for $23,201,000. The executive center consists of
150,437 square feet and is managed by Blackstone Real Estate Advisors
(BREA), an affiliate of Blackstone.

Interstone/Colorado Springs Partnership, L.P. (Colorado) was formed
effective September 15, 1994. An option agreement exercised on September
27, 1994 resulted in the contribution of the Colorado Springs Marriott and
$792,379 in cash and all of the associated assets and liabilities to
Colorado. The predecessor owner of the hotel was controlled by the owner of
IHC.

Interstone/Denver Partnership, L.P. (Denver) was formed effective
November 7, 1994 and acquired the Denver Hilton South for $12,500,000
effective December 14, 1994.

Interstone/Atlanta Partnership, L.P. (Atlanta) was formed effective
February 1, 1995. Effective February 15, 1995, Atlanta acquired
substantially all of the assets and liabilities, except for the land, of
the Atlanta Marriott Northeast. The purchase price was $14,025,000 and the
land is being leased through an operating lease. See Note 12.

Interstone/Conshohocken Partnership, L.P. (Conshohocken) was formed
March 15, 1995 and on that date acquired all of the partnership interests
in WCB Eleven Limited Partnership, the owner of the Philadelphia Marriott
West for $23,744,000.

Interstone/Williamsburg Partnership, L.P. (Williamsburg), formed
effective July 6, 1995, purchased the Fort Magruder Inn and Conference
Center on October 10, 1995. The purchase price was $12,800,000, which
included $2,192,000 to acquire the land previously leased by the seller. In
addition to the purchase price, $1,200,000 was paid for a noncompete
agreement with the seller for a five year period.

Interstone/Huntington Partnership, L.P. (IHPLP) and Huntington Hotel
Partners, L.P. (HHPLP) (collectively, Huntington) own the Huntington Hilton
Hotel, effective December 7, 1995, located in Melville, New York and the
first and second mortgages encumbering the hotel, respectively. The hotel
was acquired through the acquisition of the first and second mortgages on
the hotel for $21,212,306 and a settlement agreement with 110 Huntington
Associates (HA), the former owner of the hotel.

F-38
<PAGE> 119

NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------

1. BASIS OF PRESENTATION--CONTINUED
With the exception of Lisle, Houston and Denver, the accompanying combined
financial statements include all transactions of the Partnerships and the
Predecessor Entities from January 1, 1993 to December 31, 1995 and are presented
on the basis of the predecessors' historical cost basis up to the date that the
property was acquired. From the date of acquisition, the accompanying combined
financial statements are presented based on the Partnerships' new basis. Lisle,
Houston and Denver are included from their respective date of acquisition.

The terms of the Partnerships expire December 31, 2044 or 2045; however,
dissolution will occur earlier in the event of the sale of the Partnerships'
assets or a disabling event, as defined by the agreements. In accordance with
the terms of the partnership agreements, subsequent capital contributions from
the partners may be required in instances where cash from operations is
insufficient to meet debt service requirements and other partnership expenses.
Such additional capital contributions are to be made at the discretion of the
general partner and are to be paid by the partners in proportion to their
respective partnership interests.

The combined financial statements of the Predecessor Entities have been
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in a Registration Statement of
Interstate Hotels Company and are not intended to be a complete presentation of
the Hotels' operations.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Cash and Cash Equivalents:

The Partnerships consider all unrestricted, highly liquid investments
purchased with a remaining maturity of three months or less to be cash
equivalents.

Restricted Cash:

The management and franchise agreements discussed in Note 3 and the
long-term debt discussed in Note 7 provide that certain cash from operations be
restricted for the future acquisition of or for the replacement of property and
equipment each year based on a percentage of gross hotel revenues. The
requirements range from 3% to 4%. In addition, certain of the loan agreements
described in Note 7 also required an amount to be deposited into a renovation
reserve for certain capital improvements and require monthly deposits to be made
into an escrow account for real estate taxes.

Inventories:

Inventories are stated at cost which is determined using the first-in,
first-out (FIFO) method of accounting.

Property and Equipment:

Property and equipment are recorded at cost which includes the allocated
purchase price for the acquisitions described in Note 1. Property and equipment
are depreciated primarily on the straight-line method over their estimated
useful lives (buildings and improvements over 28 to 35 years and furniture,
fixtures and equipment over 5 to 7 years). Expenditures for maintenance and
repairs are expensed as incurred. The cost and related accumulated depreciation
applicable to property no longer in service are eliminated from the accounts and
any gain or loss thereon is included in operations. A hotel's initial
expenditures for the purchase of china, glassware, silverware and linens are
capitalized as furniture, fixtures and equipment and amortized on a
straight-line basis over a five year life. Costs for replacement of those items
are charged to operations in the period the items are placed in service.

F-39
<PAGE> 120

NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Deferred Expenses:

Generally the deferred financing costs and franchise fees are being
amortized on the straight-line basis over periods ranging from 3 to 5 years. The
non-compete agreement is being amortized over its 5 year term.

Concentration of Credit Risk:

The Partnerships maintain cash and cash equivalents accounts with various
financial institutions in excess of the amount insured by the Federal Deposit
Insurance Corporation. The Partnership has not experienced any losses in such
accounts.

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 dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Revenue Recognition:

The Hotels recognize revenue from their rooms, catering, gift shop and
restaurant facilities as earned on the close of each business day.

Income Tax Status:

The entities included in the combined financial statement are non-tax
paying entities (partnerships) with the exception of one predecessor entity. For
the tax paying predecessor entity, income taxes were accrued and recorded in the
combined financial statements. Partnerships are not subject to state and federal
income taxes. Accordingly, net income or loss and any available tax credits are
allocated to the individual partners in proportion to their income and loss
rates of participation. Should loss allocations cause the adjusted capital
account of the limited partners to be reduced to zero, any additional losses are
allocated to the general partners.

Acquisitions:

The acquisitions from third parties have been accounted for by the purchase
method. Accordingly, the purchase price has been allocated to assets acquired
and liabilities assumed based on their estimated fair values, as determined by
real estate tax assessments and other fair market valuations. The acquisitions
were financed through the issuance of debt and capital contributions.

Unaudited Financial Statements:

The unaudited combined statements of operations and owners' equity and cash
flows for the nine-month period ended September 30, 1995 and the period from
January 1, 1996 to June 24, 1996, in the opinion of management, have been
prepared on the same basis as the audited combined financial statements and
include all significant adjustments (consisting primarily of normal recurring
adjustments) considered necessary for a fair presentation of the results of
these interim periods. The data disclosed in these notes to the combined
financial statements for these periods are also unaudited. Operating results for
the nine-month period ended September 30, 1995 and for the period from January
1, 1996 through June 24, 1996 are not necessarily indicative of the results for
the entire year.

F-40
<PAGE> 121

NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------

3. RELATED PARTY TRANSACTIONS:

Since their acquisition by the Partnerships, the Hotels have generally been
operated pursuant to franchise agreements between IHC, as franchisee, and
various franchisers. Prior to their acquisition by the Partnerships, the
Predecessor Entities generally were also party to franchise arrangements. The
terms of the franchise agreements range from 10 to 25 years and can be extended
by the mutual consent of the parties. The agreements require ongoing fees, which
comprise royalty expense in the combined statement of operations, generally
ranging from 3% to 6% of room revenues and 2% to 3% of certain food and beverage
revenues. In addition, other fees paid to the franchisers include a national
advertising campaign fee of approximately 1% of room revenues, as well as fees
for a national reservation system, networking, honored guest awards and other
promotional programs.

Since their acquisition by the Partnerships, the Hotels have been operated
under a management agreement with IHC which provides for a management fee of
2.8% of gross operating revenue. The terms of the agreements extend through
December 31, 2044. The agreements can be terminated earlier by either party upon
the occurrence of certain conditions as specified in the agreements. In
addition, Colorado and Conshohocken were managed by IHC prior to their
acquisition by the Partnerships. Generally, the Hotels not managed by IHC prior
to their acquisition by the Partnerships were party to similar management
arrangements. The management fees earned by IHC were approximately $726,000 in
1993, $1,062,000 in 1994 and $1,900,000 in 1995.

An affiliate of IHC provides reinsurance to major insurance carriers solely
in connection with the insurance coverage that those carriers provide to the
Hotels. IHC also provides certain accounting and bookkeeping assistance to the
Partnerships, of which no amounts were paid by the Partnerships for these
services.

4. INVENTORIES:

The components of inventories were as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Food............................................................. $263,244 $248,327
Beverage......................................................... 281,752 308,976
Gift shop and other.............................................. 170,677 94,245
-------- --------
$715,673 $651,548
======== ========
</TABLE>

5. PROPERTY AND EQUIPMENT:

Property and equipment consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
------------ ------------
<S> <C> <C>
Land...................................................... $ 14,975,971 $ 18,357,867
Buildings and improvements................................ 124,326,343 114,315,868
Furniture, fixtures and equipment......................... 30,679,335 33,600,537
------------ ------------
169,981,649 166,274,272
Less accumulated depreciation............................. 30,446,526 15,676,714
------------ ------------
$139,535,123 $150,597,558
============ ============
</TABLE>

F-41
<PAGE> 122

NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------

5. PROPERTY AND EQUIPMENT--CONTINUED
When assets were acquired from Predecessor Entities, a new basis was
determined and accumulated depreciation was reduced to zero.

6. DEFERRED EXPENSES:

The components of deferred expenses were as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
---------- ----------
<S> <C> <C>
Deferred financing costs...................................... $1,548,043 $2,069,941
Franchise fees................................................ 77,500 119,800
Non-compete agreement......................................... -- 1,200,000
---------- ----------
1,625,543 3,389,741
Less accumulated amortization................................. 690,686 280,780
---------- ----------
$ 934,857 $3,108,961
========== ==========
</TABLE>

7. LONG-TERM DEBT:

Long-term debt consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
PROPERTY 1994 1995
---------------------------------------------------------- ------------ ------------
<S> <C> <C>
Lisle:
5.98% note payable due 1999............................. $15,425,000 --
Pooled loan agreement (A)............................... -- $22,436,016
Houston:
8.0% note payable due 2001 (B).......................... 16,250,000 16,250,000
Colorado:
5.98% note payable due 1999............................. 8,000,000 --
Pooled loan agreement (A)............................... -- 10,220,852
Denver:
10.69% note payable due 1998............................ 9,500,000 --
Pooled loan agreement (A)............................... -- 11,467,297
Atlanta:
Notes payable (average rate of 8.75%)................... 7,381,432 --
Capital lease obligations............................... 250,662 --
Pooled loan agreement (A)............................... -- 12,713,743
Conshohocken:
9.50% note payable due 1996............................. 14,598,203 --
Pooled loan agreement (A)............................... -- 17,948,813
Williamsburg:
6.75% note payable due 2003............................. 4,533,200 --
Capital lease obligations............................... 148,042 --
Variable rate note payable due 1999 (C)................. -- 11,000,000
</TABLE>

F-42
<PAGE> 123

NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------

7. LONG-TERM DEBT--CONTINUED

(A) Effective August 31, 1995, Lisle, Denver, Atlanta, Conshohocken and
Colorado entered into a pooled loan agreement. The total amount borrowed under
the pooled loan agreement was $75,000,000. The proceeds were used to retire debt
and acquire certain properties. The pooled loan agreement provides for joint and
several liability to the Partnerships for the full amount of the outstanding
loan. Substantially all of the assets and the management agreement of the
Partnerships collateralize the borrowings. Principal is payable in varying
monthly payments with interest at LIBOR plus 3%. The interest rate in effect at
December 31, 1995 was 8.91%. The varying monthly principal payments are based on
an annual calculation using a percentage of the outstanding principal balance,
net income and cash flows, as defined by the agreement. All remaining unpaid
accrued interest and principal will be due August 31, 1999. The loan agreement
provides for a 2% prepayment penalty in the first year and a 1% penalty in the
second year. The Partnerships purchased an interest rate cap that limits LIBOR
to 7.5% through August 31, 1998. The carrying value of the interest rate cap at
December 31, 1995 was approximately $443,000.

The pooled loan agreement contains certain restrictive covenants including
limitations on the assumption of additional indebtedness, changes in the
Partnerships' agreements and changes to the franchiser and the managing agents
of the Hotels (IHC and BREA). Additionally, an entity affiliated with the
managing general partner issued a letter of credit in the amount of $5,000,000
on behalf of the Partnerships. The letter of credit provides for principal
repayment upon the occurrence of a default or if certain financial terms are not
met by the Partnerships between March 31, 1996 and April 25, 1998.

(B) The Houston partnership borrowed $16,250,000 under a note payable
agreement, the proceeds of which, combined with capital contributions, were used
to acquire the Hotel. The note accrues interest at the contract rate of 8% and
is payable in monthly interest only payments at the pay rate of 7% through March
1995, 7.5% from April 1995 through March 1996 and 8% thereafter. Interest due in
excess of the pay rate accrues interest at the contract rate. At December 31,
1995, such amount was $246,895 and was included in accrued interest on the
accompanying combined balance sheets. Beginning April 1996, the note is payable
in equal monthly installments of principal and interest of $121,208 through
March 2001, at which time all remaining unpaid accrued interest and principal
will be due.

(C) Effective October 10, 1995, the Williamsburg partnership entered into a
loan agreement which provides for $13,000,000, of which $11,000,000 was drawn on
the date of the agreement (the initial disbursement). The proceeds of the
initial disbursement, combined with capital contributions, were used to acquire
the hotel. The agreement also includes a provision that allows for an additional
draw of up to $2,000,000 within 12 to 18 months after the initial disbursement
if certain financial conditions are met, as defined by the agreement (the second
disbursement). Interest is payable monthly at the rate of LIBOR plus 3.5%. The
interest rate in effect at December 31, 1995 was 9.44%. Beginning at the time of
the second disbursement or 18 months after the initial disbursement, whichever
is earlier, equal monthly principal payments will be due based on the then
outstanding principal balance amortized at the current interest rate in effect
over a 25 year period. The note payable matures October, 1999 at which time all
remaining unpaid

F-43
<PAGE> 124

NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------

7. LONG-TERM DEBT--CONTINUED
accrued interest and principal will be due. The agreement provides for a 2%
prepayment penalty for the first two years after the initial disbursement and a
1% penalty in the third year.

(D) Huntington borrowed $13,100,000, the proceeds of which, combined with
capital contributions, were used to complete the acquisition described in Note
1. Interest is payable at the rate of LIBOR plus 4.0%. The interest rate in
effect at December 31, 1995 was 9.66%. The partnership has the option to request
a fixed interest rate based on quoted rates from the borrower for portions of
the outstanding balance not to exceed $4,000,000 for various periods as provided
in the note agreement. Interest is payable monthly commencing July 1, 1995.
Commencing March 1, 1997, equal monthly principal payments will be due based on
a 25 year amortization period. The note payable matures June 1998, at which time
all remaining unpaid principal and accrued interest will be due.

The management of the Partnerships estimate that based on projected net
income and cash flows, approximately $1,417,000 of principal payments will be
due during 1996 and, accordingly, this amount has been classified as a current
liability on the accompanying combined balance sheets.

Based on interest rates currently available to the Partnerships for the
issuance of debt with similar terms and remaining maturities, management
believes that the carrying amount of debt and the interest rate cap is a
reasonable estimation of fair value.

Aggregate scheduled maturities of the notes for each of the five years
ending December 31 are as follows:

<TABLE>
<S> <C>
1996..................................................... $ 1,417,217
1997..................................................... 3,229,342
1998..................................................... 16,597,473
1999..................................................... 88,712,876
2000..................................................... 4,102,144
Thereafter............................................... 1,077,669
------------
$115,136,721
============
</TABLE>

A predecessor entity obtained a first mortgage note in the amount of
$14,000,000, the proceeds of which were used to satisfy an existing mortgage and
letter of credit note plus accrued interest, pursuant to a binding letter of
intent. The predecessor entity also entered into a subordinated mortgage note
with the lender and, in exchange for entering into the agreement, in addition to
payment of $600,000 proceeds from the first mortgage, the lender sold the
promissory note to the predecessor entity. The extinguishment of the mortgage
and letter of credit notes and the promissory note resulted in a gain of
$25,795,725, which is presented as an extraordinary item in the 1993 combined
statements of operations.

Pursuant to the terms of the commitment letter dated March 8, 1994, IHC
paid $100,000 to the holder of the term loan as an option for the purchase of a
predecessor entity's loan for $11,000,000. The extinguishment of the predecessor
entity's loan resulted in an $18,381,077 gain, which is presented as an
extraordinary item in the 1994 combined statements of operations.

F-44
<PAGE> 125

NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------

8. DEPARTMENTAL INCOME:

Combined departmental income is as follows:

<TABLE>
<CAPTION>
NINE MONTHS JANUARY 1
YEAR ENDED DECEMBER 31, ENDED TO
--------------------------------------- SEPTEMBER 30, JUNE 24,
1993 1994 1995 1995 1996
----------- ----------- ----------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Rooms........................... $21,637,770 $28,813,329 $40,291,221 $31,125,679 $21,402,669
Food and beverage............... 4,367,048 7,676,644 9,305,887 6,648,224 5,306,094
Telephone....................... 603,939 836,275 1,132,807 949,233 690,115
Gift shop and other............. 342,496 772,157 692,895 376,275 247,962
Office.......................... -- 1,040,738 2,273,267 1,265,941 1,049,344
----------- ----------- ----------- ----------- -----------
$26,951,253 $39,139,143 $53,696,077 $40,365,352 $28,696,184
=========== =========== =========== =========== ===========
</TABLE>

9. EMPLOYEE BENEFITS:

The Hotels participate in the following employee benefit plans which are
sponsored by IHC:

The Interstate Hotels Corporation Employee Health and Welfare Plan (and
related Health Trust) provides employees of IHC with group health insurance
benefits. The group policies provide for a "minimum premium plan" whereby IHC is
self-insured for certain benefits, subject to certain individual claim and
aggregate maximum liability limits. The Hotels pay, directly to IHC, the
employer portion of the premiums, which is based on the estimated conventional
premium. Premiums may be prospectively adjusted to consider actual claims
experience. The Hotels incurred expenses of approximately $573,000 in 1994 and
$1,007,000 in 1995, related to the plan. The Health Trust is exempt from federal
income tax under Section 501(c)(9) of the Internal Revenue Code as a voluntary
employees' beneficiary association.

IHC maintains a defined contribution savings plan for all employees.
Eligibility for participation in the plan is based on the employee's attainment
of 21 years of age and on the completion of one year of service with IHC.
Employer contributions are based on a percentage of employee contributions.
Participants may make voluntary contributions to the plan of up to 6% of their
compensation, as defined. The Hotels incurred expenses of approximately $87,000
in 1994 and $175,000 in 1995 related to the plan.

Additionally, IHC sponsors certain other employee benefit plans, which
change from time to time, but generally provide for incentive bonuses and
deferred compensation to certain key employees of the Hotels. These compensation
awards are dependent on the Hotel's performance and other established criteria.
The Hotels incurred expenses amounting to approximately $96,000 in 1994,
$607,000 in 1995 related to these plans.

Predecessor entities generally did not provide any health and welfare,
retirement benefit or bonus and deferred compensation plans.

10. INCOME TAXES:

The provision for taxes of a predecessor entity was approximately $85,000,
$142,000 and $89,000 in 1993, 1994 and 1995, respectively, and consists
primarily of current federal and state taxes. These amounts are included in
other expenses in the accompanying combined statements of operations. The net
deferred tax liability primarily relates to depreciation.

F-45
<PAGE> 126

NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------

11. LEASE INCOME:

The following is a schedule of future minimum rental income for the Lisle
Executive Center under noncancelable operating leases as of December 31, 1995:

<TABLE>
<S> <C>
1996...................................................... $ 2,680,000
1997...................................................... 2,451,000
1998...................................................... 1,789,000
1999...................................................... 1,572,000
2000...................................................... 1,018,000
Thereafter................................................ 658,000
-----------
$10,168,000
===========
</TABLE>

12. OPERATING LEASES:

The Hotels have various land and equipment operating leases. Total rental
expense amounted to approximately $247,000 in 1993, $294,000 in 1994 and
$685,000 in 1995. The following is a schedule of future minimum lease payments
under these leases:

<TABLE>
<S> <C>
1996....................................................... $ 655,000
1997....................................................... 377,000
1998....................................................... 193,000
1999....................................................... 43,000
2000....................................................... 29,000
Thereafter................................................. 1,823,000
----------
$3,120,000
==========
</TABLE>

13. CASH FLOW INFORMATION:

Cash payments for interest were $1,788,652, $11,866,008 and $9,231,650 in
1993, 1994 and 1995, respectively.

Cash payments for taxes were $103,345, $79,978 and $4,184 in 1993, 1994,
and 1995, respectively.

Non-cash investing and financing activities were as follows:

<TABLE>
<S> <C>
1994:
Elimination of Predecessor Entities' equity................. $29,316,893
===========
1995:
Elimination of Predecessor Entities' equity................. $ 4,851,419
===========
</TABLE>

On June 25, 1996 all other non-cash assets, liabilities and equity were
transferred to IHC.

F-46
<PAGE> 127

NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED
---------

14. COMMITMENTS AND CONTINGENCIES:

In the ordinary course of business various lawsuits, claims and proceedings
have been or may be instituted or asserted against the Partnerships. Based on
currently available facts, management believes that the disposition of matters
that are pending or asserted will not have a material adverse effect on the
financial position, results of operations or liquidity of the Partnerships.

15. NEW ACCOUNTING PRONOUNCEMENT:

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of." The new standard is
effective for fiscal year 1996. Management believes that the implementation of
the standard will not have a material effect on these combined financial
statements.

F-47
<PAGE> 128

REPORT OF INDEPENDENT ACCOUNTANTS

To the Partners
Interstone/CGL Partners, L.P.:

We have audited the accompanying combined balance sheet of Interstone/CGL
Partners, L.P. (the Partnership) as of December 31, 1995 and the related
combined statements of operations and partners' capital and cash flows for the
period from December 15, 1995 (inception) to December 31, 1995 and the
accompanying combined balance sheets of Predecessor Entity (as defined in Note
1) as of December 31, 1994 and December 14, 1995 and the related combined
statements of operations and predecessor equity and cash flows for the years
ended December 31, 1993 and 1994 and for the period from January 1, 1995 to
December 14, 1995. These combined financial statements are the responsibility of
the Partnership's and Predecessor Entity'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'financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2, the combined financial statements of the
Predecessor Entity have been prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion in
a Registration Statement of Interstate Hotels Company and are not intended to be
a complete presentation of the Predecessor Entity.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Interstone/CGL
Partners, L.P. as of December 31, 1995 and the combined results of its
operations and cash flows for the period from December 15, 1995 (inception) to
December 31, 1995 and the financial position of the Predecessor Entity as of
December 31, 1994 and December 14, 1995 and the combined results of its
operations and cash flows for the years ended December 31, 1993 and 1994 and for
the period from January 1, 1995 to December 14, 1995, in conformity with
generally accepted accounting principles.

/s/COOPERS & LYBRAND L.L.P.

Pittsburgh, Pennsylvania
April 10, 1996, except for paragraph 2 of Note 1,
as to which the date is June 25, 1996

F-48
<PAGE> 129

INTERSTONE/CGL PARTNERS, L.P.
AND PREDECESSOR ENTITY

COMBINED BALANCE SHEETS

---------

ASSETS

<TABLE>
<CAPTION>
PREDECESSOR ENTITY PARTNERSHIP
---------------------------- ------------
DECEMBER 31, DECEMBER 14, DECEMBER 31,
1994 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 3,198,348 $ 198,922 $ 6,126,483
Accounts receivable.............................. 3,700,112 4,470,676 1,231,348
Inventories (Note 6)............................. 1,525,754 1,367,815 350,229
Prepaid expenses and other....................... 1,024,352 763,053 114,803
------------ ------------ ------------
Total current assets........................ 9,448,566 6,800,466 7,822,863
------------ ------------ ------------
Restricted cash (Note 3)........................... 884,364 992,337 2,771,814
Property and equipment, net (Notes 3, 7 and 10).... 127,839,673 123,341,620 166,041,651
Deferred expenses (Note 8)......................... -- -- 2,928,346
------------ ------------ ------------
Total assets................................ $138,172,603 $131,134,423 $179,564,674
============ ============ ============
LIABILITIES, EQUITY AND CAPITAL
Current liabilities:
Accounts payable................................. 1,433,882 622,800 1,561,280
Due to CIGNA (Note 3)............................ 1,592,863 1,848,384 --
Accrued liabilities:
Real estate taxes............................. 721,912 623,778 595,053
Salaries and benefits......................... 1,157,502 698,812 1,230,178
Royalties and fees (Note 5)................... 123,010 48,037 103,523
Management fees (Note 5)...................... 594,871 512,588 57,037
Other......................................... 979,274 1,589,552 714,682
Customer deposits................................ 326,955 458,108 374,501
Current portion of long-term debt (Note 10)...... -- -- 3,000,000
------------ ------------ ------------
Total current liabilities................... 6,930,269 6,402,059 7,636,254
------------ ------------ ------------
Other liabilities (Note 9)......................... -- -- 1,212,968
Long-term debt (Note 10)........................... -- -- 117,000,000
------------ ------------ ------------
Total liabilities........................... 6,930,269 6,402,059 125,849,222
------------ ------------ ------------
Commitments and contingencies (Notes 9 and 13)
Predecessor equity................................. 131,242,334 124,732,364 --
Partners' capital.................................. -- -- 53,715,452
------------ ------------ ------------
Total liabilities, equity and capital......... $138,172,603 $131,134,423 $179,564,674
============ ============ ============
</TABLE>

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

F-49
<PAGE> 130

INTERSTONE/CGL PARTNERS, L.P.
AND PREDECESSOR ENTITY

COMBINED STATEMENTS OF OPERATIONS AND PREDECESSOR'S
EQUITY AND PARTNERS' CAPITAL
---------

<TABLE>
<CAPTION>
PREDECESSOR
ENTITY
PREDECESSOR ENTITY PARTNERSHIP ------------ PARTNERSHIP
----------------------------------------- -------------- NINE MONTHS ------------
JANUARY 1 DECEMBER 15 ENDED JANUARY 1
YEAR ENDED DECEMBER 31, TO (INCEPTION) TO SEPTEMBER TO
-------------------------- DECEMBER 14, DECEMBER 31, 30, JUNE 24,
1993 1994 1995 1995 1995 1996
----------- ------------ ------------ -------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rooms............................... $29,689,872 $ 44,368,711 $ 47,005,616 $1,197,237 $ 35,288,880 $ 25,354,896
Food and beverage................... 14,377,451 22,211,752 23,571,905 1,174,170 17,149,631 12,272,711
Telephone........................... 1,472,886 2,051,051 2,369,874 59,208 1,777,276 1,380,253
Gift shop........................... 269,430 491,778 381,200 19,760 286,544 181,616
Other............................... 457,579 1,082,302 1,274,314 34,123 962,950 673,506
----------- ------------ ------------ ---------- ------------ ------------
46,267,218 70,205,594 74,602,909 2,484,498 55,465,281 39,862,982
Departmental costs and expenses....... 20,128,137 29,295,928 30,499,098 1,386,137 22,615,896 15,641,860
----------- ------------ ------------ ---------- ------------ ------------
Departmental income (Note 11)..... 26,139,081 40,909,666 44,103,811 1,098,361 32,849,385 24,221,122
Other expenses (Note 5):
Administration and general.......... 5,007,565 7,733,793 7,624,794 292,393 6,218,156 3,543,300
Management fee...................... 1,868,102 3,268,802 4,034,540 80,896 2,243,629 1,131,561
Royalties........................... 673,762 1,120,609 1,272,321 55,255 1,230,680 963,856
Advertising and sales............... 2,864,140 4,113,422 4,636,739 168,934 3,409,427 2,432,806
Repairs and maintenance............. 2,406,479 3,358,253 3,469,537 152,470 2,652,742 1,727,645
Heat, power and light............... 2,081,933 2,784,810 2,833,376 146,171 2,143,343 1,372,855
Insurance and taxes................. 2,100,483 3,023,493 3,505,079 97,478 2,757,816 1,977,464
Depreciation and amortization....... 4,885,249 7,124,855 7,088,752 366,181 5,514,919 4,256,078
Other, net.......................... 239,405 (198,437) 622,125 31,600 (139,173) 759,390
----------- ------------ ------------ ----------- ------------ ------------
22,127,118 32,329,600 35,087,263 1,391,378 26,031,539 18,164,955
----------- ------------ ------------ ----------- ------------ ------------
4,011,963 8,580,066 9,016,548 (293,017) 6,817,846 6,056,167
Interest expense (Note 10)............ -- -- -- (460,000) -- (4,964,750)
----------- ------------ ------------ ----------- ------------ ------------
Income (loss) before income
tax expense....................... 4,011,963 8,580,066 9,016,548 (753,017) 6,817,846 1,091,417
Income tax expense (Note 3)........... 1,605,000 3,432,000 3,607,000 -- 2,727,000 --
----------- ------------ ------------ ----------- ------------ ------------
Net income (loss)................... 2,406,963 5,148,066 5,409,548 (753,017) 4,090,846 1,091,417
----------- ------------ ------------ ----------- ------------ ------------
Predecessor's equity and partners'
capital:
Beginning of period................. 75,519,277 91,875,901 131,242,334 -- 131,242,334 53,715,452
Increase (decrease) in predecessor's
equity............................ 13,949,661 34,218,367 (11,919,518) -- -- --
Capital contributions............... -- -- -- 54,468,469 -- --
Transfer of Partnership interest.... -- -- -- -- -- (54,057,658)
Distributions....................... -- -- -- -- (9,982,028) (749,211)
----------- ------------ ------------ ----------- ------------ ------------
End of period....................... $91,875,901 $131,242,334 $124,732,364 $53,715,452 $125,351,152 $ --
=========== ============ ============ =========== ============ ============
</TABLE>

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

F-50
<PAGE> 131

INTERSTONE/CGL PARTNERS, L.P.
AND PREDECESSOR ENTITY

COMBINED STATEMENTS OF CASH FLOWS
---------

<TABLE>
<CAPTION>
PREDECESSOR
PARTNERSHIP ENTITY PARTNERSHIP
PREDECESSOR ENTITY ------------- ------------- -----------
------------------------------------------- DECEMBER 15
JANUARY 1 (INCEPTION) NINE MONTHS JANUARY 1
YEAR ENDED DECEMBER 31, TO TO ENDED TO
--------------------------- DECEMBER 14, DECEMBER 31, SEPTEMBER 30, JUNE 24,
1993 1994 1995 1995 1995 1996
----------- ------------ ------------ ------------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)............... $ 2,406,963 $ 5,148,066 $ 5,409,548 $ (753,017) $ 4,090,846 $ 1,091,417
Adjustments to reconcile net
income (loss) to cash provided
by operations:
Depreciation and
amortization................ 4,885,249 7,124,855 7,088,752 366,181 5,514,919 4,256,078
Changes in assets and
liabilities:
Accounts receivable........... (694,952) 355,572 (770,564 ) (823,798) 261,561 (4,303,414)
Inventories................... (234,024) 29,445 157,939 (6,085) (44,491) 63,384
Prepaid expenses and other.... (79,904) (242,593) 261,299 64,234 (71,112) (675,277)
Accounts payable.............. (15,025) 505,177 (811,082 ) 752,999 113,597 125,795
Accrued liabilities........... 527,007 1,685,986 (103,802 ) 1,468,004 906,085 4,369,538
Customer deposits............. 136,001 (42,124) 131,153 (170,307) 105,327 (86,330)
----------- ------------ ------------ ------------- ----------- ----------
Net cash provided by
operating activities...... 6,931,315 14,564,384 11,363,243 898,211 10,876,732 4,841,191
----------- ------------ ------------ ------------- ----------- ----------
Cash flows from investing
activities:
Funds restricted for future
acquisition of furniture,
fixtures and equipment........ (374,721) (569,691) (489,594 ) (2,771,814) (463,233) (2,808,054)
Restricted funds used to
purchase furniture, fixtures
and equipment................. 366,224 936,768 381,621 -- 289,459 1,053,522
Cash paid for deferred franchise
fees.......................... -- -- -- (107,045) -- --
Cash received on foreclosure.... 351,384 2,247,262 -- -- -- --
Acquisition of Hotels, net of
cash acquired of $144,650..... -- -- -- (159,994,406) -- --
Acquisition of property and
equipment, net................ (1,280,646) (2,883,340) (2,590,699 ) -- (2,236,116) (1,053,522)
----------- ------------ ------------ ------------- ----------- ----------
Net cash used in investing
activities................ (937,759) (269,001) (2,698,672 ) (162,873,265) (2,409,890) (2,808,054)
----------- ------------ ------------ ------------- ----------- ----------
Cash flows from financing
activities:
Proceeds from long-term debt.... -- -- -- 120,000,000 -- --
Repayment of long-term debt..... -- -- -- -- -- (750,000)
Cash paid for financing fees.... -- -- -- (2,650,000) -- --
Distributions to
predecessor/partnership....... (7,846,423) (12,446,117) (11,919,518 ) -- (9,982,028) (749,211)
Transfer of Partnership
interest...................... -- -- -- -- -- (6,660,409)
Change in due to CIGNA.......... 378,496 72,963 255,521 -- 60,774 --
Partner capital contributions... -- -- -- 50,751,537 -- --
----------- ------------ ------------ ------------- ----------- ----------
Net cash (used in) provided
by financing activities... (7,467,927) (12,373,154) (11,663,997 ) 168,101,537 (9,921,254) (8,159,620)
----------- ------------ ------------ ------------- ----------- ----------
Net (decrease) increase in cash
and cash equivalents............ (1,474,371) 1,922,229 (2,999,426 ) 6,126,483 (1,454,412) (6,126,483)
Cash and cash equivalents at
beginning of period............. 2,750,490 1,276,119 3,198,348 -- 3,198,348 6,126,483
----------- ------------ ------------ ------------- ----------- ----------
Cash and cash equivalents at end
of period....................... $ 1,276,119 $ 3,198,348 $ 198,922 $ 6,126,483 $ 1,743,936 $ --
=========== ============ ============ ============= =========== ==========
</TABLE>

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

F-51
<PAGE> 132

INTERSTONE/CGL PARTNERS, L.P.
AND PREDECESSOR ENTITY

NOTES TO COMBINED FINANCIAL STATEMENTS

1. ORGANIZATION:

Interstone/CGL Partners, L.P.:

Interstone/CGL Partners, L.P. (the Partnership), a limited partnership, was
formed effective November 2, 1995 by Interstone/CGL Management Associates (as
general partner) and Interstone Two Partners I, L.P., Interstone Two Partners
II, L.P., Interstone Two Partners III, L.P. and Interstone Two Partners IV, L.P.
(as limited partners, collectively the Interstone Partners). A Purchase, Sale
and Contribution Agreement (the Sale Agreement) was entered into between the
Partnership, CGI Partners L.P. (CGI), Quebec Street Investments Inc. (QSI) and
Connecticut General Life Insurance Company (CIGNA) on November 20, 1995. CGI and
QSI are affiliates of CIGNA, the then current owner of six hotels (the Hotels).
Pursuant to the Sale Agreement, CGI and QSI were admitted as 25% limited
partners of the Partnership in exchange for a 25% interest in the Hotels. On the
closing date, December 15, 1995, the Interstone Partners purchased the remaining
75% interest in the Hotels from CGI and QSI. Immediately following the purchase,
CGI and QSI distributed their limited partnership interests in the Partnership
to CIGNA. The transaction was accounted for as a purchase with CIGNA's
contributed basis in the Hotels recorded at CIGNA's historical cost.

In conjunction with the Initial Public Offering (IPO) of Interstate Hotels
Company (the Company), interest in the Partnership was acquired by IHC Member
Corporation (an affiliate of the partners and the Company) on June 25, 1996.
Therefore, these financial statements include the unaudited results of
operations for the Partnership from January 1, 1996 through June 24, 1996.

Predecessor Entity:

CIGNA (Predecessor Entity) acquired the Hotels through foreclosure or
deed-in-lieu-of foreclosure. Four of the Hotels were acquired prior to January
1, 1993 and are included in these financial statements beginning January 1,
1993. Valley Forge Doubletree Guest Suites Hotel and Warner Center Marriott
Hotel are included in the accompanying combined financial statements beginning
on May 20, 1993 and February 25, 1994, respectively, since records prior to such
dates are not available. The Predecessor Entity recorded the assets acquired at
the lower of cost or fair value.

Hotels:

The properties included in the combined financial statements include the
following full-service hotels (collectively, the Hotels):

<TABLE>
<CAPTION>
HOTEL LOCATION
- ------------------------------------- ---------------------
<S> <C>
Tysons Corner Marriott Hotel (Tysons) Tysons Corner, VA
Marriott Suites at Valley Forge,
formerly Valley Forge Doubletree
Guest Suites Hotel through January
15, 1995 (collectively, Valley
Forge) Wayne, PA
Embassy Suites Schaumburg Hotel
(Schaumburg)Embassy Suites
Schaumburg Schaumburg, IL
Fort Lauderdale Airport Hilton (Ft.
Lauderdale) Fort Lauderdale, FL
Boston Marriott Andover (Andover) Andover, MA
Warner Center Marriott Hotel (Warner) Woodland Hills, CA
</TABLE>

F-52
<PAGE> 133

NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED

2. BASIS OF PRESENTATION:

The above entities are affiliates through common ownership, and accordingly
are presented in a combined presentation. All significant intercompany balances
and transactions have been eliminated in combination.

The term of the Partnership expires December 31, 2045; however, dissolution
will occur earlier in the event of the sale of the Partnership's assets or a
disabling event, as defined by the agreement. In accordance with the terms of
the partnership agreement, subsequent capital contributions from the partners
may be required in instances where cash from operations is insufficient to meet
debt service requirements and other partnership expenses. Such additional
capital contributions are to be made at the discretion of the general partner
and are to be paid by the partners in proportion to their respective partnership
interests. The partnership agreement also provides for the exchange of
partnership interests in the event of the failure of a partner to make
subsequent capital contributions.

The Partnership does not have access to certain books and records of CIGNA
for the period prior to December 15, 1995 and, therefore, the financial
statements for the Predecessor Entity include only those transactions recorded
in the books and records of the Hotels, except that income tax expense has been
provided for in the statements of operations based on applicable statutory
rates. Transactions recorded by CIGNA that related to the Hotels, principally
interest on intercompany borrowings, are excluded from these combined financial
statements since they were not recorded on the Hotels' records.

The combined financial statements of the Predecessor Entity have been
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in a Registration Statement of
Interstate Hotels Company and are not intended to be a complete presentation of
the Hotels' operations.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Cash and Cash Equivalents:

The Partnership considers all unrestricted, highly liquid investments
purchased with a remaining maturity of three months or less to be cash
equivalents.

Restricted Cash:

The management and franchise agreements discussed in Note 5 and the
long-term debt discussed in Note 10 provide that certain cash from operations be
restricted based on a percentage of gross hotel revenues for the future
acquisition or for the replacement of property and equipment each year.

Inventories:

Inventories are stated at cost which is determined using the first-in,
first-out (FIFO) method of accounting. Upon the acquisition of the Hotels by the
Partnership, china, glass, silver and linen were no longer inventoried but
included in furniture, fixtures and equipment as discussed below.

Property and Equipment:

Property and equipment are recorded at cost which includes the allocated
purchase price for the acquisition described in Note 4 or the lower of cost or
fair value at the date of acquisition for the Predecessor Entity. Property and
equipment are depreciated primarily on the straight-line method over their
estimated useful lives (buildings and improvements over 28 to 35 years and
furniture, fixtures and equipment over 5 to 7 years). Expenditures for
maintenance and repairs are expensed as incurred. The cost and related
accumulated depreciation applicable to property no longer in service are
eliminated from the accounts and any gain or loss thereon is included in
operations. Upon the formation of the Partnership, the Hotels' allocation of the
purchase price of china, glassware, silverware and linens were capitalized as
furniture, fixtures and equipment

F-53
<PAGE> 134

NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
and are being amortized on a straight-line basis over a five year life. Costs
for replacement of these items are charged to operations in the period the items
are placed in service.

Deferred Expenses:

Deferred expenses at December 31,1995 consist of deferred financing costs
and franchise fees related to the formation of the Partnership on December 15,
1995. The deferred financing costs and franchise fees are being amortized on the
straight-line basis over periods ranging from 5 to 12 years.

Due to CIGNA:

Prior to December 15, 1995, the Hotels participated in a centralized cash
management system with CIGNA. Cash advanced to the Hotels under this system is
presented as a current liability due to CIGNA in the accompanying combined
balance sheets.

Concentrations of Credit Risk:

The Partnership maintains cash and cash equivalents accounts with various
financial institutions in excess of the amount insured by the Federal Deposit
Insurance Corporation. The Partnership has not experienced any losses in such
accounts.

Financial Instruments:

Derivative financial instruments are used by the Partnership in the
management of its interest rate exposures and are accounted for on the accrual
basis. Cost of interest rate swap agreements are amortized over the life of the
contract.

Use of Estimates:

Revenue Recognition:

The Hotels recognize revenue from their rooms, catering, gift shop and
restaurant facilities as earned on the close of each business day.

Income Tax Status:

Partnerships are not subject to state and federal income taxes.
Accordingly, net income or loss and any available tax credits are allocated to
the individual partners in proportion to their income and loss rates of
participation. Should loss allocations cause the adjusted capital account of the
limited partners to be reduced to zero, any additional losses are allocated
instead to the general partners. As discussed in Note 1, for the period prior to
December 15, CIGNA was a taxable entity and an income tax expense was provided
based on applicable statutory rates.

Unaudited Financial Statements:

The unaudited combined statements of operations and equity and partners'
capital and cash flows for the nine-month period ended September 30, 1995 and
the period from January 1, 1996 to June 24, 1996, in the

F-54
<PAGE> 135

NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
opinion of management, have been prepared on the same basis as the audited
combined financial statements and include all significant adjustments
(consisting primarily of normal recurring adjustments) considered necessary for
a fair presentation of the results of these interim periods. The data disclosed
in these notes to the combined financial statements for these periods are also
unaudited. Operating results for the period from January 1, 1996 to June 24,
1996 are not necessarily indicative of the results for the entire year.

4. ACQUISITION OF PROPERTY:

Effective December 15, 1995, the Partnership acquired the Hotels and
substantially all of the associated assets and liabilities. The purchase price
of $172,000,000, which was financed through the issuance of $120,000,000 in
long-term debt and contributed cash, was allocated to assets and liabilities of
each hotel based on their estimated fair values, as determined by certain fair
market valuations. In addition, an acquisition fee of $500,000 was paid to an
affiliate of the managing general partner.

5. FRANCHISE, MANAGEMENT AGREEMENTS AND RELATED PARTY TRANSACTIONS:

The Hotel franchise agreements are as follows:

<TABLE>
<CAPTION>
HOTEL FRANCHISEE FRANCHISER
- --------------------- -------------------------------------- ------------------------------
<S> <C> <C>
Valley Forge Interstone/CGL Partners, L.P. Marriott International, Inc.
Schaumburg Interstone/CGL Partners, L.P. Promus Hotels, Inc.
Ft. Lauderdale Connecticut General Life Insurance Co. Hilton Inns, Inc.
and Interstone/CGL Partners, L.P.
Andover Interstate Hotels Corporation Marriott International, Inc.
Warner Interstate Hotels Corporation Marriott International, Inc.
</TABLE>

The terms of the agreements range from 30 days to 20 years. The agreements,
except for Tysons, require ongoing fees ranging from 2% to 5% of room revenue.
Such fees comprise royalty expense in the combined statements of operations. In
addition, other fees paid to the various franchisers include national
reservation system fees, national advertising campaign fees, honored guest
awards, and other promotional program fees.

Management agreements with Interstate Hotels Corporation (IHC) provide for
a management fee of 2.8% of gross revenues, 1.4% of which is subordinated to
debt service. The terms of the agreements extend through December 31, 2044. The
agreements can be terminated earlier by either party upon the occurrence of
certain conditions as specified in the agreement. The management agreement for
Tysons with Marriott International, Inc. provides for a management fee of 3% of
gross revenues in lieu of any franchise fees. The term of the agreement expired
March 12, 1996 and has been extended on a month to month basis by mutual consent
of the parties on the then current terms of the management agreement. With the
exception of Warner, each Hotel was managed by a management company other than
IHC for the period prior to December 15, 1995. Management fee expense for Warner
amounted to approximately $812,000 for the year ended December 31, 1994 and
$830,000 for the period from January 1,1995 to December 14, 1995.

The Partnership also has an asset management agreement with an affiliate of
CIGNA which provides for fees of $500,000 per year. Additionally, the asset
management agreement provides for a termination fee payable to CIGNA in the
amount of $2,500,000, less aggregate management asset fees paid, in the event
that CIGNA no longer holds an interest in the Partnership.

An affiliate of IHC provides reinsurance to major insurance carriers solely
in connection with the insurance coverages that those carriers provide to the
Hotels. IHC also provides certain accounting and bookkeeping assistance to the
Partnership, of which no amounts were paid by the Partnership for these services
in 1995.

F-55
<PAGE> 136

NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED

5. FRANCHISE, MANAGEMENT AGREEMENTS AND RELATED PARTY TRANSACTIONS--CONTINUED
Rent expense approximating $627,000 and $500,000 for the periods ending
December 31, 1994 and December 14, 1995, respectively, was paid to affiliates of
the Predecessor Entity for Warner land rent. The land was acquired by the
Partnership on December 15, 1995.

6. INVENTORIES:

The components of inventories were as follows:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 14, DECEMBER 31,
1994 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
China, glass, silver and linen................ $1,109,711 $ 791,217 $ --
Food.......................................... 156,148 142,865 113,782
Beverage...................................... 158,454 138,395 163,012
Gift shop and other........................... 101,441 295,338 73,435
---------- ---------- --------
$1,525,754 $1,367,815 $350,229
========== ========== ========
</TABLE>

7. PROPERTY AND EQUIPMENT:

Property and equipment consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 14, DECEMBER 31,
1994 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
Land......................................... $ 19,546,363 $ 19,570,133 $ 19,489,864
Buildings and improvements................... 100,123,030 100,148,647 125,222,411
Furniture, fixtures and equipment............ 33,453,013 35,994,325 21,671,427
------------ ------------ ------------
153,122,406 155,713,105 166,383,702
Less accumulated depreciation................ 25,282,733 32,371,485 342,051
------------ ------------ ------------
$127,839,673 $123,341,620 $166,041,651
============ ============ ============
</TABLE>

8. DEFERRED EXPENSES:

The components of deferred expenses were as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Deferred financing costs................................................ $2,825,000
Franchise fees.......................................................... 127,475
----------
2,952,475
Less accumulated amortization........................................... 24,129
----------
$2,928,346
==========
</TABLE>

9. OTHER LIABILITIES:

Pursuant to an agreement dated December 15, 1995 between the Partnership
and Marriott Hotel Services, Inc. and in connection with the Sale Agreement
discussed in Note 1, the Partnership assumed a liability payable to Marriott
Hotel Services, Inc. upon the termination of certain franchise agreements. The
agreement stipulates a payment varying between $1,212,968 and $2,425,936
depending upon when termination of the franchise agreements occurs. It is the
intent of management to maintain the franchise agreements for the full term. As
such, management accrued $1,212,968 as of December 31, 1995, which represents
the minimum liability under the agreement.

F-56
<PAGE> 137

NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED

10. LONG-TERM DEBT:

Effective December 15, 1995, the Partnership entered into a loan agreement
(the Agreement). The Agreement consisted of two notes payable in the aggregate
principal amount of $120,000,000 made pursuant to a loan (the MultiState Loan)
and a California loan (the California Loan). The MultiState Loan's and the
California Loan's portions of the total were $100,000,000 and $20,000,000,
respectively.

The notes are payable in quarterly principal payments of $750,000 with
monthly interest at LIBOR plus 2.75%. The interest rate in effect at December
31, 1995 was 8.63%. In addition, the Agreement provides for supplemental
amortization payments beginning in January 1997 based on cash flow, as defined
by the Agreement. All remaining unpaid interest and principal will be due
December 14, 2000. The Partnership entered into an interest rate swap that
provides for a fixed interest rate of 8.55% on principal of $72,000,000
effective January 31, 1996 and expiring December 15, 2000.

The Agreement provides that no distributions, dividends or repayments are
permitted during the first loan year. Thereafter, distributions, dividends or
repayments to partners will be made based on cash flow as defined in the
Agreement. The monthly asset management fee payment to CIGNA, pursuant to a
separate agreement (Note 5), is also subject to cash flow. The notes payable
contain certain other restrictive covenants including limitations on the
assumption of additional indebtedness, changes in the partnership agreement and
changes in the franchiser and the managing agent of the Hotel (IHC). The notes
are collateralized by the management agreements.

The Agreement also provides for joint and several liability to the borrower
for the full amount of the outstanding loan. The California Loan is
collateralized by substantially all of the assets of Warner and the MultiState
Loan is collateralized by all of the assets of the other Hotels. The Agreement
also provides for the release of a hotel from the collateral requirements upon
the payment of a release price, as defined in the loan agreement, to be applied
to the total outstanding principal balance under the Agreement for all Hotels.
Additionally, the monthly principal payments are increased upon the collateral
release of each Hotel.

Based on interest rates currently available, management believes that the
carrying amount of the notes payable and the interest rate swap are a reasonable
estimation of fair value.

Aggregate scheduled maturities of the notes for each of the five years
ending December 31, are as follows:

F-57
<PAGE> 138

NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED

11. DEPARTMENTAL INCOME:

Combined departmental income was as follows:

<TABLE>
<CAPTION>
DECEMBER 15 NINE MONTHS
YEAR ENDED DECEMBER 31, JANUARY 1 TO (INCEPTION) TO ENDED JANUARY 1
------------------------- DECEMBER 14, DECEMBER 31, SEPTEMBER 30, TO JUNE 24
1993 1994 1995 1995 1995 1996
----------- ----------- ------------ -------------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Rooms............... $22,022,998 $33,954,095 $ 36,056,686 $ 778,989 $27,067,731 $19,748,635
Food and beverage... 3,420,603 5,703,848 6,205,118 279,568 4,434,067 3,365,260
Telephone........... 733,229 972,971 1,413,475 2,482 1,017,610 814,793
Gift shop........... 46,351 54,248 68,799 4,275 9,724 10,845
Other............... (84,100) 224,504 359,733 33,047 320,253 281,589
----------- ----------- ----------- ---------- ----------- -----------
$26,139,081 $40,909,666 $ 44,103,811 $1,098,361 $32,849,385 $24,221,122
=========== =========== =========== ========== =========== ===========
</TABLE>

12. EMPLOYEE BENEFITS:

Effective December 15, 1995, the Hotels participate in the following
employee benefit plans which are sponsored by IHC:

The Interstate Hotels Corporation Employee Health and Welfare Plan (and
related Health Trust) provides employees of IHC with group health insurance
benefits. The group policies provide for a "minimum premium plan" whereby IHC is
self-insured for certain benefits, subject to certain individual claim and
aggregate maximum liability limits. The Hotels pay, directly to IHC, the
employer portion of the premiums, which is based on the estimated conventional
premium. Premiums may be prospectively adjusted to consider actual claims
experience. The Hotels incurred expenses of approximately $4,300 for the period
from December 15, 1995 to December 31, 1995 related to the plan. The Health
Trust is exempt from federal income tax under Section 501(c)(9) of the Internal
Revenue Code as a voluntary employees' beneficiary association.

IHC maintains a defined contribution savings plan for all employees.
Eligibility for participation in the plan is based on the employee's attainment
of 21 years of age and on the completion of one year of service with IHC.
Employer contributions are based on a percentage of employee contributions.
Participants may make voluntary contributions to the plan of up to 6% of their
compensation, as defined. The Hotels incurred expenses of approximately $2,400
for the period from December 15, 1995 to December 31, 1995 related to the plan.

Additionally, IHC sponsors certain other employee benefit plans, which
change from time to time, but generally provide for incentive bonuses and
deferred compensation to certain key employees of the Hotels. These compensation
awards are dependent on the Hotel's performance and other established criteria.
The Hotels incurred expenses amounting to approximately $10,000 for the period
from December 15, 1995 to December 31, 1995 related to these plans.

13. COMMITMENTS AND CONTINGENCIES:

Earthquake Insurance:

Warner participates in a pooled earthquake insurance program that includes
all Company-managed properties in California. The program provides a total
aggregate coverage of $35,000,000 with each hotel paying a deductible equal to
5% of its then current fair market value.

F-58
<PAGE> 139

NOTES TO COMBINED FINANCIAL STATEMENTS--CONTINUED

13. COMMITMENTS AND CONTINGENCIES--CONTINUED
The Partnership's investment in the property and equipment of Warner as of
December 31, 1995 was as follows:

<TABLE>
<S> <C>
Land........................................................ $ 6,250,000
Building and improvements................................... 43,613,883
Furniture, fixtures and equipment........................... 6,707,068
-----------
$56,570,951
===========
</TABLE>

In the ordinary course of business, various lawsuits, claims or proceedings
have been or may be instituted or asserted against the Partnership. Based on
currently available facts, management believes that the disposition of matters
that are pending or asserted will not have a material adverse effect on the
financial position, results of operation or liquidity of the Partnership.

14. SUPPLEMENTAL CASH FLOW INFORMATION:

Non-cash investing and financing for foreclosed or contributed properties
activities consisted of the following:

<TABLE>
<S> <C>
1993:
Land...................................................... $ 4,548,000
Building.................................................. 14,357,084
Furniture, fixtures and equipment......................... 2,891,000
-----------
$21,796,084
===========
1994:
Building.................................................. $34,359,250
Furniture, fixtures and equipment......................... 7,248,950
Accounts receivable....................................... 1,791,127
Inventory................................................. 721,052
Prepaid expenses.......................................... 337,778
Liabilities............................................... (40,935)
-----------
$44,417,222
===========
DECEMBER 15 TO DECEMBER 31, 1995:
CIGNA 25% capital contribution of the Hotels.............. $ 3,716,932
Acquisition costs incurred by CIGNA....................... 613,281
Deferred expenses......................................... 195,000
-----------
$ 4,525,213
===========
</TABLE>

On June 25, 1996, all other non-cash assets, liabilities and equity were
transferred to IHC.

15. NEW ACCOUNTING PRONOUNCEMENT:

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of." The new standard is
effective for the first quarter of 1996. Management believes that the
implementation of the standard will not have a material effect on these combined
financial statements.

F-59
<PAGE> 140

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
Interstate Hotels Corporation:

We have audited the accompanying balance sheets of Boston Marriott
Westborough Hotel (the Hotel) as of December 31, 1994 and 1995, and the related
statements of operations and equity and cash flows for the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Hotel's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

As discussed in Note 1, the financial statements of the Hotel have been
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in a Registration Statement of
Interstate Hotels Company and are not intended to be a complete presentation of
the Hotel.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Boston Marriott Westborough
Hotel as of December 31, 1994 and 1995, and its operations and cash flows for
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.

/s/COOPERS & LYBRAND L.L.P.

Pittsburgh, Pennsylvania
May 2, 1996, except for paragraph 3 of Note 1,
as to which the date is July 1, 1996

F-60
<PAGE> 141

BOSTON MARRIOTT WESTBOROUGH HOTEL

BALANCE SHEETS
---------

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 110,616 $ 1,049,549
Accounts receivable............................................ 962,699 870,685
Inventories (Note 4)........................................... 259,882 275,039
Prepaid expenses and other..................................... 138,677 129,074
----------- -----------
Total current assets................................. 1,471,874 2,324,347
Property and equipment, net (Note 5)................................ 12,024,769 11,438,422
----------- -----------
Total assets................................................... $13,496,643 $13,762,769
=========== ===========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable............................................... 269,670 134,779
Accrued liabilities:
Salaries and benefits........................................ 248,415 294,890
Compensated absences......................................... 187,175 179,552
Royalties and fees (Note 3).................................. 31,764 56,253
Management fees (Note 3)..................................... 98,442 89,592
Other........................................................ 228,792 195,930
Customer deposits.............................................. 25,548 19,788
----------- -----------
Total liabilities.................................... 1,089,806 970,784
Commitments and contingencies (Notes 8 and 9).......................
Equity.............................................................. 12,406,837 12,791,985
----------- -----------
Total liabilities and equity......................... $13,496,643 $13,762,769
=========== ===========
</TABLE>

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

F-61
<PAGE> 142

BOSTON MARRIOTT WESTBOROUGH HOTEL

STATEMENTS OF OPERATIONS AND EQUITY
---------

<TABLE>
<CAPTION>
NINE MONTHS JANUARY 1
YEAR ENDED DECEMBER 31, ENDED TO
--------------------------------------- SEPTEMBER 30, JULY 1,
1993 1994 1995 1995 1996
----------- ----------- ----------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Rooms........................ $ 5,011,439 $ 5,501,954 $ 5,997,813 $ 4,430,714 $ 3,168,223
Food and beverage............ 3,683,959 4,016,093 4,218,510 2,928,133 2,196,953
Telephone.................... 322,211 318,707 358,571 269,223 191,352
Gift shop.................... 91,115 92,761 91,381 68,845 13,328
Other........................ 104,851 120,947 144,350 97,837 106,336
----------- ----------- ----------- ----------- ------------
9,213,575 10,050,462 10,810,625 7,794,752 5,676,192
Departmental costs and expenses
(Note 3)..................... 4,087,048 4,419,216 4,680,309 3,372,228 2,373,735
----------- ----------- ----------- ----------- ------------
Departmental income
(Note 7)........... 5,126,527 5,631,246 6,130,316 4,422,524 3,302,457
Other expenses (Note 3):
Administration and general... 1,020,695 996,806 1,082,227 792,120 652,684
Management fee............... 414,355 479,286 528,631 364,444 270,047
Royalties.................... 394,229 434,731 464,945 339,752 240,776
Advertising and sales........ 625,127 599,276 640,302 470,989 312,289
Repairs and maintenance...... 344,957 418,660 474,837 350,552 280,559
Heat, power and light........ 323,592 343,711 385,730 296,246 210,402
Insurance and taxes.......... 230,773 275,270 258,503 194,663 139,794
Depreciation................. 775,388 808,323 830,760 623,070 415,380
----------- ----------- ----------- ----------- ------------
4,129,116 4,356,063 4,665,935 3,431,836 2,521,931
----------- ----------- ----------- ----------- ------------
Income before income
tax expense........ 997,411 1,275,183 1,464,381 990,688 780,526
Income tax expense............. 399,000 510,000 586,000 396,000 312,000
----------- ----------- ----------- ----------- ------------
Net income........... 598,411 765,183 878,381 594,688 468,526
Equity:
Beginning of period.......... 13,810,649 12,271,929 12,406,837 12,406,837 12,791,985
Decrease in equity........... (2,137,131) (630,275) (493,233) (674,025) (13,260,511)
----------- ----------- ----------- ----------- ------------
End of period................ $12,271,929 $12,406,837 $12,791,985 $12,327,500 $ --
=========== =========== =========== =========== ============
</TABLE>

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

F-62
<PAGE> 143

BOSTON MARRIOTT WESTBOROUGH HOTEL

STATEMENTS OF CASH FLOWS

---------

<TABLE>
<CAPTION>
NINE MONTHS JANUARY 1
YEAR ENDED DECEMBER 31, ENDED TO
------------------------------------ SEPTEMBER 30, JULY 1,
1993 1994 1995 1995 1996
----------- --------- ---------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income...................... $ 598,411 $ 765,183 $ 878,381 $ 594,688 $ 468,526
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation................. 775,388 808,323 830,760 623,070 415,380
Changes in assets and
liabilities:
Accounts receivable.......... (116,944) (94,839) 92,014 393,838 279,832
Inventories.................. 9,350 11,685 (15,157) 13,184 23,397
Prepaid expenses and other... (10,559) (47,842) 9,603 (12,783) 25,721
Accounts payable............. 68,179 70,941 (134,891) (91,309) (126,331)
Accrued liabilities.......... 150,564 206,429 21,629 (194,611) 2,043
Customer deposits............ 838,769 (852,557) (5,760) 5,118 (374)
----------- --------- ---------- ---------- -----------
Net cash provided by
operating activities....... 2,313,158 867,323 1,676,579 1,331,195 1,088,194
----------- --------- ---------- ---------- -----------
Cash flows from investing
activities:
Purchase of property and
equipment.................... (148,734) (451,052) (244,413) (218,441) (147,676)
----------- --------- ---------- ---------- -----------
Net cash used in investing
activities................. (148,734) (451,052) (244,413) (218,441) (147,676)
Cash flows from financing
activities:
Net (distributions)
contributions from owners.... (2,137,131) (630,275) (493,233) (674,025) (1,990,067)
----------- --------- ---------- ---------- -----------
Net cash (used in) provided
by financing activities.... (2,137,131) (630,275) (493,233) (674,025) (1,990,067)
Net increase (decrease) in cash
and cash equivalents............ 27,293 (214,004) 938,933 438,729 (1,049,549)
Cash and cash equivalents at
beginning of period............. 297,327 324,620 110,616 110,616 1,049,549
----------- --------- ---------- ---------- -----------
Cash and cash equivalents at end
of period....................... $ 324,620 $ 110,616 $1,049,549 $ 549,345 $ --
=========== ========= ========== ========== ===========
</TABLE>

The accompanying notes are an integral part of the financial statements

F-63
<PAGE> 144

BOSTON MARRIOTT WESTBOROUGH HOTEL

NOTES TO FINANCIAL STATEMENTS
---------

1. BASIS OF PRESENTATION:

The Boston Marriott Westborough Hotel (Hotel) is a full service property
operated under a management agreement (Agreement) with Interstate Hotels
Corporation (IHC) and the owner of the Hotel, State Mutual Life Insurance
Company of America (SMLIC). The initial term of the Agreement ends on December
31, 2001 and can be extended, by mutual consent of the parties, on the then
current terms of the Agreement for annual periods. SMLIC obtained the Hotel on
January 2, 1991 through a deed-in-lieu of foreclosure and recorded the assets
acquired at the lower of cost or fair value based on certain fair market
valuations.

IHC does not have access to certain books and records of SMLIC, and
therefore, the financial statements include only those transactions recorded in
the books and records of the Hotel except that income tax expense has been
provided for in the statement of operations based on applicable statutory rates.
Transactions recorded by SMLIC that relate to the Hotel, principally interest on
intercompany borrowings, are excluded from these financial statements since they
are not recorded on the Hotel's records.

IHC Member Corporation (an affiliate of IHC) purchased the Hotel from SMLIC
on July 1, 1996 . As a result, these financial statements include the unaudited
results of operations for the Hotel through July 1, 1996.

These financial statements have been prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission for
inclusion in a Registration Statement of Interstate Hotels Company and are not
intended to be a complete presentation of the Hotel's operations.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Cash and Cash Equivalents:

The Hotel considers all unrestricted, highly liquid investments purchased
with a remaining maturity of three months or less to be cash equivalents.

Inventories:

Inventories are stated at cost which is determined using the first-in,
first-out (FIFO) method of accounting.

Property and Equipment:

Property and equipment are recorded at cost (or the allocated lower of cost
or fair value at the date of foreclosure as described in Note 1). Property and
equipment are depreciated primarily on the straight-line method over their
useful lives (building and improvements over 25 years and furniture, fixtures
and equipment over 7 years). Expenditures for maintenance and repairs are
expensed as incurred. The cost and the related accumulated depreciation
applicable to property no longer in service or fully depreciated are eliminated
from the accounts, and any gain or loss thereon is included in operations.

Concentration of Credit Risk:

The Hotel maintains cash and cash equivalents with two financial
institutions in excess of the amount insured by the Federal Deposit Insurance
Corporation. The Hotel has not experienced any losses in such amounts.

F-64
<PAGE> 145

NOTES TO FINANCIAL STATEMENTS--CONTINUED
---------

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED

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 the
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.

Revenue Recognition:

The Hotel recognizes revenue from its rooms, gift shop, catering and
restaurant facilities as earned on the close of each business day.

Unaudited Financial Statements:

The unaudited balance sheet as of September 30, 1996 and the unaudited
statements of operations and equity and cash flows for the nine-month period
ended September 30, 1995 and for the period from January 1, 1996 through July 1,
1996, in the opinion of management, have been prepared on the same basis as the
audited financial statements and include all significant adjustments (consisting
primarily of normal recurring adjustments) considered necessary for a fair
presentation of the results of these interim periods. The data disclosed in
these notes to the financial statements for these periods are also unaudited.
Operating results for the period ended period from January 1, 1996 through July
1, 1996 is not necessarily indicative of the results for the entire year.

3. RELATED PARTY TRANSACTIONS:

The Hotel is operated as a Marriott Hotel pursuant to a franchise agreement
(Agreement) dated July 13, 1991 between Interstate Hotels Corporation as
franchisee, and Marriott Corporation, as franchiser. The initial term of the
Agreement extends through July 12, 2001 and can be extended, by the mutual
consent of the parties and on the then current terms of Marriott International
franchise agreements, for five successive five-year terms. The Agreement
requires ongoing fees, which comprise royalty expense in the statements of
operations and equity amounting to 6% of room revenues and 3% of certain food
and beverage revenues. In addition, other fees paid to Marriott Corporation
include a national advertising campaign fee of .8% of room revenues, as well as
fees for a national reservation system, networking, honored guest awards and
other promotional programs. These other fees amounted to approximately $433,000
in 1993, $475,000 in 1994 and $513,000 in 1995.

The management agreement referred to in Note 1 provides for a base
management fee of 3.5% of gross revenues and an incentive fee equal to 20% of
cash available for distribution, as defined, in the management agreement. The
management fees earned by IHC were approximately $323,000 in 1993, $352,000 in
1994 and $378,000 in 1995. The incentive fees earned by IHC approximated $92,000
in 1993, $128,000 in 1994 and $150,000 in 1995.

An affiliate of IHC provides reinsurance to major insurance carriers for
certain insurance coverages that the carriers provide to the Hotel. IHC also
provides certain accounting and bookkeeping assistance to the Hotel, of which no
amounts were paid by the Hotel for these services.

F-65
<PAGE> 146

NOTES TO FINANCIAL STATEMENTS--CONTINUED
---------

4. INVENTORIES:

The components of inventories were as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
China, glass, silver and linen................................... $175,233 $196,611
Food............................................................. 34,363 32,394
Beverage......................................................... 40,668 37,300
Gift shop and other.............................................. 9,618 8,734
-------- --------
$259,882 $275,039
======== ========
</TABLE>

5. PROPERTY AND EQUIPMENT:

Property and equipment consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
----------- -----------
<S> <C> <C>
Land........................................................ $ 1,020,646 $ 1,050,646
Building and improvements................................... 11,465,695 11,457,392
Furniture, fixtures and equipment........................... 2,354,638 2,577,354
----------- -----------
14,840,979 15,085,392
Less accumulated depreciation............................... 2,816,210 3,646,970
----------- -----------
$12,024,769 $11,438,422
=========== ===========
</TABLE>

6. DEPARTMENTAL INCOME:

Departmental income was as follows:

<TABLE>
<CAPTION>
NINE MONTHS JANUARY 1
YEAR ENDED DECEMBER 31, ENDED TO
------------------------------------ SEPTEMBER 30, JULY 1,
1993 1994 1995 1995 1996
---------- ---------- ---------- ------------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Rooms....................... $3,858,285 $4,232,332 $4,686,660 $3,453,042 $2,436,269
Food and beverage........... 1,069,955 1,200,047 1,185,742 785,306 678,771
Telephone................... 190,143 198,935 237,011 176,936 131,906
Gift shop................... (9,223) (15,979) (13,168) (8,994) (3,356)
Other....................... 17,367 15,911 34,071 16,234 58,867
---------- ---------- ---------- ---------- ----------
$5,126,527 $5,631,246 $6,130,316 $4,422,524 $3,302,457
========== ========== ========== ========== ==========
</TABLE>

7. EMPLOYEE BENEFITS:

The Hotel participates in the following employee benefit plans which are
sponsored by IHC:

The Interstate Hotels Corporation Employee Health and Welfare Plan
(and related Trust) provides employees of IHC with group health insurance
benefits. The group policies provide for a "minimum premium plan" whereby
IHC is self-insured for certain benefits, subject to certain individual
claim and aggregate maximum liability limits. The Hotel pays, directly to
IHC, the employer portion of the premium, which is based on the estimated
conventional premium. Premiums may be prospectively adjusted to consider
actual claims experience. The Hotel incurred expenses of approximately
$147,000,

F-66
<PAGE> 147

NOTES TO FINANCIAL STATEMENTS--CONTINUED
---------

7. EMPLOYEE BENEFITS--CONTINUED
$188,000 and $154,000 for the years ended December 31, 1993, 1994 and 1995,
respectively. The Trust is exempt from federal income tax under Section
501(c)(9) of the Internal Revenue Code as a voluntary employees'
beneficiary association.

IHC maintains a defined contribution savings plan for all employees.
Eligibility for participation in the plan is based on the employee's
attainment of 21 years of age and on the completion of one year of service
with IHC. Employer contributions are based on a percentage of employee
contributions. Participants may make voluntary contributions to the plan of
up to 6% of their compensation, as defined. The Hotel incurred expenses of
approximately $32,000 in 1993, $40,000 in 1994 and $44,000 in 1995 related
to the plan.

Additionally, IHC sponsors certain other employee benefit plans, which
change from time to time, but generally provide for incentive bonuses and
deferred compensation to certain key employees of the Hotel. These
compensation awards are dependent on the Hotel's performance and other
established criteria. The Hotel incurred expenses amounting to
approximately $159,000 in 1993, $100,000 in 1994 and $109,000 in 1995
related to these plans.

8. OPERATING LEASES:

The Hotel accounts for various equipment leases as operating leases. Total
rental expense amounted to approximately $136,000 in 1993, $121,000 in 1994 and
$129,000 in 1995. The following is a schedule of future minimum lease payments
under these leases:

9. COMMITMENT AND CONTINGENCIES:

Pursuant to the management agreement referred to in Note 1, SMLIC is
required to deposit in the Hotel's account additional funds necessary to
maintain operating funds on hand of $300,000.

In the ordinary course of business, various lawsuits, claims or proceedings
have been or may be instituted or asserted against the Hotel. Based on currently
available facts, management believes that the disposition of matters that are
pending or asserted will not have a material adverse effect on the financial
position, results of operation or liquidity of the Hotel.

10. SIGNIFICANT CUSTOMERS:

The Hotel's largest customer represented approximately 13%, 16% and 18% of
revenues for the years ended December 31, 1993, 1994 and 1995 and 15% for the
nine-month period ended September 30, 1995 and 17% for the period from January
1, 1996 through July 1, 1996, respectively.

11. NEW ACCOUNTING PRONOUNCEMENT:

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of." The new standard is
effective for the first quarter of 1996. Management believes that the
implementation of the standard will not have a material effect on these
financial statements.

F-67
<PAGE> 148

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors

Interstate Hotels Company:

We have audited the accompanying combined balance sheet of Carter
Associates and Carter Associates, Inc. (collectively, Carter) as of December 31,
1995 and the related combined statements of operations and partners' deficit and
cash flows for the year then ended. These financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audit.

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

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Carter as
of December 31, 1995, and the combined results of their operations and cash
flows for the year then ended, in conformity with generally accepted accounting
principles.

/s/ COOPERS & LYBRAND L.L.P.

Pittsburgh, Pennsylvania

November 20, 1996

F-68
<PAGE> 149

CARTER ASSOCIATES AND CARTER ASSOCIATES, INC.

COMBINED BALANCE SHEET

DECEMBER 31, 1995

---------

ASSETS

<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents.................................................... $ 12,280
Restricted cash (Note 2)
Property and equipment.................................................... 21,425
Escrow.................................................................... 174,309
Accounts receivable.......................................................... 332,823
Inventories (Note 4)......................................................... 185,421
Prepaid expenses and other................................................... 34,194
-----------
Total current assets...................................................... 760,452
Deferred expenses, net of amortization of $128,032............................. 325,515
Property and equipment, net (Note 5)........................................... 18,051,277
-----------
Total assets.............................................................. $19,137,244
===========
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Bank overdraft............................................................... 57,786
Accounts payable............................................................. 303,770
Accrued liabilities:
Salaries and benefits..................................................... 94,692
Compensated absences...................................................... 187,635
Royalties and fees (Note 3)............................................... 127,396
Other..................................................................... 133,109
Customer deposits............................................................ 20,695
Current portion of long-term debt (Note 7)................................... 647,361
-----------
Total current liabilities................................................. 1,572,444
Long-term debt (Note 7)........................................................ 22,954,674
-----------
Total liabilities......................................................... 24,527,118
Commitments and contingencies (Notes 9 and 10)................................. --
Partners' deficit.............................................................. (5,389,874)
-----------
Total liabilities and partners' deficit................................... $19,137,244
===========
</TABLE>

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

F-69
<PAGE> 150

CARTER ASSOCIATES AND CARTER ASSOCIATES, INC.

COMBINED STATEMENTS OF OPERATIONS AND PARTNERS' DEFICIT

---------

<TABLE>
<CAPTION>
NINE MONTHS SEVEN MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, JULY 31,
1995 1995 1996
------------ ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Rooms............................................ $ 6,553,232 $ 5,042,582 $ 3,870,206
Food and beverage................................ 3,511,795 2,538,224 1,935,390
Telephone........................................ 170,015 123,853 101,326
Gift shop........................................ 164,610 121,579 97,214
Other............................................ 125,652 97,510 74,984
------------ ----------- ------------
10,525,304 7,923,748 6,079,120
Departmental costs and expenses (Note 3)........... 4,712,794 3,486,279 2,706,292
------------ ----------- ------------
Departmental income (Note 7).................. 5,812,510 4,437,469 3,372,828
Other expenses (Note 3):
Administration and general....................... 978,946 737,499 534,583
Management fee................................... 65,132 46,591 39,894
Royalties........................................ 344,329 262,588 204,648
Advertising and sales............................ 763,831 570,159 424,444
Repairs and maintenance.......................... 491,921 402,341 311,468
Heat, power and light............................ 385,372 291,207 242,439
Insurance and taxes.............................. 423,691 317,572 242,069
Depreciation and amortization.................... 617,203 461,930 433,954
Other............................................ 27,911 28,288 10,989
------------ ----------- ------------
4,098,336 3,118,175 2,444,488
------------ ----------- ------------
1,714,174 1,319,294 928,340
Interest expense................................... 2,096,786 1,538,685 1,177,476
------------ ----------- ------------
Net loss...................................... (382,612) (219,391) (249,136)
Partners' deficit:
Beginning of period.............................. (5,449,007) (5,449,007) (5,389,874)
Contributions.................................... 489,795 489,795 --
Distributions.................................... (48,050) (15,000) --
------------ ----------- ------------
End of period.................................... $ (5,389,874) $(5,193,603) $ (5,639,010)
============ =========== ============
</TABLE>

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

F-70
<PAGE> 151

CARTER ASSOCIATES AND CARTER ASSOCIATES, INC.

COMBINED STATEMENTS OF CASH FLOWS

---------

<TABLE>
<CAPTION>
NINE MONTHS SEVEN MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, JULY 31,
1995 1995 1996
------------- -------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Net loss............................................ $ (382,612) $ (219,391) $ (249,136)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization.................. 617,203 461,930 433,954
Changes in assets and liabilities:
Accounts receivable............................ 60,933 25,260 60,493
Due from partners.............................. -- (62,423) (118,373)
Inventories.................................... 7,044 7,488 9,348
Prepaid expenses and other..................... (27,966) (109,640) (18)
Accounts payable............................... 39,837 13,310 (38,618)
Accrued liabilities............................ 109,746 781,432 550,569
Customer deposits.............................. (1,305) 559 1,771
----------- ------------ ----------
Net cash provided by operating activities.... 422,880 898,525 649,990
----------- ------------ ----------
Cash flows from investing activities:
Funds restricted for property and equipment....... (9,808) -- (1,536)
Purchase of property and equipment................ (170,638) (81,905) (62,570)
----------- ------------ ----------
Net cash used in investing activities........ (180,446) (81,905) (64,106)
----------- ------------ ----------
Cash flows from financing activities:
Bank overdraft.................................... (87,838) (75,774) 26,138
Proceeds from issuance of debt.................... 335,979 251,984 195,988
Repayment of long-term debt....................... (889,689) (1,492,631) (806,120)
Decrease in escrow reserve........................ 6,531 72,848 19,076
Cash paid for financing fees...................... (48,100) (48,100) (21,666)
Capital contributions............................. 489,795 489,795 --
Capital distributions............................. (48,050) (15,000) --
----------- ------------ ----------
Net cash used in financing activities........ (241,372) (816,878) (586,584)
----------- ------------ ----------
Net increase (decrease) in cash and cash
equivalents....................................... 1,062 (258) (700)
Cash and cash equivalents at beginning of period.... 11,218 11,218 12,280
----------- ------------ ----------
Cash and cash equivalents at end of period.......... $ 12,280 $ 10,960 $ 11,580
=========== ============ ==========
Supplemental disclosure of cash flow information:
Cash paid for interest............................ $ 2,097,133 $ 1,538,685 $1,177,476
=========== ============ ==========
</TABLE>

The accompanying notes are an integral part of the combined financial statements

F-71
<PAGE> 152

CARTER ASSOCIATES AND CARTER ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

---------

1. BASIS OF PRESENTATION:

Carter Associates (a limited partnership) owns the full service 300 room
hotel in Roanoke, Virginia (the Hotel). Carter Associates, Inc. (an S
Corporation) is employed as an independent contractor to supervise, direct and
control the management and operations of the Hotel pursuant to a management
agreement dated May 30, 1985 with Carter Associates. The initial term of the
agreement ends on December 31, 2001 and can be extended, by mutual consent of
the parties, on the then current terms of the agreement for annual periods. The
sole shareholder of Carter Associates, Inc. is T.A. Carter. T.A. Carter is also
a limited partner in Carter Associates. The accompanying combined financial
statements of Carter Associates and Carter Associates, Inc. (collectively,
Carter) have been presented on a combined basis due to common ownership and
management. All significant intercompany transactions have been eliminated.

The Hotel was acquired by Interstate Hotels Corporation, an affiliate of
Interstate Hotels Company, on August 1, 1996. Therefore, these financial
statements include the unaudited results of operations for Carter for the period
from January 1, 1996 through July 31, 1996.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Cash and Cash Equivalents:

The Hotel considers all unrestricted, highly liquid investments purchased
with a remaining maturity of three months or less to be cash equivalents.

Restricted Cash:

The franchise agreement with Marriott Corporation (Marriott) discussed in
Note 3 provides that cash from operations be restricted for the future
acquisition or for the replacement of property and equipment each year based on
a percentage of gross hotel revenues (3% in 1995).

Inventories:

Inventories are stated at cost which is determined using the first-in,
first-out (FIFO) method of accounting.

Income Tax Status:

Partnerships and S corporations are not subject to state and federal income
taxes. Accordingly, net income or loss and any available tax credits are
allocated to the individual partners in proportion to their income and loss
rates of participation.

Property and Equipment:

Property and equipment are recorded at cost . Property and equipment are
depreciated primarily on the straight-line method over their useful lives
(building and improvements over 40 years and furniture, fixtures and equipment
over 5 years). Expenditures for maintenance and repairs are expensed as
incurred. The cost and the related accumulated depreciation applicable to
property no longer in service or fully depreciated are eliminated from the
accounts, and any gain or loss thereon is included in operations.

Deferred Expenses:

Deferred expenses consist of loan costs and franchise fees which are being
amortized on the straight-line basis over a 10 year period.

F-72
<PAGE> 153

NOTES TO FINANCIAL STATEMENTS--CONTINUED

---------

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED

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 the
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.

Revenue Recognition:

The Hotel recognizes revenue from its rooms, gift shop, catering and
restaurant facilities as earned on the close of each business day.

Unaudited Financial Statements:

The unaudited combined statements of operations and partners' deficit and
cash flows for the nine-month period ended September 30, 1995 and the period
from January 1, 1996 to July 31, 1996, in the opinion of management, have been
prepared on the same basis as the audited combined financial statements and
include all significant adjustments (consisting primarily of normal recurring
adjustments) considered necessary for a fair presentation of the results of
these interim periods. The data disclosed in these notes to the combined
financial statements for these periods are also unaudited. Operating results for
the period from January 1, 1996 to July 31, 1996 are not necessarily indicative
of the results for the entire year.

3. RELATED PARTY TRANSACTIONS:

The Hotel is operated as a Marriott Hotel pursuant to a franchise agreement
(Agreement) dated September 20, 1983 between Carter Associates as franchisee,
and Marriott as franchiser. The initial term of the Agreement extends through
July 12, 2001 and can be extended, by the mutual consent of the parties, on the
then current terms of Marriott International franchise agreements, for five
successive five-year terms. The Agreement requires ongoing fees, which comprise
royalty expense in the combined statements of operations and partners' deficit,
amounting to 6% of room revenues and 3% of certain food and beverage and gift
shop revenues. In addition, other fees paid to Marriott include a national
advertising campaign fee of .8% of room revenues, as well as fees for a national
reservation system, networking, honored guest awards and other promotional
programs. These other fees amounted to approximately $52,200 in 1995.

Pursuant to an agreement dated December 16, 1993, Marriott agreed to allow
the Hotel to defer 1.5% of the current franchise fees on room sales and on food
and beverage sales (refer to Note 8). The deferred amounts are to be repaid over
a period of five years or less. Amounts paid to Marriott for deferred franchise
fees were approximately $135,600 in 1995. The full amount of deferred fees and
any interest thereon is immediately payable upon the sale of the Hotel.

The Hotel pays management fees to T.A. Carter, part-owner of the hotel. The
management agreement referred to in Note 1 provides for a base management fee of
$60,000 plus payroll taxes to be paid to T.A. Carter. The management fees paid
by the Hotel were approximately $65,100 in 1995. Additionally, the Hotel pays
Downtown East Realty Company (another entity owned by T.A. Carter), for
accounting services provided during the year. Amounts paid for such services
approximated $64,800 in 1995.

The Hotel obtained a loan from the NCH Corporation, which is also owned in
part by T.A. Carter (refer to Note 8). Amounts paid to the NCH Corporation
amounted to approximately $125,500 in 1995 for payments made on the loan.

F-73
<PAGE> 154

NOTES TO FINANCIAL STATEMENTS--CONTINUED
---------

4. INVENTORIES:

The components of inventories at December 31, 1995 are as follows:

<TABLE>
<S> <C>
China, glass, silver and linen.................................... $ 62,464
Food.............................................................. 34,918
Beverage.......................................................... 26,214
Gift shop and other............................................... 61,825
--------
$185,421
========
</TABLE>

5. PROPERTY AND EQUIPMENT:

Property and equipment consisted of the following at December 31, 1995:

<TABLE>
<S> <C>
Land........................................................... $ 2,501,326
Building and improvements...................................... 20,192,376
Furniture, fixtures and equipment.............................. 3,562,480
-----------
26,256,182
Less accumulated depreciation.................................. 8,204,905
-----------
$18,051,277
===========
</TABLE>

6. DEPARTMENTAL INCOME:

Departmental income was as follows:

<TABLE>
<CAPTION>
NINE MONTHS SEVEN MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, JULY 31,
1995 1995 1996
------------ ------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Rooms............................... $4,676,686 $ 3,627,244 $2,811,379
Food and beverage................... 978,780 694,399 464,584
Telephone........................... 92,877 67,028 58,662
Gift shop........................... 33,495 25,377 16,186
Other............................... 30,672 23,421 22,017
---------- ----------- ----------
$5,812,510 $ 4,437,469 $3,372,828
========== =========== ==========
</TABLE>

7. LONG-TERM DEBT:

Long-term debt consisted of the following at December 31, 1995:

<TABLE>
<S> <C>
First mortgage (A)............................................. $19,963,372
Second mortgage (B)............................................ 1,995,651
Installment note payable (C)................................... 455,198
Installment note payable (D)................................... 548,833
Installment note payable (E)................................... 618,770
Installment note payable (F)................................... 20,211
-----------
$23,602,035
===========
</TABLE>

(A) The Hotel has a first mortgage to Aetna Life insurance Company. The first
mortgage accrues interest at the contract rate of 9.125% and is payable at
the pay rate of 8.5% in monthly installments of principal and interest of
$138,626 for the period from September 1, 1992 through August 1, 1997. The
difference

F-74
<PAGE> 155

NOTES TO FINANCIAL STATEMENTS--CONTINUED

---------

7. LONG-TERM DEBT--CONTINUED

between the pay rate and the contract rate is deferred and added to the
principal balance of the mortgage. Beginning September 1, 1997 and
continuing on the first day of each month thereafter to and including
maturity, the monthly payment will include interest on the accrued balance
at the contract rate together with amortization sufficient to reduce the
outstanding principal and accrued interest thereon to $17,102,000. The
maturity date is August 31, 2002 at which time all principal and accrued
interest thereon is due. Two of the partners of Carter Associates have
guaranteed 15% of the outstanding principal and interest of the first
mortgage.

The first mortgage is subject to a prepayment penalty equal to the greater
of 1% of the outstanding loan balances or an amount calculated based on the
present value of the remaining mortgage payments as defined by the
agreement.

(B) The second mortgage is payable to the Federal Deposit Insurance Corporation
(FDIC) and is subordinated to the first mortgage above. The principal
balance of the note was increased to include all accrued but unpaid interest
outstanding as of December 31, 1993. For repayment terms, the principal was
divided into two parts. The two parts bear interest at a rate between 7% and
9%. Both parts require varying principal payments until they mature on
December 1, 1998, at which time all unpaid principal and accrued interest is
due. The second mortgage is guaranteed by two of the partners of Carter
Associates.

(C) The installment note payable is payable to Marriott for deferred franchise
fees. The note bears interest at a rate of 7% per annum and is payable in
monthly payments of $15,417 that are first applied to interest with the
balance applied to principal.

(D) The installment note is payable to Marriott for franchise fees that are
deferred for the period September 1, 1992 through December 31, 1996
amounting to one and one-half of current franchise fees on room and food and
beverage sales. The notes bears interest at a rate of 7% per annum and on
the same terms and conditions stated in (C) with payments to begin on the
earlier of January 1, 1999 or the repayment of all amounts under (C).

(E) The installment note payable to NCH Corporation, a related party, bears
interest at a rate of 8% per annum. The note is payable in monthly principal
and interest payments of $15,961.

(F) The installment note payable to Ford Motor credit contains add-on interest
at a rate of 9.5%. The note is payable in monthly principal and interest
payments with a final payment of $10,766 due on September 15, 1997.
Collateral on this obligation includes a vehicle with a book value of
$16,478 at December 31, 1995.

The first and second mortgages are collateralized by substantially all of the
assets of the Hotel.

Statement of Financial Accounting Standards No. 107 requires disclosure about
fair value of financial instruments. Based on interest rates currently
available, management believes that the carrying amount of the notes payable are
a reasonable estimation of fair value.

Aggregate scheduled maturities of long-term debt for each of the next five years
ending December 31, are as follows:

<TABLE>
<S> <C>
1996........................................... $ 647,361
1997........................................... 508,392
1998........................................... 2,734,776
1999........................................... 715,123
2000........................................... 630,922
Thereafter..................................... 18,365,461
-----------
$23,602,035
===========
</TABLE>

F-75
<PAGE> 156

NOTES TO FINANCIAL STATEMENTS--CONTINUED

---------

8. OPERATING LEASES:

The Hotel accounts for various equipment leases as operating leases. Total
rental expense amounted to approximately $6,886 in 1995. The following is a
schedule of future minimum lease payments under these leases:

9. COMMITMENT AND CONTINGENCIES:

10. NEW ACCOUNTING PRONOUNCEMENT:

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of." The new standard is
effective for the first quarter of 1996. Management believes that the
implementation of the standard will not have a material effect on these
financial statements.

F-76
<PAGE> 157

REPORT OF INDEPENDENT ACCOUNTANTS

To the Partners

OBR Limited, L.P.:

We have audited the accompanying balance sheet of OBR Limited, L.P. d/b/a
Doral Ocean Beach Resort ("the Partnership") as of December 31, 1995 and the
related statements of operations and owners' equity and cash flows for the year
then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of OBR Limited, L.P. as of
December 31, 1995 and the results of its operations and cash flows for the year
then ended, in conformity with generally accepted accounting principles.

/s/ COOPERS & LYBRAND L.L.P.

Miami, Florida

April 12, 1996, except for Note 12

as to which the date is October 12, 1996

F-77
<PAGE> 158

OBR LIMITED, L.P.

D/B/A DORAL OCEAN BEACH RESORT

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 155,813 $ 682,259
Accounts receivable........................................... 1,418,111 624,508
Inventories................................................... 1,134,355 1,160,600
Prepaid expenses and other assets............................. 357,562 260,396
------------ ------------
Total current assets..................................... 3,065,841 2,727,763
Property and equipment, net..................................... 28,718,629 28,984,447
Deposits........................................................ 203,341 200,955
Deferred expenses............................................... 501,311 538,123
------------ ------------
Total assets............................................. $ 32,489,122 $ 32,451,288
============ ============
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable.............................................. 1,451,041 1,055,605
Accrued liabilities:
Salaries and benefits...................................... 578,073 508,070
Other...................................................... 422,183 271,215
Customer deposits............................................. 353,442 272,651
Due to affiliates............................................. 1,016,149 1,069,510
Current portion of long-term debt............................. 295,258 13,950,593
Current portion of capital lease obligation................... 124,941 120,067
------------ ------------
Total current liabilities................................ 4,241,087 17,247,711
Long-term debt.................................................. 19,018,433 5,190,914
Capital lease obligation........................................ 85,129 650,802
------------ -------------
Total liabilities........................................ 23,344,649 23,089,427
Commitments and contingencies (Notes 6 and 8)
Owners' equity.................................................. 9,144,473 9,361,861
------------ ------------
Total liabilities and owners' equity..................... $ 32,489,122 $ 32,451,288
============ ============
</TABLE>

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

F-78
<PAGE> 159

OBR LIMITED, L.P.
D/B/A DORAL OCEAN BEACH RESORT

STATEMENTS OF OPERATIONS AND OWNERS' EQUITY

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ---------------------------------
1995 1995 1996
------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Rooms.......................................... $ 13,183,288 $ 9,677,694 $ 9,980,754
Food and beverage.............................. 6,734,335 4,724,336 4,348,412
Telephone...................................... 1,026,704 761,845 760,976
Other.......................................... 514,132 415,233 494,114
------------ ------------ ------------
21,458,459 15,579,108 15,584,256
Departmental costs and expenses.................. 10,084,554 7,117,781 6,951,360
------------ ------------ ------------
Departmental income......................... 11,373,905 8,461,327 8,632,896
------------ ------------ ------------
Other expenses:
Administration and general..................... 2,167,225 1,698,805 1,816,943
Management fees................................ 422,228 316,672 375,476
Advertising and sales.......................... 1,445,097 1,087,612 1,074,648
Repairs and maintenance........................ 1,209.917 952,749 959,453
Heat, power and light.......................... 1,130,320 806,663 718,321
Rent, taxes and insurance...................... 1,065,004 779,777 754,502
Depreciation and amortization.................. 1,548,903 1,190,224 1,279,699
Other.......................................... 335,062 303,854 77,759
------------ ------------ ------------
9,323,756 7,136,356 7,056,801
------------ ------------ ------------
2,050,149 1,324,971 1,576,095
Interest expense................................. 1,944,771 1,482,866 1,358,707
------------ ------------ ------------
Net income (loss)........................... 105,378 (157,895) 217,388
Owner's equity:
Beginning of period............................ 8,739,095 8,739,095 9,144,473
Capital contributions.......................... 300,000 300,000 --
------------ ------------ ------------
End of period.................................. $ 9,144,473 $ 8,881,200 $ 9,361,861
============ ============ ============
</TABLE>

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

F-79
<PAGE> 160

OBR LIMITED, L.P.

D/B/A DORAL OCEAN BEACH RESORT

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ---------------------------------
1995 1995 1996
------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $ 105,378 $ (157,895) $ 217,388
Adjustments to reconcile net income (loss) to
cash provided by operations:
Depreciation and amortization expense....... 1,548,903 1,190,224 1,279,699
Changes in assets and liabilities:
Accounts receivable........................... 246,091 515,196 793,603
Inventories................................... (208,247) (171,752) (26,245)
Prepaid expenses and other assets............. 22,647 76,220 99,552
Accounts payable.............................. (904,332) (1,039,563) (395,436)
Accrued liabilities........................... (74,462) (95,633) (220,971)
Customer deposits............................. (289,014) (307,054) (80,791)
------------ ------------ ----------
Net cash flows provided by
operating activities................... 446,964 9,743 1,666,799
------------ ------------ ----------
Cash flows from investing activities:
Acquisition of property and equipment............ (1,069,085) (714,263) (774,619)
Land development costs........................... (8,835) (8,835) (95,475)
------------ ------------ ----------
Net cash used in investing activities.... (1,077,920) (723,098) (870,094)
------------ ------------ ----------
Cash flows from financing activities:
Deferred loan costs.............................. (44,824) (44,824) --
Proceeds from long-term debt..................... 400,000 400,000 47,000
Payments on long-term debt and
capital lease obligations..................... (394,219) (291,892) (370,620)
Advances from partners and affiliates............ 419,420 531,882 53,361
Capital contributions............................ 300,000 300,000 --
------------ ------------ ----------
Net cash flows provided by (used in)
financing activities................... 680,377 895,166 (270,259)
------------ ------------ ----------
Net increase in cash and cash equivalents.......... 49,421 181,811 526,446
Cash and cash equivalents, beginning of period..... 106,392 106,392 155,813
------------ ------------ ----------
Cash and cash equivalents, end of period........... $ 155,813 $ 288,203 $ 682,259
============ ============ ==========
Supplemental disclosure of cash flow information:
Cash paid for interest........................ $ 1,802,091 $ 1,340,186 $1,358,707
= ========== ============ ==========
Noncash investing activities:
Property and equipment acquired with
capital lease............................... $ -- $ -- $ 712,235
============ ============ ==========
</TABLE>

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

F-80
<PAGE> 161

OBR LIMITED, L.P.

D/B/A DORAL OCEAN BEACH RESORT

NOTES TO FINANCIAL STATEMENTS

---------

1. BASIS OF PRESENTATION:

OBR Limited, L.P. d/b/a Doral Ocean Beach Resort (the "Partnership"), a
Delaware limited partnership, was formed effective October 21, 1993 by OBR
Management, L.C. (as general partner) and OBR Holdings, Inc. and Reserve Hugo,
Inc. (as limited partners). On October 28, 1993, the Partnership purchased the
Doral Ocean Beach Resort (the "Hotel"), a 420 room full-service ocean front
resort hotel including water sport facilities, for $27,250,000.

In accordance with the terms of the partnership agreement, subsequent
capital contributions from the general partner may be required upon dissolution
of the Partnership and liquidation of its assets. Limited partners have no
personal liability with respect to any liabilities or obligations of the
Partnership except to the extent that such limited partner assumes or guarantees
any of the debts of the Partnership.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Cash and Cash Equivalents:

The Partnership considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.

Inventories:

Inventories consist principally of food, beverages, supplies, china,
glassware and linen and are stated at the lower of cost (first-in, first-out) or
market.

Property and Equipment:

Property and equipment are stated at cost which includes the allocated
purchase price for the acquisition described in Note 1. Property and equipment
are depreciated primarily on the straight-line method over their estimated
useful lives (buildings and improvements over 25 to 35 years and furniture,
fixtures and equipment over 5 to 7 years). Expenditures for maintenance and
repairs are expensed as incurred; major renewals and betterments are
capitalized. The carrying amount and accumulated depreciation of assets which
are sold or retired are removed from the accounts in the year of disposal and
any resultant gain or loss is included in the results of operations.

Deferred Expenses:

Deferred expenses consist of loan costs, land development and other costs.
Loan costs are being amortized on the straight-line basis over the five year
life of the loan. The Partnership is considering the development of property
located adjacent to the hotel in the near future. Land development costs (i.e.,
engineering surveys, permits and architectural drawings) related to this project
will be capitalized to the project once it is deemed feasible by the
Partnership. If the project is not deemed feasible, these development costs will
be written-off in the period such determination is made.

Concentration of Credit Risk:

From time to time the Partnership maintains cash balances with financial
institutions in excess of federally insured limits. The Partnership has not
experienced any losses in such accounts.

F-81
<PAGE> 162

NOTES TO FINANCIAL STATEMENTS--CONTINUED

---------

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED

Use of Estimates:

Revenue Recognition:

The Partnership recognizes revenues from their rooms, catering, gift shop
and restaurant facilities as earned on the close of each business day.

Income Taxes:

OBR Limited, L.P. is a Delaware limited partnership. Accordingly, Federal
or State income taxes, if any, are the responsibility of the individual
partners. The terms of the limited partnership agreement provide, among other
things, that profits and losses be shared 99% by the limited partners and 1% by
the general partner.

Unaudited Financial Statements:

The unaudited balance sheet as of September 30, 1996 and the unaudited
statements of operations and owners' equity and cash flows for the nine months
ended September 30, 1995 and 1996, in the opinion of management, have been
prepared on the same basis as the audited financial statements and include all
significant adjustments (consisting primarily of normal recurring adjustments)
considered necessary for a fair presentation of the results of these interim
periods. The data disclosed in these notes to the financial statements for these
periods are also unaudited. Operating results for the nine month period ended
September 30, 1996 is not necessarily indicative of the results for the entire
year.

3. INVENTORIES:

Inventories consisted of the following:

DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
Food and beverage.................................... $ 280,170 $ 217,683
Supplies............................................. 162,645 212,137
China, glassware, silver and linen................... 691,540 730,780
----------- ----------
Total.............................................. $ 1,134,355 $1,160,600
=========== ==========
</TABLE>

F-82
<PAGE> 163

NOTES TO FINANCIAL STATEMENTS--CONTINUED

---------

4. PROPERTY AND EQUIPMENT:

Property and equipment consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
Land and improvements................................ $ 12,448,839 $ 12,448,839
Buildings and improvements........................... 12,218,295 12,706,380
Furniture, fixtures and equipment.................... 6,297,270 7,287,988
Telephone and computer equipment..................... 600,725 608,776
------------ ------------
31,565,129 33,051,983
Less accumulated depreciation and amortization....... 2,846,500 4,067,536
------------ ------------
$ 28,718,629 $ 28,984,447
============ ============
</TABLE>

5. DEFERRED EXPENSES:

Deferred costs consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
Mortgage loan costs.................................. $ 186,994 $186,994
Land development costs............................... 263,442 358,917
Other deferred expenses.............................. 192,917 192,917
--------- --------
643,353 738,828
Less accumulated amortization........................ 142,042 200,705
--------- --------
Deferred expenses, net............................... $ 501,311 $538,123
========= ========
</TABLE>

F-83
<PAGE> 164

NOTES TO FINANCIAL STATEMENTS--CONTINUED

---------

6. LONG-TERM DEBT:

Long-term debt consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
$14,500,000 first mortgage note payable, interest at
10% annually; monthly payments of principal and
interest of $139,928 through January 2, 1997 at
which time a balloon payment is due; collateralized
by substantially all property and equipment of the
hotel. ............................................ $ 13,971,697 $ 13,753,013
$4,500,000 second mortgage note payable, interest at
7% annually; monthly payments of interest only of
$26,250; balloon payment due October 29, 1998;
collateralized by property and equipment. ......... 4,500,000 4,500,000
$1,250,000 third mortgage note payable, interest at
prime annually; monthly payments of interest only
through December 15, 1996, then monthly payments of
principal and interest; balloon payment due
November 8, 1998; collateralized by substantially
all property and equipment. ....................... 841,994 888,494
------------ ------------
19,313,691 19,141,507
Less current portion................................. 295,298 13,950,593
------------ ------------
$ 19,018,433 $ 5,190,914
============ ============
</TABLE>

The proceeds of the first and second mortgage notes were used to purchase
the Hotel. The terms of the first mortgage note provide for the Partnership to
remit escrow payments of $52,379 for real estate taxes on a monthly basis. The
proceeds of the third mortgage note were used for renovations to the Hotel. As
of December 31, 1995, approximately $379,752 of this note was utilized for
outstanding letters of credit.

Principal payments due on the above debt in the years subsequent to
December 31, 1995 are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1996............................................ $ 295,258
1997............................................ 18,442,780
1998............................................ 575,653
-----------
$19,313,691
===========
</TABLE>

F-84
<PAGE> 165

NOTES TO FINANCIAL STATEMENTS--CONTINUED

---------

7. DEPARTMENTAL INCOME:

Departmental income was as follows:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -------------------------
1995 1995 1996
------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Rooms.................................... $ 9,712,833 $7,086,313 $7,338,062
Food and beverage........................ 901,728 755,865 443,245
Telephone................................ 515,378 368,863 484,775
Other.................................... 243,966 250,286 366,814
------------ ---------- ----------
$ 11,373,905 $8,461,327 $8,632,896
============ ========== ==========
</TABLE>

8. COMMITMENTS AND CONTINGENCIES:

Lease Commitments:

The Partnership leases certain equipment under capital lease agreements.
The present value of future minimum lease payments as of December 31, 1995 are
as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1996....................................................... $136,434
1997....................................................... 36,984
1998....................................................... 36,984
1999....................................................... 31,951
--------
Total minimum lease payments............................... 242,353
Less amount representing interest.......................... 32,283
--------
Present value of net minimum lease payments................ 210,070
Less current portion....................................... 124,941
--------
$ 85,129
========
</TABLE>

Pension Plan:

The Partnership makes contributions along with other employers to
union-sponsored multiemployer pension plans based on the number of hours worked
by employees covered under union contracts. The Multiemployer Pension Plan
Amendments Act of 1989 imposes certain liabilities upon employers associated
with multiemployer plans who withdraw from such a plan or upon termination of
said plan. The Partnership has not received information from the plans'
administrator to determine its share of unfunded vested benefits, if any. The
Partnership has not undertaken to terminate, withdraw or partially withdraw from
the plans. Amounts charged to income as a contribution to the multiemployer
plans were approximately $74,000 for the year ended December 31, 1995.

License Agreement:

The Partnership entered into a five year license agreement for the use of
the name "Doral Ocean Beach Resort" and certain logos. The agreement provides
for a monthly fee of .5% of gross revenues.

Litigation:

In March 1995, claims of lien of approximately $296,000 were filed by
contractors in connection with costs incurred for room renovations at the Hotel.
Management challenged these liens because the renovations

F-85
<PAGE> 166

NOTES TO FINANCIAL STATEMENTS--CONTINUED

---------

8. COMMITMENTS AND CONTINGENCIES--CONTINUED

were not completed and subcontractors and materialmen were not paid by the
general contractor. During 1995, the Partnership obtained a payment bond for the
above mentioned liens in order to cover any losses resulting therefrom. The
payment bond is collateralized by a letter of credit in the amount of
approximately $380,000 which has been issued as part of the third mortgage note
(see Note 5).

The parties have reached a settlement whereby all claims will be dismissed
and the claims of lien will be discharged and released. The Partnership expects
to pay approximately $50,000 as part of this settlement, which amounts will be
capitalized upon payment.

9. LEASE INCOME:

The Partnership is a lessor of retail space at the Hotel. The aggregate
amount of minimum rental payments to be received under non-cancelable operating
leases consisted of the following at December 31, 1995:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1996............................................... $ 81,000
1997............................................... 93,000
1998............................................... 82,000
1999............................................... 84,000
Thereafter......................................... 84,000
--------
$424,000
========
</TABLE>

10. TRANSACTIONS WITH PARTNERS AND AFFILIATES:

In August 1995, the Partnership received a $700,000 loan from its limited
partners. The loan bears no interest and is due from the Partnership upon
demand. As of December 31, 1995 and September 30, 1996, amounts due to partners
and affiliates totaled $1,016,149 and $1,069,510, respectively. Such amounts are
non-interest bearing and due on demand. In September 1995, the Partnership
received a $300,000 capital contribution from its limited partners.

The Partnership has entered into a five year management agreement with an
affiliate of the general partner to operate the Hotel. The agreement provides
for a monthly fee of $33,334 or 11% of gross operating profit, whichever is
greater, and reimbursement of all reasonable out-of-pocket costs and expenses
incurred by the manager. For 1995, the affiliate limited its management fee to
approximately $422,000.

11. NEW ACCOUNTING PRONOUNCEMENT:

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of." The new standard is
effective for fiscal year 1996. Management believes that the implementation of
the standard will not have a material effect on these financial statements.

12. SUBSEQUENT EVENT:

On October 12, 1996, the Partnership sold substantially all of the assets
associated with the Hotel to Interstate Hotels Corporation for $43,000,000.

F-86
<PAGE> 167

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholder

Trust Leasing, Inc. and Trust Management, Inc.:

We have audited the accompanying combined balance sheet of Trust
Management, Inc. and Trust Leasing, Inc. (formerly McNeill Hospitality
Corporation and McNeill Hotel Company) as of December 31, 1995 and the related
combined statement of operations, shareholder's equity, and cash flows for the
year then ended. These combined financial statements are the responsibility of
the management of Trust Management, Inc. and Trust Leasing, Inc. Our
responsibility is to express an opinion on these combined financial statements
based on our audit.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Trust
Management, Inc. and Trust Leasing, Inc. as of December 31, 1995 and the
combined results of their operations and cash flows for the year then ended, in
conformity with generally accepted accounting principles.

/s/ COOPERS & LYBRAND L.L.P.

Memphis, Tennessee

October 14, 1996, except

for Note 9, as to which

the date is November 15, 1996

F-87
<PAGE> 168

TRUST MANAGEMENT, INC. AND TRUST LEASING, INC.

COMBINED BALANCE SHEETS

(In Thousands)

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $5,554 $11,672
Accounts receivable:
Trade........................................................ 1,245 2,699
Affiliate.................................................... 328 674
Inventories..................................................... 168 273
Prepaid expenses................................................ 597 782
------ -------
Total current assets.................................... 7,892 16,100
Furniture and equipment, net.................................... 216 205
Investments (Note 7)............................................ 277 3,148
------ -------
Total assets............................................ $8,385 $19,453
====== =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Notes payable--current.......................................... 508 360
Accounts payable................................................ 1,482 1,912
Accrued lease payable........................................... 2,280 6,956
Accrued expenses--other......................................... 2,340 3,550
------ --------
Total current liabilities............................... 6,610 12,778
------ -------
Notes payable--long-term.......................................... 90 72
------ -------
Commitments and contingencies (Note 6)
Shareholder's equity:
Common stock.................................................... 1 1
Additional paid-in capital...................................... -- 2,875
Advances to shareholder......................................... (866) (772)
Retained earnings............................................... 2,550 4,499
------ -------
Total shareholder's equity.............................. 1,685 6,603
------ -------
Total liabilities and shareholder's equity.............. $8,385 $19,453
====== =======
</TABLE>

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

F-88
<PAGE> 169

TRUST MANAGEMENT, INC. AND TRUST LEASING, INC.

COMBINED STATEMENTS OF OPERATIONS

(dollars in thousands)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------
1995 1995 1996
------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Lodging revenues:
Room revenue........................................... $ 52,585 $38,397 $62,040
Food and beverage revenue.............................. 1,543 1,046 1,846
Other revenue.......................................... 2,440 1,765 2,581
Management and related fees.............................. 821 628 604
-------- ------- -------
57,389 41,836 67,071
-------- ------- -------
Lodging expenses:
Hotel operating costs and expenses..................... 12,713 9,090 14,645
Food and beverage expense.............................. 1,216 811 1,507
Franchise costs........................................ 4,122 3,012 4,858
Advertising and promotion.............................. 1,619 1,102 1,942
Utilities.............................................. 2,777 1,956 3,440
Repairs and maintenance................................ 2,208 1,572 2,626
Taxes and insurance.................................... 848 521 757
Lease expense............................................ 24,101 17,996 28,883
General and administrative............................... 4,458 3,133 4,555
Salaries and benefits.................................... 2,296 1,528 1,872
Depreciation and amortization............................ 20 15 23
-------- ------- -------
56,378 40,736 65,108
-------- ------- -------
Operating income.................................... 1,011 1,100 1,963
-------- ------- -------
Other income (expense):
Investment income (loss)............................... 37 23 25
Interest expense....................................... (79) (53) (39)
-------- ------- -------
Net income............................................... $ 969 $ 1,070 $ 1,949
======== ======= =======
</TABLE>

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

F-89
<PAGE> 170

TRUST MANAGEMENT, INC. AND TRUST LEASING, INC.

COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY

(dollars in thousands)

<TABLE>
<CAPTION>
ADVANCES ADDITIONAL TOTAL
COMMON TO PAID-IN RETAINED SHAREHOLDER'S
STOCK SHAREHOLDER CAPITAL EARNINGS EQUITY
------ ----------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994.......... $ 1 $(343) $ -- $1,581 $ 1,239
Net income.......................... -- -- -- 969 969
Increase in advances to
shareholder...................... -- (523) -- -- (523)
---- ----- ------ ------ -------
Balance at December 31, 1995.......... 1 (866) -- 2,550 1,685
Net income (unaudited).............. -- -- -- 1,949 1,949
Decrease in advances to shareholder
(unaudited)...................... -- 94 -- -- 94
Capital contribution (unaudited).... -- -- 2,875 -- 2,875
---- ----- ------ ------ -------
Balance at September 30, 1996
(unaudited)......................... $ 1 $(772) $2,875 $4,499 $ 6,603
===== ====== ====== ====== =======
</TABLE>

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

F-90
<PAGE> 171

TRUST MANAGEMENT, INC. AND TRUST LEASING, INC.

COMBINED STATEMENTS OF CASH FLOWS

(dollars in thousands)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ------------------
1995 1995 1996
------------ ------ -------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 969 $1,070 $ 1,949
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 20 15 23
Changes in assets and liabilities:
Accounts and note receivable...................... (39) (411) (1,800)
Inventories....................................... (67) (38) (105)
Prepaid expenses.................................. (196) (234) (185)
Accounts payable.................................. 421 194 430
Accrued expenses.................................. 1,307 3,640 5,886
Equity in earnings of limited partnership......... (10) (8) (7)
Other assets...................................... -- (25) --
------ ------ -------
Net cash provided by operating activities....... 2,405 4,203 6,191
------ ------ -------
Cash flows from investing activities:
Purchase of units in Equity Inns Partnership, L.P......... -- -- (2,875)
Purchase of common stock in Equity Inns, Inc.............. (269) (269) --
Dividends received........................................ 13 10 11
Purchase of furniture and equipment....................... (54) (20) (12)
------ ------ -------
Net cash used in investing activities........... (310) (279) (2,876)
------ ------ -------
Cash flows from financing activities:
Payments on capital lease obligations..................... (13) (8) (16)
Payments on lines of credit............................... (202) (177) (150)
Capital contribution...................................... -- -- 2,875
(Increase) decrease in advances to shareholder............ (523) 23 94
------ ------ -------
Net cash provided by (used in) financing
activities................................... (738) (162) 2,803
------ ------ -------
Net change in cash and cash equivalents..................... 1,357 3,762 6,118
Cash and cash equivalents at beginning of period............ 4,197 4,197 5,554
------ ------ -------
Cash and cash equivalents at end of period.................. $5,554 $7,959 $11,672
====== ====== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 68 $ 46 $ 30
====== ====== =======
Cash paid during the year for taxes....................... $ 68 $ 66 $ 67
====== ====== =======
Noncash investing activities:
During 1995, Trust Management entered into capital
leases for computer equipment of $120.
In February, 1994, Trust Management exchanged an
interest in hotel property (held through a limited
partnership interest) for units in the Partnership.
The exchange was recorded on a historical cost basis
(see Note 7).
</TABLE>

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

F-91
<PAGE> 172

TRUST MANAGEMENT, INC. AND TRUST LEASING, INC.

NOTES TO FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

---------

1. BASIS OF PRESENTATION AND ORGANIZATION:

Basis of Presentation:

The accompanying financial statements of Trust Leasing, Inc. and Trust
Management, Inc. (formerly McNeill Hotel Company and McNeill Hospitality
Corporation) have been presented on a combined basis due to common ownership and
management and because each of the entities are expected to be the subject of a
business combination with Interstate Hotel Corporation ("IHC"), a publicly held
hotel management company. All significant interhotel and intercompany balances
and transactions have been eliminated.

Organization:

Trust Leasing, Inc. ("Trust Leasing") began operations on March 1, 1994 and
is wholly owned by Mr. Phillip H. McNeill, Sr. ("McNeill"). Trust Leasing has
elected status as a Subchapter S corporation under the Internal Revenue Code.
Trust Leasing was formed to operate and lease hotels owned by Equity Inns
Partnership, L.P. (the "Partnership") pursuant to separate percentage lease
agreements. Approximately 97% of the Partnership is owned by Equity Inns, Inc.
("ENNS"), its sole general partner, a company in which McNeill is also chief
executive officer and chairman of the board of directors.

As of December 31, 1995, Trust Leasing leases thirty-seven hotels from the
Partnership with a total of 4,444 rooms in twenty-one states (46 hotels at
September 30, 1996, see Note 9). Twenty-seven of the hotels are operated as
Hampton Inn hotels under franchise agreements with Promus Companies, Inc. Three
of the hotels are operated as Residence Inn hotels under franchise agreements
with Marriott, Inc. Three of the hotels are operated as Comfort Inn hotels under
a franchise agreement with Choice Hotels International, Inc. Four of the hotels
are operated as Holiday Inn Hotels or Holiday Inn Express Hotels under franchise
agreements with Holiday Inn, Inc. Thirty-one of the hotels are limited service
hotels, three of the hotels are full service hotels and three of the hotels are
extended stay hotels.

Each hotel is separately leased by the Partnership to Trust Leasing under a
percentage lease agreement ("Percentage Leases") that includes a non-cancelable
term of ten years, subject to earlier termination upon certain events and is
accounted for as an operating lease. The leases require a base rental payment to
be made to the Partnership on a monthly basis and additional quarterly payments
to be made based on a percentage of gross room revenue, beverage revenue and
food revenue, if applicable, of the hotels. Trust Leasing will not be considered
in default for non-payment of the percentage rent as long as such payment is
made within ninety days of the end of the calendar year.

Trust Management, Inc. ("Trust Management") began operations on May 20,
1991 and is also wholly owned by McNeill. Trust Management has elected status as
a Subchapter S corporation under the Internal Revenue Code. Trust Management
operates and manages hotel properties pursuant to management agreements with the
respective owners of the hotels. Several of the managed hotels are owned by
entities in which McNeill has an ownership interest. Trust Management does not
manage any of the hotels owned by the Partnership. The accompanying combined
statements of operations include only the income earned from the management of
such properties while the actual hotel property operating assets, liabilities,
income and expenses are included in the owners' financial statements.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Cash Equivalents:

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

F-92
<PAGE> 173

NOTES TO FINANCIAL STATEMENTS--CONTINUED

(dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED

Inventories:

Inventories, consisting primarily of linens and food and beverage, are
stated at the lower of cost (generally, first-in, first-out) or market.

Furniture and Equipment:

Furniture and equipment is stated at cost net of accumulated depreciation
of $30 at December 31, 1995, of which $10 represents accumulated amortization on
capitalized leases. Depreciation is based on the straight-line method over the
estimated useful life. Expenditures for maintenance, repairs and minor renewals
are expensed as incurred. When furniture and equipment are sold, the related
cost and accumulated depreciation are removed from the respective accounts and
any gain or loss is credited or charged to operations.

Investments:

Investments include approximately 264,000 units of limited partnership
interest in the Partnership ("Partnership Units") and 25,000 shares of common
stock of Equity Inns, Inc.

Pursuant to FASB Statement No. 115, Trust Leasing has classified its
readily marketable equity securities of Equity Inns, Inc. as available for sale,
and, therefore, these securities are carried at market value which equals cost
at December 31, 1995. Unrealized gains or losses, if applicable, will be
reflected in shareholder's equity. The investment in Partnership Units
represents an approximate .11% interest in Equity Inns, L.P. and is accounted
for using the equity method, as a result of McNeill's influence over the
Partnership's operating and financial policies.

Revenue Recognition:

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

Franchise Costs:

The cost of obtaining the franchise licenses for the leased hotels is paid
by the Partnership, and the ongoing franchise fees are paid by Trust Leasing.
Franchise licenses and the related franchise fees for managed hotels are paid by
the respective owners. These fees are generally computed as a percentage of room
revenue for each hotel in accordance with franchise agreements.

Income Taxes:

No provision for federal income taxes is required for Trust Leasing and
Trust Management as the companies are both S corporations as defined by the
Internal Revenue Code. State and local income tax expense and benefits
recognized by Trust Leasing and Trust Management are not significant and are
included in the combined statements of operations.

Concentration of Credit Risk:

Trust Management and Trust Leasing place cash deposits at a major bank.
Bank account balances exceeded Federal Depository Insurance limits by $4.3
million at December 31, 1995. Management believes the credit risk related to
these deposits is minimal.

F-93
<PAGE> 174

NOTES TO FINANCIAL STATEMENTS--CONTINUED

(dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED

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.

Unaudited Financial Statements:

The unaudited interim combined balance sheet as of September 30, 1996 and
the unaudited combined statements of operations, changes in shareholder's
equity, and cash flows for the nine months ended September 30, 1995 and 1996
reflect, in the opinion of management, all adjustments necessary for a fair
presentation of the interim combined financial statements. All such adjustments
are of a normal and recurring nature. The data disclosed in Notes 1 and 6 to the
combined financial statements for these periods is also unaudited.

3. CAPITAL LEASES:

Trust Management leases computer equipment under agreements which are
classified as capital leases. Leased capital assets included in property, plant
and equipment at December 31, 1995 totaled $125.

Future minimum payments, by year, under noncancelable capital leases with
remaining terms of one year or more consist of the following at December 31,
1995:

<TABLE>
<S> <C>
1996....................................................... $ 34
1997....................................................... 34
1998....................................................... 32
1999....................................................... 32
2000....................................................... 11
----
Total minimum lease payments............................... 143
Amounts representing interest.............................. 30
----
Present value of net minimum payments...................... 113
Current portion............................................ (23)
----
Long-term capitalized lease obligations.................... $ 90
====
</TABLE>

4. NOTES PAYABLE:

Trust Management has use of two lines of credit totaling $800. Outstanding
borrowings under these lines of credit totaled $486 as of December 31, 1995. The
weighted average interest rate on these borrowings was 9.83% at December 31,
1995 which represents the bank's weighted average prime rate plus 1%. Both lines
of credit are reviewed annually for renewal. The outstanding borrowings against
these lines of credit are personally guaranteed by McNeill.

5. EMPLOYEE BENEFITS:

In 1995, Trust Leasing and Trust Management became self-insured for
employee health and workers' compensation claims. Stop loss insurance policies
are maintained for employee health and workers' compensation to limit Trust
Leasing's and Trust Management's per occurrence and aggregate liability in any
given year. Actual claims and premiums on stop loss insurance are paid through a
combination of employer and employee contributions. Included in the 1995
combined statement of operations is $691 related to these benefits.

F-94
<PAGE> 175

NOTES TO FINANCIAL STATEMENTS--CONTINUED

(dollars in thousands, except per share data)

6. COMMITMENTS:

Leasing Operations:

At December 31, 1995, Trust Leasing has future lease commitments to the
Partnership under the Percentage Leases which expire in 2004 (25 hotels) and
2005 (12 hotels). Minimum future rental payments are computed based on the base
rent as defined under these noncancelable operating leases and is as follows:

<TABLE>
<CAPTION>
YEAR AMOUNT
---------------------------------------------- ---------------
<S> <C>
1996.......................................... $ 16,967
1997.......................................... 16,967
1998.......................................... 16,967
1999.......................................... 16,967
2000.......................................... 16,967
2001 and thereafter........................... 66,354
---------
$ 151,189
=========
</TABLE>

Trust Leasing paid base rents of approximately $12.6 million and percentage
rents in excess of base rents of approximately $11.5 million for the year ended
December 31, 1995. The percentage rents are based on a percentage of gross room
revenue, beverage revenue and food revenue, if applicable, of the hotels. Both
the base rent and the threshold room revenue amount in each percentage rent
formula is adjusted for changes in the CPI. The adjustment is calculated at the
beginning of each year, provided the lease has been in effect for a complete
calendar year, based upon the average change in the CPI during the prior 24
months. The adjustment in any lease year may not exceed 7%. Effective January 1,
1996, twenty-five of the leases were adjusted, resulting in a 2.8% increase in
both base rent and threshold room revenue.

At December 31, 1995 and September 30, 1996, Trust Leasing owed the
Partnership $2.3 million and $7.0 million, respectively, primarily representing
the previous quarter's percentage rents which were paid to the Partnership by
March 31, 1996 and October 30, 1996, respectively.

Other than real estate and personal property taxes and maintenance of
underground utilities and structural elements, which are obligations of the
Partnership, the Percentage Leases require Trust Leasing to pay rent, insurance,
all costs and expenses and all utility and other charges incurred in the
operation of the Hotels.

Trust Leasing is also obligated to indemnify and hold harmless the
Partnership from and against all liabilities, costs and expenses incurred by or
asserted against the Partnership in the normal course of operating the Hotels.

Trust Leasing is not permitted to sublet all or any part of the Hotels or
assign its interest under any of the Percentage Leases without the prior written
consent of the Partnership.

In the event the Partnership enters into an agreement to sell or otherwise
transfer a hotel, the Partnership has the right to terminate the Percentage
Lease agreement with Trust Leasing. Upon termination the Partnership must either
pay Trust Leasing the fair market value of their leasehold interest in the
remaining term of the Percentage Lease agreement to be terminated or offer to
Trust Leasing a substitute hotel lease on terms that would create a leasehold
interest in the new hotel with a fair market value equal to or greater than the
fair market value of the remaining leasehold interest under the terminated
Percentage Lease agreement.

Trust Leasing has agreed that during the term of the Percentage Leases it
will maintain a ratio of total debt to consolidated net worth (as defined in the
Percentage Leases, net worth of Trust Leasing, Inc.) of less than or equal to
50%, exclusive of capitalized leases. Debt is construed to mean any indebtedness
incurred in excess of normal trade payables (i.e., operating trade payables and
percentage leases payable).

F-95
<PAGE> 176

NOTES TO FINANCIAL STATEMENTS--CONTINUED

(dollars in thousands, except per share data)

6. COMMITMENTS--CONTINUED

Hotel Management Operations:

At December 31, 1995, Trust Management had 10 management contracts with
terms ranging from 4 to 10 years which expire through the year 2005, of which 7
of these agreements are with hotels in which McNeill has an ownership interest.
Under the terms of the agreement, Trust Management is responsible for the
operations of such hotels, including the collection of revenues and payment of
operating expenses. The management agreements generally provide for a basic
management fee based on a percentage (ranging from 3% to 5%) of adjusted gross
revenues as defined in the agreement. Additionally, the agreements provide for
fees related to accounting and payroll-related services provided to the hotels.
The management agreements are subject to certain cancellation provisions.

7. RELATED PARTY TRANSACTIONS:

Trust Leasing and Trust Management lease office space from a limited
partnership wholly owned by McNeill and his family. Under this arrangement Trust
Leasing and Trust Management are charged a monthly fee of approximately $6.

Included in management and related fee income are amounts earned on
management contracts for hotels in which McNeill has an ownership interest. In
1995 these amounts totaled $492. Affiliated accounts receivable include amounts
related to management fees or other miscellaneous items due from hotels owned by
the Partnership or managed hotels in which McNeill has an ownership interest.

Included in salaries and benefits in 1995 is approximately $1,300 related
to McNeill's compensation.

During 1995, Trust Leasing purchased 25,000 shares of ENNS' common stock.
The stock is pledged as collateral for personal indebtedness of McNeill.

During 1994, Trust Leasing loaned McNeill $171 in exchange for a note
receivable. The note, which was included in advances to shareholder, was due on
demand and carried an interest rate of 7.25%. The note and accrued interest were
paid in 1995. Interest income earned on the note was $7 in 1995.

Other shareholder's advances have no specific repayment terms and have been
classified as a reduction of shareholder's equity in the combined balance
sheets.

In 1994, upon completion of its initial public offering ("IPO"), Equity
Inns, Inc. contributed substantially all of the net assets of the IPO to the
Partnership in exchange for an approximate 86.5% sole general partnership
interest in the Partnership. The Partnership used the proceeds to acquire eight
hotels from various selling partnerships ("Selling Partnerships"). Rather than
receiving cash for their interest in the Selling Partnerships upon the sale of
such hotels, certain partners in the Selling Partnerships, including affiliates
of Equity Inns, Inc., elected to receive limited partnership interests in the
Partnership ("Units"). Such affiliates were considered to be promoters of Equity
Inns, Inc. and accordingly, the assets transferred in exchange for Units were
recorded on a historical cost basis. One of the affiliates was Trust Management,
Inc. which exchanged an interest in a hotel property for Units.

8. FAIR VALUE OF FINANCIAL INSTRUMENTS:

Statement of Financial Accounting Standards 107 requires all entities to
disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the Company reports the carrying amount of cash and
cash equivalents, accounts receivable, notes payable, accounts payable and
accrued expenses at cost which approximates fair value due to the short maturity
of these instruments.

F-96
<PAGE> 177

NOTES TO FINANCIAL STATEMENTS--CONTINUED

(dollars in thousands, except per share data)

9. SUBSEQUENT EVENTS:

During 1996, outstanding borrowings under Trust Management's $300 line of
credit were repaid.

Since December 31, 1995, Trust Management has acquired four additional
management contracts, three of which are for hotels that have not yet opened.
Additionally, the Partnership has acquired the following hotels which are leased
and operated by Trust Leasing pursuant to Percentage Leases which expire in
2006:

<TABLE>
<CAPTION>
ANNUAL BASE
HOTEL ACQUISITION DATE RENT
- ---------------------------------------------- -------------------- ---------------
<S> <C> <C>
Hampton Inn--Knoxville, TN (118 rooms) February 21, 1996 $ 351
Hampton Inn--Baltimore, MD (116 rooms) March 14, 1996 538
Hampton Inn--Detroit, MI (125 rooms) May 31, 1996 624
Homewood Suites--Hartford, CT (132 rooms) May 31, 1996 880
Residence Inn--Madison, WI (80 rooms) June 25, 1996 357
Holiday Inn--Winston-Salem, NC (160 rooms) June 28, 1996 423
Hampton Inn--Scottsdale, AZ (126 rooms) July 16, 1996 780
Hampton Inn--Chattanooga, TN (167 rooms) July 22, 1996 690
Homewood Suites--San Antonio, TX (124 rooms) September 27, 1996 854
Residence Inn--Burlington, VT (96 rooms) October 1, 1996 651
Homewood Suites--Phoenix, AZ (124 rooms) November 5, 1996 1,032
</TABLE>

In January 1996, Trust Leasing and Trust Management implemented a 401(k)
profit sharing plan available to all eligible employees. The amount of matching
company contributions equals 1/4% for every 1% contributed by the employee up
to a maximum of 6% of each employee's contributions. In connection with the
proposed transaction with IHC as further described below, the 401(k) profit
sharing plan will be terminated.

On April 16, 1996, Trust Leasing purchased 250,000 Partnership Units in a
private placement. The Units were purchased at $11.50 per Unit, resulting in a
total cost of $2,875,000. In connection with this transaction, Phillip H.
McNeill, Sr. made a capital contribution of $2,875,000 to Trust Leasing. On
October 18, 1996, in connection with terms of the transaction with
Crossroads/Memphis as discussed herein, Trust Leasing distributed its investment
of 250,000 Partnership Units and 25,000 shares of Common Stock of Equity Inns,
Inc. to Phillip H. McNeill, Sr.

On October 4, 1996, Phillip H. McNeill, Sr. entered into an agreement,
subject to certain conditions, to contribute substantially all of the assets of
Trust Leasing and of Trust Management, including the leases between Trust
Leasing and the Partnership, to Crossroads/Memphis Partnership, L.P.
("Crossroads/ Memphis"), an affiliate of IHC which is a company not presently
affiliated with Trust Leasing, Trust Management or Mr. McNeill, in exchange for
partnership interests in Crossroads/Memphis. The transaction was completed on
November 15, 1996. As a result of the transaction, the terms of the Percentage
Leases were extended to 15 years.

F-97
<PAGE> 178

INDEPENDENT AUDITOR'S REPORT

To the Board of Directors

Fountain Suites Hotel

We have audited the accompanying hotel balance sheet of Fountain Suites
Hotel as of December 31, 1995, and the related statements of hotel operations
and hotel equity and hotel cash flows for the year 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 audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fountain Suites Hotel at
December 31, 1995, and the results of its hotel operations and the hotel cash
flows for the year then ended, in conformity with generally accepted accounting
principles.

/s/ PANNELL KERR FORSTER

February 16, 1996, except for paragraphs 1 and 4 of

Note 1, as to which the date is November 25, 1996.

F-98
<PAGE> 179

FOUNTAIN SUITES HOTEL

HOTEL BALANCE SHEET

---------

<TABLE>
<CAPTION>
DECEMBER 31,
1995
-------------
<S> <C>
Current assets
Cash......................................................................... $ 126,903
Accounts receivable, trade................................................... 209,076
Inventories.................................................................. 30,943
Prepaid expenses............................................................. 43,431
------------
Total current assets...................................................... 410,353
------------
Net property and equipment..................................................... 13,420,059
Deposits....................................................................... 91,327
------------
Total assets................................................................... $ 13,921,739
============
LIABILITIES AND EQUITY
Current liabilities
Accounts payable............................................................... $ 227,221
Accrued liabilities:
Salaries and benefits..................................................... 241,934
Property and sales tax.................................................... 324,596
Other..................................................................... 60,467
Advance deposits............................................................. 153,511
------------
Total current liabilities................................................. 1,007,729
Commitments and contingencies (Note 4)
Equity......................................................................... 12,914,010
------------
Total liabilities and equity................................................... $ 13,921,739
============
</TABLE>

The accompanying notes are an integral part of these statements

F-99
<PAGE> 180

FOUNTAIN SUITES HOTEL

STATEMENTS OF HOTEL OPERATIONS AND HOTEL EQUITY

---------

<TABLE>
<CAPTION>
UNAUDITED
----------------------------
NINE MONTHS
YEAR ENDED ENDED JANUARY 1
DECEMBER SEPTEMBER TO
31, 30, AUGUST 29,
1995 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
Revenues
Rooms (Note 5).................................. $ 6,483,658 $ 4,978,039 $ 5,074,456
Food............................................ 2,021,260 1,478,883 1,365,706
Beverage........................................ 312,276 223,188 210,075
Telephone....................................... 349,258 277,601 238,425
Other........................................... 56,139 36,766 87,267
----------- ----------- ------------
Total revenues............................... 9,222,591 6,994,477 6,975,929
----------- ----------- ------------
Departmental costs and expenses
Rooms........................................... 1,490,485 1,121,896 978,477
Food............................................ 1,663,713.. 1,229,281 1,017,342
Beverage........................................ 179,317 134,016 97,375
Telephone....................................... 164,653 131,428 90,001
----------- ----------- ------------
Total departmental costs and expenses........ 3,498,168 2,616,621 2,183,195
----------- ----------- ------------
Total operating departmental income............... 5,724,423 4,377,856 4,792,734
----------- ----------- ------------
Other expenses
Administrative and general...................... 999,888 747,293 797,932
Advertising and sales........................... 716,073 556,821 470,972
Repairs and maintenance......................... 657,718 496,385 396,993
Heat, power and light........................... 468,658 366,406 302,666
Management and incentive fees................... 387,352 306,763 374,637
Insurance and taxes............................. 564,217 428,656 352,764
Depreciation.................................... 1,026,708 770,031 338,490
----------- ----------- ------------
Total other expenses......................... 4,820,614 3,672,355 3,034,454
----------- ----------- ------------
Income before income tax expense.................. 903,809 705,501 1,758,280
Income tax expense................................ 361,522 282,200 703,312
----------- ----------- ------------
Excess of hotel operating revenue over expenses... 542,287 423,301 1,054,968
Equity, beginning of period....................... 12,153,851 12,153,851 12,914,010
Net increase (decrease) in equity (Note 1)........ 217,872 506,144 (13,968,978)
----------- ----------- ------------
Equity, end of period............................. $12,914,010 $13,083,296 $ --
=========== =========== ============
</TABLE>

The accompanying notes are an integral part of these statements.

F-100
<PAGE> 181

FOUNTAIN SUITES HOTEL

STATEMENTS OF HOTEL CASH FLOWS

---------

<TABLE>
<CAPTION>
UNAUDITED
---------------------------
NINE MONTHS
YEAR ENDED ENDED JANUARY 1
DECEMBER SEPTEMBER TO
31, 30, AUGUST 29,
1995 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Excess of hotel operating revenue over
expenses...................................... $ 542,287 $ 423,301 $ 1,054,968
Adjustments to reconcile to net cash provided by
operating activities
Depreciation................................ 1,026,708 770,031 338,490
(Increase) decrease in operating assets
Accounts receivable, trade............... 154,048 173,912 6,363
Inventories.............................. 10,386 20,600 13,335
Prepaid expenses......................... 15,302 24,573 19,734
Deposits................................. (10,975) (7,475) (4,471)
Increase (decrease) in operating liabilities
Accounts payable......................... (139,500) (176,334) (214,221)
Accrued liabilities...................... (40,097) 144,618 181,233
Advance deposits......................... 107,405 (20,756) (148,383)
----------- ----------- ------------
Net cash provided by operating
activities.......................... 1,665,564 1,352,470 1,247,048
----------- ----------- ------------
Net cash used in investing activities
Purchases of property and equipment.............. (190,903) (145,957) (115,640)
----------- ----------- ------------
Cash flows from financing activities
Net distributions to owner....................... (1,545,680) (1,259,722) (1,258,311)
Payments on long term debt....................... (24,845) (24,845) --
----------- ----------- ------------
Net cash used in financing
activities.......................... (1,570,525) (1,284,567) (1,258,311)
----------- ----------- ------------
Net decrease in cash............................... (95,864) (78,054) (126,903)
Cash, beginning of period.......................... 222,767 227,767 126,903
----------- ----------- ------------
Cash, end of period................................ $ 126,903 $ 149,713 $ --
=========== =========== ============
</TABLE>

The accompanying notes are an integral part of these statements.

F-101
<PAGE> 182

FOUNTAIN SUITES HOTEL

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1995

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

History and Operations:

The Fountain Suites Hotel (Hotel) is a full service property located in
Phoenix, Arizona, which was owned by FSH Investment Corp. (FSH) as of December
31, 1995. The Hotel was subsequently acquired by Interstate Hotels Corporation,
an affiliate of Interstate Hotels Company (IHC), on August 29, 1996 (the
Acquisition). As a result, these financial statements include the unaudited
results of hotel operations for the Hotel for the period from January 1, 1996
through August 29, 1996.

IHC does not have access to certain books and records of FSH, and
therefore, the financial statements include only those transactions recorded in
the operating accounts of the Hotel except that income tax expense has been
provided based upon the applicable statutory rates. Transactions recorded by FSH
that relate to the Hotel, principally loan advances, interest and payments on
long-term debt, are excluded from these financial statements since they are not
included in the operating accounts acquired by IHC.

Basis of Accounting:

The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. Previously, the Hotel's financial
statements were prepared on the basis of accounting FSH used for income tax
purposes, which is a comprehensive basis of accounting other than generally
accepted accounting principles (GAAP). All tax to GAAP adjustments have been
recorded to opening period equity.

Inventories:

Inventories of food and beverages are carried at the lower of cost or
market, cost being determined on a first-in, first-out basis.

Property and Equipment:

Property and equipment are stated at cost. The cost of assets retired,
together with related accumulated depreciation are eliminated from the accounts
in the year of disposition.

Maintenance and repairs are charged to operating expense as incurred. The
cost of renewals and betterments which materially extend the useful lives of the
assets or increase their productivity are capitalized.

The Hotel provides for depreciation using the straight-line method over the
useful lives as follows:

<TABLE>
<S> <C>
Buildings....................................... 31.5 Years
Furniture, fixtures and equipment............... 7 Years
</TABLE>

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 the
disclosure of contingent assets and liabilities at the date of the financial
statements and the

F-102
<PAGE> 183

NOTES TO FINANCIAL STATEMENTS--CONTINUED

DECEMBER 31, 1995

---------

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED

reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.

Revenue Recognition:

The Hotel recognizes revenue from its rooms and restaurant facilities as
earned on the close of each business day.

Unaudited Financial Statements:

The unaudited statements of hotel operations and hotel equity and hotel
cash flows for the nine-month period ended September 30, 1995 and for the period
from January 1, 1996 through August 29, 1996, in the opinion of management, have
been prepared on the same basis as the audited financial statements and include
all significant adjustments (consisting primarily of normal recurring
adjustments) considered necessary for a fair presentation of the results of
these interim periods. The data disclosed in these notes to the financial
statements for these periods are also unaudited. Operating results for the
period from January 1, 1996 through August 29, 1996 is not necessarily
indicative of the results for the entire year.

NOTE 2. MANAGEMENT AGREEMENT:

Prior to the Acquisition, the Hotel was managed by an affiliated
corporation, pursuant to a management agreement which had been in effect since
1988.

The agreement had an initial term of 20 years, with options to extend for
four additional periods of five years each. The agreement provided for a basic
management fee equal to 2% of gross revenues plus an incentive management fee
equal to 10% of net cash flow before debt service. In addition, the Hotel
reimbursed the affiliate management company for its allocable share of certain
corporate, sales and marketing expenses.

The accompanying financial statements include management and incentive fees
of approximately $387,000 for the year ended December 31, 1995 and $307,000 for
the nine month period ended September 30, 1995 and $375,000 for the period from
January 1, 1996 through August 29, 1996.

NOTE 3. PROPERTY AND EQUIPMENT:

Property and equipment consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Land.................................................. $ 4,197,262
Buildings............................................. 10,655,985
Furniture, fixtures and equipment..................... 9,445,830
------------
24,299,077
Less accumulated depreciation......................... (10,879,018)
------------
Net property and equipment............................ $ 13,420,059
============
</TABLE>

F-103
<PAGE> 184

NOTES TO FINANCIAL STATEMENTS--CONTINUED

DECEMBER 31, 1995

---------

NOTE 4. COMMITMENTS AND CONTINGENCIES:

Operating Leases:

The Hotel has operating leases for office and hotel equipment expiring in
2000. Rent expense under these leases for the year ended December 31, 1995 was
approximately $69,000. Future annual lease payments related to the leases as of
December 31, 1995 are:

401(k) Retirement Plan:

Effective January 1, 1996, the Hotel became a participant in a 401(k)
defined contribution retirement plan established by the affiliated management
company. The Hotel matched 25% of each participating employee's contribution (up
to a total match equal to 1% of the employee's annual compensation), and such
employer contributions became fully vested as a result of the acquisition.

NOTE 5. REVENUES FROM SIGNIFICANT CUSTOMERS:

The Hotel had one significant customer who provided approximately 16
percent of the gross room revenues for the year ended December 31, 1995 and 16
percent for the nine month period ended September 30, 1995 and 19 percent for
the period from January 1, 1996 through August 29, 1996.

F-104
<PAGE> 185

PHOTO PHOTO

ROANOKE AIRPORT MARRIOTT FORT MAGRUDER INN
ROANOKE, VIRGINIA (MANAGED) WILLIAMSBURG, VIRGINIA (OWNED)

PHOTO PHOTO

LOS ANGELES WESTIN BONAVENTURE MARRIOTT'S CASA MARINA RESORT
LOS ANGELES, CALIFORNIA (MANAGED) KEY WEST, FLORIDA (MANAGED)

PHOTO

MARRIOTT AT SAWGRASS RESORT
PONTE VEDRA BEACH, FLORIDA (MANAGED)

<PAGE> 186

===============================================================================

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. 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 THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THIS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 7
The Company......................... 12
Recent Developments................. 13
Price Range of Common Stock......... 16
Dividend Policy..................... 16
Use of Proceeds..................... 16
Capitalization...................... 17
Selected Financial and Other Data... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 21
Indebtedness of the Company......... 27
Business and Properties............. 29
Management.......................... 47
Principal Shareholders.............. 61
Certain Relationships and Related
Transactions...................... 62
Description of Capital Stock........ 64
Shares Eligible for Future Sale..... 66
Taxation............................ 67
Underwriting........................ 70
Legal Matters....................... 71
Experts............................. 72
Forward-Looking Information......... 72
Available Information............... 72
Index to Financial Statements....... F-1
</TABLE>
===============================================================================

===============================================================================

4,000,000 SHARES
LOGO

INTERSTATE HOTELS
COMPANY
COMMON STOCK

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

PROSPECTUS

------------------------
MERRILL LYNCH & CO.

MONTGOMERY SECURITIES

MORGAN STANLEY & CO.
INCORPORATED

SMITH BARNEY INC.

CREDIT LYONNAIS SECURITIES
(USA) INC.
, 1996
===============================================================================
<PAGE> 187

ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED DECEMBER 6, 1996

PROSPECTUS
[LOGO]

4,000,000 SHARES
INTERSTATE HOTELS COMPANY

COMMON STOCK
------------------------

All of the shares of Common Stock of Interstate Hotels Company (the
"Company") are being offered by the Company. Of the 4,000,000 shares of Common
Stock offered, 600,000 shares are being offered hereby outside the United States
and Canada by the International Underwriters and 3,400,000 shares are being
offered in a concurrent offering in the United States and Canada by the U.S.
Underwriters. The offering price and aggregate underwriting discount per share
are identical for both offerings (the "Offering"). The Common Stock is listed on
the New York Stock Exchange (the "NYSE") under the trading symbol "IHC." On
November 12, 1996, the last reported sale price of the Common stock on the NYSE
was $25 5/8 per share.
------------------------

SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)
===========================================================================================================
<S> <C> <C> <C>
Per Share................................... $ $ $
- -----------------------------------------------------------------------------------------------------------
Total(3).................................... $ $ $
===========================================================================================================
</TABLE>

(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."

(2) Before deducting expenses payable by the Company estimated at $ .

(3) The Company has granted the several International Underwriters and the
several U.S. Underwriters 30-day options to purchase up to an additional
90,000 and 510,000 shares of Common Stock, respectively, to cover
over-allotments. If all such shares of Common Stock are purchased, the total
Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See
"Underwriting."
------------------------

The shares of Common Stock are offered by the several Underwriters subject to
prior sale, when, as and if issued to and accepted by them, subject to approval
of certain legal matters by counsel to the Underwriters. The Underwriters
reserve the right to withdraw, cancel or modify such offer and to reject orders
in whole or in part. It is expected that delivery of the shares of Common Stock
will be made in New York City on or about , 1996.
------------------------
MERRILL LYNCH INTERNATIONAL
CREDIT LYONNAIS SECURITIES

MONTGOMERY SECURITIES

MORGAN STANLEY & CO.
INTERNATIONAL
SMITH BARNEY INC.
------------------------

The date of this Prospectus is , 1996.

<PAGE> 188

ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
UNDERWRITING

The International Underwriters named below (the "International
Underwriters"), acting through their international representatives, Merrill
Lynch International, Credit Lyonnais Securities, Montgomery Securities, Morgan
Stanley & Co. International Limited and Smith Barney Inc. (the "International
Representatives"), have severally agreed, subject to the terms and conditions of
an International Purchase Agreement with the Company (the "International
Purchase Agreement"), to purchase from the Company the number of shares of
Common Stock set forth opposite their respective names. The International
Underwriters are committed to purchase all of such shares if any are purchased.
Under certain circumstances, the commitments of non-defaulting International
Underwriters may be increased as set forth in the International Purchase
Agreement.

<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITERS OF SHARES
----------------- ---------
<S> <C>
Merrill Lynch International..............................................
Credit Lyonnais Securities...............................................
Montgomery Securities....................................................
Morgan Stanley & Co. International.......................................
Smith Barney Inc. .......................................................
-------
Total....................................................... 600,000
=======
</TABLE>

The Company has also entered into a purchase agreement (the "U.S. Purchase
Agreement") with certain underwriters in the United States (the "U.S.
Underwriters" and, together with the International Underwriters, the
"Underwriters") for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Montgomery Securities, Morgan Stanley & Co. Incorporated, Smith Barney Inc. and
Credit Lyonnais Securities (USA) Inc. are acting as U.S. representatives (the
"U.S. Representatives"). Subject to the terms and conditions set forth in the
U.S. Purchase Agreement, and concurrently with the sale of 600,000 shares of
Common Stock to the International Underwriters pursuant to the International
Purchase Agreement, the Company has agreed to sell to the U.S. Underwriters, and
the U.S. Underwriters have severally agreed to purchase, an aggregate of
3,400,000 shares of Common Stock. Under certain circumstances under the U.S.
Purchase Agreement, the commitments of non-defaulting U.S. Underwriters may be
increased. The public offering price per share and the total underwriting
discount per share will be identical under the International Purchase Agreement
and the U.S. Purchase Agreement.

In the International Purchase Agreement and the U.S. Purchase Agreement,
the several International Underwriters and the several U.S. Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such agreement if any of the shares of Common Stock being sold pursuant to
each such agreement are purchased. Sales of Common Stock to be purchased by the
International Underwriters in the International Offering and the U.S.
Underwriters in the U.S. Offering are conditioned upon one another.

The Company has granted the International Underwriters an option
exercisable for 30 days after the date hereof to purchase up to an additional
90,000 shares at the public offering price per share, less the underwriting
discount, solely to cover over-allotments, if any. To the extent that the
International Underwriters exercise this option, each International Underwriter
will be obligated, subject to certain conditions, to purchase the number of
additional shares of Common Stock proportionate to such International
Underwriter's initial amount reflected in the foregoing table. Additionally, the
Company has granted the U.S. Underwriters an option exercisable for 30 days
after the date hereof to purchase up to an additional 510,000 shares at the
public offering price per share, less the underwriting discount, solely to cover
over-allotments, if any, on terms similar to those granted to the International
Underwriters.

The International Underwriters propose initially to offer the shares to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain selected dealers at such price less a concession not
in excess of $ per share, and the International Underwriters may allow, and
such dealers may reallow, a discount not in excess of $ per share to certain
other dealers. After the completion of the Offering, the offering price,
concession and discount may be changed.

70
<PAGE> 189

ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS

The International Underwriters and the U.S. Underwriters have entered into
an intersyndicate agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Pursuant to the Intersyndicate Agreement,
sales may be made between the U.S. Underwriters and the International
Underwriters of such number of shares of Common Stock as may be mutually agreed.
The price of any Common Stock so sold shall be the public offering price, less
an amount not greater than the selling concession.

The International Representatives and the U.S. Representatives acted as
representatives of the Underwriters in the IPO and received customary
underwriting compensation in connection therewith.

The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.

In the International Purchase Agreement, the Company has agreed to
indemnify the several International Underwriters against certain civil
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.

LEGAL MATTERS

71
<PAGE> 190

ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS

EXPERTS

The Consolidated Financial Statements of Interstate Hotels Company and
Predecessor Entity as of December 31, 1994 and 1995 and for the years ended
December 31, 1993, 1994 and 1995; the Combined Financial Statements of
Interstone I Property Partnerships and Predecessor Entities as of December 31,
1994 and 1995 and for the years ended December 31, 1993, 1994 and 1995; the
Combined Financial Statements of Interstone/CGL Partners, L.P. and Predecessor
Entity as of December 31, 1994, December 14, 1995 and December 31, 1995 and for
the years ended December 31, 1993 and 1994, for the period from January 1, 1995
to December 14, 1995 and for the period from December 15, 1995 to December 31,
1995; and the Financial Statements of Boston Marriott Westborough Hotel as of
December 31, 1994 and 1995 and for the years ended December 31, 1993, 1994 and
1995; the Combined Financial Statements of Carter Associates and Carter
Associates, Inc. as of December 31, 1995 and for the year ended December 31,
1995; the Financial Statements of OBR Limited, L.P. as of December 31, 1995 and
for the year ended December 31, 1995; and the Combined Financial Statements of
Trust Management, Inc. and Trust Leasing, Inc. as of December 31, 1995 and for
the year ended December 31, 1995 included in this Prospectus have been included
herein in reliance on the reports of Coopers & Lybrand L.L.P., independent
accountants, given on their authority as experts in accounting and auditing.

FORWARD-LOOKING INFORMATION

AVAILABLE INFORMATION

72
<PAGE> 191

ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS

York Stock Exchange. Reports and other information concerning the Company may be
inspected and copied at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.

73
<PAGE> 192

===============================================================================

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

TABLE OF CONTENTS

===============================================================================
4,000,000 SHARES
LOGO

INTERSTATE HOTELS
COMPANY
COMMON STOCK
------------------------

PROSPECTUS

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

MERRILL LYNCH INTERNATIONAL

CREDIT LYONNAIS SECURITIES

MONTGOMERY SECURITIES

MORGAN STANLEY & CO.
INTERNATIONAL

SMITH BARNEY INC.
, 1996

================================================================================
<PAGE> 193

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the estimated expenses, other than
underwriting discounts and commissions, paid or payable in connection with the
issuance and distribution of the Common Stock being registered hereby:

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............. $ 51,570
National Association of Securities Dealers, Inc. Filing Fee..... 17,578
New York Stock Exchange Listing Fee............................. 47,800
Printing and Engraving Expenses................................. 325,000
Legal Fees and Expenses......................................... 400,000
Accounting Fees and Expenses.................................... 550,000
Transfer Agent and Registrar Fees............................... 2,000
Miscellaneous Fees and Expenses................................. 126,052
----------
Total...................................................... $1,520,000
==========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Sections 1741 through 1750 of Subchapter D, Chapter 17, of the Pennsylvania
Business Corporation Law of 1988, as amended (the "BCL"), contain provisions for
mandatory and discretionary indemnification of a corporation's directors,
officers and other personnel, and related matters.

Under Section 1741, subject to certain limitations, a corporation has the
power to indemnify directors and officers under certain prescribed circumstances
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with an action or
proceeding, whether civil, criminal, administrative or investigative (other than
derivative actions), to which any of them is a party or is threatened to be made
a party by reason of his being a representative of the corporation or serving at
the request of the corporation as a representative of another corporation,
partnership, joint venture, trust or other enterprise, if he acted in good faith
and in a manner he reasonably believed to be in, or not opposed to, the best
interests of the corporation and, with respect to any criminal proceeding, had
no reasonable cause to believe his conduct was unlawful.

Section 1742 permits indemnification in derivative actions if the
appropriate standard of conduct is met, except in respect of any claim, issue or
matter as to which the person has been adjudged to be liable to the corporation
unless and only to the extent that the proper court determines upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, the person is fairly and reasonably entitled to indemnity for the
expenses that the court deems proper.

Under Section 1743, indemnification is mandatory to the extent that the
officer or director has been successful on the merits or otherwise in defense of
any action or proceeding referred to in Section 1741 or 1742.

Section 1744 provides that, unless ordered by a court, any indemnification
under Section 1741 or 1742 shall be made by the corporation only as authorized
in the specific case upon a determination that the representative met the
applicable standard of conduct and that such determination will be made (i) by
the board of directors by a majority vote of a quorum of directors not parties
to the action or proceeding; (ii) if a quorum is not obtainable, or if
obtainable and a majority of disinterested directors so directs, by independent
legal counsel; or (iii) by the shareholders.

Section 1745 provides that expenses incurred by an officer or director in
defending an action or proceeding may be paid by the corporation in advance of
the final disposition of such action or proceeding upon receipt of an
undertaking by or on behalf of such person to repay such amount if it shall
ultimately be determining that he is not entitled to be indemnified by the
corporation.

II-1
<PAGE> 194

Section 1746 provides generally that the indemnification and advancement of
expenses provided by Subchapter 17D of the BCL (i) will not be deemed exclusive
of any other rights to which a person seeking indemnification or advancement of
expenses may be entitled under any bylaw, agreement, vote of shareholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding that office, and (ii) may not
be made in any case where the act or failure to act giving rise to the claim for
indemnification is determined by a court to have constituted willful misconduct
or recklessness.

Section 1747 grants a corporation the power to purchase and maintain
insurance on behalf of any director or officer against any liability incurred by
him in his capacity as officer or director, whether or not the corporation would
have the power to indemnify him against that liability under Subchapter 17D of
BCL.

Sections 1748 and 1749 extend the indemnification and advancement of
expenses provisions contained in Subchapter 17D of the BCL to successor
corporations in fundamental corporate changes and to representatives serving as
fiduciaries of employee benefit plans.

Section 1750 provides that the indemnification and advancement of expenses
provided by, or granted pursuant to, Subchapter 17D of the BCL shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs and personal representative of such person.

The Company's Bylaws provide in general that the Company shall indemnify
its officers and directors to the fullest extent permitted by law. The Bylaws
further provide that any alteration, amendment, or repeal of the indemnification
provisions, if not approved by 80% of the total number of directors of the
Company, requires the affirmative vote of shareholders owning at least 80% of
the outstanding shares entitled to vote.

As authorized by the Company's Articles of Incorporation, the Company
entered into indemnification agreements with each of its directors. These
indemnification agreements provide for, among other things, (i) the
indemnification by the Company of the indemnitees thereunder to the extent
described above, (ii) the advancement of attorney's fees and other expenses, and
(iii) the establishment, upon approval by the Board, of trusts or other funding
mechanisms to fund the Company's indemnification obligations thereunder.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

In April 1996, the Company issued 10,000 shares of Common Stock to Milton
Fine, Chairman of the Board of the Company, for nominal consideration. The
shares were issued without registration under the Securities Act pursuant to the
exemption afforded by Section 4(2) of the Securities Act.

Reference is made to "Certain Relationships and Transactions--The
Organization and Initial Public Offering" and "Management--Stock Option Grants"
regarding shares of Common Stock issued in connection with the Organization, the
purchasers thereof and the consideration therefor. Such issuances occurred
without registration under the Securities Act pursuant to the exemptions
afforded by Section 3(a)(9) or 4(2) of the Securities Act.

II-2
<PAGE> 195

ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.

(a) Exhibits.

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- ------------------------------------------------------------------------------
<S> <C>
1.1(a) Form of Purchase Agreement (U.S. Version)
1.1(b) Form of Purchase Agreement (International Version)
+ 2.1 Agreement and Plan of Merger, dated as of November 1, 1995, among Interstate
Hotels Corporation and the other persons signatory thereto
++ 2.2 Formation Agreement among the Company and the parties identified on the
signature page thereof
++ 3.1 Amended and Restated Articles of Incorporation of the Company
++ 3.2 Amended and Restated By-Laws of the Company
4.1 Specimen Common Stock Certificate
++ 4.2(a) Credit Agreement, dated as of June 25, 1996, among Interstate Hotels
Corporation, Credit Lyonnais and the other parties signatory thereto
4.2(b) First Amendment to Credit Agreement, dated October 21, 1996, among Interstate
Hotels Corporation, Credit Lyonnais and the other parties signatory thereto
5.1 Opinion of Jones, Day, Reavis & Pogue regarding the legality of issuance of
the Common Stock being registered
+ 10.1(a) Option Agreement, dated as of October 12, 1995, among Interstate Hotels
Corporation and the other persons signatory thereto
+ 10.1(b) Amendment No. 1 to Option Agreement, dated as of December 15, 1995, among
Interstate Hotels Corporation and the other persons signatory thereto
+ 10.1(c) Amendment No. 2 to Option Agreement, dated as of March 29, 1996, among
Interstate Hotels Corporation and the other persons signatory thereto
+ 10.2 Agreement of Purchase and Sale, dated as of March 29, 1996, among the Sellers
named therein and IHC Member Corporation
+ 10.3 Contribution Agreement, dated as of March 29, 1996, among Interstate Hotels
Corporation and the other persons signatory thereto
++ 10.4 Stockholders Agreement, dated as of June 25, 1996, among the Company,
Blackstone Real Estate Advisors L.P. and the shareholders named therein
++ 10.5 Registration Rights Agreement, dated as of June 25, 1996, among the Company
and the shareholders named therein
+ 10.6 Master Agreement, dated as of April 1, 1996, among Host Funding, Inc.,
Crossroads Hospitality Tenant Company, L.L.C. and Crossroads Hospitality
Company, L.L.C.
+ 10.7(a) Lease Agreement, dated as of March 29, 1996, between Host Funding, Inc. and
Crossroads Hospitality Tenant Company, L.L.C. relating to the Super 8 Miner,
Missouri
+ 10.7(b) Lease Agreement, dated as of March 29, 1996, between Host Funding, Inc. and
Crossroads Hospitality Tenant Company, L.L.C. relating to the Super 8 Poplar
Bluff, Missouri
+ 10.7(c) Lease Agreement, dated as of March 29, 1996, between Host Funding, Inc. and
Crossroads Hospitality Tenant Company, L.L.C. relating to the Super 8 Rock
Falls, Illinois
</TABLE>

<TABLE>
<S> <C>
+ 10.7(d) Lease Agreement, dated as of March 29, 1996, between Host Funding, Inc. and
Crossroads Hospitality Tenant Company, L.L.C. relating to the Super 8 San
Diego, California
+ 10.7(e) Lease Agreement, dated as of March 29, 1996, between Host Funding, Inc. and
Crossroads Hospitality Tenant Company, L.L.C. relating to the Super 8
Somerset, Kentucky
</TABLE>

II-3
<PAGE> 196

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- ------------------------------------------------------------------------------
<S> <C>
+ 10.8(a)(1) Interstone Three Partners I L.P. Limited Partnership Agreement, dated as of
December 15, 1995, among BJS Interstone Management Associates, IHC/Interstone
Corporation, Blackstone Real Estate Partners I L.P. and IHC/Interstone
Partnership II, L.P.
++ 10.8(a)(2) First Amendment to Interstone Three Partners I L.P. Limited Partnership
Agreement, dated as of June 25, 1996, among BJS Interstone Management
Associates, IHC/ Interstone Corporation, Blackstone Real Estate Partners I
L.P. and IHC/Interstone Partnership II, L.P.
+ 10.8(b)(1) Interstone Three Partners II L.P. Limited Partnership Agreement, dated as of
December 15, 1995, among BJS Interstone Management Associates, IHC/Interstone
Corporation, Blackstone Real Estate Partners II L.P. and IHC/Interstone
Partnership II, L.P.
++ 10.8(b)(2) First Amendment to Interstone Three Partners II L.P. Limited Partnership
Agreement, dated as of June 25, 1996, among BJS Interstone Management
Associates, IHC/ Interstone Corporation, Blackstone Real Estate Partners II
L.P. and IHC/Interstone Partnership II, L.P.
+ 10.8(c)(1) Interstone Three Partners III L.P. Limited Partnership Agreement, dated as of
December 15, 1995, among BJS Interstone Management Associates, IHC/Interstone
Corporation, Blackstone Real Estate Partners III L.P., Blackstone Real Estate
Holdings L.P., Blackstone RE Capital Partners L.P., Blackstone RE Offshore
Capital Partners L.P. and IHC/Interstone Partnership II, L.P.
++ 10.8(c)(2) First Amendment to Interstone Three Partners III L.P. Limited Partnership
Agreement, dated as of June 25, 1996, among BJS Interstone Management
Associates, IHC/ Interstone Corporation, Blackstone Real Estate Partners III
L.P., Blackstone Real Estate Holdings L.P., Blackstone RE Capital Partners
L.P., Blackstone RE Offshore Capital Partners L.P. and IHC/Interstone
Partnership II, L.P. Interstone Three Partners IV L.P. Limited Partnership
Agreement, dated as
+ 10.8(d)(1) of December 15, 1995, among BJS Interstone Management Associates,
IHC/Interstone Corporation, Blackstone Real Estate Partners IV L.P.,
Blackstone RE Capital Partners II L.P. and IHC/Interstone Partnership II, L.P.
++ 10.8(d)(2) First Amendment to Interstone Three Partners IV L.P. Limited Partnership
Agreement, dated as of June 25, 1996, among BJS Interstone Management
Associates, IHC/ Interstone Corporation, Blackstone Real Estate Partners IV
L.P., Blackstone RE Capital Partners II L.P. and IHC/Interstone Partnership
II, L.P.
+ 10.9 Interstate Hotels Company Executive Retirement Plan
+ 10.10 Interstate Hotels Company Equity Incentive Plan
+ 10.11 Interstate Hotels Company Stock Purchase Plan
+ 10.12 Interstate Hotels Company Management Bonus Plan
+ 10.13 Interstate Hotels Company Stock Option Plan for Non-Employee Directors
+ 10.14(a) Employment Agreement between the Company and Milton Fine
+ 10.14(b) Employment Agreement between the Company and W. Thomas Parrington, Jr.
+ 10.14(c) Employment Agreement between the Company and J. William Richardson
+ 10.14(d) Employment Agreement between the Company and Robert L. Froman
+ 10.14(e) Employment Agreement between the Company and Marvin I. Droz
10.14(f) Employment Agreement between the Company and Thomas D. Reese
+ 10.15 Form of Severance Agreement between the Company and each of Milton Fine, W.
Thomas Parrington, Jr., J. William Richardson, Robert L. Froman and Marvin I.
Droz
+ 10.16 Form of Indemnification Agreement between the Company and each of its
directors
</TABLE>

II-4
<PAGE> 197

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- ------------------------------------------------------------------------------
<S> <C>
+ 10.17(a) Interstate Hotels Company Deferred Compensation Plan
+ 10.17(b) Deferred Compensation Agreement between the Company and W. Thomas Parrington,
Jr.
+ 10.17(c) Deferred Compensation Agreement between the Company and J. William Richardson
10.18(a)(1) Contribution Agreement, dated as of October 4, 1996, among Trust Leasing,
Inc., Trust Management, Inc., Phillip H. McNeill, Sr., Crossroads/Memphis
Company, L.L.C. and Crossroads/Memphis Partnership, L.P.
10.18(a)(2) First Amendment to Contribution Agreement, dated November 4, 1996, among Trust
Leasing, Inc., Trust Management, Inc., Phillip H. McNeill, Sr.,
Crossroads/Memphis Company, L.L.C. and Crossroads/Memphis Partnership, L.P.
10.18(a)(3) Second Amendment to Contribution Agreement, dated November 15, 1996, among
Trust Leasing, Inc., Trust Management, Inc., Phillip H. McNeill, Sr.,
Crossroads/Memphis Company, L.L.C. and Crossroads/Memphis Partnership, L.P.
10.18(b)(1) Master Agreement, dated as of November 4, 1996, among Equity Inns Partnership,
L.P., Interstate Hotels Corporation, Equity Inns, Inc., Crossroads/Memphis
Partnership, L.P. and Crossroads Future Company, L.L.C.
10.18(b)(2) First Amendment to Master Agreement, dated November 15, 1996, among Equity
Inns Partnership, L.P., Interstate Hotels Corporation, Equity Inns, Inc.,
Crossroads/Memphis Partnership, L.P. and Crossroads Future Company, L.L.C.
21.1 List of Subsidiaries of the Company
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Jones, Day, Reavis & Pogue (included in Exhibit 5.1)
23.3 Consent of Pannell Kerr Forster
* 24.1 Powers of Attorney executed by the Company, Michael J. Aranson, David J. Fine,
Milton Fine, R. Michael McCullough, W. Thomas Parrington, Jr., J. William
Richardson, Thomas J. Saylak and Steven J. Smith
* 27.1 Financial Data Schedule
</TABLE>

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

* Filed previously as an exhibit to this Registration Statement.

+ Filed previously as an exhibit to the Company's Registration Statement on
Form S-1, as amended (File No. 333-3958), and incorporated herein by
reference.

++ Filed previously as an exhibit to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1996 and incorporated herein by
reference.

(B) FINANCIAL STATEMENT SCHEDULES.

No schedules for which provision is made in the applicable regulations of
the Securities and Exchange Commission are required under the related
instructions or are applicable or the information is contained in the financial
statements and therefore have been omitted.

ITEM 17. UNDERTAKINGS.

The Company hereby undertakes to provide to the Underwriters at the closing
specified in the Purchase Agreements certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
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 Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses

II-5
<PAGE> 198

incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
registered, the Company 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 Securities Act and will be governed by the final
adjudication of such issue.

The Company hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act 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, each posteffective 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.

II-6
<PAGE> 199

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Amendment No. 2 to its Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Pittsburgh, in the State of Pennsylvania, on December 6, 1996.

INTERSTATE HOTELS COMPANY

By: /s/ MARVIN I. DROZ
--------------------------------
Marvin I. Droz
Senior Vice President

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Company's Registration Statement on Form S-1 has been signed below
by the following persons in the capacities indicated on December 6, 1996.

<TABLE>
<CAPTION>
SIGNATURE TITLE
- ---------------------------------------- ------------------------------------------------
<C> <S>

* President and Chief Executive Officer
- ----------------------------------------
W. Thomas Parrington, Jr.

* Executive Vice President and Chief Financial
- ---------------------------------------- Officer
J. William Richardson (Principal Financial and Accounting Officer)

* Director
- ----------------------------------------
Milton Fine

* Director
- ----------------------------------------
David J. Fine

* Director
- ----------------------------------------
Michael J. Aranson

* Director
- ----------------------------------------
R. Michael McCullough

* Director
- ----------------------------------------
Thomas J. Saylak

* Director
- ----------------------------------------
Steven J. Smith
</TABLE>

*By: /s/ MARVIN I. DROZ
---------------------------
Marvin I. Droz

Pursuant to Powers of Attorney
filed previously with the
Securities and Exchange Commission

II-7
<PAGE> 200

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ------------- ---------------------------------------------------------------------- -----
<S> <C> <C>
1.1(a) Form of Purchase Agreement (U.S. Version)
1.1(b) Form of Purchase Agreement (International Version)
+ 2.1 Agreement and Plan of Merger, dated as of November 1, 1995, among
Interstate Hotels Corporation and the other persons signatory thereto
++ 2.2 Formation Agreement among the Company and the parties identified on
the signature page thereof
++ 3.1 Amended and Restated Articles of Incorporation of the Company
++ 3.2 Amended and Restated By-Laws of the Company
4.1 Specimen Common Stock Certificate
++ 4.2(a) Credit Agreement, dated as of June 25, 1996, among Interstate Hotels
Corporation, Credit Lyonnais and the other parties signatory thereto
4.2(b) First Amendment to Credit Agreement, dated October 21, 1996, among
Interstate Hotels Corporation, Credit Lyonnais and the other parties
signatory thereto
5.1 Opinion of Jones, Day, Reavis & Pogue regarding the legality of
issuance of the Common Stock being registered
+ 10.1(a) Option Agreement, dated as of October 12, 1995, among Interstate
Hotels Corporation and the other persons signatory thereto
+ 10.1(b) Amendment No. 1 to Option Agreement, dated as of December 15, 1995,
among Interstate Hotels Corporation and the other persons signatory
thereto
+ 10.1(c) Amendment No. 2 to Option Agreement, dated as of March 29, 1996, among
Interstate Hotels Corporation and the other persons signatory thereto
+ 10.2 Agreement of Purchase and Sale, dated as of March 29, 1996, among the
Sellers named therein and IHC Member Corporation
+ 10.3 Contribution Agreement, dated as of March 29, 1996, among Interstate
Hotels Corporation and the other persons signatory thereto
++ 10.4 Stockholders Agreement, dated as of June 25, 1996, among the Company,
Blackstone Real Estate Advisors L.P. and the shareholders named
therein
++ 10.5 Registration Rights Agreement, dated as of June 25, 1996, among the
Company and the shareholders named therein
+ 10.6 Master Agreement, dated as of April 1, 1996, among Host Funding, Inc.,
Crossroads Hospitality Tenant Company, L.L.C. and Crossroads
Hospitality Company, L.L.C.
+ 10.7(a) Lease Agreement, dated as of March 29, 1996, between Host Funding,
Inc. and Crossroads Hospitality Tenant Company, L.L.C. relating to the
Super 8 Miner, Missouri
+ 10.7(b) Lease Agreement, dated as of March 29, 1996, between Host Funding,
Inc. and Crossroads Hospitality Tenant Company, L.L.C. relating to the
Super 8 Poplar Bluff, Missouri
+ 10.7(c) Lease Agreement, dated as of March 29, 1996, between Host Funding,
Inc. and Crossroads Hospitality Tenant Company, L.L.C. relating to the
Super 8 Rock Falls, Illinois
+ 10.7(d) Lease Agreement, dated as of March 29, 1996, between Host Funding,
Inc. and Crossroads Hospitality Tenant Company, L.L.C. relating to the
Super 8 San Diego, California
+ 10.7(e) Lease Agreement, dated as of March 29, 1996, between Host Funding,
Inc. and Crossroads Hospitality Tenant Company, L.L.C. relating to the
Super 8 Somerset, Kentucky
</TABLE>

<PAGE> 201

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ------------- ---------------------------------------------------------------------- -----
<S> <C> <C>
+ 10.8(a)(1) Interstone Three Partners I L.P. Limited Partnership Agreement, dated
as of December 15, 1995, among BJS Interstone Management Associates,
IHC/ Interstone Corporation, Blackstone Real Estate Partners I L.P.
and IHC/Interstone Partnership II, L.P.
++ 10.8(a)(2) First Amendment to Interstone Three Partners I L.P. Limited
Partnership Agreement, dated as of June 25, 1996, among BJS Interstone
Management Associates, IHC/Interstone Corporation, Blackstone Real
Estate Partners I L.P. and IHC/Interstone Partnership II, L.P.
+ 10.8(b)(1) Interstone Three Partners II L.P. Limited Partnership Agreement, dated
as of December 15, 1995, among BJS Interstone Management Associates,
IHC/ Interstone Corporation, Blackstone Real Estate Partners II L.P.
and IHC/ Interstone Partnership II, L.P.
++ 10.8(b)(2) First Amendment to Interstone Three Partners II L.P. Limited
Partnership Agreement, dated as of June 25, 1996, among BJS Interstone
Management Associates, IHC/Interstone Corporation, Blackstone Real
Estate Partners II L.P. and IHC/Interstone Partnership II, L.P.
+ 10.8(c)(1) Interstone Three Partners III L.P. Limited Partnership Agreement,
dated as of December 15, 1995, among BJS Interstone Management
Associates, IHC/ Interstone Corporation, Blackstone Real Estate
Partners III L.P., Blackstone Real Estate Holdings L.P., Blackstone RE
Capital Partners L.P., Blackstone RE Offshore Capital Partners L.P.
and IHC/Interstone Partnership II, L.P.
++ 10.8(c)(2) First Amendment to Interstone Three Partners III L.P. Limited
Partnership Agreement, dated as of June 25, 1996, among BJS Interstone
Management Associates, IHC/Interstone Corporation, Blackstone Real
Estate Partners III L.P., Blackstone Real Estate Holdings L.P.,
Blackstone RE Capital Partners L.P., Blackstone RE Offshore Capital
Partners L.P. and IHC/Interstone Partnership II, L.P. Interstone Three
Partners IV L.P. Limited Partnership Agreement, dated as
+ 10.8(d)(1) of December 15, 1995, among BJS Interstone Management Associates, IHC/
Interstone Corporation, Blackstone Real Estate Partners IV L.P.,
Blackstone RE Capital Partners II L.P. and IHC/Interstone Partnership
II, L.P.
++ 10.8(d)(2) First Amendment to Interstone Three Partners IV L.P. Limited
Partnership Agreement, dated as of June 25, 1996, among BJS Interstone
Management Associates, IHC/Interstone Corporation, Blackstone Real
Estate Partners IV L.P., Blackstone RE Capital Partners II L.P. and
IHC/Interstone Partnership II, L.P.
+ 10.9 Interstate Hotels Company Executive Retirement Plan
+ 10.10 Interstate Hotels Company Equity Incentive Plan
+ 10.11 Interstate Hotels Company Stock Purchase Plan
+ 10.12 Interstate Hotels Company Management Bonus Plan
+ 10.13 Interstate Hotels Company Stock Option Plan for Non-Employee Directors
+ 10.14(a) Employment Agreement between the Company and Milton Fine
+ 10.14(b) Employment Agreement between the Company and W. Thomas Parrington, Jr.
+ 10.14(c) Employment Agreement between the Company and J. William Richardson
+ 10.14(d) Employment Agreement between the Company and Robert L. Froman
+ 10.14(e) Employment Agreement between the Company and Marvin I. Droz
10.14(f) Employment Agreement between the Company and Thomas D. Reese
+ 10.15 Form of Severance Agreement between the Company and each of Milton
Fine, W. Thomas Parrington, Jr., J. William Richardson, Robert L.
Froman and Marvin I. Droz
</TABLE>

<PAGE> 202

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ------------- ---------------------------------------------------------------------- -----
<S> <C> <C>
+ 10.16 Form of Indemnification Agreement between the Company and each of its
directors
+ 10.17(a) Interstate Hotels Company Deferred Compensation Plan
+ 10.17(b) Deferred Compensation Agreement between the Company and W. Thomas
Parrington, Jr.
+ 10.17(c) Deferred Compensation Agreement between the Company and J. William
Richardson
10.18(a)(1) Contribution Agreement, dated as of October 4, 1996, among Trust
Leasing, Inc., Trust Management, Inc., Phillip H. McNeill, Sr.,
Crossroads/Memphis Company, L.L.C. and Crossroads/Memphis Partnership,
L.P.
10.18(a)(2) First Amendment to Contribution Agreement, dated November 4, 1996,
among Trust Leasing, Inc., Trust Management, Inc., Phillip H. McNeill,
Sr., Crossroads/ Memphis Company, L.L.C. and Crossroads/Memphis
Partnership, L.P.
10.18(a)(3) Second Amendment to Contribution Agreement, dated November 15, 1996,
among Trust Leasing, Inc., Trust Management, Inc., Phillip H. McNeill,
Sr., Crossroads/ Memphis Company, L.L.C. and Crossroads/Memphis
Partnership, L.P.
10.18(b)(1) Master Agreement, dated as of November 4, 1996, among Equity Inns
Partnership, L.P., Interstate Hotels Corporation, Equity Inns, Inc.,
Crossroads/Memphis Partnership, L.P. and Crossroads Future Company,
L.L.C.
10.18(b)(2) First Amendment to Master Agreement, dated November 15, 1996, among
Equity Inns Partnership, L.P., Interstate Hotels Corporation, Equity
Inns, Inc., Crossroads/ Memphis Partnership, L.P. and Crossroads
Future Company, L.L.C.
21.1 List of Subsidiaries of the Company
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Jones, Day, Reavis & Pogue (included in Exhibit 5.1)
23.3 Consent of Pannell Kerr Forster
* 24.1 Powers of Attorney executed by the Company, Michael J. Aranson, David
J. Fine, Milton Fine, R. Michael McCullough, W. Thomas Parrington,
Jr., J. William Richardson, Thomas J. Saylak and Steven J. Smith
* 27.1 Financial Data Schedule
</TABLE>

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

* Filed previously as an exhibit to this Registration Statement.

+ Filed previously as an exhibit to the Company's Registration Statement on
Form S-1, as amended (File No. 333-3958), and incorporated herein by
reference.

++ Filed previously as an exhibit to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1996 and incorporated herein by
reference.

<PAGE> 1
Exhibit 1.1(a)

3,400,000 Shares

INTERSTATE HOTELS COMPANY

(a Pennsylvania corporation)

Common Stock

(Par Value $.01 Per Share)

U.S. PURCHASE AGREEMENT

December [ ], 1996

MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MONTGOMERY SECURITIES
MORGAN STANLEY & CO., INCORPORATED
SMITH BARNEY INC.
CREDIT LYONNAIS SECURITIES (USA) INC.
as Representatives of the several U.S. Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Merrill Lynch World Headquarters
North Tower
World Financial Center
New York, New York 10281

Ladies and Gentlemen:

Interstate Hotels Company, a Pennsylvania corporation (the "Company"),
confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("Merrill Lynch"), Montgomery Securities ("Montgomery"),
Morgan Stanley & Co. Incorporated ("Morgan Stanley"), Smith Barney Inc. ("Smith
Barney"), Credit Lyonnais Securities (USA) Inc. ("Credit Lyonnais"), and each
of the other underwriters named in Schedule A hereto (collectively, the "U.S.
Underwriters," which term shall also include any underwriter substituted as
hereinafter provided in Section 10 hereof), for whom Merrill Lynch, Montgomery,
Morgan Stanley, Smith Barney and Credit Lyonnais are acting as representatives
(in such capacity, Merrill Lynch, Montgomery, Morgan Stanley,

<PAGE> 2

Smith Barney and Credit Lyonnais shall hereinafter be referred to collectively
as the "Representatives"), with respect to the sale by the Company and the
purchase by the U.S. Underwriters, acting severally and not jointly, of the
respective number of shares of common stock, par value $.01 per share, of the
Company ("Common Stock") set forth in said Schedule A (except as otherwise
provided in the U.S. Pricing Agreement referred to below) and with respect to
the grant by the Company to the U.S. Underwriters, acting severally and not
jointly, of the option described in Section 2(b) hereof to purchase all or any
part of 510,000 additional shares of Common Stock to cover over-allotments, in
each case except as may otherwise be provided in the U.S. Pricing Agreement (as
hereinafter defined). The 3,400,000 shares of Common Stock (the "Initial U.S.
Securities") to be purchased by the U.S. Underwriters and all or any part of
the 510,000 shares of Common Stock subject to the option described in Section
2(b) hereof (the "Option U.S. Securities") are collectively hereinafter called
the "Securities."

Prior to the purchase and public offering of the Securities by the several
U.S. Underwriters, the Company and the Representatives, acting on behalf of the
several U.S. Underwriters, shall enter into an agreement substantially in the
form of Exhibit A hereto (the "U.S. Pricing Agreement"). The U.S. Pricing
Agreement may take the form of an exchange of any standard form of written
telecommunication between the Company and the Representatives and shall specify
such applicable information as is indicated in Exhibit A hereto. The offering
of the Securities will be governed by this agreement (the "Agreement"), as
supplemented by the U.S. Pricing Agreement. From and after the date of the
execution and delivery of the U.S. Pricing Agreement, this Agreement shall be
deemed to incorporate the U.S. Pricing Agreement.

It is understood that the Company is concurrently entering into an
agreement dated the date hereof (the "International Purchase Agreement")
providing for the offering by the Company of 600,000 shares of Common Stock
(the "Initial International Securities") through arrangements with certain
underwriters outside the United States and Canada (the "International
Underwriters") for whom Merrill Lynch International, Credit Lyonnais
Securities, Montgomery Securities, Morgan Stanley & Co. International Limited
and Smith Barney Inc. are acting as the

<PAGE> 3

representatives (the "International Representatives") and the grant by the
Company to the International Underwriters, acting severally and not jointly, of
an option to purchase all or any part of the International Underwriters' pro
rata portion of up to 90,000 additional shares of Common Stock solely to cover
over-allotments, if any (the "Option International Securities", and
collectively with the Initial International Securities, the "International
Securities"). It is understood that the Company is not obligated to sell, and
the International Underwriters are not obligated to purchase, any Initial
International Securities unless all of the Initial U.S. Securities are
contemporaneous purchased by the U.S. Underwriters.

Prior to the purchase and public offering of the International Securities
by the several International Underwriters, the Company and the International
Representatives, acting on behalf of the several International Underwriters,
shall enter into an agreement substantially in the form of Exhibit A to the
International Purchase Agreement (the "International Pricing Agreement"). The
International Pricing Agreement may take the form of an exchange of any
standard form of written telecommunication between the Company and the
International Representatives and shall specify such applicable information as
is indicated in Exhibit A to the International Purchase Agreement. The offering
of the International Securities will be governed by the International Purchase
Agreement, as supplemented by the International Pricing Agreement. From and
after the date of the execution and delivery of the International Pricing
Agreement, the International Purchase Agreement shall be deemed to incorporate
the International Pricing Agreement.

The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (File No. 333-15507) and a
related preliminary prospectus for the registration of the Securities under the
Securities Act of 1933, as amended (the "1933 Act"), has filed such amendments
thereto, if any, and such amended preliminary prospectuses as may have been
required to the date hereof, and will file such additional amendments thereto
and such amended prospectuses as may hereafter be required. Such registration
statement (as amended, if applicable) and the prospectus constituting a part
thereof (including the information,

<PAGE> 4

if any, deemed to be part thereof pursuant to Rule 430A(b) of the rules and
regulations of the Commission under the 1933 Act (the "1933 Act Regulations")),
as from time to time amended or supplemented pursuant to the 1933 Act, or
otherwise, are hereinafter referred to as the "Registration Statement," and the
"Prospectus," respectively, except that if any revised prospectus shall be
provided to the U.S. Underwriters by the Company for use in connection with the
offering of the Securities which differs from the Prospectus on file at the
Commission at the time the Registration Statement becomes effective (whether or
not such revised prospectus is required to be filed by the Company pursuant to
Rule 424(b) of the 1933 Act Regulations), the term Prospectus shall refer to
such revised prospectus from and after the time it was provided to the U.S.
Underwriters for such use. Two forms of prospectuses are to be used in
connection with the offering and sale of the Securities to the Underwriters,
one relating to the International Securities and one relating to the U.S.
Securities. The form of prospectus relating to the International Securities is
identical to the form of prospectus relating to the U.S. Securities, except for
the front and back covers and the information under the caption "Underwriting."
Any registration statement (including any amendment or supplement thereto or
information which is deemed part thereof) filed by the Company to register
additional shares of Common Stock of the Company under Rule 462(b) of the 1933
Act Regulations (a "Rule 462(b) Registration Statement") shall be deemed to be
part of the Registration Statement. Any prospectus (including any amendment or
supplement thereto or information which is deemed part thereof) included in a
Rule 462(b) Registration Statement and any term sheet as contemplated by Rule
434 of the 1933 Act Regulations (a "Term Sheet") shall be deemed to be part of
the Prospectus. Capitalized terms used but not otherwise defined herein shall
have the meanings given to those terms in the Prospectus.

The Company understands that the U.S. Underwriters propose to make a
public offering of the Securities as soon as the U.S. Representatives deem
advisable after the Registration Statement becomes effective and the U.S.
Pricing Agreement has been executed and delivered.

<PAGE> 5

The Company has reserved up to 100,000 of the Securities (the "Reserved
Securities") for offering and sale to certain of its employees, customers,
vendors and business associates pursuant to a reserve share program as stated
in the "Underwriting" section of the Prospectus (the "Reserve Share Program").
The Securities under the Reserve Share Program will be sold to the employees,
customers, vendors and business associates by the U.S. Underwriters pursuant to
this Agreement and by the International Underwriters pursuant to the
International Purchase Agreement at the public offering price. Any such shares
not orally confirmed for purchase by such persons by the end of the first
business day following the date of this Agreement will be offered to the public
by the U.S. Underwriters and the International Underwriters as set forth in the
Prospectus.

SECTION 1. Representations and Warranties of the Company.

(a) The Company represents and warrants to each U.S. Underwriter as of the
date hereof and as of the date of the U.S. Pricing Agreement (such later date
being hereinafter referred to as the "Representation Date") as follows:

(i) At the time the Registration Statement becomes effective and at
the Representation Date, the Registration Statement will comply in all
material respects with the requirements of the 1933 Act and the 1933 Act
Regulations and will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading. The Prospectus, at the
Representation Date (unless the term "Prospectus" refers to a prospectus
which has been provided to the U.S. Underwriters by the Company for use in
connection with the offering of the Securities which differs from the
Prospectus on file at the Commission at the time the Registration
Statement becomes effective, in which case at the time it is first
provided to the U.S. Underwriters for such use) and at the Closing.0 Time
referred to in Section 2 hereof, will comply in all material respects with
the requirements of the 1933 Act and the 1933 Act Regulations and will not
include an untrue statement of a material fact or

<PAGE> 6

omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the representations and warranties in
this subsection shall not apply to statements in or omissions from the
Registration Statement or Prospectus made in reliance upon and in
conformity with information furnished to the Company in writing by any
U.S. Underwriter through the Representatives expressly for use in the
Registration Statement or Prospectus.

(ii) Coopers & Lybrand L.L.P., the accounting firm that audited the
financial statements included in the Registration Statement and
Prospectus, is an independent public accountant as required by the 1933
Act and the 1933 Act Regulations.

(iii) The financial statements (including the related notes thereto)
included in the Registration Statement and the Prospectus present fairly,
in all material respects, the financial position of the respective entity
or entities or group presented therein at the respective dates indicated
and the results of their operations for the respective periods specified;
except as otherwise stated in the Registration Statement, said financial
statements have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis through the periods
specified. The other financial and statistical information and data
included in the Registration Statement and the Prospectus present fairly,
in all material respects, the information included therein and, to the
extent applicable, have been prepared on a basis consistent with such
financial statements and/or the books and records of the respective
entities or group presented therein. Pro forma financial information
included in the Prospectus has been prepared in accordance with the
applicable requirements of the 1933 Act and the 1933 Act Regulations with
respect to pro forma financial information and includes all adjustments
necessary to present fairly, in all material respects, the pro forma
financial position of the Company at the respective dates indicated and
the results of operations for the respective periods specified.

<PAGE> 7

(iv) No stop order suspending the effectiveness of the Registration
Statement or any part thereof has been issued and no proceeding for that
purpose has been instituted or, to the knowledge of the executive officers
of the Company, after due inquiry, threatened by the Commission or by the
state securities authority of any jurisdiction. No order preventing or
suspending the use of the Prospectus has been issued and no proceeding for
that purpose has been instituted or, to the knowledge of the executive
officers of the Company, after due inquiry, threatened by the Commission
or by the state securities authority of any jurisdiction.

(v) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, except as otherwise described
therein, and giving pro forma effect to all acquisitions (as described in
the Prospectus), (A) there has been no change in the condition, financial
or otherwise, in the earnings, assets, business affairs or business
prospects of the Company or any of its Subsidiaries, whether or not
arising in the ordinary course of business, which would be materially
adverse to the Company and its Subsidiaries taken as a whole (any such
change being hereinafter referred to as a "Material Adverse Change"), (B)
there has been no casualty, loss or condemnation or other adverse event
with respect to any of the hotel properties in which the Company or any of
its Subsidiaries will own as of the Closing Date (the "Hotels") which
would have a material adverse effect on the earnings, assets, business
affairs or business prospects of the Company, its Subsidiaries or the
Hotels, which would be materially adverse to the Company and its
Subsidiaries taken as a whole (a "Material Adverse Effect"), (C) there
have been no transactions or acquisitions entered into by the Company or
any of its Subsidiaries, other than those in the ordinary course of
business, which would have a Material Adverse Effect, (D) there have been
no changes to any of the management agreements which the Company has
entered into with various hotel property owners, other than those in the
ordinary course of business, which would have a Material Adverse Effect,
(E) there has been no dividend or distribution of any kind declared, paid
or

<PAGE> 8

made by the Company on any class of its capital stock, and (F) there has
been no change in the capital shares of the Company, or any increase in
the indebtedness of the Company or any of its Subsidiaries or encumbering
of the Hotels which would have a Material Adverse Effect. For purposes of
this Agreement, "Subsidiary" means, with respect to any party, any
corporation or other entity, whether incorporated or unincorporated of
which more than 50% of either the equity interests is, or voting control
of such corporation or other entity is, directly or indirectly through
subsidiaries, beneficially owned by the Company.

(vi) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the Commonwealth of
Pennsylvania, with corporate power and authority to own, lease and operate
its properties and to conduct its business as described in the Prospectus
and to enter into and perform its obligations under this Agreement and the
U.S. Pricing Agreement and the other Company Documents (as hereinafter
defined) to which it is a party; and the Company is duly qualified as a
foreign corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of
the ownership, leasing or management of property or the conduct of
business, except where the failure to so qualify would not have a Material
Adverse Effect.

(vii) Each of the Company's Subsidiaries that is a limited partnership
(collectively, the "Partnership Subsidiaries") and would constitute a
"significant subsidiary" under Rule 1-02 of Regulation S-X under the
Securities Act has been duly formed and is validly existing as a limited
partnership in good standing under and by virtue of the laws of the state
of its formation, with the requisite partnership power and authority to
own, lease and manage its properties, to conduct the business in which it
is engaged or proposes to engage as described in the Prospectus and to
enter into and perform its obligations under the Company Documents (as
defined herein) to which it is a party. Each of the Partnership
Subsidiaries is duly qualified or

<PAGE> 9

registered as a foreign entity to transact business and is in good
standing in each jurisdiction in which such qualification is required,
whether by reason of the ownership, leasing or management of property or
the conduct of business, except where the failure to so qualify would not
have a Material Adverse Effect.

(viii) Each of the Company's Subsidiaries that is a corporation (the
"Corporate Subsidiaries," and collectively with the Partnership
Subsidiaries, the "Subsidiaries") and would at the Closing Time constitute
a "significant subsidiary" under Rule 102 of Regulation S-X under the
Securities Act ("Significant Subsidiary") is a corporation duly
incorporated and validly existing as a corporation in good standing under
the laws of its jurisdiction of incorporation with the requisite corporate
power and authority to own, lease and manage its properties, to conduct
the business in which it is engaged or proposes to engage and to enter
into and perform its obligations under the Company Documents to which it
is a party. Each of the Corporate Subsidiaries is duly qualified as a
foreign corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason
of the ownership, leasing or management of property or the conduct of
business, except where the failure to so qualify would not have a Material
Adverse Effect. As of the Closing Time, all of the issued and outstanding
capital stock of each of the Corporate Subsidiaries will be duly
authorized, validly issued, fully paid and non-assessable, and except as
described, or in respect of indebtedness which is described, in the
Prospectus, all of such capital stock will be owned by the Company,
directly or through the Company's Subsidiaries, free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim or
restriction other than any lien or encumbrance imposed by any such
Subsidiaries' organizational documents or by shareholder agreements. No
shares of capital stock of the Company's Subsidiaries are reserved for any
purpose, and there are no outstanding securities convertible into or
exchangeable for any capital stock of the Company's Subsidiaries and no
outstanding options, rights (preemptive or otherwise) or

<PAGE> 10

warrants to purchase or to subscribe for shares of such capital stock or
any other securities of Company's Subsidiaries other than pursuant to such
Subsidiaries' respective organizational documents.

(ix) At the Closing Time, the capital shares of the Company will be as
set forth in the Prospectus under "Capitalization" and "Description of
Capital Stock." All the issued and outstanding shares of Common Stock of
the Company have been duly authorized and are validly issued, fully paid
and non-assessable and have been offered and sold in compliance with all
applicable laws (including, without limitation, federal or state
securities laws). No shares of the capital stock of the Company are
reserved for any purpose except as described in the Prospectus. Except as
described in the Prospectus and except as granted under this Agreement,
there are no outstanding securities convertible into or exchangeable for
any capital stock of the Company and there are no outstanding options,
rights (preemptive or otherwise) or warrants to purchase or to subscribe
for such Common Stock or any other securities of the Company.

(x) The Securities have been duly authorized for issuance and sale to
the U.S. Underwriters pursuant to this Agreement, and, when issued and
delivered by the Company pursuant to this Agreement against payment of the
consideration set forth in the U.S. Pricing Agreement, will be validly
issued, fully paid and non-assessable. The terms of the Common Stock
conform in all material respects to all statements and descriptions
related thereto contained in the Prospectus. The issuance of the
Securities is not subject to any preemptive or other similar rights, other
than pursuant to the Registration Rights Agreement (referred to in the
Prospectus under "The Organization, Acquisition and Financing Plan") and
the Stockholders' Agreements (as hereinafter defined).

(xi) All shares of Common Stock (other than the Securities) issued or
to be issued, at or prior to the Closing Time, in connection with the
Transactions (as hereinafter defined) have been duly authorized for
issuance by the Company, and as of

<PAGE> 11

the Closing Time upon payment therefor as provided herein will be validly
issued, fully paid and nonassessable.

(xii) None of the Company or any of its Subsidiaries (the "Transaction
Entities") is in violation of its certificate or articles of
incorporation, by-laws, certificate of partnership, partnership agreement,
certificate of formation, limited liability company agreement or other
similar governing document, as the case may be, and none of the
Transaction Entities is in default in the performance or observance of any
obligation, agreement covenant or condition contained in any contract,
indenture, mortgage, loan agreement, note, lease or other instrument or of
any applicable law, rule, order, administrative regulation or
administrative or court decree, to which such entity is a party or by
which such entity may be bound, or to which any of its property or assets
or any Hotel may be bound or subject, except for such violations and
defaults that would not, individually or in the aggregate, have a Material
Adverse Effect.

(xiii) (A) This Agreement has been duly and validly authorized,
executed and delivered by the Company and, assuming due authorization,
execution and delivery by the Representatives, is a valid and binding
agreement of the Company; (B) at the Representation Date, the Pricing
Agreement will have been duly and validly authorized, executed and
delivered by the Company, and assuming due authorization, execution and
delivery by the Representatives, will be a valid and binding agreement of
the Company; (C) at the Closing Time, the Credit Agreement, dated June 25,
1996, as amended October [ ], 1996 among the Company, Interstate Hotels
Corporation ("IHC"), Credit Lyonnais New York Branch, and the other banks
signatory thereto (the "Credit Agreement") will be duly and validly
authorized, executed and delivered by the parties thereto, will be a valid
and binding agreement of the parties thereto, and will be enforceable
against the parties thereto in accordance with its terms; and (D) at the
Closing Time, the Master Agreement, dated as of November 4, 1996, among
Equity Inns Partnership, IHC, Equity Inns, Inc., Crossroads/Memphis

<PAGE> 12

Partnership, L.P. and Crossroads Furniture Company, L.L.C. (the "Master
Agreement") has been duly and validly authorized, executed and delivered
by IHC, is a valid and binding agreement of IHC, and is enforceable
against IHC in accordance with its terms. This Agreement, the U.S. Pricing
Agreement, the Credit Agreement, the Master Agreement and the Transaction
Agreements (defined below) are sometimes hereinafter collectively called
the "Company Documents."

(xiv) The performance of the obligations set forth herein or in the
other Company Documents and the consummation of the Transactions or the
other transactions contemplated hereby and thereby or in the Prospectus by
the Transaction Entities will not conflict with or constitute a breach or
violation by such parties of, or default under or result in the creation
or imposition of any lien, charge or encumbrance upon any Hotel or any
other property or asset of a Transaction Entity under, (A) any of the
other Company Documents; (B) any material contract, indenture, mortgage,
loan agreement, note, lease, joint venture or partnership agreement or
other instrument or agreement to which any Transaction Entity is a party
or by which they, any of them, any of their respective properties or other
assets or any Hotel may be bound or subject; (C) the certificate or
articles of incorporation, by-laws, certificate of limited partnership,
partnership agreement or other governing documents, as the case may be, of
any Transaction Entity, or (D) any applicable law, rule, order,
administrative regulation or administrative or court decree, in each case
except for conflicts, breaches, violations or defaults that would not have
a Material Adverse Effect.

(xv) The execution and delivery of all material agreements and
documents executed in connection with or in contemplation of the
transactions (collectively, the "Transactions") described in the
Prospectus as "The Organization," "Acquisition of Owned Hotels,"
"Acquisition of Additional Hotels," and "The Financing Plan" under the
heading "THE ORGANIZATION, ACQUISITION AND FINANCING PLAN" (the
"Transaction Agreements"), and the performance of the obligations set
forth therein and the consumma-

<PAGE> 13

tion of the Transactions or the transactions contemplated thereby by the
Transaction Entities have been duly and validly authorized by all
necessary corporate or partnership action, as the case may be, by or on
behalf of the Transaction Entities. Except as described in the Prospectus
(including, without limitation, the transactions described in the
Prospectus under the heading "The Organization, Acquisition and Financing
Plan -- Acquisition of Additional Hotels"), each of the Transactions will
have been completed on or before the Closing Time.

(xvi) None of the Company's commitments to a partnership formed
between or among one or more affiliates of the Company and one or more
affiliates of Blackstone Real Estate Advisors, L.P. (the "Interstone III
Partnership"), including, but not limited to the capital commitments
described under "The Organization and Financing Plan -- Acquisition of
Owned Hotels" in the Prospectus is expected to result in any Material
Adverse Effect.

(xvii)(a) No labor dispute with the employees of any Transaction
Entity exists or is imminent, and (b) none of the executive officers of
the Company is aware of any existing or imminent labor disturbance by the
employees of any of the Transaction Entities' principal suppliers,
manufacturers or contractors, which, in the case of either (a) or (b),
could reasonably be expected to result in any Material Adverse Effect.

(xviii) There is no action, suit or proceeding before or by any court
or governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the executive officers of the Company, after due inquiry,
threatened against or affecting any Transaction Entity, Hotel or officer
or director of the Company that is required to be disclosed in the
Registration Statement or the Prospectus or that, if determined adversely
to any Transaction Entity, Hotel, or such officer or director, considered
in the aggregate will or could reasonably be expected to (A) have a
Material Adverse Effect, or (B) materially and adversely affect the
consummation of the Transactions.

<PAGE> 14

(xix) Except as described in the Prospectus, there are no pending
legal or governmental proceedings to which any Transaction Entity is a
party or of which they or any of their respective properties or assets or
any Hotel is the subject, including ordinary routine litigation incidental
to the business, that, considered in the aggregate, could reasonably be
expected to have a Material Adverse Effect. There are no contracts,
indentures, mortgages, loan agreements, notes, leases or other instruments
which are required to be described or referred to in the Registration
Statement or to be filed as exhibits to the Registration Statement by the
1933 Act or by the 1933 Act Regulations which have not been so described,
referred to or filed, and the descriptions thereof or references thereto
in the Registration Statement are accurate in all material respects.

(xx) Except as described in the Prospectus, each of the Transaction
Entities has filed all federal, state, local and foreign income tax
returns which have been required to be filed (except in any case in which
the failure to so file would not have a Material Adverse Effect), and has
paid all taxes required to be paid and any other assessment, fine or
penalty levied against it, to the extent that any of the foregoing is due
and payable, except, in all cases, for any such tax, assessment, fine or
penalty that is being contested in good faith (except in any case in which
the failure to so pay would not have a Material Adverse Effect).

(xxi) None of the Transaction Entities is, and at Closing Time none of
the Transaction Entities will be, required to be registered under the
Investment Company Act of 1940, as amended (the "1940 Act").

(xxii) Except as described in the Prospectus, the Company and its
Subsidiaries own or possess, or can acquire on reasonable terms, the
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks and trade names (collectively,

<PAGE> 15

"proprietary rights") material to the conduct of the business now operated
by them, and none of the Company or any of its Subsidiaries has received
any notice nor is any executive officer of the Company otherwise aware of
any infringement of or conflict with asserted rights of others with
respect to any proprietary rights, or of any facts which would render any
proprietary rights invalid or inadequate to protect the interest of such
Transaction Entity therein, and which infringement or conflict (if the
subject of any unfavorable decision, ruling, or finding) or invalidity or
inadequacy, singly or in the aggregate, would have a Material Adverse
Effect.

(xxiii) No authorization, approval, consent or order of any court or
governmental authority or agency or other entity or person is required to
be obtained by any Transaction Entity in connection with the offering,
issuance or sale of the Securities hereunder, except such as may be
required under the 1933 Act or the 1933 Act Regulations or state
securities or real estate syndication laws or the by-laws and rules of the
National Association of Securities Dealers, Inc. (the "NASD") or such as
have been received prior to the date of this Agreement. No consent is
required to be obtained by any Transaction Entity in connection with the
consummation of any part of the Transactions, for which the failure to
obtain such consent would have a Material Adverse Effect, except such as
may have been received prior to the date of this Agreement.

(xxiv) Each of the Transaction Entities possesses, or has made
application for, such certificates, authorizations or permits issued by
the appropriate local, state, federal or foreign regulatory agencies or
bodies necessary to conduct the business now operated by it, or proposed
to be conducted by it, except for such certificates, authorizations and
permits, the failure to obtain, maintain or possess of which by any of the
Transaction Entities would not have a Material Adverse Effect, and none of
the Transaction Entities have received any notice of proceedings relating
to the revocation or modification of any such certificate, authority or
permit which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a Material Adverse Effect.

<PAGE> 16

(xxv) Except as described in the Prospectus or pursuant to the
Registration Rights Agreement or Stockholders' Agreements, there are no
persons with registration or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise registered
by the Company under the 1933 Act.

[(XXVI) THE SECURITIES HAVE BEEN APPROVED FOR LISTING ON THE NEW YORK
STOCK EXCHANGE UPON NOTICE OF ISSUANCE.]

(xxvii) At the Closing Time, (A) the Transaction Entities will have
good indefeasible title or a valid leasehold estate, as the case may be,
to each of the Hotels and other real property interests indicated in the
Prospectus to be owned or leased by the Company (or its Subsidiaries), in
each case free and clear of all liens, encumbrances, claims, security
interests and defects, other than (i) those referred to in the Prospectus,
(ii) mortgages and security agreements relating to the Hotels, (iii) those
referred to in the existing title insurance policies pertaining to the
Hotels, and (iv) those which would not have a Material Adverse Effect; (B)
there will be no options or rights of first refusal to purchase any Hotel,
any interest therein or any part thereof, other than those referred to in
the Prospectus; (C) each of the Hotels will comply with all applicable
codes, laws and regulations (including, without limitation, building and
zoning codes, laws and regulations and laws relating to access to the
Hotels), except for such failures to comply that would not have Material
Adverse Effect, and (D) the executive officers of the Company shall have
no knowledge of, after due inquiry, any pending or threatened condemnation
proceeding, zoning change or other proceeding or action that would have a
Material Adverse Effect.

(xxviii) The Transaction Entities have obtained title insurance on the
fee and ground lease interests in each of the Hotels in which the Company
has an ownership interest, in an amount at least

<PAGE> 17

equal to the purchase price of each such owned Hotel.

(xxix) Except as disclosed in the Prospectus, and, except for
activities, conditions, circumstances or matters that would not have a
Material Adverse Effect, (A) to the knowledge of the executive officers of
the Company, after due inquiry, the operations of the Transaction Entities
are in compliance with all Environmental Laws (as defined below) and all
requirements of applicable permits, licenses, approvals and other
authorizations issued pursuant to Environmental Laws; (B) to the knowledge
of the executive officers of the Company, after due inquiry, none of the
Transaction Entities has caused or suffered to occur any Release (as
defined below) of any Hazardous Substance (as defined below) into the
Environment (as defined below) on, in or under or from any Hotel or any
developed or undeveloped land held (at any time) by any of the Transaction
Entities, and no condition exists on, in or under to any Hotel that could
reasonably be expected to result in the Company violating, or incurring
liability under, any Environmental Law or give rise to the imposition of
any Lien (as defined below) under any Environmental Law; (C) none of the
Transaction Entities has received any written notice of a claim under or
pursuant to any Environmental Law or under common law pertaining to
Hazardous Substances on, in, under or originating from any Hotel; (D) none
of the executive officers of the Company has knowledge of, after due
inquiry, nor has any Transaction Entity received any written notice from
any Governmental Authority (as defined below) or other person claiming any
violation of any Environmental Law or a determination to undertake and/or
request the investigation, remediation, clean-up or removal of any
Hazardous Substance released into the Environment on, in, under or from
any Hotel; and (E) no Hotel is included or, to the knowledge of the
executive officers of the Company, after due inquiry, proposed for
inclusion on the National Priorities List issued pursuant to CERCLA (as
defined below) by the United States Environmental Protection Agency (the
"EPA") or on the Comprehensive Environmental Response, Compensation, and
Liability Information System database maintained

<PAGE> 18

by the EPA, and the executive officers of the Company have no knowledge,
after due inquiry, that any Hotel has otherwise been identified in a
published writing by the EPA as a potential CERCLA removal, remedial or
response site or, to the knowledge of the executive officers of the
Company, after due inquiry, proposed for inclusion on any similar list of
potentially contaminated sites pursuant to any other Environmental Law.

As used herein, "Hazardous Substance" shall include any hazardous
substance, hazardous waste, toxic substance, pollutant, hazardous material, or
similarly designated materials including, without limitation, oil, petroleum or
any petroleum-derived substance or waste, asbestos or asbestos-containing
materials, PCB's, pesticides, explosives, radioactive materials, dioxins, urea
formaldehyde insulation or any constituent of any such substance, pollutant or
waste which is identified, regulated, prohibited or limited under any
Environmental Law (including, without limitation, materials listed in the
United States Department of Transportation Optional Hazardous Material Table,
49 C.F.R. Section 172.101, or in the EPA's List of Hazardous Substances and
Reportable Quantities, 40 C.F.R. Part 302 as the same may now or hereafter be
amended; "Environment" shall mean any surface water, drinking water, ground
water, land surface, subsurface strata, river sediment, buildings, structures,
workplace and indoor and outdoor air; "Environmental Law" shall mean the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended (42 U.S.C. Section 9601, et seq.) ("CERCLA"), the Resource
Conservation and Recovery Act of 1976, as amended (42 U.S.C. Section 6901, et
seq.), the Clean Air Act, as amended (42 U.S.C. Section 7401, et seq.), the
Clean Water Act, as amended (33 U.S.C. Section 1251, et seq.), the Toxic
Substances Control Act, as amended (15 U.S.C. Section 2601, et seq.), the
Occupational Safety and Health Act of 1970, as amended (29 U.S.C. Section 651,
et seq.), the Hazardous Materials Transportation Act, as amended (49 U.S.C.
Section 1801, et seq.), and all other federal, state and local laws,
ordinances, regulations, rules and orders relating to the protection of the
environment or of human health from environmental effects; "Governmental
Authority" shall mean any federal, state or local governmental office, agency
or authority having the duty or authority to promulgate, implement or enforce
any Environmental Law; "Lien" shall mean, with

<PAGE> 19

respect to any Hotel, any mortgage, deed of trust, pledge, security
interest, lien, encumbrance, penalty, fine, charge, assessment, judgment or
other liability in, on or affecting such Hotel; and "Release" shall mean any
spilling, leaking, pumping, pouring, emitting, emptying, discharging,
injecting, escaping, leaching, dumping, emanating or disposing of any Hazardous
Substance into the Environment, including, without limitation, the abandonment
or discard of barrels, containers, tanks (including, without limitation,
underground storage tanks) or other receptacles containing or previously
containing any Hazardous Substance or any release, emission, discharge or
similar term, as those terms are defined or used in any Environmental Law.

(xxx) To the actual knowledge of the executive officers of the
Company, none of the environmental consultants retained by the Company or
any Subsidiary which prepared environmental and asbestos inspection
reports with respect to any of the Hotels was employed for such purpose on
a contingent basis or has any substantial interest in any Transaction
Entity, and none of them nor any of their directors, officers or employees
is connected with any Transaction Entity as a promoter, selling agent,
voting trustee, director, officer or employee.

(b) Any certificate signed by any executive officer or authorized
representative of the Company and delivered to the Representatives or to
counsel for the U.S. Underwriters shall be deemed a representation and warranty
by such entity or person, as the case may be, to each U.S. Underwriter as to
the matters covered thereby.

SECTION 2. Sale and Delivery to U.S. Underwriters; Closing.

(a) On the basis of the representations and warranties herein contained,
and subject to the terms and conditions herein set forth, the Company agrees to
sell to each U.S. Underwriter, severally and not jointly, and each U.S.
Underwriter, severally and not jointly, agrees to purchase from the Company, at
the price per share set forth in the U.S. Pricing Agreement, the number of
Initial U.S. Securities set forth in Schedule A hereto opposite the name of
such U.S. Underwriter (except as otherwise provided in the U.S. Pricing
Agreement), plus any

<PAGE> 20

additional number of Initial U.S. Securities which such U.S. Underwriter may
become obligated to purchase pursuant to the provisions of Section 10 hereof.

(i) If the Company has elected not to rely upon Rule 430A under the
1933 Act Regulations, the public offering price and the purchase price per
share to be paid by the several U.S. Underwriters for the Securities each
have been determined and set forth in the U.S. Pricing Agreement and an
amendment to the Registration Statement and the Prospectus will be filed
before the Registration Statement becomes effective.

(ii) If the Company has elected to rely upon Rule 430A under the 1933
Act Regulations, the purchase price per share to be paid by the several
U.S. Underwriters for the Securities shall be an amount equal to the
public offering price, less an amount per share to be determined by
agreement between the Representatives and the Company. The public offering
price per share of the Securities shall be a fixed price to be determined
by agreement among the Representatives and the Company. The public
offering price and the purchase price, when so determined, shall be set
forth in the U.S. Pricing Agreement. In the event that such prices have
not been agreed upon and the U.S. Pricing Agreement has not been executed
and delivered by all parties thereto by the close of business on the
fourteenth business day following the date of this Agreement, this
Agreement shall terminate forthwith, without liability of any party to any
other party other than pursuant to Sections 6 and 7 hereof, unless
otherwise agreed to by the Company and the Representatives.

(b) In addition, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
hereby grants an option to the U.S. Underwriters, severally and not jointly, to
purchase up to an additional 510,000 shares of Common Stock at the price per
share set forth in the U.S. Pricing Agreement solely to cover over-allotments.
The option hereby granted will expire 30 days after the date hereof (or, if the
Company has elected to rely on Rule 430A under the 1933 Act Regulations,

<PAGE> 21

30 days after the execution of the U.S. Pricing Agreement), provided that if
such thirtieth day is not a New York Stock Exchange trading day, the thirtieth
day will be the next succeeding New York Stock Exchange trading day and may be
exercised in whole or in part from time to time only for the purpose of
covering over-allotments which may be made in connection with the offering and
distribution of the Initial U.S. Securities upon notice by the Representatives
to the Company setting forth the number of Option U.S. Securities as to which
the several U.S. Underwriters are then exercising the option and the time and
date of payment and delivery for such Option U.S. Securities. Any such time
and date of delivery (a "Date of Delivery") shall be determined by the
Representatives, but shall not be later than seven full business days nor
earlier than two full business days after the exercise of said option, nor in
any event prior to the Closing Time, as hereinafter defined, unless otherwise
agreed upon by the Representatives and the Company. If the option is exercised
as to all or any portion of the Option U.S. Securities, the Option U.S.
Securities shall be purchased by the U.S. Underwriters, severally and not
jointly, in proportion to their respective Initial U.S. Securities underwriting
obligations as set forth in Schedule A.

(c) Payment of the purchase price for, and delivery of certificates for,
the Initial U.S. Securities shall be made at the office of Jones, Day, Reavis &
Pogue ("Jones Day"), 599 Lexington Avenue, New York, New York 10022, or at such
other place as shall be agreed upon by the Representatives and the Company, at
10:00 A.M. on the fourth business day (or the third business day if required
under Rule 15c6-1 of the rules and regulations (the "1934 Act Regulations") of
the Commission under the Securities Exchange Act of 1934, as amended (the "1934
Act"), or unless postponed in accordance with the provisions of Section 10)
following the date the Registration Statement becomes effective (or, if the
Company has elected to rely upon Rule 430A of the 1993 Act Regulations, the
fourth business day (or the third business day if required under Rule 15c6-1 of
the 1934 Act) after execution of the U.S. Pricing Agreement), or such other
time not later than ten business days after such date as shall be agreed upon
by the Representatives and the Company (such time and date of payment and
delivery being herein called "Closing Time"). In addition, in the event

<PAGE> 22

that any or all of the Option U.S. Securities are purchased by the U.S.
Underwriters, payment of the purchase price for, and delivery of certificates
for, such Option U.S. Securities shall be made at the above-mentioned offices
of Jones Day, or at such other place as shall be agreed upon by the
Representatives and the Company, on each Date of Delivery as specified in the
notice from the Representatives to the Company. Payment for the Initial U.S.
Securities shall be made to the Company by wire transfer in immediately
available funds, provided that it is understood and agreed that interest on the
aggregate purchase price for the Initial U.S. Securities in federal funds for
one day at Merrill Lynch's overnight borrowing rate shall be deducted from such
payment and shall reduce the purchase price payable for the Initial U.S.
Securities by such amount. Payment for the Option U.S. Securities shall be
made to the Company by certified or official bank check or checks drawn in New
York Clearing House funds or similar next day funds payable to the order of the
Company, against delivery to the Representatives for the respective accounts of
the U.S. Underwriters of certificates for the Securities to be purchased by
them. Certificates for the Initial U.S. Securities and the Option U.S.
Securities, if any, shall be in such denominations and registered in such names
as the Representatives may request in writing at least two business days before
the Closing Time or the relevant Date of Delivery, as the case may be. It is
understood that each U.S. Underwriter has authorized the Representatives, for
its account, to accept delivery of, receipt for, and make payment of the
purchase price for, the Initial U.S. Securities and the Option U.S. Securities,
if any, which it has agreed to purchase. Merrill Lynch, Montgomery, Morgan
Stanley, Smith Barney and Credit Lyonnais, individually and not as
representatives of the U.S. Underwriters, may (but shall not be obligated to)
make payment of the purchase price for the Initial U.S. Securities or the
Option U.S. Securities, if any, to be purchased by any U.S. Underwriter whose
payment has not been received by the Closing Time or the relevant Date of
Delivery, as the case may be, but any such payment shall not relieve such U.S.
Underwriter from its obligations hereunder. The certificates for the Initial
U.S. Securities and the Option U.S. Securities, if any, will be made available
for examination and packaging by the Representatives not later than 10:00 A.M.
on the last business

<PAGE> 23

day prior to Closing Time or the relevant Date of Delivery, as the case may be,
in New York, New York.

SECTION 3. Covenants of the Company.

The Company covenants with each U.S. Underwriter as follows:

(a) As soon as the Company is advised or otherwise obtains knowledge of
any of the following, the Company will promptly notify the Representatives of
(i) the effectiveness of the Registration Statement and any amendment thereto
(including any post-effective amendments), (ii) the receipt of any comments
from the Commission relating to the Registration Statement and the Prospectus,
(iii) any request by the Commission for any amendment to the Registration
Statement or any amendment or supplement to the Prospectus or for additional
information, and (iv) the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of any order
preventing or suspending the use of any preliminary prospectus or the
suspension of qualification of the Securities for offering or sale in any
jurisdiction or the initiation or threat of any proceedings for these purposes.
The Company will make every reasonable effort to prevent the issuance of any
stop order and, if any stop order is issued, to obtain the lifting thereof at
the earliest possible moment.

(b) The Company will give the Representatives notice of its intention to
file or prepare any amendment to the Registration Statement (including any
post-effective amendment), any Rule 462(b) Registration Statement or any
amendment or supplement to the Prospectus (including any revised prospectus)
which the Company proposes for use by the U.S. Underwriters in connection with
the offering of the Securities which differs from the Prospectus on file at the
Commission at the time the Registration Statement becomes effective, whether or
not such revised prospectus is required to be filed pursuant to Rule 424(b) of
the 1933 Act Regulations, the 1934 Act, the 1934 Act Regulations or any Term
Sheet. The Company will furnish the Representatives with copies of any such
amendment or supplement a reasonable amount of time prior to such proposed
filing or use, as the case may be, and will not file any such amendment or
supplement or use any

<PAGE> 24

such prospectus to which the Representatives or counsel for the U.S.
Underwriters reasonably shall object.

(c) The Company will deliver to the Representatives, as soon as possible,
as many signed and conformed copies of the Registration Statement as originally
filed and of each amendment thereto (including exhibits filed therewith or
incorporated by reference therein and documents incorporated by reference
therein) as the Representatives reasonably may request.

(d) The Company will furnish to each U.S. Underwriter, from time to time
during the period when the Prospectus is required to be delivered under the
1933 Act or the 1934 Act, such number of copies of the Prospectus (as amended
or supplemented) as such U.S. Underwriter reasonably may request for the
purposes contemplated by the 1933 Act or the applicable rules and regulations
of the Commission thereunder.

(e) If any event shall occur as a result of which it is necessary, in the
opinion of counsel for the U.S. Underwriters, to amend or supplement the
Prospectus in order to comply with the 1933 Act or the 1934 Act or to make the
Prospectus not misleading in the light of the circumstances existing at the
time it is delivered to a purchaser, the Company forthwith will amend or
supplement the Prospectus (in form and substance reasonably satisfactory to
counsel for the U.S. Underwriters) so that, as so amended or supplemented, the
Prospectus will not include an untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances existing at the time it is delivered to a purchaser,
not misleading; and the Company will furnish to the U.S. Underwriters a
reasonable number of copies of such amendment or supplement.

(f) The Company will endeavor, in cooperation with the U.S. Underwriters,
to qualify the Securities for offering and sale under the applicable securities
laws of such states and other United States or foreign jurisdictions as the
Representatives may reasonably designate; provided, however, the Company will
not be required to qualify as a foreign corporation, file a general consent to
service of process in any such jurisdiction, subject itself to taxation in
respect of doing business in any

<PAGE> 25

jurisdiction in which it is not otherwise so subject, or provide any
undertaking or make any change in its charter, certificate of incorporation,
by-laws or other governing document that the Board of Directors of the Company
reasonably determines to be contrary to the best interests of the Company and
its shareholders. In each jurisdiction in which the Securities have been so
qualified, the Company will use all reasonable efforts to file such statements
and reports as may be required by the laws of such jurisdiction to continue
such qualification in effect for so long a period as the Representatives
reasonably may request for the distribution of the Securities.

(g) The Company will make generally available to its security holders as
soon as practicable, but not later than 90 days after the close of the
Company's fiscal year, an earnings statement (in form and in a manner complying
with the provisions of Rule 158 of the 1933 Act Regulations) covering a
twelve-month period beginning not later than the first day of the Company's
fiscal quarter next following the "effective date" (as defined in said Rule
158) of the Registration Statement.

(h) The Company will use the net proceeds received by it from the sale of
the Securities in the manner specified in the Prospectus under "Use of Pro-
ceeds."

(i) If, at the time that the Registration Statement becomes effective, any
information shall have been omitted therefrom in reliance upon Rule 430A and/or
Rule 434 of the 1933 Act Regulations, then immediately following the execution
of the U.S. Pricing Agreement, the Company will prepare and file with the
Commission in accordance with such Rule 430A and/or Rule 434 and Rule 424(b) of
the 1933 Act Regulations copies of an amended Prospectus, or, if required by
such Rule 430A and/or Rule 434, a post-effective amendment to the Registration
Statement (including an amended Prospectus), containing all information so
omitted. If required, the Company will prepare and file or transmit for filing
a Rule 462(b) Registration Statement not later than the date of execution of
the U.S. Pricing Agreement. If a Rule 462(b) Registration Statement is filed by
the Company, the Company shall make payment of, or arrange for payment

<PAGE> 26

of, the additional registration fee owing to the Commission as required by Rule
111 of the 1933 Act Regulations.

(j) The Company, during the period when the Prospectus is required to be
delivered under the 1933 Act or the 1934 Act, will file all documents required
to be filed with the Commission pursuant to Sections 13, 14 or 15 of the 1934
Act within the time periods required by the 1934 Act and the 1934 Act
Regulations.

(k) The Company will use its reasonable efforts to maintain the listing of
the Securities on the New York Stock Exchange.

(l) During a period 180 days from the Closing Time, the Company will not,
without the prior written consent of Merrill Lynch, directly or indirectly,
sell, offer to sell, transfer, pledge, hypothecate, grant any option for the
sale of or otherwise dispose of, any shares of Common Stock or any security
convertible into or exchangeable or exercisable for shares of the Common Stock,
except for (i) Securities to be sold to the U.S. Underwriters, (ii) the award
of options or other rights or the issuance of Common Stock pursuant to employee
and director stock purchase, equity incentive and option plans as described in
the Prospectus, (iii) the issuance of Common Stock (whether upon conversion,
exchange or otherwise) in connection with an acquisition, whether by purchase
of assets, merger or other form of business acquisition or combination
transaction, provided that the foregoing restrictions apply to the issued
Common Stock, or (iv) the adoption of a shareholder rights plan.

(m) During a period of [THREE] years from the Closing Time, the Company or
any partnership affiliated with the Company will not, without the prior written
consent of Merrill Lynch, waive or assign any options or rights granted to the
Company in relation to the Company's acquisition of Equity Inns, including, but
not limited to, any right of first offer to purchase or manage any property.

<PAGE> 27

ers or filed with the New York Stock Exchange or with the Commission or any
governmental authority succeeding to any of the Commission's functions other
than reports on Form 3 or Form 4 or registration statements on Form S-8.

(o) The Company hereby agrees that it will ensure that the Reserved
Securities will be restricted as required by the National Association of
Securities Dealers, Inc. (the "NASD") or the NASD rules from sale, transfer,
assignment, pledge or hypothecation for a period of three months following the
date of this Agreement. The U.S. Underwriters will notify the Company as to
which persons will need to be so restricted. At the request of the U.S.
Underwriters, the Company will direct the transfer agent to place a stop
transfer restriction upon such securities for such period of time. Should the
Company release, or seek to release, from such restrictions any of the Reserved
Securities, the Company agrees to reimburse the U.S. Underwriters for any
reasonable expenses (including, without limitation, legal expenses) they incur
in connection with such release.

SECTION 4. Payment of Expenses; Financial Advisory Fees.

(a) The Company will pay all expenses incident to the performance of its
obligations under this Agreement, including (i) the printing and filing of the
Registration Statement as originally filed and of each amendment thereto, of
each preliminary prospectus, and of the Prospectus and any amendments or
supplements thereto, (ii) the cost of printing, or reproducing, and
distributing to the U.S. Underwriters copies of this Agreement and the U.S.
Pricing Agreement, (iii) the preparation, issuance and delivery of the
certificates for the Securities to the U.S. Underwriters, (iv) the fees and
disbursements of the Company's counsel and accountants, (v) the qualification
of the Securities under securities laws and real estate syndication laws in
accordance with the provisions of Section 3(f) hereof, including filing fees
and the fees of counsel at their normal hourly rate, in an aggregate amount not
to exceed $20,000 and [REASONABLE CHARGES AND DISBURSEMENTS FOR THE U.S.
UNDERWRITERS IN CONNECTION THEREWITH AND IN CONNECTION WITH THE PREPARATION OF
THE "BLUE SKY" SURVEY], [(VI) THE COST OF PRINTING, OR REPRODUCING AND
DELIVERING TO THE U.S. UNDERWRITERS COPIES OF THE "BLUE SKY" SURVEY,] (vii)
the fee of the National

<PAGE> 28

Association of Securities Dealers, Inc., [(VIII) THE FEES AND EXPENSES INCURRED
IN CONNECTION WITH THE LISTING OF THE SECURITIES ON THE NEW YORK STOCK
EXCHANGE, INC.,] (ix) the costs and charges of any transfer agent or registrar,
and the cost of preparing share certificates, and (x) any transfer taxes
imposed on the sale of the Securities to the several U.S. Underwriters and (xi)
all costs and expenses of the U.S. Underwriters, including the fees and
disbursements of counsel for the U.S. Underwriters, in connection with matters
related to the Reserved Securities which are designated by the Company for sale
to employees and others having a business relationship with the Company. It is
understood, however, that except as provided in this Section 4, the U.S.
Underwriters will pay all of their costs and expenses, including the fees and
disbursements of their counsel, and any expenses in connection with a
"tombstone" advertisement in connection with the offering of the Securities.

(b) If this Agreement is cancelled or terminated by the Representatives in
accordance with the provisions of Section 5 or Section 9(a)(i) hereof, the
Company shall reimburse the U.S. Underwriters for all of their out-of-pocket
expenses, including the reasonable fees and disbursements of counsel for the
U.S. Underwriters.

SECTION 5. Conditions of U.S. Underwriters' Obligations. The obligations
of the U.S. Underwriters hereunder are subject to the accuracy in all material
respects, as of the date hereof and at Closing Time, of the representations and
warranties of the Company herein contained, to the performance by the Company
of its obligations hereunder, and to the following further conditions:

<PAGE> 29

Commission or any state securities regulatory authority. If the Company has
elected to rely upon Rule 430A and/or Rule 434 of the 1933 Act Regulations, (A)
the price of the Securities and any price-related information previously
omitted from the effective Registration Statement pursuant to such Rule 430A
and/or Rule 434 shall have been transmitted to the Commission for filing
pursuant to Rule 424(b) of the 1933 Act Regulations within the prescribed time
period and (B) prior to the Closing Time, the Company shall have provided
evidence satisfactory to the Representatives of such timely filing, or a
post-effective amendment providing such information shall have been promptly
filed and declared effective in accordance with the requirements of Rule 430A
and/or Rule 434 of the 1933 Act Regulations and shall have become effective not
later than 5:30 p.m., New York City time, on the Representation Date or, with
the consent of the Representatives, at a later time and date, not later,
however, than 5:30 p.m., New York City time, on the first business day
following the Representation Date, or of such later date and time as shall have
been approved by a majority in interest of the Representatives. If a Rule
462(b) Registration Statement is required, such Rule 462(b) Registration
Statement shall have been transmitted to the Commission for filing and have
become effective within the prescribed time period, and, prior to the Closing
Time, the Company shall have provided to the U.S. Underwriters evidence of such
filing and effectiveness in accordance with Rule 462(b) of the 1933 Act
Regulations.

(b) At Closing Time the Representatives shall have received:

(1) The favorable opinion of Jones Day, in form and substance
reasonably satisfactory to counsel for the U.S. Underwriters, dated as of
the Closing Time, with respect to the matters set forth below:

(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the Commonwealth
of Pennsylvania with the requisite power and authority to own or lease
its properties and conduct its business as described in the
Prospectus, and the Company has the requisite power and authority to
enter into and

<PAGE> 30

perform its obligations under the other Company Documents to which it
is a party.

(ii) The Company has the authorized and outstanding capital as set
forth under the caption "Capitalization" in the Prospectus, and the
authorized capital of the Company, including the Securities, conforms
in all material respects to the description thereof set forth under
the caption "Description of Capital Stock" in the Prospectus. All the
issued and outstanding shares of Common Stock of the Company has been
duly authorized and are validly issued, fully paid and non-assessable.
To the knowledge of such counsel, no shares of the capital stock of
the Company are reserved for any purpose except as described in the
Prospectus. To the knowledge of such counsel, except as described in
the Prospectus and other than as provided in this Agreement, there are
no outstanding securities convertible into or exchangeable for any
capital shares of the Company and no outstanding options, rights
(preemptive or otherwise) or warrants to purchase or to subscribe for
shares of such stock or any other securities of the Company.

(iii) The Securities have been duly authorized for issuance and
sale to the U.S. Underwriters and, when issued and paid for in
accordance with this Agreement and the U.S. Pricing Agreement, will be
validly issued, fully paid and non-assessable. The issuance of the
Securities is not subject to any preemptive or other similar rights
(other than pursuant to the Registration Rights Agreement and the
Stockholders' Agreements) arising under the Pennsylvania Business
Corporation Law, the Articles of Incorporation or the by-laws of the
Company, or any agreement to which the Company is a party of which
such counsel is aware.

(iv) Each of this Agreement and the U.S. Pricing Agreement has been
duly and validly authorized, executed and delivered by the Company.

<PAGE> 31

(v) The execution and delivery of each of this Agreement and the
U.S. Pricing Agreement, and the performance by the Company of its
obligations set forth herein or therein do not and will not conflict
with or constitute a breach or violation of, or default under: (1) any
other Company Document; (2) any other contract or agreement filed as
an exhibit to the Registration Statement; (3) its articles of
incorporation or by-laws of the Company or (4) any law, rule or
administrative regulation applicable to the Company of any
governmental authority or agency of the United States or the
Commonwealth of Pennsylvania (except no opinion need be expressed as
to the by-laws or rules of the NASD or any state securities or real
estate syndication laws); or (5) any order or decree of any court or
governmental authority of which such counsel is aware, except in each
case for conflicts, breaches, violations or defaults that,
individually or in the aggregate, would not have a Material Adverse
Effect.

(vi) The Company is not an "investment company" or a person
"controlled by" an "investment company" within the meaning of the 1940
Act.

(vii) No authorization, approval, consent or order of any federal
or state court or governmental authority or agency is required in
connection with the offering, issuance or sale of the Securities
hereunder, in each case, except such as may be required in connection
with the sale of the Securities under the 1933 Act or the 1933 Act
Regulations, the 1934 Act or the 1934 Act Regulations, the by-laws and
rules of the NASD, or state securities laws, real estate syndication
laws or such as have been received prior to the date of such opinion.

<PAGE> 32

which no opinion need be rendered) complied as to form in all material
respects with the requirements of the 1933 Act and the 1933 Act
Regulations.

(ix) To such counsel's knowledge, there is no litigation or
governmental proceeding pending or threatened against the Company, any
of its Subsidiaries or any Hotel which would affect the subject matter
of this Agreement or is required to be described in the Prospectus
which is not so described.

(x) The statements in the Prospectus under "Business and Properties-
-Operations," "Management" and "Certain Relationships and Related
Transactions," insofar as they purport to summarize the provisions of
documents referred to therein, and the statements in the Prospectus
under "Description of Capital Stock," "Shares Eligible for Future
Sale" and "Taxation," insofar as they purport to summarize the
provisions of documents or matters of law referred to therein or
constitute legal conclusions are accurate in all material respects.

(xi) To such counsel's knowledge, there are no contracts,
indentures, mortgages, loan agreements, notes, leases or other
instruments required to be described in the Registration Statement, or
to be filed as exhibits thereto by the 1933 Act Regulations, other
than those described or referred to therein or filed as exhibits
thereto, and the descriptions thereof or references thereto are
accurate in all material respects.

(xii) To such counsel's knowledge, except as disclosed in the
Prospectus, there are no persons with registration or other similar
rights to have any securities of the Company registered pursuant to
the Registration Statement or otherwise registered by the Company
under the 1933 Act.

<PAGE> 33

[(XIII) THE SECURITIES ARE APPROVED FOR LISTING ON THE NEW YORK
STOCK EXCHANGE UPON OFFICIAL NOTICE OF ISSUANCE.]

(xiv) The Registration Statement has become effective under the
1933 Act, and, to such counsel's knowledge, no stop order suspending
the effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
threatened by the Commission.

In addition, Jones Day shall state that representatives of such firm have
participated in conferences with officers, directors and employees of the
Company, representatives of the independent public accountants who examined the
financial statements contained in the Registration Statement and Prospectus and
representatives of the U.S. Underwriters concerning the information contained
in the Registration Statement and Prospectus and the proposed responses to
various items in Form S-1. On the basis thereof (relying as to materiality and
matters of fact upon the opinions or certificates of officers and other
representatives of the Company), but without independent verification by such
counsel of, and without passing upon or assuming any responsibility for, the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus or any amendments or supplements
thereto, no facts have come to the attention of such counsel that cause them to
believe that (i) the Registration Statement (other than the operating
statistics, financial statements (including the notes thereto) and other
financial data included therein or omitted therefrom as to which such counsel
expresses no views), at the time such Registration Statement became effective,
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading or (ii) the Prospectus (other than the
operating statistics, financial statements and other financial and statistical
data included therein or omitted therefrom as to which such counsel expresses
no views), as of its date or at the Closing Time, contained or contains any
untrue statement of a material fact or omitted or omits to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.

<PAGE> 34

In giving its opinion, such counsel may rely, as to all matters of fact,
upon certificates and written statements of officers, directors and employees
of and accountants for the Company. Counsel may state that their opinion is
limited to matters governed by the federal laws of the United States, the laws
of the State of New York and the Business Corporation Law of the Commonwealth
of Pennsylvania.

(2) The favorable opinion in form and substance reasonably
satisfactory to counsel for the Underwriters, dated as of the Closing
Time, of Marvin I. Droz, Esq., Senior Vice President and General Counsel
of the Company, with respect to the matters set forth below:

(i) The Company's Significant Subsidiaries (the "Subsidiaries") have
been duly incorporated or formed and are validly existing as corporations
or entities in good standing under the laws of the Commonwealth of
Pennsylvania with the full requisite power and authority to own or lease
their properties and conduct their business as described in the
Prospectus, and the Subsidiaries have the requisite power and authority to
enter into and perform their obligations under this Agreement and the
other Company Documents to which they are a party. The Subsidiaries are
duly qualified or registered as foreign corporations or entities to
transact business and are in good standing in each jurisdiction in which
such qualifications are required, whether by reason of the ownership,
leasing or management of property or the conduct of business, except where
the failure to so qualify would not have a Material Adverse Effect.

<PAGE> 35

strument or agreement to which they are a party or by which they are or
any Hotel may be bound or subject to and of which such counsel is aware;
(3) their articles of incorporation, by-laws or other applicable governing
document; (4) any applicable law, rule or administrative regulation of the
United States or the jurisdiction of its incorporation; or (5) any order
or administrative or court decree of which such counsel is aware, except
for conflicts, breaches, violations or defaults that, individually or in
the aggregate, would not have a Material Adverse Effect.

(iii) The execution and delivery of the Company Documents other than
this Agreement and the U.S. Pricing Agreement and the performance by the
Subsidiaries of their obligations set forth therein, do not and will not
conflict with or constitute a breach or violation of, or default under:
(1) any of the Company Documents; (2) any other contract, indenture,
mortgage, loan agreement, note, lease joint venture or partnership
agreement or other instrument or agreement to which the Subsidiaries are a
party or by which they are or any Hotel may be bound or subject to and of
which such counsel is aware; (3) the articles of incorporation, by-laws or
other governing documents of the Subsidiaries; (4) any law, rule or
administrative regulation applicable to the Subsidiaries of any
governmental authority or agency of the United States or the Commonwealth
of Pennsylvania; or (5) any order or administrative or court decree of
which such counsel is aware, except for conflicts, breaches, violations or
defaults, that, individually or in the aggregate, would not have a
Material Adverse Effect.

(iv) To such counsel's knowledge, there is no litigation or any legal
or governmental proceeding pending or threatened against the Subsidiaries
or any Hotel which would affect the subject matter of this Agreement.

<PAGE> 36

In giving its opinion, such counsel may (i) rely, as to all matters of
fact, upon certificates and written statements of officers, directors, partners
and employees of and accountants for the Company and the Subsidiaries and (ii)
state that his opinion is limited to matters governed by the federal laws of
the United States and the Business Corporation Law of the Commonwealth of
Pennsylvania. In addition, as to the knowledge of such counsel, such opinion
may recite that such knowledge is limited to matters in which counsel has had
direct involvement or about which such counsel has received notification from
senior management of the Company or otherwise and that, since such counsel has
no direct management responsibilities for the Company, there may be matters
concerning the Company of which such counsel is not aware.

(3) The favorable opinion, dated as of the Closing Time, of Skadden,
Arps, Slate, Meagher & Flom LLP, New York, New York ("Skadden Arps"),
counsel for the Representatives, (A) with respect to the matters set forth
in (viii) (with respect to the Company only and with respect to this
Agreement and the U.S. Pricing Agreement only) and [(XIII)] of subsection
(b)(1) of this Section and (B) containing a statement similar to the
statement referred to in the first sentence of the next to last paragraph
of Section 5(b)(1).

In giving its opinion, Skadden Arps may rely, (A) as to all matters of
fact, upon certificates and written statements of officers and employees of and
accountants for the Company, (B) as to the good standing and qualification of
the Company to do business in any state or jurisdiction, upon certificates of
appropriate government officials or opinions of counsel in such jurisdictions,
which opinions shall be in form and substance satisfactory to counsel for the
U.S. Underwriters, and (C) as to certain matters of law, upon the opinions
given pursuant to Sections 5(b)(1) and 5(b)(2) above.

<PAGE> 37

dated as of the Closing Time, evidencing compliance with the provisions of this
subsection (c) and stating that the representations and warranties in Section 1
hereof are true and correct, in all material respects, with the same force and
effect as though expressly made at and as of Closing Time.

(d) At the time of the execution of this Agreement, the Representatives
shall have received from Coopers & Lybrand L.L.P. a letter, dated the date of
delivery thereof, in form and substance customary for transactions such as the
offering of the Securities, to the effect that (i) they are independent public
accountants with respect to the Company as required by the 1933 Act and the
1933 Act Regulations; (ii) it is its opinion that the financial statements
included in the Registration Statement prepared by such firm and covered by
their opinions therein comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the 1933 Act
Regulations; (iii) based upon limited procedures set forth in its letter,
including a reading of the latest available interim financial statements of the
Company, a reading of the minute books of the Company, inquiries of officials
of the Company responsible for financial and accounting matters and such other
inquiries and procedures as may be specified in such letter, nothing has come
to its attention which causes Coopers & Lybrand L.L.P. to believe that (A) the
unaudited financial statements of the Company included in the Registration
Statement do not comply as to form in all material respects with the applicable
accounting requirements of the 1933 Act and the 1933 Act Regulations or are not
in conformity with generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements included
in the Registration Statement, (B) the operating data and balance sheet data
set forth in the Prospectus under the captions "Pro Forma Financial Data" were
not determined on a basis substantially consistent with that used in
determining the corresponding amounts in the audited financial statements
included in the Registration Statement, (C) the pro forma financial information
included in the Registration Statement was not prepared in accordance with the
applicable requirements of the 1933 Act or the 1933 Act Regulations with
respect to pro forma financial information or was not determined on a basis
substantially consistent with that of the audited finan-

<PAGE> 38

cial statements included in the Registration Statement, or (D) at a specified
date not more than five days prior to the date of this Agreement, there has
been any change in the capital shares of the Company or any increase in the
debt of the Company or any decrease in the net assets of the Company as
compared with the amounts shown in September 30, 1996 historical financial
information of the Company included in the Registration Statement or, during
the period from September 30, 1996 to a specified date not more than five days
prior to the date of this Agreement, there were any decreases, as compared with
the corresponding period in the preceding year, in total revenues, net income
or funds from operations of the Company, except in all instances for changes,
increases or decreases which the Registration Statement and the Prospectus
disclose have occurred or may occur, and (iv) in addition to the examination
referred to in their opinions and the limited procedures referred to in clause
(iii) above, they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information which are included in the Registration Statement and
Prospectus and which are specified by the Representatives, and have found such
amounts, percentages and financial information to be in agreement with the
relevant accounting, financial and other records of the Company identified in
such letter.

(e) At the Closing Time, the Representatives shall have received from
Coopers & Lybrand L.L.P. a letter, dated the Closing Time, to the effect that
it reaffirms that statements made in the letter furnished pursuant to
subsection (d) of this Section, except that the "specified date" referred to
shall be a date not more than five days prior to the Closing Time and, if the
Company has elected to rely on Rule 430A of the 1933 Act Regulations, to the
further effect that they have carried out procedures as specified in clause
(iv) of subsection (d) of this Section with respect to certain amounts,
percentages and financial information specified by the Representatives and
deemed to be a part of the Registration Statement pursuant to Rule 430A(b) and
have found such amounts, percentages and financial information to be in
agreement with the records specified in such clause (iv).

<PAGE> 39

[(F) AT THE CLOSING TIME, THE SECURITIES SHALL BE APPROVED FOR LISTING ON
THE NEW YORK STOCK EXCHANGE UPON OFFICIAL NOTICE OF ISSUANCE.]

(g) At the Closing Time and at each Date of Delivery, if any, counsel for
the U.S. Underwriters shall have been furnished with such documents and
opinions as they may reasonably require for the purpose of enabling them to
pass upon the issuance and sale of the Securities as herein contemplated and
related proceedings, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the conditions,
herein contained; and all proceedings taken by the Company in connection with
the issuance and sale of the Securities as herein contemplated shall be
reasonably satisfactory in form and substance to the Representatives and
counsel for the U.S. Underwriters.

(h) At or prior to the Closing Time, the Representatives shall have
received a letter agreement from each director and executive officer of the
Company who is also a holder of Common Stock (the "Restricted Shares") and
Blackstone in form customary for transactions such as the offering of the
Securities to the effect that such holder shall agree that during the period of
180 days from the date hereof, such holder will not, without the prior written
consent of Merrill Lynch, sell, offer to sell, transfer, grant any option for
the sale of, pledge, enter into any agreement to sell, or otherwise dispose of
any Restricted Shares, except (i) transfers to any family member or affiliate
of such holder, including any trust established by such holder, provided that
the foregoing restrictions apply thereto, (ii) transfers to the estate or legal
guardian of any other holder of shares of Common Stock, and (iii) pledges to
secure bona fide indebtedness or any foreclosure of such pledges.

(i) In the event that the U.S. Underwriters exercise their option provided
in Section 2(b) hereof to purchase all or any portion of the Option U.S.
Securities, the representations and warranties of the Company contained herein
and the statements in any certificates furnished by the Transaction Entities
hereunder shall be true and correct in all material respects as of the Date of
Delivery and, at the Date of Delivery, the Representatives shall have received:

<PAGE> 40

(1) A certificate, dated such Date of Delivery, of the President or a
Vice President and the chief financial or chief accounting officer of the
Company confirming that the certificates delivered at Closing Time
pursuant to Section 5(c) hereof remain true and correct in all material
respects as of such Date of Delivery.

(2) The favorable opinion of Jones Day, in form and substance
reasonably satisfactory to counsel for the U.S. Underwriters, dated such
Date of Delivery, relating to the Option U.S. Securities to be purchased
on such Date of Delivery and otherwise to the same effect as the opinion
required by Section 5(b)(1) hereof.

(3) The favorable opinion of Marvin I. Droz, Esq., Senior Vice
President and General Counsel of the Company, in form and substance
reasonably satisfactory to counsel for the U.S. Underwriters, dated such
Date of Delivery and otherwise to the same effect as the opinion required
by Section 5(b)(2) hereof.

(4) The favorable opinion of Skadden Arps, counsel for the U.S.
Underwriters, dated such Date of Delivery, relating to the Option U.S.
Securities to be purchased on such Date of Delivery and otherwise to the
same effect as the opinion required by Section 5(b)(3) hereof.

(5) A letter from Coopers & Lybrand L.L.P. in form and substance
reasonably satisfactory to the Representatives and dated such Date of
Delivery, substantially the same in form and substance as the letter
furnished to the Representatives pursuant to Section 5(d) hereof, except
that the "specified date" in the letter furnished pursuant to this Section
5(i)(5) shall be a date not more than five days prior to such Date of
Delivery.

If any condition specified in this Section shall not have been fulfilled
when and as required to be fulfilled, this Agreement may be terminated by the
Representatives by notice to the Company at any time at or prior to Closing
Time, and such termination shall be

<PAGE> 41

without liability of any party to any other party except as provided in Section
4 hereof.

SECTION 6. Indemnification.

(a) The Company agrees to indemnify and hold harmless each U.S.
Underwriter and each person, if any, who controls any U.S. Underwriter within
the meaning of Section 15 of 1933 Act as follows:

(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement, or alleged
untrue statement, of a material fact contained in the Registration
Statement (or any amendment thereto), including the information deemed to
be part of the Registration Statement pursuant to Rule 430A(b) of the 1933
Act Regulations, if applicable, any information contained in any Rule
462(b) Registration Statement, if applicable, any information contained in
any Term Sheet, if applicable, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any
untrue statement or omission or alleged untrue statement or omission made
in reliance upon and in conformity with written information furnished to
the Company by any U.S. Underwriter through the Representatives expressly
for use in the Registration Statement (or any amendment thereto) or any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto); and provided, further, that this indemnity agreement with
respect to any preliminary prospectus

<PAGE> 42

shall not inure to the benefit of any U.S. Underwriter from whom the
person asserting any such losses, liabilities, claims, damages or expenses
purchased Securities, or any person controlling such U.S. Underwriter, if
a copy of the Prospectus (as then amended or supplemented if the Company
shall have furnished any such amendments or supplements thereto) was not
sent or given by or on behalf of such U.S. Underwriter to such person, if
such is required by law, at or prior to the written confirmation of the
sale of such Securities to such person and if the Prospectus (as so
amended or supplemented) would have corrected the defect giving rise to
such loss, liability, claim, damage or expense;

(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever for which indemnification is provided under subsection (i)
above if such settlement is effected with the written consent of the
indemnifying party; and

(iii) against any and all expense whatsoever, as incurred (including,
subject to Section 6(c) hereof, the reasonable fees and disbursements of
one law firm chosen by Merrill Lynch to act as counsel for all
underwriters and their controlling persons), reasonably incurred in
investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced
or threatened, or any claim whatsoever for which indemnification is
provided under subsection (i) or (ii) above, to the extent that any such
expense is not paid under (i) or (ii) above.

(b) Each U.S. Underwriter severally agrees to indemnify and hold harmless
the Company, each of the Company's directors and each of the Company's officers
who signs the Registration Statement or any amendment

<PAGE> 43

thereto and each person, if any, who controls the Company within the meaning of
Section 15 of the 1933 Act, against any and all loss, liability, claim, damage
and expense described in the indemnity contained in subsection (a)(i), (ii) and
(iii) of this Section, as incurred, but only with respect to untrue statements
or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto) or any preliminary prospectus
or the Prospectus (or any amendment or supplement thereto) in reliance upon and
in conformity with written information furnished to the Company by such U.S.
Underwriter through the Representatives expressly for use in the Registration
Statement (or any amendment thereto) or such preliminary prospectus or the
Prospectus (or any amendment or supplement thereto).

(c) Each indemnified party shall give notice as promptly as reasonably
practicable to each indemnifying party of any claims asserted against or any
action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve
such indemnifying party from any liability which it may have otherwise than on
account of this indemnity agreement except to the extent the indemnifying party
has been prejudiced in any material respect by such failure. An indemnifying
party may participate at its own expense in the defense of any such action. If
it so elects within a reasonable time after receipt of such notice, an
indemnifying party, jointly with any other indemnifying parties receiving such
notice, may assume the defense of such action with counsel chosen by it and
reasonably approved by the indemnified parties defendant in such action, unless
such indemnified parties reasonably object to such assumption on the ground
that there may be legal defenses available to them which are different from or
in addition to those available to such indemnifying party. If an indemnifying
party assumes the defense of such action, the indemnifying parties shall not be
liable for any fees and expenses of counsel for the indemnified parties
incurred thereafter in connection with such action. In no event shall the
indemnifying parties be liable for fees and expenses of more than one counsel
(in addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but
substantially similar or related actions in the same jurisdiction arising out
of the same general allegations

<PAGE> 44

or circumstances. Anything in this Section 6 to the contrary notwithstanding,
an indemnifying party shall not be liable for any settlement of any claim or
action effected without its written consent provided that such consent was not
unreasonably withheld.

(d) In connection with the offer and sale of the Reserved Securities, the
Company agrees, promptly upon a request in writing, to indemnify and hold
harmless the U.S. Underwriters from and against any and all losses,
liabilities, claims, damages and expenses incurred by them as a result of the
failure of eligible employees of the Company and other persons to pay for and
accept delivery of Reserved Securities which, by the end of the first business
day following the date of this Agreement, were subject to a properly confirmed
agreement to purchase.

SECTION 7. Contribution.

In order to provide for just and equitable contribution in circumstances
in which the indemnity agreement provided for in Section 6 is for any reasons
held to be unenforceable by the indemnified parties although applicable in
accordance with its terms, the Company, on the one hand, and the U.S.
Underwriters, on the other hand, shall contribute to the aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by said
indemnity agreement incurred by the Company, on the one hand, and one or more
of the U.S. Underwriters, on the other hand, as incurred, in such proportions
that the U.S. Underwriters are responsible for that portion represented by the
percentage that the sum of the fees payable pursuant to Sections 4(c) and (d)
hereof and the underwriting discount appearing on the cover page of the
Prospectus bears to the public offering price appearing thereon and the
Company, responsible for the balance; provided, however, that no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
1933 Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. For purposes of this Section, each
person, if any, who controls a U.S. Underwriter within the meaning of Section
15 of the 1933 Act shall have the same rights to contribution as such U.S.
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration State-

<PAGE> 45

ment, and each person, if any, who controls the Company within the meaning of
Section 15 of the 1933 Act shall have the same rights to contributions as the
Company.

SECTION 8. Representations, Warranties and Agreements to Survive Delivery.

All representations, warranties and agreements contained in this Agreement
and the U.S. Pricing Agreement, or contained in certificates of officers or
authorized representatives of the Company submitted pursuant hereto, shall
remain operative and in full force and effect, regardless of any investigation
made by or on behalf of any U.S. Underwriter or controlling person, or by or on
behalf of the Company, and shall survive delivery of the Securities to the U.S.
Underwriters.

SECTION 9. Termination of Agreement.

(a) The Representatives may terminate this Agreement, by written notice to
the Company, at any time at or prior to Closing Time (i) if there has been,
since the date of this Agreement or since the respective dates as of which
information is given in the Registration Statement, any Material Adverse
Change, (ii) if there has occurred any material adverse change in the financial
markets in the United States or any outbreak of hostilities or escalation of
existing hostilities or other calamity or crisis the effect of which on the
financial markets of the United States is such as to make it, in the judgment
of the Representatives, impracticable to market the Securities or to enforce
contracts for the sale of the Securities, or (iii) if trading in the Common
Stock has been suspended by the Commission or if trading generally on either
the New York Stock Exchange, Inc. or the American Stock Exchange, Inc. has been
suspended, or minimum or maximum prices for trading have been fixed, or maximum
ranges for prices for securities have been required, by either of said
Exchanges or by order of the Commission or any other governmental authority, or
if a banking moratorium has been declared by any of Federal, New York or
Pennsylvania authorities.

(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except
as provided in Sections 4 and 10 hereof. Notwithstanding any such

<PAGE> 46

termination, the provisions of Section 4, 6, and 7 shall remain in effect.

SECTION 10. Default by One or More of the Underwriters.

If one or more of the U.S. Underwriters shall fail at the Closing Time to
purchase the Initial U.S. Securities or on the Date of Delivery to purchase the
Option U.S. Securities which it or they are obligated to purchase under this
Agreement and the U.S. Pricing Agreement (the "Defaulted Securities"), the
Representatives shall have the right, within 24 hours thereafter, to make
arrangements for one or more of the non-defaulting U.S. Underwriters, or any
other underwriters, to purchase all, but not less than all, of the Defaulted
Securities in such amounts as may be agreed upon and upon the terms herein set
forth; if, however, the Representatives shall not have completed such
arrangements within such 24-hour period, then:

(a) If the number of Defaulted Securities does not exceed 10% of the
Securities, each of the non-defaulting U.S. Underwriters shall be obligated,
severally and not jointly, to purchase the full amount thereof in the
proportions that its respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting U.S. Underwriters, or

(b) If the number of Defaulted Securities exceeds 10% of the Securities,
this Agreement shall terminate without liability on the part of any non-de-
faulting U.S. Underwriter; provided that if such default occurs with respect to
the Option U.S. Securities after the Closing Time, this Agreement will not
terminate as to the Initial U.S. Securities.

No action taken pursuant to this Section shall relieve any defaulting U.S.
Underwriter from liability in respect of its default.

In the event of any such default which does not result in a termination of
this Agreement, any of the Representatives or the Company shall have the right
to postpone Closing Time for a period not exceeding seven days in order to
effect any required changes in the

<PAGE> 47

Registration Statement or Prospectus or in any other documents or arrangements.

SECTION 11. Notices.

All notices and other communications hereunder shall be in writing and
shall be deemed to have been duly given if mailed or transmitted by any
standard form of telecommunication. Notices to the U.S. Underwriters shall be
directed to the Representatives at Merrill Lynch World Headquarters, North
Tower, World Financial Center, New York, New York 10281-1326, attention of
Michael F. Profenius, Managing Director, with a copy to Skadden, Arps, Slate,
Meagher & Flom LLP, 919 Third Avenue, New York, New York 10022, attention of
Patrick J. Foye, Esq.; notices to the Company shall be directed to it at
Foster Plaza 10, 680 Andersen Drive, Pittsburgh, Pennsylvania 15220, attention
of Marvin I. Droz, Senior Vice President and General Counsel, with a copy to
Jones, Day, Reavis & Pogue, 599 Lexington Avenue, New York, New York 10022,
attention of Robert A. Profusek, Esq.

SECTION 12. Parties.

This Agreement and the U.S. Pricing Agreement shall each inure to the
benefit of and be binding upon the parties hereto and their respective
successors. Nothing expressed or mentioned in this Agreement or the U.S.
Pricing Agreement is intended or shall be construed to give any person, firm or
corporation, other than those referred to in Sections 6 and 7 and their heirs
and legal representatives, any legal or equitable right, remedy or claim under
or in respect of this Agreement or the U.S. Pricing Agreement or any provision
herein or therein contained. This Agreement and the U.S. Pricing Agreement and
all conditions and provisions hereof and thereof are intended to be for the
sole and exclusive benefit of the parties hereto and thereto and their
respective successors, and said controlling persons and officers and directors
and their heirs and legal representatives, and for the benefit of no other
person, firm or corporation. No purchaser of Securities from any U.S.
Underwriter shall be deemed to be a successor by reason merely of such
practice.

<PAGE> 48

13. Governing Laws and Time.

This Agreement and the Pricing U.S. Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
agreements made and to be performed in said State. Specified times of day refer
to New York City time. If the foregoing is in accordance with your
understanding of our agreement, please sign and return to the Company a
counterpart hereof, whereupon this instrument, along with all counterparts,
will become a binding agreement among the U.S. Underwriters and the Company in
accordance with its terms.

<PAGE> 49

Very truly yours,

INTERSTATE HOTELS COMPANY

By:
-----------------------------
Name: W. Thomas Parrington, Jr.
Title: President and Chief
Executive Officer

Confirmed and Accepted,
as of the date first above written:

MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MONTGOMERY SECURITIES
MORGAN STANLEY & CO. INCORPORATED
SMITH BARNEY INC.
CREDIT LYONNAIS SECURITIES (USA) INC.

By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED

By:
-------------------------------
Name:
Title: Authorized Signatory

For themselves and as Representatives of the other U.S. Underwriters named in
Schedule A hereto.

<PAGE> 50

SCHEDULE A

<TABLE>
<CAPTION>
Number of
Initial U.S.
Name of U.S. Underwriter Securities
------------------------ ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith

Incorporated..........................................................
Montgomery Securities.............................................................
Morgan Stanley & Co. Incorporated.................................................
Smith Barney Inc..................................................................
Credit Lyonnais Securities (USA) Inc..............................................
[ALEX. BROWN & SONS INCORPORATED..................................................
BT SECURITIES CORPORATION.........................................................
DEAN WITTER REYNOLDS INC..........................................................
DONALDSON, LUFKIN & JENRETTE SECURITIES
CORPORATION.....................................................................
OPPENHEIMER & CO., INC............................................................
PAINEWEBBER INCORPORATED..........................................................
PRUDENTIAL SECURITIES INCORPORATED................................................
SALOMON BROTHERS INC..............................................................
SCHRODER WERTHEIM & CO. INCORPORATED..............................................
CIBC WOOD GUNDY SECURITIES CORP...................................................
ADVEST, INC.......................................................................
J.C. BRADFORD & CO................................................................
JW CHARLES SECURITIES, INC........................................................
CROWELL, WEEDON & CO..............................................................
DAVENPORT & CO. OF VIRGINIA, INC..................................................
DOMINICK & DOMINICK, INCORPORATED.................................................
FIRST ALBANY CORPORATION..........................................................
FURMAN SELZ LLC...................................................................
GENESIS MERCHANT GROUP SECURITIES.................................................
INTERSTATE/JOHNSON LANE CORPORATION...............................................
JANNEY MONTGOMERY SCOTT INC.......................................................
LEGG MASON WOOD WALKER, INCORPORATED..............................................
MORGAN KEEGAN & COMPANY, INC......................................................
PARKER/HUNTER INCORPORATED........................................................
PENNSYLVANIA MERCHANT GROUP LTD...................................................
RAGEN MACKENZIE INCORPORATED......................................................
RAYMOND JAMES & ASSOCIATES, INC...................................................
THE ROBINSON-HUMPHREY COMPANY, INC................................................
THE SEIDLER COMPANIES INCORPORATED................................................
SUTRO & CO. INCORPORATED..........................................................
TUCKER ANTHONY INCORPORATED.......................................................
UTENDAHL CAPITAL PARTNERS, L.P....................................................
VAN KASPER & COMPANY..............................................................
WHEAT, FIRST SECURITIES, INC.]....................................................
---------
TOTAL SHARES: 3,400,000
</TABLE>

<PAGE> 51

EXHIBIT A

3,400,000 Shares

INTERSTATE HOTELS COMPANY

(a Pennsylvania corporation)

Common Stock

(Par Value $.01 Per Share)

U.S. PRICING AGREEMENT

December [ ], 1996

MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MONTGOMERY SECURITIES
MORGAN STANLEY & CO. INCORPORATED
SMITH BARNEY INC.
CREDIT LYONNAIS SECURITIES (USA) INC.
as Representative of the several U.S. Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Merrill Lynch World Headquarters
North Tower
World Financial Center
New York, New York 10281

Ladies and Gentlemen:

Reference is made to the U.S. Purchase Agreement dated December [ ], 1996,
(the "U.S. Purchase Agreement") relating to the purchase by the several U.S.
Underwriters named in Schedule A thereto (the "U.S. Underwriters"), for whom
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith

Ex. A-1

<PAGE> 52

Incorporated, Montgomery Securities, Morgan Stanley & Co. Incorporated, Smith
Barney Inc. and Credit Lyonnais Securities (USA) Inc. are acting as
representatives (the "Representatives"), of the above shares of common stock
(the "Securities") of Interstate Hotels Company (the "Company").

Pursuant to Section 2 of the U.S. Purchase Agreement, the Company agrees
with each U.S. Underwriter as follows:

1. The public offering price per share for the Securities, determined as
provided in said Section 2, shall be $[ ].

2. The purchase price per share for the Securities to be paid by the U.S.
Underwriters shall be $[ ], being an amount equal to the public offering price
set forth above less $[ ] per share.

Ex. A-2

<PAGE> 53

If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement among the U.S. Underwriters and the Company in accordance with its
terms.

Very truly yours,

INTERSTATE HOTELS COMPANY

By:
-----------------------------
Name: W. Thomas Parrington, Jr.
Title: President and Chief
Executive Officer

Confirmed and Accepted,
as of the date first above written:

MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MONTGOMERY SECURITIES
MORGAN STANLEY & CO. INCORPORATED
SMITH BARNEY INC.
CREDIT LYONNAIS SECURITIES (USA) INC.

By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED

By:
-----------------------------
Name:
Title: Authorized Signatory

For themselves and as Representatives of the other
U.S. Underwriters named in the U.S. Purchase Agreement.

Ex. A-3

<PAGE> 1
Exhibit 1.1(b)

600,000 Shares

INTERSTATE HOTELS COMPANY

(a Pennsylvania corporation)

Common Stock

(Par Value $.01 Per Share)

INTERNATIONAL PURCHASE AGREEMENT

December [ ], 1996

MERRILL LYNCH INTERNATIONAL
CREDIT LYONNAIS SECURITIES
MONTGOMERY SECURITIES
MORGAN STANLEY & CO. INTERNATIONAL LIMITED
SMITH BARNEY INC.
as Representatives of the several International
Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Merrill Lynch World Headquarters
North Tower
World Financial Center
New York, New York 10281

Ladies and Gentlemen:

Interstate Hotels Company, a Pennsylvania corporation (the "Company"),
confirms its agreement with Merrill Lynch International ("Merrill Lynch"),
Credit Lyonnais Securities ("Credit Lyonnais"), Montgomery Securities
("Montgomery"), Morgan Stanley & Co. International Limited ("Morgan Stanley")
and Smith Barney Inc. ("Smith Barney"), and each of the other underwriters
named in Schedule A hereto (collectively, the "International Underwriters,"
which term shall also include any underwriter substituted as hereinafter
provided in Section 10 hereof), for whom Merrill Lynch, Credit Lyonnais,
Montgomery, Morgan Stanley and Smith Barney are acting as representatives (in
such capacity, Merrill Lynch, Credit

<PAGE> 2

Lyonnais, Montgomery, Morgan Stanley and Smith Barney shall hereinafter be
referred to collectively as the "Representatives"), with respect to the sale by
the Company and the purchase by the International Underwriters, acting
severally and not jointly, of the respective number of shares of common stock,
par value $.01 per share, of the Company ("Common Stock") set forth in said
Schedule A (except as otherwise provided in the International Pricing Agreement
referred to below) and with respect to the grant by the Company to the
International Underwriters, acting severally and not jointly, of the option
described in Section 2(b) hereof to purchase all or any part of 90,000
additional shares of Common Stock to cover over-allotments, in each case except
as may otherwise be provided in the International Pricing Agreement (as
hereinafter defined). The 600,000 shares of Common Stock (the "Initial
International Securities") to be purchased by the International Underwriters
and all or any part of the 90,000 shares of Common Stock subject to the option
described in Section 2(b) hereof (the "Option International Securities") are
collectively hereinafter called the "Securities."

Prior to the purchase and public offering of the Securities by the several
International Underwriters, the Company and the Representatives, acting on
behalf of the several International Underwriters, shall enter into an agreement
substantially in the form of Exhibit A hereto (the "International Pricing
Agreement"). The International Pricing Agreement may take the form of an
exchange of any standard form of written telecommunication between the Company
and the Representatives and shall specify such applicable information as is
indicated in Exhibit A hereto. The offering of the Securities will be governed
by this agreement (the "Agreement"), as supplemented by the International
Pricing Agreement. From and after the date of the execution and delivery of the
International Pricing Agreement, this Agreement shall be deemed to incorporate
the International Pricing Agreement.

It is understood that the Company is concurrently entering into an
agreement dated the date hereof (the "U.S. Purchase Agreement") providing for
the offering by the Company of 3,400,000 shares of Common Stock (the "Initial
U.S. Securities") through arrangements with certain underwriters within the
United States and Canada

<PAGE> 3

(the "U.S. Underwriters") for whom Merrill Lynch & Co., Montgomery Securities,
Morgan Stanley & Co. Incorporated, Smith Barney Inc. and Credit Lyonnais
Securities (USA) Inc. are acting as the representatives (the "U.S. Repre-
sentatives") and the grant by the Company to the U.S. Underwriters, acting
severally and not jointly, of an option to purchase all or any part of the
International Underwriters' pro rata portion of up to 510,000 additional shares
of Common Stock solely to cover over-allotments, if any (the "Option U.S.
Securities", and collectively with the Initial U.S. Securities, the "U.S.
Securities").

Prior to the purchase and public offering of the U.S. Securities by the
several U.S. Underwriters, the Company and the U.S. Representatives, acting on
behalf of the several U.S. Underwriters, shall enter into an agreement
substantially in the form of Exhibit A to the U.S. Purchase Agreement (the
"U.S. Pricing Agreement"). The U.S. Pricing Agreement may take the form of an
exchange of any standard form of written telecommunication between the Company
and the U.S. Representatives and shall specify such applicable information as
is indicated in Exhibit A to the U.S. Purchase Agreement. The offering of the
U.S. Securities will be governed by U.S. Purchase Agreement, as supplemented
by the U.S. Pricing Agreement. From and after the date of the execution and
delivery of the U.S. Pricing Agreement, the U.S. Purchase Agreement shall be
deemed to incorporate the U.S. Pricing Agreement.

<PAGE> 4

Act, or otherwise, are hereinafter referred to as the "Registration Statement,"
and the "Prospectus," respectively, except that if any revised prospectus shall
be provided to the International Underwriters by the Company for use in
connection with the offering of the Securities which differs from the
Prospectus on file at the Commission at the time the Registration Statement
becomes effective (whether or not such revised prospectus is required to be
filed by the Company pursuant to Rule 424(b) of the 1933 Act Regulations), the
term Prospectus shall refer to such revised prospectus from and after the time
it was provided to the International Underwriters for such use. Two forms of
prospectuses are to be used in connection with the offering and sale of the
Securities to the International Underwriters, one relating to the International
Securities and one relating to the U.S. Securities. The form of prospectus
relating to the International Securities is identical to the form of prospectus
relating to the U.S. Securities, except for the front and back covers and the
information under the caption "Underwriting." Any registration statement
(including any amendment or supplement thereto or information which is deemed
part thereof) filed by the Company to register additional shares of Common
Stock of the Company under Rule 462(b) of the 1933 Act Regulations (a "Rule
462(b) Registration Statement") shall be deemed to be part of the Registration
Statement. Any prospectus (including any amendment or supplement thereto or
information which is deemed part thereof) included in a Rule 462(b)
Registration Statement and any term sheet as contemplated by Rule 434 of the
1933 Act Regulations (a "Term Sheet") shall be deemed to be part of the
Prospectus. Capitalized terms used but not otherwise defined herein shall have
the meanings given to those terms in the Prospectus.

The Company understands that the International Underwriters propose to
make an offering of the Securities as soon as the Representatives deem
advisable after the Registration Statement becomes effective and the
International Pricing Agreement has been executed and delivered.

<PAGE> 5

as stated in the "Underwriting" section of the Prospectus (the "Reserve Share
Program"). The Securities under the Reserve Share Program will be sold to the
employees, customers, vendors and business associates by the International
Underwriters pursuant to this Agreement and by the U.S. Underwriters pursuant
to the U.S. Purchase Agreement at the public offering price. Any such shares
not orally confirmed for purchase by such persons by the end of the first
business day following the date of this Agreement will be offered to the public
by the International Underwriters and the U.S. Underwriters as set forth in the
Prospectus.

SECTION 1. Representations and Warranties of the Company.

(a) The Company represents and warrants to each International Underwriter
as of the date hereof and as of the date of the International Pricing Agreement
(such later date being hereinafter referred to as the "Representation Date") as
follows:

(i) At the time the Registration Statement becomes effective and at
the Representation Date, the Registration Statement will comply in all
material respects with the requirements of the 1933 Act and the 1933 Act
Regulations and will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading. The Prospectus, at the
Representation Date (unless the term "Prospectus" refers to a prospectus
which has been provided to the International Underwriters by the Company
for use in connection with the offering of the Securities which differs
from the Prospectus on file at the Commission at the time the Registration
Statement becomes effective, in which case at the time it is first
provided to the International Underwriters for such use) and at the
Closing Time referred to in Section 2 hereof, will comply in all material
respects with the requirements of the 1933 Act and the 1933 Act
Regulations and will not include an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they

<PAGE> 6

were made, not misleading; provided, however, that the representations and
warranties in this subsection shall not apply to statements in or
omissions from the Registration Statement or Prospectus made in reliance
upon and in conformity with information furnished to the Company in
writing by any International Underwriter through the Representatives
expressly for use in the Registration Statement or Prospectus.

<PAGE> 7

<PAGE> 8

(vi) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the Commonwealth of
Pennsylvania, with corporate power and authority to own, lease and operate
its properties and to conduct its business as described in the Prospectus
and to enter into and perform its obligations under this Agreement and the
International Pricing Agreement and the other Company Documents (as
hereinafter defined) to which it is a party; and the Company is duly
qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required,
whether by reason of the ownership, leasing or management of property or
the conduct of business, except where the failure to so qualify would not
have a Material Adverse Effect.

<PAGE> 9

(viii) Each of the Company's Subsidiaries that is a corporation (the
"Corporate Subsidiaries," and collectively with the Partnership
Subsidiaries, the "Subsidiaries") and would constitute, at the Closing
Time, a "significant subsidiary" under Rule 1-02 of Regulation S-X under
the Securities Act ("Significant Subsidiary") is a corporation duly
incorporated and validly existing as a corporation in good standing under
the laws of its jurisdiction of incorporation with the requisite corporate
power and authority to own, lease and manage its properties, to conduct
the business in which it is engaged or proposes to engage and to enter
into and perform its obligations under the Company Documents to which it
is a party. Each of the Corporate Subsidiaries is duly qualified as a
foreign corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of
the ownership, leasing or management of property or the conduct of
business, except where the failure to so qualify would not have a Material
Adverse Effect. As of the Closing Time, all of the issued and outstanding
capital stock of each of the Corporate Subsidiaries will be duly
authorized, validly issued, fully paid and non-assessable, and except as
described, or in respect of indebtedness which is described, in the
Prospectus, all of such capital stock will be owned by the Company,
directly or through the Company's Subsidiaries, free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim or
restriction other than any lien or encumbrance imposed by any such
Subsidiaries' organizational documents or by shareholder agreements. No
shares of capital stock of the Company's Subsidiaries are reserved for any
purpose, and there are no outstanding securities convertible into or
exchangeable for any capital stock of the Company's Subsidiaries and no
outstanding options, rights (preemptive or otherwise) or

<PAGE> 10

warrants to purchase or to subscribe for shares of such capital stock or
any other securities of Company's Subsidiaries other than pursuant to such
Subsidiaries' respective organizational documents.

(x) The Securities have been duly authorized for issuance and sale to
the International Underwriters pursuant to this Agreement, and, when
issued and delivered by the Company pursuant to this Agreement against
payment of the consideration set forth in the International Pricing
Agreement, will be validly issued, fully paid and non-assessable. The
terms of the Common Stock conform in all material respects to all
statements and descriptions related thereto contained in the Prospectus.
The issuance of the Securities is not subject to any preemptive or other
similar rights, other than pursuant to the Registration Rights Agreement
(referred to in the Prospectus under "The Organization, Acquisition and
Financing Plan") and the Stockholders' Agreements (as hereinafter
defined).

<PAGE> 11

the Closing Time upon payment therefor as provided herein will be validly
issued, fully paid and non-assessable.

(xiii) [UPDATE ACCORDING TO EXHIBITS] (A) This Agreement and the U.S.
Purchase Agreement has been duly and validly authorized, executed and
delivered by the Company and, assuming due authorization, execution and
delivery by the Representatives, is a valid and binding agreement of the
Company; (B) at the Representation Date, the International Pricing
Agreement and the U.S. Pricing Agreement will have been duly and validly
authorized, executed and delivered by the Company, and assuming due
authorization, execution and delivery by the Representatives, will be a
valid and binding agreement of the Company; (C) at the Closing Time, the
Credit Agreement dated June 25, 1996 as amended October [ ], 1996 among
the Company, Interstate Hotels Corporation ("IHC"), Credit Lyonnais New
York Branch, and the other banks signatory thereto (the "Credit
Agreement") will be duly and validly authorized, executed and delivered by
the parties thereto, will be a valid and binding agreement of the parties
thereto, and will be enforceable against the parties thereto in accordance
with its terms; (D) at the Closing time, the Master Agreement, dated as of

<PAGE> 12

November 4, 1996, among Equity Inns Partnership, IHC, Equity Inns, Inc.,
Crossroads/Memphis Partnership, L.P. and Crossroads Furniture Company,
L.L.C. (the "Master Agreement") has been duly and validly authorized,
executed and delivered by IHC, is a valid and binding agreement of IHC,
and is enforceable against IHC in accordance with its terms. This
Agreement, the International Pricing Agreement, the Credit Agreement, the
Master Agreement and the Transaction Agreements (defined below) are
sometimes hereinafter collectively called the "Company Documents."

<PAGE> 13

"Transaction Agreements"), and the performance of the obligations set
forth therein and the consummation of the Transactions or the transactions
contemplated thereby by the Transaction Entities have been duly and
validly authorized by all necessary corporate or partnership action, as
the case may be, by or on behalf of the Transaction Entities. Except as
described in the Prospectus (including, without limitation, the
transactions described in the Prospectus under the heading "The
Organization, Acquisition and Financing Plan -- Acquisition of Additional
Hotels"), each of the Transactions will have been completed on or before
the Closing Time.

<PAGE> 14

<PAGE> 15

unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), trademarks, service marks and trade names
(collectively, "proprietary rights") material to the conduct of the
business now operated by them, and none of the Company or any of its
Subsidiaries has received any notice nor is any executive officer of the
Company otherwise aware of any infringement of or conflict with asserted
rights of others with respect to any proprietary rights, or of any facts
which would render any proprietary rights invalid or inadequate to protect
the interest of such Transaction Entity therein, and which infringement or
conflict (if the subject of any unfavorable decision, ruling, or finding)
or invalidity or inadequacy, singly or in the aggregate, would have a
Material Adverse Effect.

<PAGE> 16

revocation or modification of any such certificate, authority or permit
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a Material Adverse Effect.

[(XXVI) THE SECURITIES HAVE BEEN APPROVED FOR LISTING ON THE NEW YORK
STOCK EXCHANGE UPON NOTICE OF ISSUANCE.]

<PAGE> 17

(xxviii) The Transaction Entities have obtained title insurance on the
fee and ground lease interests in each of the Hotels in which the Company
has an ownership interest, in an amount at least equal to the purchase
price of each such owned Hotel.

<PAGE> 18

(as defined below) by the United States Environmental Protection Agency
(the "EPA") or on the Comprehensive Environmental Response, Compensation,
and Liability Information System database maintained by the EPA, and the
executive officers of the Company have no knowledge, after due inquiry,
that any Hotel has otherwise been identified in a published writing by the
EPA as a potential CERCLA removal, remedial or response site or, to the
knowledge of the executive officers of the Company, after due inquiry,
proposed for inclusion on any similar list of potentially contaminated
sites pursuant to any other Environmental Law.

As used herein, "Hazardous Substance" shall include any hazardous
substance, hazardous waste, toxic substance, pollutant, hazardous material, or
similarly designated materials including, without limitation, oil, petroleum or
any petroleum-derived substance or waste, asbestos or asbestos-containing
materials, PCB's, pesticides, explosives, radioactive materials, dioxins, urea
formaldehyde insulation or any constituent of any such substance, pollutant or
waste which is identified, regulated, prohibited or limited under any
Environmental Law (including, without limitation, materials listed in the
United States Department of Transportation Optional Hazardous Material Table,
49 C.F.R. section 172.101, or in the EPA's List of Hazardous Substances and
Reportable Quantities, 40 C.F.R. Part 302 as the same may now or hereafter be
amended; "Environment" shall mean any surface water, drinking water, ground
water, land surface, subsurface strata, river sediment, buildings, structures,
workplace and indoor and outdoor air; "Environmental Law" shall mean the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended (42 U.S.C. section 9601, et seq.) ("CERCLA"), the Resource
Conservation and Recovery Act of 1976, as amended (42 U.S.C. section 6901, et
seq.), the Clean Air Act, as amended (42 U.S.C. section 7401, et seq.), the
Clean Water Act, as amended (33 U.S.C. section 1251, et seq.), the Toxic
Substances Control Act, as amended (15 U.S.C. section 2601, et seq.), the
Occupational Safety and Health Act of 1970, as amended (29 U.S.C. section 651,
et seq.), the Hazardous Materials Transportation Act, as amended (49 U.S.C.
section 1801, et seq.), and all other federal, state and local laws,
ordinances, regulations, rules and orders relating to the protection of the
environment or of human health from environmental

<PAGE> 19

effects; "Governmental Authority" shall mean any federal, state or local
governmental office, agency or authority having the duty or authority to
promulgate, implement or enforce any Environmental Law; "Lien" shall mean, with
respect to any Hotel, any mortgage, deed of trust, pledge, security interest,
lien, encumbrance, penalty, fine, charge, assessment, judgment or other
liability in, on or affecting such Hotel; and "Release" shall mean any
spilling, leaking, pumping, pouring, emitting, emptying, discharging,
injecting, escaping, leaching, dumping, emanating or disposing of any Hazardous
Substance into the Environment, including, without limitation, the abandonment
or discard of barrels, containers, tanks (including, without limitation,
underground storage tanks) or other receptacles containing or previously
containing any Hazardous Substance or any release, emission, discharge or
similar term, as those terms are defined or used in any Environmental Law.

(b) Any certificate signed by any executive officer or authorized
representative of the Company and delivered to the Representatives or to
counsel for the International Underwriters or U.S. Underwriters shall be deemed
a representation and warranty by such entity or person, as the case may be, to
each International Underwriter or U.S. Underwriters as to the matters covered
thereby.

SECTION 2. Sale and Delivery to International Underwriters; Closing.

(a) On the basis of the representations and warranties herein contained,
and subject to the terms and conditions herein set forth, the Company agrees to
sell to each International Underwriter, severally and not

<PAGE> 20

jointly, and each International Underwriter, severally and not jointly, agrees
to purchase from the Company, at the price per share set forth in the
International Pricing Agreement, the number of Initial International Securities
set forth in Schedule A hereto opposite the name of such International
Underwriter (except as otherwise provided in the International Pricing
Agreement), plus any additional number of Initial International Securities
which such International Underwriter may become obligated to purchase pursuant
to the provisions of Section 10 hereof.

(i) If the Company has elected not to rely upon Rule 430A under the
1933 Act Regulations, the public offering price and the purchase price per
share to be paid by the several International Underwriters for the
Securities each have been determined and set forth in the International
Pricing Agreement and an amendment to the Registration Statement and the
Prospectus will be filed before the Registration Statement becomes
effective.

(ii) If the Company has elected to rely upon Rule 430A under the 1933
Act Regulations, the purchase price per share to be paid by the several
International Underwriters for the Securities shall be an amount equal to
the public offering price, less an amount per share to be determined by
agreement between the Representatives and the Company. The public offering
price per share of the Securities shall be a fixed price to be determined
by agreement among the Representatives and the Company. The public
offering price and the purchase price, when so determined, shall be set
forth in the International Pricing Agreement. In the event that such
prices have not been agreed upon and the International Pricing Agreement
has not been executed and delivered by all parties thereto by the close of
business on the fourteenth business day following the date of this
Agreement, this Agreement shall terminate forthwith, without liability of
any party to any other party other than pursuant to Sections 6 and 7
hereof, unless otherwise agreed to by the Company and the Representatives.

(b) In addition, on the basis of the representations and warranties
herein contained and subject to

<PAGE> 21

the terms and conditions herein set forth, the Company hereby grants an option
to the International Underwriters, severally and not jointly, to purchase up to
an additional 90,000 shares of Common Stock at the price per share set forth in
the International Pricing Agreement solely to cover over-allotments. The option
hereby granted will expire 30 days after the date hereof (or, if the Company
has elected to rely on Rule 430A under the 1933 Act Regulations, 30 days after
the execution of the International Pricing Agreement), provided that if such
thirtieth day is not a New York Stock Exchange trading day, the thirtieth day
will be the next succeeding New York Stock Exchange trading day and may be
exercised in whole or in part from time to time only for the purpose of
covering over-allotments which may be made in connection with the offering and
distribution of the Initial International Securities upon notice by the
Representatives to the Company setting forth the number of Option International
Securities as to which the several International Underwriters are then
exercising the option and the time and date of payment and delivery for such
Option International Securities. Any such time and date of delivery (a "Date of
Delivery") shall be determined by the Representatives, but shall not be later
than seven full business days nor earlier than two full business days after the
exercise of said option, nor in any event prior to the Closing Time, as
hereinafter defined, unless otherwise agreed upon by the Representatives and
the Company. If the option is exercised as to all or any portion of the Option
International Securities, the Option International Securities shall be
purchased by the International Underwriters, severally and not jointly, in
proportion to their respective Initial International Securities underwriting
obligations as set forth in Schedule A.

(c) Payment of the purchase price for, and delivery of certificates for,
the Initial International Securities shall be made at the office of Jones, Day,
Reavis & Pogue ("Jones Day"), 599 Lexington Avenue, New York, New York 10022,
or at such other place as shall be agreed upon by the Representatives and the
Company, at 10:00 A.M. on the fourth business day (or the third business day if
required under Rule 15c6-1 of the rules and regulations (the "1934 Act
Regulations") of the Commission under the Securities Exchange Act of 1934, as
amended (the "1934 Act"), or unless postponed in accor-

<PAGE> 22

dance with the provisions of Section 10) following the date the Registration
Statement becomes effective (or, if the Company has elected to rely upon Rule
430A of the 1993 Act Regulations, the fourth business day (or the third
business day if required under Rule 15c6-1 of the 1934 Act) after execution of
the International Pricing Agreement), or such other time not later than ten
business days after such date as shall be agreed upon by the Representatives
and the Company (such time and date of payment and delivery being herein called
"Closing Time"). In addition, in the event that any or all of the Option
International Securities are purchased by the International Underwriters,
payment of the purchase price for, and delivery of certificates for, such
Option International Securities shall be made at the above-mentioned offices of
Jones Day, or at such other place as shall be agreed upon by the
Representatives and the Company, on each Date of Delivery as specified in the
notice from the Representatives to the Company. Payment for the Initial
International Securities shall be made to the Company by wire transfer in
immediately available funds, provided that it is understood and agreed that
interest on the aggregate purchase price for the Initial International
Securities in federal funds for one day at Merrill Lynch's overnight borrowing
rate shall be deducted from such payment and shall reduce the purchase price
payable for the Initial International Securities by such amount. Payment for
the Option International Securities shall be made to the Company by certified
or official bank check or checks drawn in New York Clearing House funds or
similar next day funds payable to the order of the Company, against delivery to
the Representatives for the respective accounts of the International
Underwriters of certificates for the Securities to be purchased by them.
Certificates for the Initial International Securities and the Option
International Securities, if any, shall be in such denominations and registered
in such names as the Representatives may request in writing at least two
business days before the Closing Time or the relevant Date of Delivery, as the
case may be. It is understood that each International Underwriter has
authorized the Representatives, for its account, to accept delivery of, receipt
for, and make payment of the purchase price for, the Initial International
Securities and the Option International Securities, if any, which it has agreed
to purchase. Merrill Lynch, Credit Lyonnais, Montgomery, Morgan Stanley and
Smith Barney, individually and not as representa-

<PAGE> 23

tives of the International Underwriters, may (but shall not be obligated to)
make payment of the purchase price for the Initial International Securities or
the Option International Securities, if any, to be purchased by any
International Underwriter whose payment has not been received by the Closing
Time or the relevant Date of Delivery, as the case may be, but any such payment
shall not relieve such International Underwriter from its obligations
hereunder. The certificates for the Initial International Securities and the
Option International Securities, if any, will be made available for examination
and packaging by the Representatives not later than 10:00 A.M. on the last
business day prior to Closing Time or the relevant Date of Delivery, as the
case may be, in New York, New York.

SECTION 3. Covenants of the Company.

The Company covenants with each International Underwriter as follows:

<PAGE> 24

Registration Statement becomes effective, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) of the 1933 Act
Regulations, the 1934 Act, the 1934 Act Regulations or any Term Sheet. The
Company will furnish the Representatives with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or use, as
the case may be, and will not file any such amendment or supplement or use any
such prospectus to which the Representatives or counsel for the International
Underwriters reasonably shall object.

(d) The Company will furnish to each International Underwriter, from time
to time during the period when the Prospectus is required to be delivered under
the 1933 Act or the 1934 Act, such number of copies of the Prospectus (as
amended or supplemented) as such International Underwriter reasonably may
request for the purposes contemplated by the 1933 Act or the applicable rules
and regulations of the Commission thereunder.

(e) If any event shall occur as a result of which it is necessary, in the
opinion of counsel for the International Underwriters, to amend or supplement
the Prospectus in order to comply with the 1933 Act or the 1934 Act or to make
the Prospectus not misleading in the light of the circumstances existing at the
time it is delivered to a purchaser, the Company forthwith will amend or
supplement the Prospectus (in form and substance reasonably satisfactory to
counsel for the International Underwriters) so that, as so amended or
supplemented, the Prospectus will not include an untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time it is delivered
to a purchaser, not misleading; and the Company will furnish to the
International Underwriters a reasonable number of copies of such amendment or
supplement.

<PAGE> 25

(f) The Company will endeavor, in cooperation with the International
Underwriters, to qualify the Securities for offering and sale under the
applicable securities laws of such states and other United States or foreign
jurisdictions as the Representatives may reasonably designate; provided,
however, the Company will not be required to qualify as a foreign corporation,
file a general consent to service of process in any such jurisdiction, subject
itself to taxation in respect of doing business in any jurisdiction in which it
is not otherwise so subject, or provide any undertaking or make any change in
its charter, certificate of incorporation, by-laws or other governing document
that the Board of Directors of the Company reasonably determines to be contrary
to the best interests of the Company and its shareholders. In each jurisdiction
in which the Securities have been so qualified, the Company will use all
reasonable efforts to file such statements and reports as may be required by
the laws of such jurisdiction to continue such qualification in effect for so
long a period as the Representatives reasonably may request for the
distribution of the Securities.

(h) The Company will use the net proceeds received by it from the sale of
the Securities in the manner specified in the Prospectus under "Use of Pro-
ceeds."

<PAGE> 26

Agreement, the Company will prepare and file with the Commission in accordance
with such Rule 430A and/or Rule 434 and Rule 424(b) of the 1933 Act Regulations
copies of an amended Prospectus, or, if required by such Rule 430A and/or Rule
434, a post-effective amendment to the Registration Statement (including an
amended Prospectus), containing all information so omitted. If required, the
Company will prepare and file or transmit for filing a Rule 462(b) Registration
Statement not later than the date of execution of the International Pricing
Agreement. If a Rule 462(b) Registration Statement is filed by the Company, the
Company shall make payment of, or arrange for payment of, the additional
registration fee owing to the Commission as required by Rule 111 of the 1933
Act Regulations.

(k) The Company will use reasonable efforts to maintain the listing of the
Securities on the New York Stock Exchange.

(l) During a period 180 days from the Closing Time, the Company will not,
without the prior written consent of Merrill Lynch, directly or indirectly,
sell, offer to sell, transfer, pledge, hypothecate, grant any option for the
sale of or otherwise dispose of, any shares of Common Stock or any security
convertible into or exchangeable or exercisable for shares of the Common Stock,
except for (i) Securities to be sold to the International Underwriters, (ii)
the award of options or other rights or the issuance of Common Stock pursuant
to employee and director stock purchase, equity incentive and option plans as
described in the Prospectus, (iii) the issuance of Common Stock (whether upon
conversion, exchange or otherwise) in connection with an acquisition, whether
by purchase of assets, merger or other form of business acquisition or
combination transaction, provided that the foregoing restrictions apply to the
issued Common Stock, or (iv) the adoption of a shareholder rights plan.

<PAGE> 27

(n) During a period of three years from the Closing Time, the Company will
deliver to Merrill Lynch, on behalf of the Representatives promptly upon their
being mailed or filed, copies of all current, regular and periodic reports of
the Company mailed to its shareholders or filed with the New York Stock
Exchange or with the Commission or any governmental authority succeeding to any
of the Commission's functions other than reports on Form 3 or Form 4 or
registration statements on Form S-8.

(o) The Company hereby agrees that it will ensure that the Reserved
Securities will be restricted as required by the National Association of
Securities Dealers, Inc. (the "NASD") or the NASD rules from sale, transfer,
assignment, pledge or hypothecation for a period of three months following the
date of this Agreement. The International Underwriters will notify the Company
as to which persons will need to be so restricted. At the request of the
International Underwriters, the Company will direct the transfer agent to place
a stop transfer restriction upon such securities for such period of time.
Should the Company release, or seek to release, from such restrictions any of
the Reserved Securities, the Company agrees to reimburse the International
Underwriters for any reasonable expenses (including, without limitation, legal
expenses) they incur in connection with such release.

SECTION 4. Payment of Expenses; Financial Advisory Fees.

<PAGE> 28

ing to the International Underwriters copies of this Agreement and the
International Pricing Agreement, (iii) the preparation, issuance and delivery
of the certificates for the Securities to the International Underwriters, (iv)
the fees and disbursements of the Company's counsel and accountants, (v) the
qualification of the Securities under securities laws and real estate
syndication laws in accordance with the provisions of Section 3(f) hereof,
including filing fees and the fees of counsel at their normal hourly rate in an
aggregate amount not to exceed [$20,000] and [REASONABLE CHARGES AND
DISBURSEMENTS FOR THE INTERNATIONAL UNDERWRITERS IN CONNECTION THEREWITH AND IN
CONNECTION WITH THE PREPARATION OF THE "BLUE SKY" SURVEY,] [(VI) THE COST OF
PRINTING, OR REPRODUCING AND DELIVERING TO THE INTERNATIONAL UNDERWRITERS
COPIES OF THE "BLUE SKY" SURVEY,] (vii) the fee of the National Association of
Securities Dealers, Inc., [(VIII) THE FEES AND EXPENSES INCURRED IN CONNECTION
WITH THE LISTING OF THE SECURITIES ON THE NEW YORK STOCK EXCHANGE, INC.,] (ix)
the costs and charges of any transfer agent or registrar, and the cost of
preparing share certificates, and (x) any transfer taxes imposed on the sale of
the Securities to the several International Underwriters and (xi) all costs and
expenses of the International Underwriters, including the fees and
disbursements of counsel for the International Underwriters, in connection with
matters related to the Reserved Securities which are designated by the Company
for sale to employees and others having a business relationship with the
Company. It is understood, however, that except as provided in this Section 4,
the International Underwriters will pay all of their costs and expenses,
including the fees and disbursements of their counsel, and any expenses in
connection with a "tombstone" advertisement in connection with the offering of
the Securities.

(b) If this Agreement is cancelled or terminated by the Representatives in
accordance with the provisions of Section 5 or Section 9(a)(i) hereof, the
Company shall reimburse the International Underwriters for all of their
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the International Underwriters.

SECTION 5. Conditions of International Underwriters' Obligations. The
obligations of the International Underwriters hereunder are subject to the
accu-

<PAGE> 29

racy in all material respects, as of the date hereof and at Closing Time, of
the representations and warranties of the Company herein contained, to the
performance by the Company of its obligations hereunder, and to the following
further conditions:

(a) The Registration Statement shall have become effective not later than
5:30 P.M., New York City time, on the date hereof, or with the consent of the
Representatives, at a later time and date, not later, however, than 5:30 P.M.,
New York City time, on the first business day following the date hereof, or at
such later time and date as may be approved by a majority in interest of the
International Underwriters; and at the Closing Time, no stop order suspending
the effectiveness of the Registration Statement shall have been issued under
the 1933 Act or proceedings therefor initiated or threatened by the Commission
or any state securities regulatory authority. If the Company has elected to
rely upon Rule 430A and/or Rule 434 of the 1933 Act Regulations, (A) the price
of the Securities and any price-related information previously omitted from the
effective Registration Statement pursuant to such Rule 430A and/or Rule 434
shall have been transmitted to the Commission for filing pursuant to Rule
424(b) of the 1933 Act Regulations within the prescribed time period and (B)
prior to the Closing Time, the Company shall have provided evidence
satisfactory to the Representatives of such timely filing, or a post-effective
amendment providing such information shall have been promptly filed and
declared effective in accordance with the requirements of Rule 430A and/or Rule
434 of the 1933 Act Regulations and shall have become effective not later than
5:30 p.m., New York City time, on the Representation Date or, with the consent
of the Representatives, at a later time and date, not later, however, than 5:30
p.m., New York City time, on the first business day following the
Representation Date, or of such later date and time as shall have been approved
by a majority in interest of the Representatives. If a Rule 462(b) Registration
Statement is required, such Rule 462(b) Registration Statement shall have been
transmitted to the Commission for filing and have become effective within the
prescribed time period, and, prior to the Closing Time, the Company shall have
provided to the International Underwriters evidence of such filing and
effectiveness in accordance with Rule 462(b) of the 1933 Act Regulations.

<PAGE> 30

(b) At Closing Time the Representatives shall have received:

(1) The favorable opinion of Jones Day, in form and substance reasonably
satisfactory to counsel for the International Underwriters, dated as of the
Closing Time, with respect to the matters set forth below:

(i) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the Commonwealth of
Pennsylvania with the requisite power and authority to own or lease its
properties and conduct its business as described in the Prospectus, and
the Company has the requisite power and authority to enter into and
perform its obligations under this Agreement and the other Company
Documents to which it is a party.

(ii) The Company has the authorized and outstanding capital as set
forth under the caption "Capitalization" in the Prospectus, and the
authorized capital of the Company and its Significant Subsidiaries,
including the Securities, conforms in all material respects to the
description thereof set forth under the caption "Description of Capital
Stock" in the Prospectus. All the issued and outstanding shares of Common
Stock of the Company and its Subsidiaries have been duly authorized and
are validly issued, fully paid and non-assessable. To the knowledge of
such counsel, no shares of the capital stock of the Company are reserved
for any purpose except as described in the Prospectus. To the knowledge of
such counsel, except as described in the Prospectus and other than as
provided in this Agreement, there are no outstanding securities
convertible into or exchangeable for any capital shares of the Company and
no outstanding options, rights (preemptive or otherwise) or warrants to
purchase or to subscribe for shares of such stock or any other securities
of the Company.

<PAGE> 31

(iii) The Securities have been duly authorized for issuance and sale
to the International Underwriters and, when issued and paid for in
accordance with this Agreement and the International Pricing Agreement,
will be validly issued, fully paid and non-assessable. The issuance of the
Securities is not subject to any preemptive or other similar rights (other
than pursuant to the Registration Rights Agreement and the Stockholders'
Agreements) arising under the Pennsylvania Business Corporation Law, the
Articles of Incorporation or the by-laws of the Company, or any agreement
to which the Company is a party of which such counsel is aware.

(iv) Each of this Agreement and the International Pricing Agreement
has been duly and validly authorized, executed and delivered by the
Company.

(v) The execution and delivery of each of this Agreement and the
International Pricing Agreement, and the performance by the Company of its
obligations set forth herein or therein do not and will not conflict with
or constitute a breach or violation of, or default under: (1) any other
Company Document; (2) any other contract or agreement filed as an exhibit
to the Registration Statement; (3) its articles of incorporation or
by-laws of the Company or (4) any law, rule or administrative regulation
applicable to the Company of any governmental authority or agency of the
United States or the Commonwealth of Pennsylvania (except no opinion need
be expressed as to the by-laws or rules of the NASD or any state
securities or real estate syndication laws); or (5) any order or decree of
any court or governmental authority of which such counsel is aware, except
in each case for conflicts, breaches, violations or defaults that,
individually or in the aggregate, would not have a Material Adverse
Effect.

(vi) The Company is not an "investment company" or a person
"controlled by" an "investment company" within the meaning of the 1940
Act.

<PAGE> 32

(vii) No authorization, approval, consent or order of any federal or
state court or governmental authority or agency is required in connection
with the offering, issuance or sale of the Securities hereunder, in each
case, except such as may be required in connection with the sale of the
Securities under the 1933 Act or the 1933 Act Regulations, the 1934 Act or
the 1934 Act Regulations, the by-laws and rules of the NASD, or state
securities laws, real estate syndication laws or such as have been
received prior to the date of such opinion.

(viii) At the time the Registration Statement became effective, the
Registration Statement (other than the operating statistics, financial
statements and other financial data included therein or omitted therefrom,
as to which no opinion need be rendered) complied as to form in all
material respects with the requirements of the 1933 Act and the 1933 Act
Regulations.

(ix) To such counsel's knowledge, there is no litigation or
governmental proceeding pending or threatened against the Company, any of
its Subsidiaries or any Hotel which would affect the subject matter of
this Agreement or is required to be described in the Prospectus which is
not so described.

(x) The statements in the Prospectus under "Business and Properties --
Operations," "Management" and "Certain Relationships and Related
Transactions," insofar as they purport to summarize the provisions of
documents referred to therein, and the statements in the Prospectus under
"Description of Capital Stock," "Shares Eligible for Future Sale" and
"Taxation," insofar as they purport to summarize the provisions of
documents or matters of law referred to therein or constitute legal
conclusions are accurate in all material respects.

<PAGE> 33

(xi) To such counsel's knowledge, there are no contracts, indentures,
mortgages, loan agreements, notes, leases or other instruments required to
be described in the Registration Statement, or to be filed as exhibits
thereto by the 1933 Act Regulations, other than those described or
referred to therein or filed as exhibits thereto, and the descriptions
thereof or references thereto are accurate in all material respects.

(xii) To such counsel's knowledge, except as disclosed in the
Prospectus, there are no persons with registration or other similar rights
to have any securities of the Company registered pursuant to the
Registration Statement or otherwise registered by the Company under the
1933 Act.

[(XIII) THE SECURITIES ARE APPROVED FOR LISTING ON THE NEW YORK STOCK
EXCHANGE UPON OFFICIAL NOTICE OF ISSUANCE.]

(xiv) The Registration Statement has become effective under the 1933
Act, and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
threatened by the Commission.

<PAGE> 34

or any amendments or supplements thereto, no facts have come to the attention
of such counsel that cause them to believe that (i) the Registration Statement
(other than the operating statistics, financial statements (including the notes
thereto) and other financial data included therein or omitted therefrom as to
which such counsel expresses no views), at the time such Registration Statement
became effective, contained any untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary in order
to make the statements therein not misleading or (ii) the Prospectus (other
than the operating statistics, financial statements and other financial and
statistical data included therein or omitted therefrom as to which such counsel
expresses no views), as of its date or at the Closing Time, contained or
contains any untrue statement of a material fact or omitted or omits to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.

<PAGE> 35

perform their obligations under this Agreement and the other Company
Documents to which they are a party. The Subsidiaries are duly
qualified or registered as foreign corporations or entities to
transact business and are in good standing in each jurisdiction in
which such qualifications are required, whether by reason of the
ownership, leasing or management of property or the conduct of
business, except where the failure to so qualify would not have a
Material Adverse Effect.

(ii) To such counsel's knowledge, the Subsidiaries are not in
breach or violation of or default under (1) any of the Company
Documents; (2) any other contract, indenture, mortgage, loan
agreement, note, lease, joint venture or partnership agreement or
other instrument or agreement to which they are a party or by which
they are or any Hotel may be bound or subject to and of which such
counsel is aware; (3) their articles of incorporation, by-laws or
other applicable governing document; (4) any applicable law, rule or
administrative regulation of the United States or the jurisdiction of
its incorporation; or (5) any order or administrative or court decree
of which such counsel is aware, except for conflicts, breaches,
violations or defaults that, individually or in the aggregate, would
not have a Material Adverse Effect.

(iii) The execution and delivery of the Company Documents other
than this Agreement and the International Pricing Agreement and the
performance by the Subsidiaries of their obligations set forth
therein, do not and will not conflict with or constitute a breach or
violation of, or default under: (1) any of the Company Documents; (2)
any other contract, indenture, mortgage, loan agreement, note, lease
joint venture or partnership agreement or other instrument or
agreement to which the Subsidiaries are a party or by which they are
or any Hotel may be bound or subject to and of which such counsel is
aware; (3) the articles of incorporation, by-laws or other governing
docu-

<PAGE> 36

ments of the Subsidiaries; (4) any law, rule or administrative
regulation applicable to the Subsidiaries of any governmental
authority or agency of the United States or the Commonwealth of
Pennsylvania; or (5) any order or administrative or court decree of
which such counsel is aware, except for conflicts, breaches,
violations or defaults, that, individually or in the aggregate, would
not have a Material Adverse Effect.

(iv) To such counsel's knowledge, there is no litigation or any
legal or governmental proceeding pending or threatened against the
Subsidiaries or any Hotel which would affect the subject matter of
this Agreement.

(3) The favorable opinion, dated as of the Closing Time, of Skadden,
Arps, Slate, Meagher & Flom LLP, New York, New York ("Skadden Arps"),
counsel for the Representatives, (A) with respect to the matters set forth
in (viii) (with respect to the Company only and with respect to this
Agreement and the International Pricing Agreement only) and [(XIII)] of
subsection (b)(1) of this Section and (B) containing a statement similar
to the statement referred to in the first sentence of the next to last
paragraph of Section 5(b)(1).

<PAGE> 37

In giving its opinion, Skadden Arps may rely, (A) as to all matters of
fact, upon certificates and written statements of officers and employees of and
accountants for the Company, (B) as to the good standing and qualification of
the Company to do business in any state or jurisdiction, upon certificates of
appropriate government officials or opinions of counsel in such jurisdictions,
which opinions shall be in form and substance satisfactory to counsel for the
International Underwriters, and (C) as to certain matters of law, upon the
opinions given pursuant to Sections 5(b)(1) and 5(b)(2) above.

(c) At Closing Time, (i) there shall not have been, since the date hereof
or since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any Material Adverse Change, and
(ii) the Representatives shall have received a certificate of the President or
a Vice President and the chief financial or chief accounting officer (or such
officer acting in a similar capacity) of the Company, dated as of the Closing
Time, evidencing compliance with the provisions of this subsection (c) and
stating that the representations and warranties in Section 1 hereof are true
and correct, in all material respects, with the same force and effect as though
expressly made at and as of Closing Time.

<PAGE> 38

such letter, nothing has come to its attention which causes Coopers &
Lybrand L.L.P. to believe that (A) the unaudited financial statements of the
Company included in the Registration Statement do not comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act
and the 1933 Act Regulations or are not in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that of
the audited financial statements included in the Registration Statement, (B)
the operating data and balance sheet data set forth in the Prospectus under the
captions "Pro Forma Financial Data" were not determined on a basis
substantially consistent with that used in determining the corresponding
amounts in the audited financial statements included in the Registration
Statement, (C) the pro forma financial information included in the Registration
Statement was not prepared in accordance with the applicable requirements of
the 1933 Act or the 1933 Act Regulations with respect to pro forma financial
information or was not determined on a basis substantially consistent with that
of the audited financial statements included in the Registration Statement, or
(D) at a specified date not more than five days prior to the date of this
Agreement, there has been any change in the capital shares of the Company or
any increase in the debt of the Company or any decrease in the net assets of
the Company as compared with the amounts shown in September 30, 1996 historical
financial information of the Company included in the Registration Statement or,
during the period from September 30, 1996 to a specified date not more than
five days prior to the date of this Agreement, there were any decreases, as
compared with the corresponding period in the preceding year, in total
revenues, net income or funds from operations of the Company, except in all
instances for changes, increases or decreases which the Registration Statement
and the Prospectus disclose have occurred or may occur, and (iv) in addition to
the examination referred to in their opinions and the limited procedures
referred to in clause (iii) above, they have carried out certain specified
procedures, not constituting an audit, with respect to certain amounts,
percentages and financial information which are included in the Registration
Statement and Prospectus and which are specified by the Representatives, and
have found such amounts, percentages and financial information to be in
agreement with the relevant accounting, financial and other records of the
Company identified in such letter.

<PAGE> 39

[(F) AT THE CLOSING TIME, THE SECURITIES SHALL BE APPROVED FOR LISTING ON
THE NEW YORK STOCK EXCHANGE UPON OFFICIAL NOTICE OF ISSUANCE.]

(g) At the Closing Time and at each Date of Delivery, if any, counsel for
the International Underwriters shall have been furnished with such documents
and opinions as they may reasonably require for the purpose of enabling them to
pass upon the issuance and sale of the Securities as herein contemplated and
related proceedings, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the conditions,
herein contained; and all proceedings taken by the Company in connection with
the issuance and sale of the Securities as herein contemplated shall be
reasonably satisfactory in form and substance to the Representatives and
counsel for the International Underwriters.

<PAGE> 40

period of 180 days from the date hereof, such holder will not, without the
prior written consent of Merrill Lynch, sell, offer to sell, transfer, grant
any option for the sale of, pledge, enter into any agreement to sell, or
otherwise dispose of any Restricted Shares, except (i) transfers to any family
members or affiliate of such holder, including any trust established by such
holder, provided that the foregoing restrictions apply thereto, (ii) transfers
to the estate or legal guardian of any other holder of shares of Common Stock,
and (iii) pledges to secure bona fide indebtedness or any foreclosure of such
pledges.

(i) In the event that the International Underwriters exercise their option
provided in Section 2(b) hereof to purchase all or any portion of the Option
International Securities, the representations and warranties of the Company
contained herein and the statements in any certificates furnished by the
Transaction Entities hereunder shall be true and correct in all material
respects as of the Date of Delivery and, at the Date of Delivery, the
Representatives shall have received:

(2) The favorable opinion of Jones Day, in form and substance
reasonably satisfactory to counsel for the International Underwriters,
dated such Date of Delivery, relating to the Option International
Securities to be purchased on such Date of Delivery and otherwise to the
same effect as the opinion required by Section 5(b)(1) hereof.

(3) The favorable opinion of Marvin I. Droz, Esq., Senior Vice
President and General Counsel of the Company, in form and substance
reasonably satisfactory to counsel for the International Underwriters,
dated such Date of Delivery and otherwise to the same effect as the
opinion required by Section 5(b)(2) hereof.

(4) The favorable opinion of Skadden Arps, counsel for the
International Underwriters, dated such Date of Delivery, relating to the
Option International Securities to be purchased on such Date of Delivery
and otherwise to the same effect as the opinion required by Section 5(b)
(3) hereof.

<PAGE> 41

SECTION 6. Indemnification.

(a) The Company agrees to indemnify and hold harmless each International
Underwriter and each person, if any, who controls any International Underwriter
within the meaning of Section 15 of 1933 Act as follows:

<PAGE> 42

misleading or arising out of any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto) or the omission or
alleged omission therefrom of a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that this indemnity
agreement shall not apply to any loss, liability, claim, damage or expense
to the extent arising out of any untrue statement or omission or alleged
untrue statement or omission made in reliance upon and in conformity with
written information furnished to the Company by any International
Underwriter through the Representatives expressly for use in the
Registration Statement (or any amendment thereto) or any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto); and
provided, further, that this indemnity agreement with respect to any
preliminary prospectus shall not inure to the benefit of any International
Underwriter from whom the person asserting any such losses, liabilities,
claims, damages or expenses purchased Securities, or any person
controlling such International Underwriter, if a copy of the Prospectus
(as then amended or supplemented if the Company shall have furnished any
such amendments or supplements thereto) was not sent or given by or on
behalf of such International Underwriter to such person, if such is
required by law, at or prior to the written confirmation of the sale of
such Securities to such person and if the Prospectus (as so amended or
supplemented) would have corrected the defect giving rise to such loss,
liability, claim, damage or expense;

<PAGE> 43

(b) Each International Underwriter severally agrees to indemnify and hold
harmless the Company, each of the Company's directors and each of the Company's
officers who signs the Registration Statement or any amendment thereto and each
person, if any, who controls the Company within the meaning of Section 15 of
the 1933 Act, against any and all loss, liability, claim, damage and expense
described in the indemnity contained in subsection (a)(i), (ii) and (iii) of
this Section, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Registration
Statement (or any amendment thereto) or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by such
International Underwriter through the Representatives expressly for use in the
Registration Statement (or any amendment thereto) or such preliminary
prospectus or the Prospectus (or any amendment or supplement thereto).

<PAGE> 44

indemnifying party has been prejudiced in any material respect by such failure.
An indemnifying party may participate at its own expense in the defense of any
such action. If it so elects within a reasonable time after receipt of such
notice, an indemnifying party, jointly with any other indemnifying parties
receiving such notice, may assume the defense of such action with counsel
chosen by it and reasonably approved by the indemnified parties defendant in
such action, unless such indemnified parties reasonably object to such
assumption on the ground that there may be legal defenses available to them
which are different from or in addition to those available to such indemnifying
party. If an indemnifying party assumes the defense of such action, the
indemnifying parties shall not be liable for any fees and expenses of counsel
for the indemnified parties incurred thereafter in connection with such action.
In no event shall the indemnifying parties be liable for fees and expenses of
more than one counsel (in addition to any local counsel) separate from their
own counsel for all indemnified parties in connection with any one action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances. Anything in this
Section 6 to the contrary notwithstanding, an indemnifying party shall not be
liable for any settlement of any claim or action effected without its written
consent provided that such consent was not unreasonably withheld.

(d) In connection with the offer and sale of the Reserved Securities, the
Company agrees, promptly upon a request in writing, to indemnify and hold
harmless the International Underwriters from and against any and all losses,
liabilities, claims, damages and expenses incurred by them as a result of the
failure of eligible employees of the Company and other persons to pay for and
accept delivery of Reserved Securities which, by the end of the first business
day following the date of this Agreement, were subject to a properly confirmed
agreement to purchase.

SECTION 7. Contribution.

<PAGE> 45

although applicable in accordance with its terms, the Company, on the one hand,
and the International Underwriters, on the other hand, shall contribute to the
aggregate losses, liabilities, claims, damages and expenses of the nature
contemplated by said indemnity agreement incurred by the Company, on the one
hand, and one or more of the International Underwriters, on the other hand, as
incurred, in such proportions that the International Underwriters are
responsible for that portion represented by the percentage that the sum of the
underwriting discount appearing on the cover page of the Prospectus bears to
the public offering price appearing thereon and the Company, responsible for
the balance, and the fees payable pursuant to Sections 4(c) and (d) hereof;
provided, however, that no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section, each person, if any, who
controls an International Underwriter within the meaning of Section 15 of the
1933 Act shall have the same rights to contribution as such International
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act shall have the same
rights to contributions as the Company.

SECTION 8. Representations, Warranties and Agreements to Survive Delivery.

All representations, warranties and agreements contained in this Agreement
and the International Pricing Agreement, or contained in certificates of
officers or authorized representatives of the Company submitted pursuant
hereto, shall remain operative and in full force and effect, regardless of any
investigation made by or on behalf of any International Underwriter or
controlling person, or by or on behalf of the Company, and shall survive
delivery of the Securities to the International Underwriters.

SECTION 9. Termination of Agreement.

(a) The Representatives may terminate this Agreement, by written notice to
the Company, at any time at or prior to Closing Time (i) if there has been,

<PAGE> 46

since the date of this Agreement or since the respective dates as of which
information is given in the Registration Statement, any Material Adverse
Change, (ii) if there has occurred any material adverse change in the financial
markets in the United States or in the international financial markets or any
outbreak of hostilities or escalation of existing hostilities or other calamity
or crisis the effect of which on the financial markets of the United States is
such as to make it, in the judgment of the Representatives, impracticable to
market the Securities or to enforce contracts for the sale of the Securities,
or (iii) if trading in the Common Stock has been suspended by the Commission or
if trading generally on either the New York Stock Exchange, Inc. or the
American Stock Exchange, Inc. has been suspended, or minimum or maximum prices
for trading have been fixed, or maximum ranges for prices for securities have
been required, by either of said Exchanges or by order of the Commission or any
other governmental authority, or if a banking moratorium has been declared by
any of Federal, New York or Pennsylvania authorities.

SECTION 10. Default by One or More of the Underwriters.

If one or more of the International Underwriters shall fail at the Closing
Time to purchase the Initial International Securities or on the Date of
Delivery to purchase the Option International Securities which it or they are
obligated to purchase under this Agreement and the International Pricing
Agreement (the "Defaulted Securities"), the Representatives shall have the
right, within 24 hours thereafter, to make arrangements for one or more of the
non-defaulting International Underwriters, or any other underwriters, to
purchase all, but not less than all, of the Defaulted Securities in such
amounts as may be agreed upon and upon the terms herein set forth; if, however,
the Representatives shall not have completed such arrangements within such
24-hour period, then:

<PAGE> 47

(a) If the number of Defaulted Securities does not exceed 10% of the
International Securities, each of the non-defaulting International Underwriters
shall be obligated, severally and not jointly, to purchase the full amount
thereof in the proportions that its respective underwriting obligations
hereunder bear to the underwriting obligations of all non-defaulting
International Underwriters, or

(b) If the number of Defaulted Securities exceeds 10% of the International
Securities, this Agreement shall terminate without liability on the part of any
non-defaulting International Underwriter; provided that if such default occurs
with respect to the Option International Securities after the Closing Time,
this Agreement will not terminate as to the Initial International Securities.

No action taken pursuant to this Section shall relieve any defaulting
International Underwriter from liability in respect of its default.

SECTION 11. Notices.

All notices and other communications hereunder shall be in writing and
shall be deemed to have been duly given if mailed or transmitted by any
standard form of telecommunication. Notices to the International Underwriters
shall be directed to the Representatives at Merrill Lynch World Headquarters,
North Tower, World Financial Center, New York, New York 10281-1326, attention
of Michael F. Profenius, Managing Director, with a copy to Skadden, Arps,
Slate, Meagher & Flom LLP, 919 Third Avenue, New York, New York 10022,
attention of Patrick J. Foye, Esq.; notices to the Company shall be directed to
it at Foster Plaza 10, 680 Andersen Drive, Pittsburgh, Pennsylvania 15220,
attention of Marvin I. Droz, Senior Vice President and General Counsel, with a
copy to Jones, Day, Reavis & Pogue, 599 Lexington Avenue, New York, New York
10022, attention of Robert A. Profusek, Esq.

<PAGE> 48

SECTION 12. Parties.

This Agreement and the International Pricing Agreement shall each inure to
the benefit of and be binding upon the parties hereto and their respective
successors. Nothing expressed or mentioned in this Agreement or the
International Pricing Agreement is intended or shall be construed to give any
person, firm or corporation, other than those referred to in Sections 6 and 7
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or the International Pricing
Agreement or any provision herein or therein contained. This Agreement and the
International Pricing Agreement and all conditions and provisions hereof and
thereof are intended to be for the sole and exclusive benefit of the parties
hereto and thereto and their respective successors, and said controlling
persons and officers and directors and their heirs and legal representatives,
and for the benefit of no other person, firm or corporation. No purchaser of
Securities from any International Underwriter shall be deemed to be a successor
by reason merely of such practice.

13. Governing Laws and Time.

THIS AGREEMENT AND THE INTERNATIONAL PRICING AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SAID STATE WITHOUT GIVING
EFFECT TO PRINCIPLES OF CONFLICT OF LAW. Specified times of day refer to New
York City time.

<PAGE> 49

If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement among the International Underwriters and the Company in accordance
with its terms.

Very truly yours,

INTERSTATE HOTELS COMPANY

By:
--------------------------------
Name: W. Thomas Parrington, Jr.
Title: President and Chief
Executive Officer

Confirmed and Accepted,
as of the date first above written:
MERRILL LYNCH INTERNATIONAL
CREDIT LYONNAIS SECURITIES
MONTGOMERY SECURITIES
MORGAN STANLEY & CO. INTERNATIONAL LIMITED
SMITH BARNEY INC.
as Representatives of the several International
Underwriters

By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED

By:
-------------------------------
Name:
Title: Authorized Signatory

For themselves and as Representatives of the other International Underwriters
named in Schedule A hereto.

<PAGE> 50

SCHEDULE A

<TABLE>
<CAPTION>
Number of
Initial
International
Name of International Underwriter Securities
- --------------------------------- ----------
<S> <C>
Merrill Lynch International.................................................. 120,000

Credit Lyonnais Securities................................................... 120,000

Montgomery Securities........................................................ 120,000

Morgan Stanley & Co. International Limited................................... 120,000

Smith Barney Inc............................................................. 120,000
-------

600,000
</TABLE>

<PAGE> 51

EXHIBIT A

600,000 Shares

INTERSTATE HOTELS COMPANY

(a Pennsylvania corporation)

Common Stock

(Par Value $.01 Per Share)

INTERNATIONAL PRICING AGREEMENT

December [ ], 1996

MERRILL LYNCH INTERNATIONAL
CREDIT LYONNAIS SECURITIES
MONTGOMERY SECURITIES
MORGAN STANLEY & CO. INTERNATIONAL LIMITED
SMITH BARNEY INC.
as Representatives of the several International
Underwriters

c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Merrill Lynch World Headquarters
North Tower
World Financial Center
New York, New York 10281

Ladies and Gentlemen:

Reference is made to the International Purchase Agreement dated December
[ ], 1996, (the "International Purchase Agreement") relating to the purchase by
the several International Underwriters named in Schedule A thereto (the "Inter-

Ex. A-1

<PAGE> 52

national Underwriters"), for whom Merrill Lynch & International, Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Credit Lyonnais Securities, Montgomery
Securities, Morgan Stanley & Co. International Limited and Smith Barney Inc.
are acting as representatives (the "Representatives"), of the above shares of
common stock (the "Securities") of Interstate Hotels Company (the "Company").

Pursuant to Section 2 of the International Purchase Agreement, the Company
agrees with each International Underwriter as follows:

1. The public offering price per share for the Securities, determined as
provided in said Section 2, shall be $[ ].

2. The purchase price per share for the Securities to be paid by the
International Underwriters shall be $[ ], being an amount equal to the public
offering price set forth above less $[ ] per share.

Ex. A-2

<PAGE> 53

If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement among the International Underwriters and the Company in accordance
with its terms.

Very truly yours,

INTERSTATE HOTELS COMPANY

By:
-------------------------------
Name: W. Thomas Parrington, Jr.
Title: President and Chief
Executive Officer

Confirmed and Accepted,
as of the date first above written:

MERRILL LYNCH INTERNATIONAL
CREDIT LYONNAIS SECURITIES
MONTGOMERY SECURITIES
MORGAN STANLEY & CO. INTERNATIONAL LIMITED
SMITH BARNEY INC.
as Representatives of the several International
Underwriters

By:
---------------------------------
Name:
Title: Authorized Signatory

For themselves and as Representatives of the other
International Underwriters named in the International Purchase
Agreement.

Ex. A-3

<PAGE> 1

<TABLE>
<S> <C>
EXHIBIT 4.1

INTERSTATE HOTELS COMPANY

COMMON STOCK INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA COMMON STOCK
CUSIP 460886 10 4

This Certifies that SEE REVERSE FOR
CERTAIN DEFINITIONS

is the owner of

SHARES OF THE PAR VALUE OF $.01 EACH, OF THE COMMON STOCK OF
INTERSTATE HOTELS COMPANY

transferable only on the stock transfer books of the Corporation by the holder thereof in person or by a duly authorized attorney
upon surrender of this certificate properly endorsed. Such shares are non-withdrawable and not of an insurable type. This
certificate and the shares represented hereby are issued and shall be subject to all provisions of the Articles of Incorporation of
the Corporation and the Bylaws of the Corporation, as now or hereafter amended, to all of which the holder hereof by the acceptance
hereof assents. This certificate is not valid until countersigned and registered by the Transfer Agent and Registrar.

CERTIFICATE OF STOCK

Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.

Dated:

SECRETARY CHAIRMAN OF THE BOARD

Countersigned and Registered:

CHASEMELLON SHAREHOLDER SERVICES, L.L.C.

Transfer Agent and Registrar

Authorized Signature

</TABLE>

<PAGE> 2
INTERSTATE HOTELS COMPANY

THE CORPORATION WILL FURNISH TO ANY SHAREHOLDER WITHOUT CHARGE, UPON REQUEST
TO THE TRANSFER AGENT AND REGISTRAR, A FULL STATEMENT OF THE DESIGNATIONS,
PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS OF THE SHARES OF EACH CLASS OF
STOCK OF THE CORPORATION AUTHORIZED TO BE ISSUED AND THE VARIATIONS IN THE
RELATIVE RIGHTS AND PREFERENCES BETWEEN THE SHARES OF EACH SERIES OF PREFERRED
STOCK SO FAR AS THE SAME (IF ANY) HAVE BEEN FIXED AND DETERMINED, AND THE
AUTHORITY OF THE BOARD OF DIRECTORS TO FIX AND DETERMINE THE RELATIVE RIGHTS AND
PREFERENCES OF SUBSEQUENT SERIES.

The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - ------- Custodian ---------------
(Cust) (Minor)

TEN ENT - as tenants by the entireties under Uniform Gifts to Minors

JT TEN - as joint tenants with right of survivorship
and not as tenants in common Act ------------------------
(State)

Additional abbreviations may also be used though not in the above list.

For value received ----------------- hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY ON OTHER
IDENTIFYING NUMBER OF ASSIGNEE

[ ]

- --------------------------------------------------------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)

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

- ------------------------------------------------------------------------------------------------------------------------- Shares
of the Common Stock represented by the within Certificate and do hereby irrevocably constitute and appoint

- ------------------------------------------------------------------------------------------------------------------------ Attorney
to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises.

Dated ------------------------------------------

-------------------------------------------------------
Notice: The signature to this assignment must correspond
with the name as written upon the face of the
certificate in every particular, without alteration
or enlargement or any change whatever.

AMERICAN BANKNOTE COMPANY PRODUCTION COORDINATOR SUSAN MCNAMEE -215-830-2150
650 BLAIR MILL ROAD PROOF OF MAY 29, 1996
HORSHAM, PA 19044 INTERSTATE
215-857-3480 H 44294bk

SALES PERSON- A.GERMAN/B.ROTH-412-171-9032 OR9 747 Opr. og/h NEW
/home/ed/inprogress/home 12/Interstate 44294 /NET/BANKNOTE/HOME 12/1

</TABLE>

<PAGE> 1
Exhibit 4.2(b)

AMENDMENT

AMENDMENT (this "Amendment"), dated as of October 21, 1996,
among Interstate Hotels Company, Interstate Hotels Corporation and the lending
institutions party to the Credit Agreement referred to below. All capitalized
terms used herein and not otherwise defined shall have the respective meanings
provided such terms in the Credit Agreement referred to below.

W I T N E S S E T H :

WHEREAS, the Borrower, Holdings, the Banks and Credit
Lyonnais New York Branch as Administrative Agent are parties to the Credit
Agreement, dated as of June 25, 1996 (as amended, modified or supplemented to
the date hereof, the "Credit Agreement");

WHEREAS, Holdings and the Borrower have requested that the
Banks agree to amend certain provisions of the Credit Agreement, and the Banks
are willing to amend such provisions, subject to and on the terms and
conditions set forth herein;

NOW THEREFORE, it is agreed:

1. The Credit Agreement is hereby amended as follows:

(a) The phrase "Term Facility or the Revolving Facility" in
the first sentence of Section 1.01 is changed to read "Term Facility,
the Revolving Facility or the Additional Term Facility".

(b) All references to "Term Loan" or "Term Loans" in Sections
1.01(a), 1.05(a), 1.05(b), 1.07 and 1.09(a)(vi) shall be changed to
refer to "Term A Loan" or "Term A Loans", respectively.

"(c) Loans under the Additional Term Facility (each
a "Term B Loan" and, collectively, the "Term B Loans"): (i)
shall be made pursuant to a single Borrowing on the Amendment
Date; (ii) except as hereinafter provided, may, at the option
of the Borrower, be incurred

<PAGE> 2

and maintained as, and/or converted into, Base Rate Loans or
Eurodollar Loans, provided that all Term B Loans made by all
Banks pursuant to the same Borrowing shall, unless otherwise
specifically provided herein, consist entirely of Term B
Loans of the same Type; and (iii) shall not exceed in initial
aggregate principal amount for any Bank the Additional Term
Commitment, if any, of such Bank as in effect on the
Amendment Date. Once repaid, Term B Loans borrowed hereunder
may not be reborrowed."

(d) Section 1.02 is amended by changing the reference to
"eight" therein to read "12".

(e) Section 1.05(a) is amended by (i) deleting the "and"
immediately prior to "(ii)" therein and (ii) inserting at the end of
said Section the following:

"and (iii) if Term B Loans, by a promissory note
substantially in the form of Annex A to the Amendment with
blanks appropriately completed in conformity herewith (each
an "Additional Term Note" and, collectively, the "Additional
Term Notes")."

(f) Section 1.05 is further amended by renumbering clause (d)
as clause (e) and inserting a new clause (d) to read:

"(d) The Additional Term Note issued to a Bank
shall: (i) be executed by the Borrower; (ii) be payable to
the order of such Bank and be dated the Amendment Date; (iii)
be in a stated principal amount equal to the Additional Term
Commitment of such Bank (or in the case of a new Note issued
pursuant to Section 12.04, the Term B Loans evidenced thereby
at the time of issuance) and be payable in the principal
amount of Term B Loans evidenced thereby; (iv) mature on the
TF Maturity Date; (v) bear interest as provided in the
appropriate clause of Section 1.08 in respect of the Base
Rate Loans and Eurodollar Loans, as the case may be,
evidenced thereby; (vi) be subject to mandatory repayment as
provided in Section 4.02; and (vii) be entitled to the
benefits of this Agreement and the other Credit Documents."

(g) Section 1.06 is amended by inserting immediately prior to
the reference to Base Rate Loans in clause (i) thereof the phrase
"Term B Loans or Revolving Loans that are".

-2-

<PAGE> 3

(h) Section 1.09(a) is amended by (x) inserting at the end of
the first sentence thereof the phrase ", subject to the provisions of
clause (iv) of the next sentence" and (y) deleting all of clause (iv)
of the second sentence thereof and inserting in lieu thereof:

"(iv) subject to the foregoing clauses (i) through
(iii), only a PSD Interest Period shall be available to be
selected prior to the Syndication Date for all Term B Loans
and Revolving Loans, with all Term B Loans constituting
Eurodollar Loans during said period to be outstanding
pursuant to a single Borrowing and all Revolving Loans
constituting Eurodollar Loans during said period to be
outstanding pursuant to a single Borrowing, with both such
Borrowings to commence and end on the same day."

(i) Section 1.09(a) is further amended by renumbering clause
(vii) as clause (viii) and inserting a new clause (vii) to read:

"(vii) no Interest Period with respect to any
Borrowing of Term B Loans may (x) extend beyond any date upon
which a Scheduled Repayment is required to be made if, after
giving effect to the selection of such Interest Period, the
aggregate principal amount of Term B Loans maintained as
Eurodollar Loans with Interest Periods ending after such date
would exceed the aggregate principal amount of Term B Loans
permitted to be outstanding after such Scheduled Repayment or
(y) extend beyond the TF Maturity Date; and"

(j) Section 3.03(c) is amended by changing the reference to
"$5,000,000" therein to read "$10,000,000".

(k) Section 4.01 shall be amended by adding after the phrase
"Section 4.01" in clause (iv) thereof the phrase "shall be applied to
the Term A Loans and the Term B Loans pro rata among same and".

(l) Section 4.02(A)(f) is amended by (x) replacing the "and"
in the second parenthetical contained therein with a comma and (y)
adding immediately after the word "employees" contained in such
parenthetical the phrase "and (iii) Excluded Proceeds".

(m) Section 4.02(A) is further amended by adding a new clause
(k) to read:

-3-

<PAGE> 4

"(k) On each date set forth below the Borrower shall
be required to repay the principal amount of Term B Loans as
is set forth opposite such date (each such repayment, also a
"Scheduled Repayment"):

<TABLE>
<CAPTION>
Scheduled Repayment Date Amount
<S> <C>
March 26, 1997 $ 650,000
June 26, 1997 650,000
September 26, 1997 1,300,000
December 26, 1997 1,300,000
March 26, 1998 1,300,000
June 26, 1998 1,300,000
September 26, 1998 2,000,000
December 26, 1998 2,000,000
March 26, 1999 2,000,000
June 26, 1999 2,000,000
September 26, 1999 3,300,000
December 26, 1999 3,300,000
March 26, 2000 3,300,000
June 26, 2000 3,300,000
September 26, 2000 4,600,000
December 26, 2000 4,600,000
March 26, 2001 4,600,000
June 26, 2001 4,600,000
September 26, 2001 5,300,000
December 26, 2001 5,300,000
March 26, 2002 5,300,000
June 26, 2002 5,300,000
September 26, 2002 6,000,000
December 26, 2002 6,000,000
March 26, 2003 6,000,000
TF Maturity Date 14,700,000"
</TABLE>

(n) Section 6.05(a) is amended by adding at the end of the
last sentence thereof the phrase "provided that the proceeds of
Revolving Loans may not be utilized to fund payments under the
guaranty of the Borrower permitted by Section 8.04(f)(C) hereof".

(o) Section 8.02(d) is amended to add after the phrase "15
days prior to the date of such acquisition" the phrase "other than the
New Partnership Acquisition".

-4-

<PAGE> 5

(p) Section 8.04 of the Credit Agreement is amended by (i)
deleting the "and" prior to clause (B) in subsection 8.04(f) and
inserting at the end of such subsection the phrase "and (C) the
Borrower constituting a guaranty of the lease obligations of New
Partnership at any time prior to its becoming a Subsidiary Guarantor";
(ii) adding after the reference to "$70,000,000" in subsection 8.04(g)
the phrase "or, in the case of Non-Recourse Debt in excess of
$50,000,000, $110,000,000"; (iii) changing the reference to
"$50,000,000" in subsection 8.04(g) to read "$100,000,000"; (iv)
deleting the "and" after subsection 8.04(h) and inserting "; and" in
lieu of the period at the end of subsection 8.04(i); and (v) inserting
a new subsection 8.04(j) to read:

"(j) Permitted Subordinated Debt."

(q) Section 8.06(b) is amended by (i) adding immediately
after the phrase "Capitalized Lease Obligations" therein the phrase
"and NP Lease Obligations" and (ii) changing the reference to
"$2,500,000" therein to read "$4,000,000".

(r) Section 8.08 is amended to add at the end thereof the
phrase "and provided that the Interests Exchange will not violate this
Section".

(s) Section 8.14 is amended by (x) adding an "(A)"
immediately prior to "Holdings" at the beginning of such Section, (y)
adding "; and" immediately after "2.25:1" and inserting the following:

"(B) Holdings will not permit the Adjusted Debt Service
Coverage for any Test Period to be less than 1.50:1."

(t) Section 8.10 is amended by (a) changing the heading to
read "Leverage Ratios"; (b) inserting "(a)" prior to "The Borrower";
(c) inserting "Senior" prior to "Total Indebtedness"; and (d) adding a
new clause (b) to read:

"(b) The Borrower will not permit the ratio of (i) Modified
Total Indebtedness as of a date set forth below to (ii) EBITDA for the
Test Period ended on such date to be greater than the ratio set forth
opposite such date below:

<TABLE>
<CAPTION>
Date Ratio
<S> <C>
December 31, 1996, March 31,
June 30, September 30 and
</TABLE>

-5-

<PAGE> 6

<TABLE>
<S> <C>
December 31, 1997 5.25:1

March 31, June 30, September 30 and
December 31, 1998, March 31, June 30,
September 30 and December 31, 1999 5.00:1

March 31, June 30, September 30 and
December 31, 2000, March 31, June 30,
September 30 and December 31, 2001 4.75:1

March 31, June 30, September 30
and December 31, 2002 4.50:1

March 31, 2003 and each
fiscal quarter thereafter 4.25:1
</TABLE>

(u) Section 8.13 is amended by adding at the end thereof a
phrase to read:

"plus (z) 60% of each increase to the Consolidated Net Worth
of Holdings resulting from each public offering of the common
stock of Holdings after the Amendment Date".

(v) Section 8.15 is amended by adding at the end of the first
sentence thereof the phrase "provided that New Partnership may become
a Subsidiary pursuant to the New Partnership Acquisition even though
it will not be at such time a Wholly-Owned Subsidiary or a Specified
Subsidiary".

(w) Section 10 is amended as follows:

(I) the definition of Eurodollar Rate is amended by
adding after the phrase "clause (i)" therein the phrase "and,
in any event, in respect of the Eurodollar Rate to apply to a
PSD Interest Period".

(II) the definition of Facility is amended by
changing the phrase "either" to "any" and adding after the
phrase "Term Facility" the phrase ", the Additional Term
Facility".

-6-

<PAGE> 7

(III) the definition of "Note" shall be amended in
its entirety to read:

"Note" shall mean and include each Term
Note, each Additional Term Note and each Revolving
Note.

(IV) the definition of NRD Borrower and NRL
Subsidiary are each amended by changing the phrase
"corporation (i) all of the capital stock of which "in each
thereof to read "corporation or limited liability company (i)
all of the capital stock or ownership interests of which".

(V) the definition of Permitted Acquisition is
amended by adding at the end thereof the phrase "and provided
that, in any event, the New Partnership Acquisition shall
constitute a Permitted Acquisition".

(VI) the definition of PSD Interest Period is
amended in its entirety to read:

"PSD Interest Period" shall mean an
Interest Period for any Term B Loans or
Revolving Loans commenced prior to the
Syndication Date that satisfies the
requirements of Section 1.09(a)(iv) and (y) is
15 days in length, provided that the final PSD
Interest Period shall be such shorter or longer
period as is necessary to end on the 26th day
of the month in which the Syndication Period
ends (as selected by the Administrative Agent).

(VII) the definition of Scheduled Repayment is
amended by adding the phrase "and in Section 4.02(A)(k)" at
the end thereof.

(VIII) the definition of Specified Asset sale is
amended by deleting the phrase "Initial Borrowing Date" and
inserting in lieu thereof the date "October 25, 1996".

(IX) the definition of Syndication Date is amended in
its entirety to read:

"Syndication Date" shall mean the earlier
of (x) the date which is 60 days after the Amendment
Date and (y) the date upon which the Administrative
Agent determines in its sole discretion

-7-

<PAGE> 8

(and notifies the Borrower) that the primary
syndication of the Additional Loans and Incremental
Revolving Commitments has been completed.

(X) the definition of Term Loan is amended in its
entirety to read:

"Term Loans" shall mean the Term A Loans
and for all purposes of this Agreement other than
Section 4.02(A)(c) and the Term Notes, the Term B
Loans.

(XI) the following new definitions are added in
appropriate alphabetical order:

"Additional Term Commitment" shall mean for
each Bank listed on Annex B to the Amendment the
amount set forth opposite its name on such Annex B
under the heading "Additional Term Commitment",
which Commitment shall terminate on the Amendment
Date after the making of the Term B Loans.

"Additional Term Facility" shall mean the
Facility evidenced by the Additional Term
Commitment.

"Additional Term Note" shall have the
meaning provided in Section 1.05(a).

"Adjusted Debt Service Coverage Ratio"
shall mean, for any Test Period, the ratio of (x)
Adjusted EBITDA to (y) Adjusted Total Debt Service,
in each case for such Test Period.

"Adjusted EBITDA" shall mean for any
period, the sum of (x) EBITDA for such period plus
(y) Total Lease Expense for such period to the
extent deducted in determining such EBITDA.

"Adjusted Total Debt Service" shall mean,
for any period, the sum of (x) Total Debt Service
for such period plus (y) Total Lease Expense for
such period.

"Amendment" shall mean the Amendment dated
as of October 21, 1996 to this Agreement.

-8-

<PAGE> 9

"Amendment Date" shall mean the date on
which the Amendment became effective in accordance
with its terms.

"Companies" shall mean and include Trust
Leasing, Inc. and Trust Management, Inc., each a
Tennessee corporation.

"Excluded Proceeds" shall mean the net cash
proceeds, if any, of up to $200 million from a
public issuance of common equity by Holdings
effected after the Amendment Date and prior to
January 15, 1997.

"GP" shall have the meaning provided in the
definition of New Partnership Acquisition.

"Interests Exchange" shall mean the
exchange or exchanges of the Companies' limited
partnership interests in New Partnership for common
stock of Holdings as provided for in the NP
Acquisition Documents.

"Modified Senior Total Indebtedness" shall
mean at any time (x) Modified Total Indebtedness at
such time less (y) the outstanding principal amount
of Permitted Subordinated Debt at such time.

"New Partnership" shall mean a newly
created limited partnership in which the sole
general partner shall be an indirect Wholly-Owned
Subsidiary of the Borrower ("GP") and the sole
limited partners shall be the Companies, or any
successor thereto in which the Borrower and the
Subsidiary Guarantors are the sole partners and/or
shareholders.

"New Partnership Acquisition" shall mean
and include (i) the acquisition of the sole general
partnership interest in New Partnership by GP
concurrently with the contribution by GP of
approximately $500,000 of working capital to New
Partnership; (ii) the acquisition of the sole
limited partnership interests in New Partnership by
the Companies concurrently with the contribution by
the Companies to New Partnership of all of the
management agreements, hotel leases and similar
contracts and agreements of the Companies, which
partnership interests shall be exchangeable, in
whole or in part, at the option of the

-9-

<PAGE> 10

Companies, for common stock of Holdings as provided
for in the NP Acquisition Documents; (iii) the
execution of a shareholders agreement among Holdings
and the Companies providing, inter alia, for
limitations on the sale of any common stock of
Holdings obtained by the Companies pursuant to the
Interests Exchange; (iv) the execution of a master
lease agreement and other agreements between New
Partnership and Equity Inns Partnership, L.P.; and
(v) the issuance of a guaranty by the Borrower of
all of New Partnership's lease obligations; with all
components of the New Partnership Acquisition to be
effected pursuant to the NP Acquisition Documents.

"NP Acquisition Documents" shall mean all
the agreements and related documents executed in
connection with the consummation of all components
of the New Partnership Acquisition provided that all
thereof shall be reasonably satisfactory to the
Administrative Agent.

"NP Guaranty Commencement Date" shall mean
the date on which the Subsidiary Guaranty, Pledge
Agreement and Security Agreement become effective
with respect to New Partnership as set forth in the
assumption agreements executed by New Partnership,
i.e., the date, if any, on which New Partnership
becomes a Wholly-Owned Subsidiary.

"NP Lease Obligations" shall mean all
obligations of New Partnership and/or Crossroads
Future Company, LLC (as lessee) under leases
(including any master lease) with Equity Inns
Partnership, L.P.

"Permitted Subordinated Debt" shall mean
subordinated debt of the Borrower in an aggregate
principal amount not to exceed $150 million, having
no stated payment of principal due earlier than the
first anniversary of the TF Maturity Date and
otherwise issued on terms satisfactory to the
Required Banks, provided that Permitted Subordinated
Debt shall not be issued at any time in excess of
that amount which could have been issued on the last
day of the fiscal quarter then last ended without
violating Section 8.10(b) on such date, with
Modified Total Indebtedness determined on such date
without any such subtraction for Non-Recourse Debt.

-10-

<PAGE> 11

"Term A Loan" shall have the meaning
provided in Section 1.01(a).

"Term B Loan" shall have the meaning
provided in Section 1.01(a).

"Total Lease Expense" shall mean, for any
period, total lease expense (excluding payments made
under Capital Leases) of Holdings and its
Subsidiaries on a consolidated basis, all as
determined in accordance with GAAP.

(x) Section 12.12 is amended by changing the phrase therein
"is to Section 4.02(A)(c)" to read "(x) is to Section 4.02(A)(c)
and/or 4.02(A)(k), (y) would actually increase (as oppose to waiving
reductions of) any Facility or add any new facility or (z) would
increase the aggregate principal amount of Indebtedness permitted to
be incurred pursuant to Section 8.04 by an amount greater than 15% of
the aggregate principal amount of all Indebtedness permitted under
Section 8.04 as of the Amendment Date."

2. On the Amendment Date the Total Revolving Commitment is
increased by $100 million and Annex I to the Credit Agreement is amended to
read as set forth in Annex B hereto.

3. It is agreed that (i) New Partnership shall be obligated
to take all the actions required by the last sentence of Section 8.15 of the
Credit Agreement on or promptly following the NP Guaranty Commencement Date and
(ii) the failure of GP to take all the actions specified in such last sentence
to the satisfaction of the Agent within 10 Business Days following the
Amendment Date shall constitute a default of Section 8.15.

4. In order to induce the Banks to enter into this Amendment,
the Borrower hereby represents and warrants that (x) all proceeds of the Term B
Loans shall be used first to repay Non-Recourse Debt and a promissory note
incurred and/or issued on or about October 10, 1996 in an aggregate amount
equal to $30.1 million and second to repay outstanding Revolving Loans, (y) no
Default or Event of Default exists on the Amendment Date (as defined below),
after giving effect to this Amendment, and (z) all of the representations and
warranties contained in the Credit Documents shall be true and correct in all
material respects on the Amendment Date both before and after giving effect to
this Amendment, with the same effect as though such representations and
warranties had been made on and as of the Amendment Date (it being understood

-11-

<PAGE> 12

that any representation or warranty made as of a specific date shall be true
and correct in all material respects as of such specific date).

5. This Amendment is limited as specified and shall not
constitute a modification, acceptance or waiver of any other provision of the
Credit Agreement or any other Credit Document.

6. This Amendment may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which counterparts when executed and delivered shall be an original, but all
of which shall together constitute one and the same instrument. A complete set
of counterparts shall be lodged with the Borrower and the Administrative Agent.

7. This Amendment and the rights and obligations of the
parties hereunder shall be construed in accordance with and governed by the
laws of the State of New York.

8. This Amendment shall become effective as of the date (the
"Amendment Date") when the following conditions have been met to the
satisfaction of the Agent:

(i) GP and New Partnership shall each have executed
assumption agreements in the form of Annex C and Annex D,
respectively, to this Amendment pursuant to which each becomes party
to the Subsidiary Guaranty, the Pledge Agreement and the Security
Agreement, it being understood the assumption agreement executed by
New Partnership provides that the assumption provided for therein will
not become effective until the NP Guaranty Commencement Date;

(ii) each of Holdings, the Borrower, Credit Lyonnais and the
Required Banks shall have duly executed a copy hereof (whether the
same or different copies) and shall have delivered (including by way
of facsimile transmission) the same to the Agent at its Notice Office;

(iii) each Bank with a Revolving Commitment that increases on
the Amendment Date and/or an Additional Term Commitment shall have
received a new Revolving Note in the amount of its new Revolving
Commitment and/or an Additional Term Note in the amount of its
Additional Term Commitment, as the case may be, executed by the
Borrower;

-12-

<PAGE> 13

(iv) the Administrative Agent shall have received an opinion
for Jones, Day, Reavis & Pogue, special counsel to Holdings and its
Subsidiaries, dated the Amendment Date, covering such matters related
to this Amendment as reasonably requested by the Administrative Agent;
and

(v) concurrently with the effectiveness of the Amendment, the
Borrower shall have incurred Revolving Loans from all Banks with
Revolving Commitments, pro rata on the basis of such Revolving
Commitments as set forth on Annex B hereto, in an aggregate amount at
least equal to the Revolving Loans outstanding after giving effect to
the use of the proceeds of the Term B Loans.

9. From and after the Amendment Date, all references to the
Credit Agreement in the Credit Agreement and the other Credit Documents shall
be deemed to be references to such Credit Agreement as modified hereby.

-13-

<PAGE> 14

IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered as of the date
first above written.

INTERSTATE HOTELS COMPANY

By /s/ J. WILLIAM RICHARDSON
----------------------------------
Title: Executive Vice President

INTERSTATE HOTELS CORPORATION

By /s/ J. WILLIAM RICHARDSON
----------------------------------
Title: Executive Vice President

CREDIT LYONNAIS NEW YORK BRANCH,
Individually and as Administrative Agent

By /s/ RICH ROHRBACH
--------------------------------
Title: Vice President

PNC, BANK NATIONAL ASSOCIATION,
Individually, and as a Co-Agent

By /s/ JAY C. BAKER
--------------------------------
Title: Vice President

THE BANK OF NEW YORK,
Individually, and as a Co-Agent

By /s/ DAVID FOWLER
--------------------------------
Title: Vice President

-14-

<PAGE> 15

MASSACHUSETTS MUTUAL LIFE
INSURANCE COMPANY

By /s/ THOMAS FINNEY
--------------------------------
Title: Vice President, Secretary and
Associate General Counsel

-15-

<PAGE> 16

MITSUI LEASING (U.S.A.) INC.

By /s/ MASATO UTSUMI
--------------------------------
Title: Masato Utsumi, President

-16-

<PAGE> 17

GIROCREDIT BANK AG DER
SPARKASSEN, GRAND CAYMAN
ISLAND BRANCH

By /s/ JOHN REDDING
--------------------------------
Title:

By /s/ RICHARD STONE
--------------------------------
Title:

-17-

<PAGE> 18

SOCIETE GENERALE

By /s/ SEDARE CORADIN
--------------------------------
Title: Vice President

-18-

<PAGE> 19

VIA BANQUE

By /s/ CHRISTEL PROT
--------------------------------
Title: Director

By /s/ P. ARNOULT
--------------------------------
Title: Director

-19-

<PAGE> 20

STRATA FUNDING LTD.

By /s/ GREGORY L. SMITH
--------------------------------
Title:

-20-

<PAGE> 21

CERES FINANCE LTD.

By /s/ GREGORY L. SMITH
--------------------------------
Title:

-21-

<PAGE> 22

AERIES FINANCE LTD.

By /s/ ANDREW WIGNALL
--------------------------------
Title: Director

-22-

<PAGE> 23

RESTRUCTURED OBLIGATIONS BACKED
BY SENIOR ASSETS B.V.

By Chancellor Senior Sercured
Management, Inc as Portfolio Advisor

By /s/ CHRISTOPHER A. BONDY
--------------------------------
Christopher A. Bondy
Vice President

-23-

<PAGE> 24

KEYPORT LIFE INSURANCE COMPANY

By Chancellor Senior Sercured
Management, Inc as Portfolio Advisor

By /s/ CHRISTOPHER A. BONDY
--------------------------------
Christopher A. Bondy
Vice President

-24-

<PAGE> 25

MEDICAL LIABILITY MUTUAL
INSURANCE COMPANY

By Chancellor Senior Sercured
Management, Inc as Investment Manager

By /s/ CHRISTOPHER A. BONDY
--------------------------------
Christopher A. Bondy
Vice President

-25-

<PAGE> 26

UNITED OF OMAHA LIFE INSURANCE
COMPANY

By Chancellor Senior Sercured
Management, Inc as Portfolio Advisor

By /s/ CHRISTOPHER A. BONDY
--------------------------------
Christopher A. Bondy
Vice President

-26-

<PAGE> 27

CAPTIVA FINANCE LTD.

By /s/ GREGORY L. SMITH
--------------------------------
Title: Director

-27-

<PAGE> 28

ARAB BANK PLC

By /s/ PETER BOYADJIAN
----------------------------------
Title: Executive Vice President
and Branch Manager

-28-

<PAGE> 29

CIBC INC.

By /s/ PAUL J. CHAKMAK
--------------------------------
Paul J. Chakmak
Title: Director, CIBC Wood Gundy
Securities Corp., AS AGENT

<PAGE> 30

ANNEX A

FORM OF ADDITIONAL TERM NOTE

$________________ New York, New York
____ ___, 1996

FOR VALUE RECEIVED, INTERSTATE HOTELS CORPORATION, a Delaware
corporation (the "Borrower"), hereby promises to pay to the order of
_________________________ (the "Bank"), in lawful money of the United States of
America in immediately available funds, at the office of Credit Lyonnais, New
York Branch (the "Administrative Agent") located at 1301 Avenue of the
Americas, New York, New York 10019, on the TF Maturity Date (as defined in the
Agreement) the principal sum of _______________ DOLLARS ($_____________) or, if
less, the then unpaid principal amount of all Term B Loans (as defined in the
Agreement) made by the Bank pursuant to the Agreement.

The Borrower promises also to pay interest on the unpaid
principal amount of each Term B Loan made by the Bank in like money at said
office from the date hereof until paid at the rates and at the times provided
in Section 1.08 of the Agreement.

This Note is one of the Additional Term Notes referred to in
the Credit Agreement, dated as of June 25, 1996, among Interstate Hotels
Company, the Borrower, the financial institutions from time to time party
thereto (including the Bank) and Credit Lyonnais New York Branch, as
Administrative Agent (as from time to time in effect, the "Agreement"), and is
entitled to the benefits thereof and of the other Credit Documents (as defined
in the Agreement). As provided in the Agreement, this Note is subject to
mandatory repayment prior to the TF Maturity Date, in whole or in part.

In case an Event of Default (as defined in the Agreement)
shall occur and be continuing, the principal of and accrued interest on this
Note may be declared to be due and payable in the manner and with the effect
provided in the Agreement.

The Borrower hereby waives presentment, demand, protest or
notice of any kind in connection with this Note.

THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE
GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.

INTERSTATE HOTELS CORPORATION

By
--------------------------------
Title:

<PAGE> 31

ANNEX B

ANNEX I

Revolving
Bank Commitment
- ---- ----------

<TABLE>
<S> <C>
Credit Lyonnais $142,372,881.36
New York Branch

PNC Bank, N.A. 11,864,406.78

The Bank Of New York 11,864,406.78

Arab Bank PLC 5,084,745.76

Mitsui Leasing (U.S.A.) Inc. 5,084,745.76

Girocredit Bank Ag Der Sparkassen 3,389,830.51
Grand Cayman Island Branch

CIBC 8,474,576.27

Societe Generale 8,474,576.27

Via Banque 3,389,830.51
---------------
TOTAL REVOLVING COMMITMENT $200,000,000.00
</TABLE>

<PAGE> 1
Exhibit 5.1

[LETTERHEAD OF JONES, DAY, REAVIS & POGUE]

December 6, 1996

Interstate Hotels Company
Foster Plaza 10
680 Andersen Drive
Pittsburgh, Pennsylvania 15220

Re: Underwritten Offering of up to 4,600,000
Shares of Common Stock, par value $.01 per
share, of Interstate Hotels Company
------------------------------------------

Ladies and Gentlemen:

We are acting as counsel to Interstate Hotels Company, a Pennsylvania
corporation (the "Company"), in connection with the issuance and sale of up to
4,600,000 shares (the "Shares") of common stock, par value $.01 per share, of
the Company in accordance with the U.S. Purchase Agreement (the "U.S. Purchase
Agreement") to be entered into among the Company, Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Montgomery Securities, Morgan
Stanley & Co. Incorporated, Smith Barney Inc. and Credit Lyonnais Securities
(USA) Inc., as Representatives of the several U.S. Underwriters (the "U.S.
Underwriters") to be named in Schedule A thereto and the International Purchase
Agreement (the "International Purchase Agreement") to be entered into among the
Company, Merrill Lynch International, Credit Lyonnais Securities, Montgomery
Securities, Morgan Stanley & Co. International Limited and Smith Barney Inc.,
as Representatives of the several International Underwriters (the
"International Underwriters") to be named in Schedule A thereto. The U.S.
Purchase Agreement and the International Purchase Agreement are hereinafter
referred to collectively as the "Purchase Agreements" and the U.S. Underwriters
and the International Underwriters are hereinafter referred to collectively as
the "Underwriters."

We have examined such documents, records and matters of law as we have
deemed necessary for purposes of this opinion. Based on the foregoing and
subject to the qualifications and limitations hereinafter specified, we are of
the opinion that the Shares are duly authorized and, when issued and delivered
to the Underwriters in accordance with the Purchase Agreements against payment
of the consideration therefor as provided therein and as contemplated by the
Registration Statement on Form S-1 (the "Registration Statement") filed by the
Company to effect the

<PAGE> 2
Interstate Hotels Company
December 6, 1996
Page 2

registration of the Shares under the Securities Act of 1933, as amended, will
be validly issued, fully paid and nonassessable.

In rendering the foregoing opinion, we have assumed the authenticity of
all documents represented to us to be originals, the conformity to original
documents of all copies of documents submitted to us, the accuracy and
completeness of all corporate records made available to us by the Company
and the genuineness of all signatures that purport to have been made in a
corporate, governmental, fiduciary or other capacity, and that the persons
who affixed such signatures had authority to do so.

We hereby consent to the filing of this opinion as Exhibit 5.1 to
the Registration Statement and the reference to us under the caption "Legal
Matters" in the Prospectus constituting a part of the Registration Statement.

Very truly yours,

/S/ JONES, DAY, REAVIS & POGUE

Jones, Day, Reavis & Pogue

<PAGE> 1
Exhibit 10.14(f)

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT ("Agreement"), dated as of September 30,
1996, is made and entered into by and between Interstate Hotels Corporation, a
Pennsylvania corporation (the "Company"), and Thomas D. Reese (the
"Executive").

RECITALS

A. The Company desires to obtain the services of the Executive as a
senior executive of the Company;

B. Concurrently herewith, the Company and the Executive have entered
into a Severance Agreement pursuant to which the Company may provide certain
severance benefits to the Executive (the "Severance Agreement"); and

C. The Executive desires to provide his services to the Company on the
terms and conditions herein provided.

NOW, THEREFORE, the parties agree as follows:

1. DEFINITIONS. In addition to terms defined elsewhere herein, the
following terms have the following meanings when used in this Agreement with
initial capital letters:

(a) "BASE PAY" means the salary provided for in Section 4(a), as
such amount may be adjusted hereunder.

(b) "BOARD" means the Board of Directors of the Company or an
authorized committee thereof.

(i) an intentional act of fraud, embezzlement or theft in
connection with his duties or in the course of his employment with the
Company or any Subsidiary;

(ii) intentional wrongful damage to property of the Company or
any Subsidiary;

(iii) intentional Unauthorized Disclosure, Use or Solicitation;
or

(iv) intentional wrongful engagement in any Competitive
Activity;

<PAGE> 2

and any such act shall have been materially harmful to the Company. For
purposes of this Agreement, no act or failure to act on the part of the
Executive will be deemed "intentional" if it was due primarily to an error in
judgment or negligence, but will be deemed "intentional" only if done or
omitted to be done by the Executive not in good faith and without reasonable
belief that his action or omission was in the best interest of the Company.
Notwithstanding the foregoing, the Executive will not be deemed to have been
terminated for "Cause" hereunder unless and until there shall have been
delivered to the Executive a copy of a resolution duly adopted by the
affirmative vote of not less than three quarters of the full Board of Directors
then in office at a meeting of the Board of Directors called and held for such
purpose, after reasonable notice to the Executive and an opportunity for the
Executive, together with his counsel (if the Executive chooses to have counsel
present at such meeting), to be heard before the Board, finding that, in the
good faith opinion of the Board, the Executive had committed an act
constituting "Cause" as herein defined and specifying the particulars thereof
in detail, provided, however, that nothing herein will limit the right of the
Executive or his beneficiaries to contest the validity or propriety of any such
determination and such determination, albeit a condition to any termination for
"Cause" as aforesaid, will not create any presumption that "Cause" in fact
exists.

(d) "COMPETITIVE ACTIVITY" means any act by the Executive that is
prohibited under Section 6(a).

(e) "DISABILITY" means the Executive's inability, as a result of
mental or physical illness, injury or disease, substantially to perform his
material duties and responsibilities under this Agreement for a period of 180
consecutive calendar days within any 12-month period.

(f) "EMPLOYEE BENEFITS" means the perquisites, benefits and service
credit for benefits as provided under any and all employee welfare benefit
policies, plans, programs or arrangements in which Executive is entitled to
participate, including without limitation any group or other life, health,
medical/hospital or other insurance (whether funded by actual insurance or
self-insured by the Company), disability, salary continuation, expense
reimbursement and other employee benefit policies, plans, programs or
arrangements that may now exist or any equivalent successor policies, plans,
programs or arrangements that may be adopted hereafter by the Company.

(g) "SUBSIDIARY" means an entity in which the Company directly or
indirectly beneficially owns 50% or more of the outstanding Voting Stock or, if
a partnership, limited liability company or similar entity, at least 50% of the
equity capital interests thereof.

(h) "TERM OF EMPLOYMENT" means the period specified in Section 2.

(i) "UNAUTHORIZED DISCLOSURE, USE OR SOLICITATION" means any
violation or breach by the Executive of any provision of Section 7.

2. TERM OF EMPLOYMENT. The Company hereby employs the Executive and
the Executive hereby accepts such employment, effective as of October 15, 1996
and ending at the close of business on October 14, 1999; provided, however,
that commencing October 15, 1999 and each October 15th thereafter the Term of
Employment will automatically be extended for

- 2 -

<PAGE> 3

successive one-year periods unless either party gives written notice to the
other, not less than 90 calendar days prior to the otherwise scheduled
expiration of the Term of Employment, that it or he does not want the Term of
Employment so to extend. Notwithstanding any other provision hereof, this
Agreement will terminate without further action effective as of immediately
prior to the payment by the Company to the Executive of the amount specified in
Section 4(a)(i) of the Severance Agreement. The Executive will devote
substantially all of his business time to the business and affairs of the
Company and its Subsidiaries (excluding reasonable amounts of time devoted to
charitable purposes, passive investments and directorships and periods in which
he is physically or mentally ill, injured or otherwise disabled).

3. DUTIES AND RESPONSIBILITIES. During the Term of Employment, the
Executive will have and perform the duties and responsibilities set forth in
Exhibit A, provided, however, that the Board may from time to time change those
duties and responsibilities (in which event the parties may, but will not be
required to, substitute a new Exhibit A) and no such change will give rise to
any liability on the part of the Company so long as such change does not result
in a change in the primary reporting relationship set forth on Exhibit A.

4. COMPENSATION AND BENEFITS. (a) BASE PAY. During the Term of
Employment, the Executive will receive Base Pay of not less than $235,000 per
year; subject to review by the Board for increase (but not decrease) at the end
of each fiscal year during the Term of Employment. Such Base Pay will be
payable by the Company in accordance with its regular compensation practices
and policies applicable to senior executives of the Company.

(b) ANNUAL PERFORMANCE BONUS. For each fiscal year of the Company
during the Term of Employment, the Executive will be eligible for an annual
performance bonus under the Company's Management Bonus Plan ("Bonus Plan"),
pursuant to which the Executive will have the opportunity to receive bonus
compensation up to 120% of the Executive's current Base Salary (as defined in
the Bonus Plan). The terms and conditions of the Bonus Plan will govern the
Executive's right to earn bonus compensation for each year the Executive
participates in the Bonus Plan. This section describes certain aspects of the
Executive's participation in the Bonus Plan. Any conflicts or discrepancies
between the description herein and the terms and conditions set forth in the
Bonus Plan will be resolved in favor of the terms and conditions set forth in
the Bonus Plan. Notwithstanding the foregoing, the Executive's performance must
be satisfactory before the Executive will receive any portion of any bonus
described above. In addition, the Executive must be employed by the Company at
the time the bonus is paid to be eligible to receive the bonus.

During the balance of 1996 and during 1997, the bonus paid will
not be less than 70% of base salary.

(c) EMPLOYEE BENEFITS. During the Term of Employment, the Executive
will be entitled to (i) participate in all employee benefit plans, programs,
policies and arrangements sponsored, maintained or contributed to by the
Company, including without limitation the Company's Executive Retirement Plan
and Supplemental Deferred Compensation Plan, subject to and in accordance with
the terms and conditions of such plans, programs, policies and arrangements as
they relate to senior executives of the Company, (ii) participate in all equity
and

- 3 -

<PAGE> 4

long-term incentive plans sponsored or maintained by the Company at a level
commensurate with his position, subject to and in accordance with the terms and
conditions of such plans as they relate to senior executives of the Company,
and (iii) receive all other benefits and perquisites provided or made available
by the Company to its senior executives, subject to and in accordance with the
terms and conditions of such benefits and perquisites as they relate to senior
executives of the Company.

(d) EXPENSES. During the Term of Employment, the Executive will be
entitled to reimbursement of all documented reasonable travel and entertainment
expenses incurred by him on behalf of the Company in the course of the
performance of his duties hereunder, subject to and in accordance with the
terms and conditions of the Company's expense reimbursement policies as they
relate to senior executives of the Company.

(e) VACATION. During the Term of Employment, the Executive will be
entitled to not less than four weeks of vacation, in addition to paid public
holidays as observed by the Company from year to year, subject to and in
accordance with the terms and conditions of the Company's regular compensation
practices and policies as they relate to senior executives of the Company.

(f) LOANS. The Company will loan the Executive $175,000, which will
be evidenced by a demand note and a mortgage on the Executive's primary
residence. Under the note, the unpaid principal amount will bear interest at
prime rate plus three pecentage points after demand. One-fifth of the initial
principal amount will be forgiven on a grossed up basis on each anniversary of
the date of the note that the Executive remains employed hereunder. If the
Executive's employment hereunder is terminated by the Company for Cause or by
the Executive for any reason other than death, Disability, retirement or
circumstances which entitle the Executive to benefits under Section 4 of his
Severance Agreement, the unpaid principal amount will thereupon be payable upon
demand. If the Executive's employment hereunder is terminated by the Company
for any reason other than Cause or by the Executive by reason of death,
Disability, retirement or circumstances which entitle the Executive to benefits
under Section 4 of his Severance Agreement, the unpaid principal amount will
thereupon be forgiven. The Company will also pay the Executive annually a bonus
equal to the amount of tax due on the amount of the loan forgiven annually.

Upon relocation to the Pittsburgh area, the Executive will be
eligible for an additional loan of not less than $250,000.

(g) OTHER AGREEMENTS. The rights and obligations of the parties
under the Consent Agreement, the Shareholder Agreement and the Severance
Agreement will be governed by the terms and conditions of each such agreement
and will not be enlarged or affected hereby.

5. TERMINATION OF EMPLOYMENT. (a) TERMINATION BY NOTICE. Subject to
the provisions of Section 2 and this Section 5, the Executive's employment
hereunder will be for the Term of Employment specified in Section 2.

- 4 -

<PAGE> 5

(b) VOLUNTARY TERMINATION OR TERMINATION FOR CAUSE. The Company
may, with or without notice, terminate the Executive's employment hereunder for
Cause. If the Executive's employment is terminated by the Company effective
during the Term of Employment for Cause, or is terminated by the Executive, the
Executive will not be entitled to any compensation or benefits provided herein,
and nothing herein will limit the Company's rights against the Executive or the
rights and obligations of the parties under Sections 6 and 7.

(c) TERMINATION FOR ANY REASON OTHER THAN CAUSE OR DISABILITY. If
the Executive's employment is terminated by the Company during the Term of
Employment for any reason other than Cause or Disability:

(i) The Executive will be entitled to receive the greater of
(A) the sum of his Base Pay and annual performance bonus for the
fiscal year immediately preceding the effective date of his
termination of employment and (B) his Base Pay (at the rate in effect
on the effective date of his termination of employment) for the
remainder of the Term of Employment, in either case payable in
accordance with the Company's regular compensation practices and
policies applicable to senior executives; and

(ii) For 12 months following the effective date of the
Executive's termination of employment or, if longer, the remainder of
the Term of Employment (the "Continuation Period"), the Company will
arrange to provide the Executive and his eligible dependents with
Employee Benefits (excluding retirement, deferred compensation and
stock option, stock purchase, stock appreciation or similar
compensatory benefits) that are substantially similar to those that
the Executive and such dependents were receiving or entitled to
receive immediately prior to the effective date of the Executive's
termination of employment, except that the level of any such Employee
Benefits to be provided to the Executive and such dependents may be
reduced in the event of a corresponding reduction generally applicable
to all senior executives. If and to the extent that any benefit
described in this Section 5(c)(ii) is not or cannot be paid or
provided under any policy, plan, program or arrangement of the Company
or any Subsidiary, as the case may be, then the Company will itself
pay or provide for the payment of such Employee Benefits to the
Executive, his dependents and his beneficiaries. Employee Benefits
otherwise receivable by the Executive pursuant to this Section
5(c)(ii) will be reduced to the extent comparable welfare benefits are
actually received by the Executive from another employer during the
Continuation Period following the effective date of the Executive's
termination of employment, and any such benefits actually received by
the Executive must be reported by the Executive to the Company.

(d) DEATH OR DISABILITY. If the Executive's employment is
terminated effective during the Term of Employment as a result of his death or
by the Company as a result of his Disability, the Executive (or, in the event
of his death, his designated beneficiary) will be entitled to receive his Base
Pay (at the rate in effect on the effective date of his termination of
employment) for a period of 12 months following such effective date, payable in
accordance with the Company's regular compensation practices and policies
applicable to senior executives but

- 5 -

<PAGE> 6

less any amounts paid to the Executive under any long-term disability plan,
program, policy or arrangement of the Company or any Subsidiary.

(e) COMPENSATION AND BENEFITS ON TERMINATION. Except as otherwise
provided in Section 5(c) or (d):

(i) All compensation and benefits payable to the Executive
pursuant to Section 4 (other than compensation and benefits previously
earned and, if applicable, vested under the terms of this Agreement or
any other applicable employee benefit plan, program, policy,
arrangement or agreement) will terminate as of the effective date of
the Executive's termination of employment; and

(ii) The Executive will not be entitled to, and hereby waives,
any claims for compensation or benefits (other than compensation and
benefits previously earned and, if applicable, vested under the terms
of this Agreement, the Severance Agreement or any other applicable
employee benefit plan, program, policy, arrangement or agreement)
payable after such effective date and for damages arising in
connection with his termination of employment pursuant to this
Agreement.

(f) NO MITIGATION OBLIGATION. The Company hereby acknowledges that
it will be difficult and may be impossible for the Executive to find reasonably
comparable employment following the Termination Date and that the
non-competition covenant contained in Section 6 will further limit the
employment opportunities for the Executive. Accordingly, the payment of the
compensation by the Company to the Executive in accordance with the terms of
this Agreement is hereby acknowledged by the Company to be reasonable, and the
Executive will not be required to mitigate the amount of any payment provided
for in this Agreement by seeking other employment or otherwise, nor will any
profits, income, earnings or other benefits from any source whatsoever create
any mitigation, offset, reduction or any other obligation on the part of the
Executive hereunder or otherwise, except as expressly provided in the last
sentence of Section 5(c)(ii).

6. COMPETITIVE ACTIVITY. (a) During the Term of Employment and the
period ending two years following the effective date of the Executive's
termination of employment, the Executive will not:

(i) enter into or engage in any business which competes with
the Company's business within the Restricted Territory (as defined
below); or

(ii) solicit customers, business patronage or orders for, or
sell, any product or products, or service or services, in competition
with, or for any business, wherever located, that competes with the
Company's business within the Restricted Territory; or

- 6 -

<PAGE> 7

(iii) divert, entice or otherwise take away any customers,
business or patronage or orders of the Company within the Restricted
Territory, or attempt to do so; or

(iv) promote or assist, financially or otherwise, any firm,
person, association, partnership, corporation or other entity engaged
in any business which competes with the Company's business within the
Restricted Territory.

(b) For the purposes of this Section 6, the Restricted Territory
will be defined as and limited to:

(i) the geographic areas within a 25 mile radius of any and all
Company locations in, to or for which the Executive worked, was
assigned or had any responsibility (either direct or supervisory) at
the time of the termination of his employment or at any time during
the two year period prior to such termination;

(ii) any customer, whether within or outside of the geographic
area described in paragraph (i) above, for or to which the Executive
worked, was assigned or had any direct responsibility at the time of
the termination of his employment or at any time during the two year
period prior to such termination; or

(iii) the following hotel chains, their subsidiaries and
affiliates, and the following real estate management companies, their
subsidiaries and affiliates, whether within or outside of the
geographic area described in paragraph (i) above: Bristol Hotel
Company, Carnival Hotels and Resorts, Doubletree Corporation, Hilton
Inns, Inc., Hyatt Corporation, Marriott International, Inc., Patriot
American Hospitality, Radisson Hotels International, Inc., Starwood
Lodging Corporation, Westin Hotels and Resorts and Wyndham Hotel
Corporation.

7. UNAUTHORIZED DISCLOSURE, USE OR SOLICITATION. (a) Executive will
keep in strict confidence, and will not, directly or indirectly, at any time
during or after his employment with the Company, disclose, furnish,
disseminate, make available or, except in the course of performing his duties
of employment hereunder, use any trade secrets or confidential business and
technical information of the Company or its customers, vendors or property
owners or managers, without limitation as to when or how Executive may have
acquired such information. Such confidential information will include, without
limitation, the Company's unique selling methods and trade techniques,
management, training, marketing and selling manuals, promotional materials,
training courses and other training and instructional materials, vendor, owner,
manager and product information, customer lists, other customer information and
other trade information. Executive specifically acknowledges that all such
confidential information including, without limitation, customer lists, other
customer information and other trade information, whether reduced to writing,
maintained on any form of electronic media, or maintained in the mind or memory
of Executive and whether compiled by the Company, and/or

- 7 -

<PAGE> 8

Executive, derives independent economic value from not being readily known to
or ascertainable by proper means by others who can obtain economic value from
its disclosure or use, that reasonable efforts have been made by the Company to
maintain the secrecy of such information, that such information is the sole
property of the Company and that any retention and use of such information by
Executive during his employment with the Company (except in the course of
performing his duties and obligations hereunder) or after the termination of
his employment will constitute a misappropriation of the Company's trade
secrets.

(b) Executive agrees that upon termination of Executive's
employment with the Company, for any reason, Executive will return to the
Company, in good condition, all property of the Company, including without
limitation, the originals and all copies of all management, training, marketing
and selling manuals, promotional materials, other training and instructional
materials, vendor, owner, manager and product information, customer lists,
other customer information and all other selling, service and trade information
and equipment. In the event that such items are not so returned, the Company
will have the right to charge Executive for all reasonable damages, costs,
attorneys' fees and other expenses incurred in searching for, taking, removing
and/or recovering such property.

(c) Executive acknowledges that to the extent permitted by law, all
work papers, reports, documentation, drawing, photographs, negatives, tapes and
masters therefor, prototypes and other materials (hereinafter, "items"),
including, without limitation, any and all such items generated and maintained
on any form of electronic media, generated by Executive during his employment
with the Company will be considered a "work made for hire" and that ownership
of any and all copyrights in any and all such items will belong to the Company.
The item will recognize the Company as the copyright owner, will contain all
proper copyright notices, e.g., "(year of creation" Interstate Hotels
Corporation. All rights reserved," and will be in condition to be registered or
otherwise placed in compliance with registration or other statutory
requirements throughout the world.

(d) Executive hereby assigns and agrees to assign to the Company,
its successors, assigns or nominees, all of his rights to any discoveries,
inventions and improvements, whether patentable or note, made, conceived or
suggested, either solely or jointly with others, by Executive while in the
Company's employ, whether in the course of his employment with the use of the
Company's time, materials or facilities or in any way within or related to the
existing or contemplated scope of the Company's business. Any discovery,
invention or improvement relating to any subject matter with which the Company
was concerned during Executive's employment and made, conceived or suggested by
Executive, either solely or jointly with others, within one year following
termination of Executive's employment under this Agreement or any successor
agreements will be irrebuttably presumed to have been so made, conceived or
suggested in the course of such employment with the use of the Company's time,
materials or facilities. Upon request by the Company with respect to any such
discoveries, inventions or improvements, Executive will execute and deliver to
the Company, at any time during or after his employment, all appropriate
documents for use in applying for, obtaining and maintaining such domestic and
foreign patents as the Company may desire, and all proper assignments therefor,
when so requested, at the expense of the Company, but without further or
additional consideration.

- 8 -

<PAGE> 9

(e) Executive may use the Company's trade names, trademarks and/or
service marks in connection with the sale of the Company's products and
services, but only in such manner and for such purposes as may be authorized by
the Company. Upon any termination of this Agreement, Executive immediately will
cease the use of such trade names, trademarks and/or service marks and
eliminate them wherever they have been used or incorporated by Executive.

(f) The Executive will not directly or indirectly (i) solicit or
endeavor to cause any employee of the Company or any Subsidiary to leave his
employment or induce or attempt to induce any such employee to breach any
employment agreement with the Company or any Subsidiary or otherwise interfere
with the employment of any such employee or (ii) solicit, endeavor to cause,
induce or attempt to induce any agent who engages in the business of marketing
the services of the Company or any Subsidiary to terminate, reduce or modify
its agency relationship with the Company or any Subsidiary.

8. SUCCESSORS AND BINDING AGREEMENT. (a) The Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation,
reorganization or otherwise) to all or substantially all of the business or
assets of the Company, by agreement in form and substance reasonably
satisfactory to the Executive, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent the Company would be
required to perform if no such succession had taken place. This Agreement will
be binding upon and inure to the benefit of the Company and any successor to
the Company, including without limitation any persons acquiring directly or
indirectly all or substantially all of the business or assets of the Company
whether by purchase, merger, consolidation, reorganization or otherwise (and
such successor will thereafter be deemed the "Company" for the purposes of this
Agreement), but will not otherwise be assignable, transferable or delegable by
the Company.

(b) This Agreement will inure to the benefit of and be enforceable
by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees and legatees.

(c) This Agreement is personal in nature and neither of the parties
hereto will, without the consent of the other, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in Sections 8(a) and (b). Without limiting the generality or effect of
the foregoing, the Executive's right to receive payments hereunder will not be
assignable, transferable or delegable, whether by pledge, creation of a
security interest, or otherwise, other than by a transfer by Executive's will
or by the laws of descent and distribution and, in the event of any attempted
assignment or transfer contrary to this Section 8(c), the Company will have no
liability to pay any amount so attempted to be assigned, transferred or
delegated.

9. LEGAL FEES AND EXPENSES. It is the intent of the Company that the
Executive not be required to incur legal fees and the related expenses
associated with the interpretation, enforcement or defense of Executive's
rights under this Agreement by litigation or otherwise because the cost and
expense thereof would substantially detract from the benefits intended to be
extended to the Executive hereunder. Accordingly, if it should appear to the
Executive that the

- 9 -

<PAGE> 10

Company has failed to comply with any of its obligations under this Agreement
or in the event that the Company or any other person takes or threatens to take
any action to declare this Agreement void or unenforceable, or institutes any
litigation, arbitration or other action or proceeding designed to deny, or to
recover from, the Executive the benefits provided or intended to be provided to
the Executive hereunder, the Company irrevocably authorizes the Executive from
time to time to retain counsel of Executive's choice, at the expense of the
Company as hereafter provided, to advise and represent the Executive in
connection with any such interpretation, enforcement or defense, including
without limitation the initiation or defense of any litigation, arbitration or
other legal action, whether by or against the Company or any Director, officer,
stockholder or other person affiliated with the Company, in any jurisdiction.
Notwithstanding any existing or prior attorney-client relationship between the
Company and such counsel, the Company irrevocably consents to the Executive's
entering into an attorney-client relationship with such counsel, and in that
connection the Company and the Executive agree that a confidential relationship
shall exist between the Executive and such counsel. Without respect to whether
the Executive prevails, in whole or in part, in connection with any of the
foregoing, the Company will pay and be solely financially responsible for any
and all attorneys' and related fees and expenses incurred by the Executive in
connection with any of the foregoing.

10. ADDITIONAL REMEDIES. (a) Notwithstanding any other remedy herein
provided for or available, if the Executive should be in breach of any of the
provisions of Section 6 or 7, the Executive expressly acknowledges and agrees
that the Company will be entitled to injunctive relief or specific performance,
without the necessity of proving damages, in addition to any other remedies it
may have.

(b) Notwithstanding any of the foregoing, in the event of any
disputes regarding the interpretation or application of any provision of this
Agreement, either the Executive or the Company, or both parties, may request in
writing that such dispute be resolved through final and binding arbitration.
The parties will jointly select the arbitrator who will hear such dispute. If
the parties cannot agree on the selection of an arbitrator, the parties will
request that one be appointed by the American Arbitration Association. The
arbitration will be conducted in Pittsburgh, Pennsylvania (or in any other
location mutually agreed upon by the parties) in accordance with the rules of
the American Arbitration Association. The parties acknowledge and agree that
time will be of the essence throughout such procedure. The decision of the
arbitrator may be entered in any court having subject matter and personal
jurisdiction over the dispute and the Executive. The Company will pay any costs
and expenses in connection with any such dispute or procedure.

11. REPRESENTATION. Each party represents and warrants that it is
fully authorized and empowered to enter into this Agreement and that the
performance of its obligations under this Agreement will not violate any
agreement between it and any other person or entity.

12. SEVERABILITY. In the event that any provision or portion of this
Agreement is determined to be invalid or unenforceable for any reason, in whole
or in part, the remaining provisions of this Agreement will be unaffected
thereby and will remain in full force and effect to the fullest extent
permitted by law.

- 10 -

<PAGE> 11

13. NOTICES. For all purposes of this Agreement, all communications,
including without limitation notices, consents, requests or approvals, required
or permitted to be given hereunder will be in writing and will be deemed to
have been duly given when hand delivered or dispatched by electronic facsimile
transmission (with receipt thereof orally confirmed), or five business days
after having been mailed by United States registered or certified mail, return
receipt requested, postage prepaid, or three business days after having been
sent by a nationally recognized overnight courier service such as Federal
Express or UPS, addressed to the Company (to the attention of the Secretary of
the Company) at its principal executive office and to the Executive at his
principal residence (with a copy to any counsel designated by the Executive),
or to such other address as any party may have furnished to the other in
writing and in accordance herewith, except that notices of changes of address
will be effective only upon receipt.

14. DISCLOSURE. During the Term of Employment and for one year
thereafter, Executive will communicate the contents of this Agreement to any
person, firm, association, partnership, corporation or other entity which he or
she intends to be employed by, associated with, or represent and which is
engaged in a business that is competitive to the business of the Company.

15. MODIFICATIONS AND WAIVERS. No provision of this Agreement may be
modified or discharged unless such modification or discharge is authorized by
the Board and is agreed to in writing, signed by the Executive and by an
officer of the Company duly authorized by the Board. No waiver by either party
hereto of any breach by the other party hereto of any condition or provision of
this Agreement to be performed by such other party will be deemed a waiver of
similar or dissimilar provisions or conditions at the time or at any prior or
subsequent time.

16. ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding of the parties hereto with respect to its subject matter, except
as such parties may otherwise agree in a writing which specifies that it is an
exception to the foregoing. This Agreement supersedes all prior agreements
between the parties hereto with respect to its subject matter and,
notwithstanding any other provision hereof, will become effective upon the
execution of this Agreement by the parties.

17. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement will be governed by and construed in accordance
with the substantive laws of the Commonwealth of Pennsylvania, without giving
effect to the principles of conflict of laws of such Commonwealth.

18. COUNTERPARTS. This Agreement may be executed simultaneously in one
or more counterparts, each of which will be deemed to be an original but all of
which together will constitute one and the same instrument.

19. HEADINGS, ETC. The section headings contained in this Agreement
are for convenience of reference only and will not be deemed to control or
affect the meaning or construction of any provision of this Agreement.
References to Sections are to Sections in this Agreement.

- 11 -

<PAGE> 12

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.

INTERSTATE HOTELS CORPORATION

By: /s/ W. THOMAS PARRINGTON, JR.
------------------------------

/s/ THOMAS D. REESE 9/30/96
------------------------------
Thomas D. Reese

- 12 -

<PAGE> 13

EXHIBIT A

Executive: Thomas D. Reese

Duties and Responsibilities: Executive Vice President - Operations

Primary Reporting Relationship: Chief Executive Officer

<PAGE> 1
Exhibit 10.18(a)(1)

CONTRIBUTION AGREEMENT

by and among

TRUST LEASING, INC.,

TRUST MANAGEMENT INC.,

PHILLIP H. McNEILL, SR.,

CROSSROADS/MEMPHIS COMPANY, L.L.C.

and

CROSSROADS/MEMPHIS PARTNERSHIP, L.P.

Dated As Of

October 4, 1996

<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
I. TRANSACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
-----------
1.1. Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2. Admission to Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3. Contributions to the Capital of the Partnership . . . . . . . . . . . . . . . . . 2
1.4. Liabilities Assumed and Liabilities Excluded . . . . . . . . . . . . . . . . . . 3
1.4.1. Liabilities Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.4.2. Excluded Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.5. Transfer Taxes and Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.6. Expenses of Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.7. Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.8. Closing Prorations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

II. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
------------------------------
2.1. Representations and Warranties of Companies . . . . . . . . . . . . . . . . . . . 12
2 1.1. Organizational Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.1.2. Authorization and Effect of Agreement . . . . . . . . . . . . . . . . . . . . 14
2.1.3. No Restrictions Against Transfer of Companies' Assets . . . . . . . . . . . . 14
2.1.4. Compliance With Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.1.5. Litigation; Decrees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.1.6. Contract Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.1.7. No Brokerage or Finder's Fees . . . . . . . . . . . . . . . . . . . . . . . . 16
2.1.8. Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.1.9. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.1.10. Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.1.11. Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.1.12. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.1.13. Conduct of the Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.1.14. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.1.15. Employee Benefit Plans, Programs or Arrangements . . . . . . . . . . . . . . 26
2.1.16. Labor Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.1.17. Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
2.2. Representations and Warranties of Crossroads . . . . . . . . . . . . . . . . . . 30
2.2.1. Organizational Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
2.2.2. Authorization and Effect of Agreement . . . . . . . . . . . . . . . . . . . . 31
2.2.3. No Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

III. COVENANTS PENDING CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
-------------------------
3.1. Investigation by Crossroads . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.2. No Announcement/Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.3. Regulatory Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
3.4. Operation of the Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
3.5. Satisfaction of Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3.6. No Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

IV. THE CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
-----------
4.1. Conditions Precedent to Obligations of Crossroads and Companies . . . . . . . . . 36
4.2. Additional Conditions Precedent to Obligations of Crossroads . . . . . . . . . . 37
</TABLE>

- ii -
<PAGE> 3
TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
4.2.1. No Material Misrepresentation or Breach . . . . . . . . . . . . . . . . . . . 38
4.2.2. Transfer Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
4.2.3. Due Diligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
4.2.4. Amendments to Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
4.2.5. Additional Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
4.3. Additional Conditions Precedent to Obligations of Companies . . . . . . . . . . . 42
4.3.1. No Material Misrepresentation or Breach . . . . . . . . . . . . . . . . . . . 42
4.3.2. Closing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
4.3.3. Crossroads Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
4.4. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

V. SURVIVAL AND INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
----------------------------
5.1. Survival; Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
5.2. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
5.3. Defense of Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

VI. MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
------------------------
6.1. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
6.2. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
6.3. Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
6.4. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
6.5. Amendments, Supplement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
6.6. Rights of the Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
6.7. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
6.8. Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
6.9. Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
6.10. Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
6.11. Titles and Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
6.12. Certain Interpretive Matters and Definitions . . . . . . . . . . . . . . . . . . 55
6.13. Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
6.14. Joint and Several . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
6.15. Invalid Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
6.16. Time of the Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
6.17. Risk of Loss/Insurance/Condemnation . . . . . . . . . . . . . . . . . . . . . . 57

VII. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
-----------
</TABLE>

- iii -
<PAGE> 4
<TABLE>
<CAPTION>
Exhibits
- --------
<S> <C>
Exhibit A Amended and Restated Agreement of Limited Partnership
Exhibit B Matters to be Covered by Opinion of Bogatin Law Firm
Exhibit C Matters to be Covered by Opinion of Jones, Day, Reavis & Pogue

Schedules
- ---------

Schedule 1.3.1(b) Companies' Assets and Hotels
Schedule 2.1.1(a) Jurisdictions Where Companies Qualified to do Business
Schedule 2.1.1(c) Shareholders of Companies
Schedule 2.1.3 Approvals, Consents for Companies
Schedule 2.1.4 Compliance with Laws
Schedule 2.1.8 Environmental Matters
Schedule 2.1.10(a) Real Property - Exceptions
Schedule 2.1.10(b) Real Property - Flood Plain
Schedule 2.1.11 Intellectual Property
Schedule 2.1.12 Financial Statements
Schedule 2.1.14 Insurance
Schedule 2.1.15 Employee Benefits
Schedule 2.1.16 Labor Relations
Schedule 2.2.3 Approvals, Consents for Crossroads, Partnership
</TABLE>

- iv -
<PAGE> 5
CONTRIBUTION AGREEMENT

THIS CONTRIBUTION AGREEMENT (this "Agreement") is made and
entered into this 4th day of October, 1996 by and among CROSSROADS/MEMPHIS
COMPANY, L.L.C., a Delaware limited liability company ("Crossroads"),
CROSSROADS MEMPHIS PARTNERSHIP, L.P. a Delaware limited partnership (the
"Partnership"), TRUST LEASING, INC., a Tennessee corporation and TRUST
MANAGEMENT INC., a Tennessee corporation (collectively, the "Companies") and
PHILLIP H. MCNEILL, SR., an individual resident of the State of Tennessee
("McNeill").

WITNESSETH:

WHEREAS, the Companies and Crossroads engage in the business
of leasing and managing various hotel properties; and

WHEREAS, McNeill owns a majority of the issued and outstanding
shares of capital stock of the Companies; and

WHEREAS, the Companies and Crossroads desire to conduct
certain of their hotel leasing and management business through the Partnership,
as more fully described herein; and

WHEREAS, the Companies and Crossroads desire to contribute
certain assets to the Partnership upon the terms and subject to the conditions
set forth herein,

<PAGE> 6
NOW, THEREFORE, the parties hereto, for good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged and
intending to be legally bound, hereby agree as follows:

I. TRANSACTION.

1.1. Defined Terms. Certain capitalized terms used herein
shall have the meanings given to such terms in Article VII hereof.

1.2. Admission to Partnership. On the terms and subject to
the conditions hereof, at the Closing (as hereinafter defined) the Companies
and Crossroads will execute (or cause to be executed), an Amended and Restated
Agreement of Limited Partnership, substantially in the form attached hereto as
Exhibit A (the "Partnership Agreement"), pursuant to which the Companies will
be admitted as limited partners of the Partnership. In addition, at the
Closing the Partnership and the Companies will execute a Redemption and Stock
Exchange Agreement, substantially in the form attached to the Partnership
Agreement as Exhibit C thereto (the "Exchange Agreement").

1.3. Contributions to the Capital of the Partnership.

(a) On the terms and subject to the conditions hereof, at
the Closing (as hereinafter defined), Crossroads will (or will

- 2 -
<PAGE> 7
cause Crossroads Hospitality Company, L.L.C. to) transfer, assign, deliver and
contribute to the Partnership, free and clear of any and all Liens, 1,957,895
shares of Common Stock of Interstate Hotels Company (the "Crossroads
Contribution").

(b) On the terms and subject to the conditions hereof, at
the Closing, the Companies will transfer, assign, deliver and contribute to the
Partnership free and clear of any and all Liens, the management agreements,
hotel leases ("Hotel Leases"), service contracts, Franchise Agreements and
other agreements (collectively, "Contracts"), the inventory, utility bonds,
cash (to the extent contemplated in Section 1.8 hereof), accounts receivable
and the other assets listed on Schedule 1.3(b) attached hereto (such other
assets together with the Contracts being collectively referred to as, the
"Companies' Assets") related to those certain hotels listed on Schedule 1.3(b)
("Hotels").

1.4. Liabilities Assumed and Liabilities Excluded

1.4.1. Liabilities Assumed. On the terms and
subject to the conditions hereof, at the Closing the Companies will transfer to
the Partnership and the Partnership will assume and agree to satisfy or perform
when due the Assumed Liabilities.

1.4.2. Excluded Liabilities. Notwithstanding anything contained in this
Agreement to the contrary, the

- 3 -
<PAGE> 8
Partnership will assume and agree to satisfy or perform only the Assumed
Liabilities, and shall not assume or be obligated to satisfy or perform any
other liability, obligation or commitment of the Companies of whatever nature,
whether absolute or contingent, direct or indirect, or currently existing or
arising hereafter. All such other liabilities, obligations and commitments
shall be retained by and remain liabilities, obligations and commitments of the
Companies (collectively, "Excluded Liabilities"). Without limitation of the
foregoing, Excluded Liabilities shall include, without limitation, the
following:

(a) Contingent and Other Claims and Liabilities. Any
contingent or unknown claim against or liability or obligation of Companies.

(b) Indebtedness. Any liability or obligation of
Companies in favor of any person, partnership, corporation or other business
entity other than the Assumed Liabilities.

(c) Taxes. Any present or future liability or obligation
of Companies for taxes of any kind or nature whatsoever, whether federal, state
or local, including without limitation, taxes on capital gains or the income of
the Companies, any franchise or doing business type taxes, or any employment or
payroll withholding taxes, together with any interest, penalties and/or fines
associated therewith.

- 4 -
<PAGE> 9
(d) Litigation. Any liability or obligation of Companies
in connection with any litigation (whether legal, administrative or otherwise)
or alternative dispute resolution mechanism pending or threatened including any
liability, obligation to arbitrate, claims, grievances or causes of action
under any collective bargaining agreement of Companies.

(e) Severance Obligations. Any liability or obligation
of Companies to its employees, whether arising by contract, by any plan or
program or pursuant to any Law, including, without limitation, the Worker
Adjustment and Retraining Notification Act ("WARN"), for severance or similar
pay.

(f) Employee Benefits. Any liabilities or obligations
relating to employee benefits or compensation arrangements including, without
limitation, any liabilities or obligations for any retiree medical or other
welfare benefits, or liabilities or obligations under any of Companies'
employee benefit plans, programs or arrangements, including without limitation,
those under health plan continuation coverage arising under a federal law
commonly known as "COBRA" or any similar state law or arising under WARN.

(g) Contracts. Any liabilities, obligations or
commitments of Companies arising under any contracts (including, without
limitation, any liability for past practices or

- 5 -
<PAGE> 10
liabilities under any union agreement), agreements or commitments, other than
the Assumed Liabilities.

(h) Environmental. Any and all liabilities, damages,
losses or expenses (including, without limitation, reasonable counsel fees and
expenses), resulting from, arising out of or in any way connected with any
Environmental Liability.

1.5. Transfer Taxes and Fees. All sales and use, stamp,
transfer, documentary or other ad valorem taxes imposed by any governmental
taxing authority or any other taxing authority (excluding, however, taxes on
capital gains or income) as a result of the transfer, assignment, delivery or
contribution of the Crossroads Contribution and the Companies' Assets hereunder
("Transfer Taxes") shall be allocated and shared fifty percent (50%) by
Crossroads and fifty percent (50%) by the Companies.

1.6. Expenses of Transaction. Except as otherwise provided
herein, each party hereto shall bear its own costs and expenses incurred in
connection with entering into this Agreement and consummating the transactions
contemplated herein including without limitation, all fees of counsel,
accountants and consultants; provided, however, that (a) all costs charged by
the holder of any Lien on the Crossroads Contribution or the Companies' Assets
shall be paid by Crossroads or the Companies, respectively, as its sole cost
and obligation, (b) the Companies shall be solely responsible for all fees and
costs owing to Smith

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<PAGE> 11
Barney, Inc. in connection with the transactions contemplated hereby, (c)
Crossroads and the Companies will each pay fifty percent (50%) of any
out-of-pocket expenses incurred to obtain a transfer or assignment of any
franchises, licenses or permits necessitated by the transactions contemplated
by this Agreement, (d) Companies shall be solely responsible for any and all
fees to be paid under the HSR Act and (e) notwithstanding anything contained
herein to the contrary, neither Crossroads nor the Partnership shall have any
responsibility for any and all costs or expenses associated with any property
improvement program imposed and/or required as a result of the transactions
contemplated hereby and by the Master Agreement, which costs and expenses shall
be the sole responsibility of Equity Inns Partnership, L.P. or Equity Inns,
Inc. ("ENNS").

1.7. Closing. Subject to the fulfillment or waiver of the
conditions precedent specified in Sections 4.1, 4.2 and 4.3, the consummation
of the transactions contemplated hereby (the "Closing") will take place on
November 1, 1996 or such other date as agreed to by the parties (the "Closing
Date"). The Closing will take place at 10:00 a.m., E.S.T. on the Closing Date
at the offices of Jones, Day, Reavis & Pogue at 500 Grant Street, Pittsburgh,
Pennsylvania.

1.8. Closing Prorations. (a) The following matters and
items pertaining to the Hotels shall be apportioned between the Companies and
the Partnership or, where applicable, credited

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<PAGE> 12
in total to or the sole responsibility of a particular party, as of the Cutoff
Time. To the extent known at Closing, net credits in favor of Partnership
shall be contributed to the Partnership by the Companies in cash at Closing and
net credits in favor of Companies shall be paid in cash at the Closing. Unless
otherwise indicated below, Partnership shall receive a credit for any of the
following items to the extent the same are accrued but unpaid as of the Cutoff
Time (whether or not due, owing or delinquent as of the Cutoff Time), and
Companies shall receive a credit to the extent any of the following items shall
have been paid prior to the Closing Date to the extent the payment thereof
relates to any period of time after the Cutoff Time:

(i) Guest Ledger Receivables; Food and Beverage
Receivables. Guest Ledger Receivables shall be prorated between Partnership
and Companies. Companies shall receive a credit for all Guest Ledger
Receivables for all room nights up to but not including the room night during
which the Cutoff Time occurs, and Partnership shall be entitled to the amounts
of Guest Ledger Receivables for the room nights after the Cutoff Time.
Companies and Partnership shall each receive a credit equal to one-half of the
amount of Guest Ledger Receivables for the full room night during which the
Cutoff Time occurs. All restaurant and bar facilities will be deemed closed as
of the Cutoff Time and Companies shall receive the income from the same until
the Cutoff Time.

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<PAGE> 13
(ii) Contracts. Any amounts prepaid or payable under any
Contracts, including, without limitation, base rent under each Hotel Lease.
All amounts known to be due under Contracts with reference to periods prior to
the Closing Date shall be paid by Companies. Percentage rents shall be
adjusted based on the last full reporting period under the applicable Hotel
Lease. Any amounts not known at the Closing will be part of the post-closing
adjustments contemplated in Section 1.8(c).

(iii) Bookings. Partnership shall receive a credit for
advance payments, if any, under Bookings to the extent the Bookings relate to a
period after the Cutoff Time.

(iv) Prepaid Expenses. Companies shall received a credit
for any and all expenses prepaid as of the Closing which will be assigned or
contributed to the Partnership and ensure to the benefit of the Partnership
after the Closing.

(v) Petty Cash Funds and House Banks. Partnership shall
receive and Companies shall contribute to Partnership as part of the Companies'
Assets all petty cash funds and cash in house banks at 100% of face value at
the Cutoff Time.

(vi) Security Deposits. Partnership shall be entitled to a
credit for all security and other deposits held by Companies as of the Cutoff
Time with respect to Contracts.

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<PAGE> 14
(b) Receivables. The receivables (including, without limitation,
commission vending machines) of the Companies shall be included in the
Companies' Assets and the Partnership shall collect them for its own account.
In the event that the amounts actually collected the the Partnership on account
of such receivables is less than the amount paid by the Partnership on account
of the Accounts Payable, Companies shall make a cash contribution to the
Partnership in the amount of such shortfall in accordance with Section 1.8(c)
hereof. In the event the amounts actually collected by the Partnership on
account of such receivables exceeds the amounts paid by the Partnership on
account of the Accounts Payable, the Partnership shall pay such excess to the
Companies in accordance with Section 1.8(c).

(i) Partnership shall cause its accounting staff
("Partnership's Accountants") to make such inventories, examinations and audits
of the Hotels, and of the books and records of the Hotels, as Partnership's
Accountants may deem necessary to make the adjustments and prorations required
under this Section 1.8, or under any other provisions of this Agreement.
Companies or their designated representatives may be present at such
inventories, examinations and audits of the Hotels. Based upon such audits and
inventories, Partnership's Accountants will prepare and deliver to the parties
no later than five (5) days prior to the Closing Date an estimated closing

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<PAGE> 15
statement (the "Closing Statement"). The Closing Statement shall contain
Partnership's best estimate of the amounts of the items requiring the
prorations and adjustments in this Agreement. The Closing Statement shall be
subject to Companies' review and approval, not to be unreasonably withheld or
denied. The parties shall attempt in good faith to reconcile any differences
before Closing. The amounts set forth on the Closing Statement, as reviewed,
approved and/or adjusted, shall be the basis upon which the prorations and
adjustments provided for herein shall be made at the Closing.

(ii) Within one hundred eighty (180) days following the
Closing Date, Partnership's Accountants shall deliver a final report to
Companies setting forth their final determination of all items to be included
on the Closing Statement. In the event that, at any time within said 180-day
period, either party discovers any items which should have been included in the
Closing Statement but were omitted therefrom or which were included on the
Closing Statement but which need further adjustment, such items shall be
adjusted in the same manner as if their existence had been known at the time of
the preparation of the Closing Statement. The foregoing limitation shall not
apply to any item which, by its nature, cannot be finally determined within the
period specified. However, no further adjustments shall be made beyond twelve
(12) months after the Closing Date.

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<PAGE> 16
(iii) The Closing Statement shall be binding and conclusive
on all parties hereto to the extent of the items covered by the Closing
Statement, unless within thirty (30) days after receipt by Companies of the
final Closing Statement Companies notifies Partnership that it disputes the
Closing Statement, and specifies in reasonable detail the items and reasons
that it so disputes. The parties shall attempt to resolve such dispute. If
such dispute is not resolved within forty-five (45) days after delivery of the
original notice by Buyer, then the parties shall submit such dispute to Coopers
& Lybrand ("Outside Accountants") and the determination of the Outside
Accountants, which shall be made within a period of fifteen (15) days after
such submittal by the parties, shall be conclusive. The fees and expenses of
the Outside Accountants shall be paid equally by Partnership and Companies.

II. REPRESENTATIONS AND WARRANTIES.

2.1. Representations and Warranties of Companies and McNeill.
The Companies and McNeill hereby, jointly and severally, represent and warrant
to Crossroads as follows:

2.1.1. Organizational Matters. (a) Each of Companies is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Tennessee and has the requisite corporate power and
authority to own, lease or

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<PAGE> 17
otherwise hold the assets owned, leased or otherwise held by it and to carry on
their respective business as presently conducted by it. Each of the Companies
is duly qualified to do business as a foreign corporation under the laws of the
jurisdictions listed on Schedule 2.1.1 (a), which are the only jurisdictions
where such qualification is necessary or required to operate its assets and/or
conduct its business.

(b) Companies own the Companies' Assets free and
clear of any Liens. Companies will transfer to the Partnership good and
marketable title to the Companies' Assets upon the delivery of the title
documents contemplated in this Agreement. The Companies' Assets are the only
assets of the Companies.

(c) The persons listed on Schedule 2.1.1 (c) are
the only shareholders of the Companies and own the number of shares in the
Companies listed opposite their names on Schedule 2.1.1 (c). McNeill has the
requisite power and capacity to execute and deliver this Agreement and to
perform the transactions contemplated hereby. The execution and delivery of
this Agreement by McNeill and the performance by McNeill of the transactions
contemplated hereby have been duly authorized by all necessary action on the
part of McNeill. This Agreement has been duly executed and delivered by
McNeill and constitutes a valid and binding obligation of McNeill enforceable
in accordance with its terms.

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<PAGE> 18
2.1.2. Authorization and Effect of Agreement. Companies have
the requisite corporate power and authority to execute and deliver this
Agreement and to perform the transactions contemplated hereby to be performed
by Companies. The execution and delivery by Companies of this Agreement and
the performance by Companies of the transactions contemplated hereby to be
performed by Companies have been duly authorized by all necessary corporate
action on the part of Companies. This Agreement has been duly executed and
delivered by Companies and, assuming the due execution and delivery of this
Agreement by Crossroads and the Partnership, constitutes a valid and binding
obligation of Companies enforceable in accordance with its terms.

2.1.3. No Restrictions Against Transfer of Companies' Assets.
The execution and delivery of this Agreement by Companies and McNeill, and the
performance by Companies and/or McNeill of the transactions contemplated hereby
to be performed by them or him will not violate any law, rule, regulation,
judgment, order or decree applicable to them or him or conflict with, or result
in any violation of, or constitute a default (with or without notice or lapse
of time, or both) under, or give rise to a right of termination, cancellation
or acceleration of any obligation or to the loss of a material benefit under,
any provision of the organizational documents of Companies or any agreement,
contract, lease, or other instrument or obligation included in any of the
Companies' Assets or Permit listed or required to be listed on any Schedule,
other than any such

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<PAGE> 19
conflicts, violations or defaults as are listed or described on Schedule 2.1.3.
consent, approval, order or authorization of, notice to, or registration,
declaration or filing with, any Governmental Authority or other entity,
domestic or foreign, or any other third party is required to be obtained or
made by or with respect to Companies or McNeill in connection with the
execution and delivery of this Agreement by Companies or McNeill or the
performance by Companies or McNeill of the transactions contemplated hereby to
be performed by him or them, except for such of the foregoing as are listed or
described on Schedule 2.1.3.

2.1.4. Compliance With Laws. Without limiting the
representations and warranties set forth in Section 2.1.9 or 2.1.12, and except
as listed or described on Schedule 2.1.4, Companies are not in material
violation of any Laws in the operation of the Hotels.

2.1.5. Litigation; Decrees. Without limiting the
representations and warranties set forth in Section 2.1.9 or 2.1.12, there are
no lawsuits, claims, administrative or other proceedings relating to the
conduct of the Companies' Assets or the Hotels pending or, to the knowledge of
Companies or McNeill after due investigation, threatened in writing, against or
affecting Companies which, if determined adversely, would have a material
adverse effect on the Companies' Assets or the Hotels. Companies are not in
default under any judgment, order or decree

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<PAGE> 20
of any Governmental Authority applicable to the operation or conduct of the
Hotels or the Companies' Assets.

2.1.6. Contract Rights. Each of the Contracts included in
the Companies' Assets is a valid and binding obligation of each of the parties
thereto and is in full force and effect. Each of the parties to the Contracts
included in the Companies' Assets has performed all obligations required to be
performed by it through the Closing Date under such Contracts and is not (with
or without the lapse of time or the giving of notice, or both) in breach or
default in any respect thereunder. Companies have delivered to Crossroads
true, correct and complete copies of such Contracts.

2.1.7. No Brokerage or Finder's Fees. Neither Companies nor
NcNeill have incurred any liability to any broker, finder or agent for any
brokerage fees, finder's fees or commissions with respect to the transactions
contemplated by this Agreement, except any fees owing to Smith Barney, Inc. for
which Companies will be solely responsible.

2.1.8. Environmental Matters. Without limiting the
representations or warranties contained elsewhere herein:

(a) To the best of Companies' and McNeill's
knowledge after due investigation, Schedule 2.1.8 sets forth a list of all
proceedings and alleged claims related to the

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<PAGE> 21
ownership, leasing and/or operation of the Hotels which Companies are or in the
last five (5) years have been a party before any Governmental Authority
relating to pollution or protection of the environment and human health and
safety, the disposition of which may result in (i) liability against Companies
for any amount for penalties, fines, damages, monitoring, maintenance of wells,
testing, investigation, sampling, response, remedial or inspection costs or
other monetary relief; (ii) the making of a capital expenditure in any amount;
or (iii) in the impairment of the utility of or the diminution in any amount in
value of the Companies' Assets or the Hotels for the purposes for which such
Companies' Assets or the Hotels are presently being used and operated.

(b) Except as disclosed in Schedule 2.1.8,
neither the Companies nor McNeill have received notice of, nor have reason to
believe there exists, any threatened proceedings, claims or allegations of the
nature described in Section 2.1.8(a) and neither the Companies nor McNeill are
aware of facts that, with the passage of time or otherwise, could lead to
proceedings of the nature described in Section 2.1.8(a).

(c) Except as to matters described in Schedule
2.1.8, and to the best of Companies' and McNeill's knowledge after due
investigation, Companies are and have always been in compliance in all respects
with all applicable Environmental Laws applicable to themselves and with
respect to

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<PAGE> 22
the respective property, activities and/or operations of the Companies' Assets
and the Hotels.

(d) There are no asserted claims nor any bases
for any claims that Companies are in violation and/or breach of or have
liability under any Environmental Laws with respect to the ownership,
management and/or operation of the Companies' Assets or the Hotels.

(e) Except as set forth on Schedule 2.1.8, in
connection with the ownership, management and/or operation of the Companies'
Assets or the Hotels, to the best of McNeill's and the Companies' knowledge
after due investigation, Companies have obtained and complied with and kept in
effect all Permits (which are listed on Schedule 2.1.8(h)) and other approvals
necessary to operate the Hotels or to store, dispose of and otherwise handle
any Hazardous Substances and/or wastes and Companies has reported, to the
extent required by Environmental Laws, all past and present sites owned,
operated or used by Companies in connection with the ownership, leasing and/or
operation of the Companies' Assets or the Hotels where Hazardous Substances
and/or wastes have been treated, stored or disposed of. Companies and NcNeill
represent that the Companies have not spilled, discharged, released, stored, or
disposed of any Hazardous Substances or wastes in violation of any
Environmental Laws.

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<PAGE> 23
(f) Except as set forth in Schedule 2.1.8, and in
connection with the ownership, leasing, management and/or operation of the
Companies' Assets or the Hotels, and to the best of the Companies' and
McNeill's knowledge after due investigation, there is no Contamination at any
on-site or off-site location to which Companies have transported Hazardous
Substances, or arranged for the transportation of Hazardous Substances, or at
which any Hazardous Substances for which the Companies may reasonably be
expected to have liability have been deposited and/or disposed of. In
addition, except as disclosed on Schedule 2.1.8, no such on-site or off-site
location is the subject of any enforcement actions or other investigations by
any Governmental Authority or other third party that may lead to claims against
Companies or Partnership for clean-up costs, investigation, remedial work,
damages to natural resources or property, or for personal injury claims.

(g) Except as otherwise disclosed on Schedule

2.1.8:

(i) Neither Companies nor McNeill have
received any request for information, notice, demand letter, administrative
inquiry, or formal or informal compliance notice or claim with respect to the
presence of Contamination or any Hazardous Substance, in, on, under or about
any property owned, leased, subleased or occupied by Companies or used in the
Hotels or the threat of migration of Contamination or any Hazardous

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<PAGE> 24
Substances onto, at, into or under any property owned or occupied by a third
party which contamination or Hazardous Substance originated at sites or
facilities currently or previously owned, operated, leased, subleased or used
by Companies;

(ii) Neither Companies nor McNeill have
received any request nor, to the best of their knowledge, do they have reason
to believe there is a basis for any information, notice, demand letter or
inquiry from a Governmental Authority or other third-party concerning
Contamination or threatened Contamination at any off-site location or locations
to which Companies transported or arranged for the transportation of Hazardous
Substances during Companies operation and/or ownership or leasing of the
Companies' Assets or the Hotels.

(iii) Except as disclosed on Schedule 2.1.8
and to the best of Companies' or McNeill's knowledge after due investigation,
no Contamination exists at, in or under any of the Hotels or structures at any
site and/or facility currently or formerly owned, operated, leased, subleased
or used by Companies; and

(iv) Except as set forth on Schedule 2.1.8
and to the best of Companies' or McNeill's knowledge after due investigation,
there are no underground storage tanks, above-ground storage tanks or
subsurface structures, or any containment vessel, located on any of the Hotels.

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<PAGE> 25
(h) To the best of Companies' and McNeill's
knowledge after due investigation, Companies have all Permits required by
Environmental Laws including, without limitation, those related to occupational
health and safety in the ownership, leasing, management, subleasing and/or
operation of the Companies' Assets and the Hotels. Schedule 2.1.8(h) contains
a listing of all Permits held by Companies required by Environmental Laws.

2.1.9. Taxes. With respect to the Companies' Assets and the
Hotels, Companies have filed or caused to be filed (on a timely basis) any and
all returns, reports, statements, declarations, schedules, notices,
certificates or other documents ("Tax Returns") filed with or submitted to any
Governmental Authority in connection with the determination, assessment,
collection or payment of any tax, lien, assessment, impost, toll duty,
deficiency, fee or related amount imposed or assessed ("Taxes") by any
Governmental Authority ("Tax Authority") that are or were required to be filed
by or with respect to any of them, either separately or as a member of a group
of corporations, pursuant to the requirements of each Tax Authority with
jurisdiction over them or their assets. Companies have paid, or made provision
for the payment of, all Taxes, which are, may be or become a lien on the
Companies' Assets or the Hotels, as reflected on such Tax Returns, or
otherwise, or pursuant to any assessment received by Companies, except such
Taxes, if any, as are being contested in good faith and as to which adequate

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<PAGE> 26
reserves (determined in accordance with GAAP) have been provided. There exists
no proposed tax assessment against Companies related to the ownership or
operation of the Companies' Assets or the Hotels. All Taxes that Companies are
or were required by any requirements to withhold or collect have been duly
withheld or collected and, to the extent required, have been paid to the proper
governmental body.

2.1.10. Real Property. Companies and McNeill have previously
furnished to Crossroads copies of all deeds and recorded instruments in the
possession of Companies and McNeill related to the Hotels and copies of all
opinions, abstracts, environmental reports, structural or other engineering
reports, title policies and surveys in the possession of Companies and McNeill
relating to the Hotels. The Hotels are the only real property owned or leased
by Companies and used in connection with the Companies' Assets. The Hotels are
not subject to any rights of way, easements, building use restrictions,
exceptions, variances, reservations or limitations of any nature whatsoever,
except such as are listed in Schedule 2.1.10(a) or those which would not
materially interfere with the current use and/or ownership and/or operation of
the Hotels. All of the Hotels are in safe condition and operating repair and
comply in all material respects with all applicable ordinances, codes,
regulations and building and other Laws applicable thereto. The present use of
the Hotels is in compliance with all zoning classifications except for
noncompliance which would not have a material adverse

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<PAGE> 27
effect on the ownership and/or operation of the Hotels. The Hotels are each
currently serviced by a community sewage system. The Hotels are situated on
properly subdivided parcels of property. All buildings and other improvements
constituting the Hotels are within the record property lines. Except as set
forth in Schedule 2.1.10(b), no portion of the Hotels are located in a flood
plain or consists of any wetlands. To the extent any of the Hotels are located
in a flood plain, Companies have adequate flood insurance for such Hotels.
Neither McNeill nor Companies have received any notice of any increase in real
estate assessments affecting the Hotels. Neither McNeill nor Companies have
received notice of any assessment for public improvement and have no knowledge
of any pending assessment, including, without limitation, assessments for
business improvement districts, transportation districts or utility services
affecting the Hotels. There are no pending or, to the best of Companies' and
McNeill's knowledge, threatened condemnation or eminent domain proceedings
which affect or would affect the Hotels or any portion thereof. The Hotels
(including, without limitation, any buildings or improvements thereof) are in
material compliance with all Laws, including, without limitation, the Americans
with Disabilities Act, as the same may be amended and any and all regulations
promulgated thereunder ("ADA"). All easements, utilities and related services
necessary for the permanent and efficient use and operation of the Hotels for
their present purposes (including potable water, storm and sanitary sewer, gas,

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<PAGE> 28
electric and telephone facilities) have been completed, paid for in full and
are presently available to the occupants thereof.

2.1.11. Intellectual Property. (a) Companies use no
trademarks, servicemarks, patents, know-how or other intellectual property
(collectively, "Intellectual Property") in connection with operation of the
Hotels, except as set forth on Schedule 2.1.11 attached hereto. The right to
use the Intellectual Property as currently used by Companies is included with
the Companies' Assets.

(b) Schedule 2.1.11 is an accurate and complete listing and
summary of all Intellectual Property. The Companies are the owners or lessees
of all right, title and interest in and to all of the Intellectual Property
free and clear of all Liens; the Intellectual Property has been registered and
is currently in compliance with formal legal requirements (including the
payment of filing, examination and maintenance fees and proofs of working or
use), are valid and enforceable and are not subject to any maintenance fees or
taxes or actions falling due within ninety (90) days after the Closing Date; no
part of the Intellectual Property has been or is now involved in any
opposition, invalidation or cancellation proceeding nor, to the best of
Companies' and McNeill's knowledge after due investigation, is any such action
threatened with respect to any of the Intellectual Property; neither Companies
nor McNeill are aware of any potentially interfering intellectual property of
any third

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<PAGE> 29
party; and no part of the Intellectual Property is infringed or has been
challenged or threatened in any way. None of the Intellectual Property used by
Companies infringe or are alleged to infringe any intellectual property of any
third party.

2.1.12. Financial Statements. (a) Attached as Schedule
2.1.12 is a list and description of the financial information delivered to IHC,
New Lessee and Partnership (collectively, the "Financial Statements"). The
Financial Statements have been prepared in accordance with GAAP consistently
applied and are true, accurate and complete in all material respects.

(b) There are no liabilities arising out of the conduct
of the Hotels which are not set forth or reflected in the Financial Statements,
except (i) liabilities which, in accordance with GAAP, were not required to be
set forth therein, or (ii) liabilities or obligations arising after the
Financial Statements in the ordinary course of business of the Hotels.

2.1.13. Conduct of the Hotels. Except as a result of matters
relating to this Agreement, since December 31, 1995 (or such date as such Hotel
has initially leased and/or managed by the Companies) the Hotels have been
operated in the ordinary course of business, the Companies have not taken any
action which would have constituted a violation of Section 3.4 if Section 3.4
had applied to Companies since December 31, 1995, and there has

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<PAGE> 30
not been any material adverse change in any of the Hotels or the financial
condition or results of operations of any of the Hotels.

2.1.14. Insurance. Set forth on Schedule 2.1.14 is
a list of all material casualty, liability and other insurance maintained by
Companies. Except as set forth on Schedule 2.1.14, all such insurance is in
full force and effect on the date hereof. Companies have received no notice,
nor do they or McNeill have knowledge after due investigation, of any condition
which may cause the cancellation, reduction or modification of such insurance
or the increase in the premiums therefor.

2.1.15. Employee Benefit Plans, Programs or
Arrangements. (a) Except as set forth on Schedule 2.1.15, Companies are not a
party to or obligated to contribute to any employee benefit plan or program,
guaranteed annual income plan, fund or arrangement, employee association or
union, or any incentive, bonus, profit-sharing, deferred compensation, stock
option or purchase plan or agreement or arrangement, or any non-competition
agreement, or any severance or termination pay plans or policies, any medical,
health, hospitalization, disability, life or other insurance plans, or any
other employee fringe benefit plans which covers any employee (collectively the
"Employee Plans"). True and correct and complete copies of all of the written
plans, programs, agreements or arrangements, and true, correct and complete
written descriptions of all of the

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<PAGE> 31
oral plans, programs, agreements or arrangements, required to be described in
Schedule 2.1.15 have heretofore been delivered or otherwise made available to
Crossroads.

(b) None of Companies, any Employee Plan of Companies or
any "party in interest," as defined in Section 3(14) of the Employee Retirement
Income Security Act of 1974, as amended and the rules and regulations
promulgated thereunder ("ERISA"), has engaged in a "prohibited transaction," as
defined in Section 406 of ERISA or Section 4975(c)(1) of the Code, which could
subject any of them or Crossroads or Partnership to liability under Section 409
or 502(i) of ERISA or Section 4975 of the Code. Companies, and each fiduciary
for each of the Employee Plans of Companies, is in material compliance with the
terms of such Employee Plans and with the requirements of any and all Laws,
including but not limited to ERISA, applicable to each such Plan. Companies
have not failed to make any contribution to, or to pay any amount due and
owing, as required by applicable Law or by the terms of any such Employee Plan
as of the last day of the most recent fiscal year of each of such Plans ended
prior to the Closing Date.

(c) There is no pending or, to the best of Companies' or
McNeill's knowledge after due investigation, threatened legal action,
administrative or regulatory proceedings or investigations against Companies or
any Employee Plan of Companies with respect to any such Plan, other than
routine

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<PAGE> 32
claims for benefits, which could result in liability to Companies or Crossroads
or Partnership and, to the best of Companies' or McNeill's knowledge after due
investigation, there is no basis for any such legal action, proceeding or
investigation.

(d) Except as set forth on Schedule 2.1.15, Companies do
not maintain or contribute to, and have not maintained or contributed to, (i)
any "multiemployer plan" (as defined in Section 3(37) of ERISA) that covers any
employee; (ii) any pension plan (as defined in Section 3(2) of ERISA) that is
subject to Title IV of ERISA that covers any employee; or (iii) any plan or
program that provides post-employment medical, health or life insurance
benefits (other than any such benefits required to be provided pursuant to
Section 4980B of the Code). During the five (5) year period preceding the
Closing Date, the Companies have not terminated any employee benefit plan
subject to Title IV of ERISA for which a Notice of Sufficiency has not been
issued by the Pension Benefit Guaranty Corporation. No amount is due or owing
from the Companies to the Pension Benefit Guaranty Corporation under Title IV
of ERISA for any reason, or to any "multiemployer plan" (as defined in Section
3(37) of ERISA) on account of any complete or partial withdrawal therefrom.

(e) With respect to each "group health plan" (within the
meaning of Section 4980B of the Code) maintained by Companies, Companies are in
compliance with, and will satisfy all

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<PAGE> 33
liabilities and obligations relating to, the continuation coverage requirements
of the federal law commonly referred to as "COBRA" or any similar state law.
Companies are in compliance with, and will satisfy all liabilities and
obligations relating to, the notice and all other requirements arising under
WARN.

(f) Companies and McNeill have delivered to Crossroads true,
correct and complete information regarding the current levels of salaries
and/or wages for the employees of the Hotels and the Companies.

2.1.16. Labor Relations. Except as disclosed on
Schedule 2.1.16, (a) no employee of the Hotels or the Companies is represented
by any union or other labor organization and no effort exists to organize any
of Companies' employees or the employees of the Hotel; (b) there is no unfair
labor practice complaint against the Hotels or the Companies pending or, to the
knowledge of either McNeill or the Companies after due investigation,
threatened before the National Labor Relations Board; (c) there is no labor
strike, dispute, picketing or other labor disputes, slow-down or stoppage
actually pending or, to the knowledge of either McNeill or the Companies,
threatened against or involving the Hotels or the Companies; (d) there is no
grievance pending against the Companies; (e) there is no private agreement or
understanding to which the Companies are a party restricting the Hotels or the
Companies from relocating, closing or terminating any of its operations or
facilities; and

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<PAGE> 34
(f) neither the Companies nor the Hotels have, in the past three years,
experienced any work stoppage or other labor difficulty or committed any unfair
labor practice.

2.1.17. Accounts Receivable. All of the accounts receivable
included in the Companies' Assets represent actual sales made in the ordinary
course of business and to the best knowledge of Companies and McNeill after due
investigation, are not subject to any setoffs or counterclaims as to the
performances of any obligation or contract arising prior to the Closing Date.

2.2. Representations and Warranties of Crossroads.
Crossroads hereby represents and warranties to Companies and McNeill as
follows:

2.2.1. Organizational Matters. (a) Crossroads is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has the requisite corporate power to own,
lease or otherwise hold its properties and assets and to carry on its business
as presently conducted.

(b) The Partnership is a limited partnership duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the requisite partnership power to own, lease or otherwise
hold its properties and assets and to carry on its business as presently
conducted.

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<PAGE> 35
2.2.2. Authorization and Effect of Agreement. Crossroads has
the requisite corporate power and the Partnership has the requisite partnership
power to execute and deliver this Agreement and to consummate the transactions
contemplated hereby to be consummated by them. The execution and delivery by
Crossroads and Partnership of this Agreement and the consummation by them of
the transactions contemplated hereby to be consummated by them have been duly
authorized by all necessary action on the part of Crossroads and Partnership.
This Agreement has been duly executed and delivered by Crossroads and
Partnership and, assuming the due execution and delivery of this Agreement by
Companies and McNeill, constitutes a valid and binding obligation of Crossroads
and Partnership.

2.2.3. No Restrictions. Except as set forth on Schedule
2.2.3, the execution and delivery of this Agreement by Crossroads and
Partnership does not, and the performance by Crossroads and Partnership of the
transactions contemplated hereby to be performed by them will not violate any
law, rule, regulation, judgment, order or decree applicable to them or conflict
with, or result in any violation of, or constitute a default (with or without
notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or to loss of a
material benefit under, any provision of the Certificate of Incorporation or
bylaws of Crossroads or the Certificate of Limited Partnership or partnership
agreement of Partnership, or any agreement, contract,

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<PAGE> 36
lease or other instrument or obligation to which Crossroads or Partnership is a
party or by which their assets are bound. No material consent, approval, order
or authorization of, or registration, declaration or filing with, any
Governmental Authority or other entity is required to be obtained or made by or
with respect to Crossroads or Partnership in connection with the execution and
delivery of this Agreement by them or the consummation by them of the
transactions contemplated hereby to be consummated by them, except as listed or
described on Schedule 2.2.3.

III. COVENANTS PENDING CLOSING

3.1. Investigation by Crossroads. (a) Prior to the Closing,
upon reasonable notice from Crossroads to Companies given in accordance with
this Agreement, Companies will afford to the officers, attorneys, accountants
or other authorized representatives of Crossroads access during normal business
hours to the facilities and the books and records of the Companies relating to
the Companies' Assets or Hotels so as to afford Crossroads full opportunity to
make such review, examination and investigation of the Companies' Assets or
Hotels as Crossroads may desire to make (including, without limitation,
environmental audits of the Hotels.) Crossroads will be permitted to make
extracts from or to make copies of such books and records as may be reasonably
necessary. Prior to the Closing, Companies will furnish or cause to be
furnished such financial and operating

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<PAGE> 37
data and other information pertaining to the Companies' Assets or Hotels as
Crossroads may request.

(b) Prior to the Closing, Companies and McNeill
will provide Crossroads with access to meet and interview current employees of
Companies; provided, however, that Companies and McNeill acknowledge that,
neither Partnership nor Crossroads is under any obligation to offer employment
to and/or to hire any such employees.

3.2. No Announcement/Confidentiality. Upon execution of this
Agreement, Companies, McNeill and Crossroads agree to make a press release in a
form to be mutually agreed upon by all of the parties. Prior to the Closing
Date, no party shall publish or permit any of its Affiliates to publish any
other press release or similar public announcement with respect to the
transactions contemplated by this Agreement without prior written consent of
all of the other parties other than as the person making such disclosure may
determine in good faith to be required by law, rule, regulation, judicial or
administrative process (in which case the disclosing party shall use reasonable
efforts to give notice to all of the other parties prior to making such
disclosure and, if reasonably practicable in the circumstances, give such other
parties the opportunity to review and comment on the proposed disclosure).

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<PAGE> 38
3.3. Regulatory Filings. Each of the parties will use its
reasonable best efforts to obtain, and to cooperate with the other in
obtaining, all authorizations, consents, orders and approvals of Governmental
Authorities that may be or become necessary in connection with the consummation
of the transactions contemplated by this Agreement including, without
limitation, filings required under the HSR Act and liquor licensing
authorities, and to take all reasonable actions to avoid the entry of any order
or decree by any Governmental Authority prohibiting the consummation of the
transactions contemplated hereby.

3.4. Operation of the Hotels. Except as consented to by
Crossroads in writing, prior to the Closing, Companies will, in respect of
their operation of the Hotels and the Companies' Assets:

(a) Use reasonable best efforts to not take or
permit to be taken or do or suffer to be done anything other than in the
ordinary course of operation of the Hotels as presently conducted, and use
reasonable best efforts to maintain the goodwill associated with the Hotels;

(b) Continue its existing practices relating to
maintenance of the Hotels and operations under the Companies' Assets;

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<PAGE> 39
(c) Except as provided in Section 1.2 of the
Master Agreement with respect to the Hotel Leases, not terminate, amend or
modify any Contract included in the Companies' Assets;

(d) Except in the ordinary course of business and
consistent with past practices, not enter into any new service contracts
related to the Hotels;

(e) Maintain and keep in full force and effect
its current insurance and shall pay any deductibles related to any claims made
under such insurance; and

(f) Not terminate or make material amendments to
any benefit plan or employee practice or policy or increase the general rates
of compensation for employees of the Hotels and/or the Companies.

3.5. Satisfaction of Conditions. Without limiting the
generality or effect of any provision of Article IV, prior to the Closing, each
of the parties hereto will use reasonable efforts with due diligence and in
good faith to satisfy promptly all conditions required hereby to be satisfied
by such party in order to expedite the consummation of the transactions
contemplated hereby.

3.6. No Solicitation. Prior to the Closing, neither
Companies nor McNeill nor their respective employees, officers,

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<PAGE> 40
agents or representatives, including without limitation, Smith Barney, Inc.,
shall directly or indirectly (a) solicit, initiate or encourage any inquiries,
proposals or offers from any person relating to any lease, acquisition or
purchase of any of the Companies' Assets, or any securities of, or any merger,
consolidation or business combination with, Companies, or (b) with respect to
any effort or attempt by any other person to do or seek any of the foregoing
(i) participate in any discussions or negotiations, (ii) furnish to any other
person any confidential information with respect to the Companies' Assets, or
(iii) otherwise cooperate in any way with, or assist or participate in, or
facilitate or encourage any such effort.

IV. THE CLOSING

4.1. Conditions Precedent to Obligations of Crossroads and
Companies. The obligations of each of Crossroads, the Partnership, the
Companies and McNeill under this Agreement to consummate the transactions
contemplated hereby will be subject to the satisfaction, at or prior to
Closing, of the conditions that (a) each governmental approval, liquor license,
and other approvals, consents or waivers identified on Schedule 2.1.3 or
Schedule 2.2.3 as being a condition of the Closing shall have been obtained,
including, without limitation, approval under the HSR Act, the consent of the
other parties to the Companies' Assets and the transfer of all Permits (or in
the case of liquor licenses, consummation of an arrangement deemed acceptable
by

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<PAGE> 41
Crossroads in its sole discretion under the applicable liquor laws allowing the
continuation of liquor service pending approval of the license transfer
application), (b) there shall not have been entered a preliminary or permanent
injunction, temporary restraining order or other judicial or administrative
order or decree in any domestic jurisdiction, the effect of which prohibits the
Closing, (c) execution of a Master Agreement by and among the Partnership,
Interstate Hotels Corporation, ENNS and Equity Inns Partnership, L.P., in form
and substance satisfactory to the parties thereto ("Master Agreement") and all
conditions to closing under the Master Agreement shall have been satisfied
other than the obligations hereunder, (d) the approval of ENNS' line of credit
lender shall have been obtained, (e) the approval of the franchisors of the
Hotels shall have been obtained, (f) the approval of Credit Lyonnais shall have
been obtained, and (g) the consent of Merrill Lynch & Co. shall have been
obtained. Any of the foregoing conditions may be waived, (x) insofar as it is
a condition to the obligations of Crossroads or the Partnership, by Crossroads
at its option and (y) insofar as it is a condition to the obligations of
Companies and McNeill, by Companies at their option.

4.2. Additional Conditions Precedent to Obligations of
Crossroads and the Partnership. The obligations of Crossroads and the
Partnership under this Agreement to consummate the transactions contemplated
hereby will be subject to the satisfaction, at or prior to the Closing, of all
of the following

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<PAGE> 42
conditions, any one or more of which may be waived at the option of Crossroads:

4.2.1. No Material Misrepresentation or Breach. There shall
have been no material breach by Companies or McNeill in the performance of any
of the covenants herein to be performed by them in whole or in part prior to
the Closing, and the representations and warranties of Companies and McNeill
contained in this Agreement shall be true and correct in all respects as of the
Closing Date, except for representations or warranties made as of a specified
date, which shall be true and correct in all respects as of the specified date,
and Companies and McNeill shall have delivered to Crossroads a certificate
certifying each of the foregoing, dated the Closing Date and signed by McNeill
and by the president and chief financial officer on behalf of each of the
Companies; and

4.2.2. Transfer Documents. There shall have been delivered
to Crossroads and the Partnership by Companies and McNeill the following
documents as executed by Companies and the other parties thereto:

(a) Assignment and Assumption Agreement and Bill of Sale for the
Companies' Assets;

(b) Incumbency and Specimen Signature Certificate of Companies;

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<PAGE> 43
(c) Resolutions of the Board of Directors [and
Shareholders] of Companies authorizing the execution and delivery of this
Agreement and the consummation of the transactions contemplated by them, all as
certified by the Secretary of Companies;

(d) Certificates of the Secretary of State of the
State of Tennessee to the effect that Companies are validly existing and in
good standing and dated as of a date not more than ten (10) days prior to
Closing;

(e) True and correct copies of the
organizational documents of Companies certified by the Secretary of Companies;

(f) The opinion of Bogatin Law Firm, counsel for
Companies and McNeill, to cover the matters set forth in Exhibit B, attached
hereto;

(g) Partnership Agreement;

(h) Exchange Agreement;

(i) Evidence that all consents necessary to
consummate the transactions contemplated by this Agreement have been obtained;
and

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<PAGE> 44
(j) Estoppel certificates and nondisturbance
agreements from the parties listed on Schedule 4.2.2(j).

4.2.3. Due Diligence. Crossroads and its representatives
shall be satisfied in their sole and absolute discretion with the results of
all aspects of the due diligence review of the Companies' Assets and the
Hotels.

4.2.4. Amendments to Leases. All of the Hotel Leases
included within the Companies' Assets shall be amended and restated by all of
the parties thereto (simultaneously with the Closing) to be in substantially
the form of Exhibit A to the Master Agreement.

4.2.5. Additional Matters. (a) All of the Hotels shall have
linen, china, glass and silver as of the Closing Date at the levels required by
the applicable franchisor.

(b) All of the utility security deposits (or
bonds in lieu thereof) existing as of the Closing Date for the Hotels shall
have been assigned to the Partnership.

(c) Crossroads and the Partnership shall have
received consents and estoppel certificates from Promus Hotels Corp. and all
third party owners regarding any and all agreements between Promus Hotels Corp.
and the Companies and between the

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<PAGE> 45
Companies and other third parties, in form and substance reasonably acceptable
to Crossroads.

(d) The Partnership and Crossroads shall have
received consents and estoppel certificates from all of the franchisors under
the Franchise Agreements and from the third parties to the management
agreements included in the Companies' Assets, in form and substance reasonably
acceptable to Crossroads.

(e) Partnership shall have obtained from a title
company reasonably satisfactory to Partnership (the "Title Company") a standard
ALTA Owner's Policy of Title Insurance (or an irrevocable commitment therefor),
in the amount of $46,500,000, (i) without any of the standard exceptions; (ii)
without the standard exclusion relating to creditors' rights; and (iii) subject
only to such exceptions which are approved by Crossroads, insuring that
Partnership is the owner of the leasehold of the Hotels (the "Title Policy").
Notwithstanding the foregoing, the Title Policy may contain the standard
exception relating to coal and mining rights, but only if the Title Company
insures against future surface operations.

(f) Originals and all copies of the books,
records and other items related to or comprising the Companies' Assets shall
have been delivered to the Partnership.

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<PAGE> 46
4.3. Additional Conditions Precedent to Obligations of
Companies and McNeill. The obligations of Companies and McNeill under this
Agreement to consummate the transactions contemplated hereby will be subject to
the satisfaction, at or prior to the Closing, of all the following conditions,
any one or more of which may be waived at the option of Companies:

4.3.1. No Material Misrepresentation or Breach. There shall
have been no material breach by Crossroads or the Partnership in the
performance of any of the covenants herein to be performed by them in whole or
in part prior to the Closing, and the representations and warranties of
Crossroads contained or referred to in this Agreement shall be true and correct
in all respects as of the Closing Date, except for representations or
warranties made as of a specified date, which shall be true and correct in all
respects as of the specified date, and Crossroads shall have delivered to
Companies a certificate certifying each of the foregoing, dated the Closing
Date and signed by its president and chief financial officer on its behalf;

4.3.2. Closing Documents. There shall have been delivered to
Companies by Crossroads and the Partnership the following documents as executed
by Crossroads and the Partnership as applicable:

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<PAGE> 47
(a) Assignment and Assumption Agreement for the
Companies' Assets pursuant to which the Partnership will assume the Assumed
Liabilities;

(b) Incumbency and Specimen Signature Certificate
of Crossroads;

(c) Certificates of the Secretary of State of the
State of Delaware to the effect that Crossroads and the Partnership are validly
existing and in good standing and dated as of a date not more than ten (10)
days prior to Closing;

(d) The opinion of Jones, Day, Reavis & Pogue,
counsel for Crossroads and the Partnership, to cover the matters set forth in
Exhibit C attached hereto;

(e) Partnership Agreement; and

(f) Exchange Agreement.

4.3.3. Crossroads Contribution. Crossroads shall have
delivered to the Partnership certificates representing the Crossroads
Contribution duly endorsed or with duly executed stock powers.

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<PAGE> 48
4.4. Termination. Notwithstanding anything contained in this
Agreement to the contrary, this Agreement may be terminated at any time prior
to the Closing:

(a) By the mutual written consent of Crossroads,
the Partnership, Companies and McNeill;

(b) By either Crossroads and the Partnership or
the Companies and McNeill if the Closing shall not have occurred on or before
December 1, 1996 provided the party (or any of its Affiliates) so terminating
this Agreement is not in default of its obligations hereunder; or

(c) By either Crossroads and the Partnership or
the Companies and McNeill if there shall have been entered a final,
nonappealable order or injunction of any Governmental Authority restraining or
prohibiting the consummation of the transactions contemplated hereby or any
material part thereof.

In the event of termination of this Agreement under this Section 4.4, each
party hereto will pay all of its own fees and expenses. There will be no
further liability hereunder on the part of any party hereto if this Agreement
is so terminated, except by reason of a material breach of any covenant
contained in this Agreement.

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<PAGE> 49
V. SURVIVAL AND INDEMNIFICATION

5.1. Survival; Definitions. (a) Each of the representations
and warranties contained in Article II, will survive the Closing and remain in
full force and effect for the term of any or all of the Contracts, as amended
and restated as contemplated by this Agreement. Any claim for indemnification
with respect to any of such matters which is not asserted by notice given as
herein provided within such specified period of survival may not be pursued.
Any claim for an Indemnifiable Loss asserted within such period of survival as
herein provided will be timely made for purposes hereof.

(b) Unless a specified period is set forth in this
Agreement (in which event such specified period will control), the covenants
contained herein will survive the Closing and remain in effect indefinitely.

(c) In addition to any and all other remedies of the
Partnership and Crossroads, the Partnership may offset, set-off or deduct any
Indemnifiable Losses it may have against any and all amounts of stock to be
transferred, delivered or assigned to the Companies under or pursuant to the
Exchange Agreement.

5.2. Indemnification. (a) Subject to Section 5.1, Companies
and McNeill will indemnify, defend and hold harmless Crossroads, the
Partnership and their Affiliates and their

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<PAGE> 50
respective directors, officers, partners, employees, agents and representatives
from and against any and all Indemnifiable Losses relating to, resulting from
or arising out of:

(i) Any breach by Companies or McNeill of any of the
representations or warranties of Companies or McNeill contained in
this Agreement;

(ii) Any breach by Companies or McNeill of any covenant of
Companies or McNeill contained in this Agreement;

(iii) Any Third Party Claim related to or arising out of any
matter described in Section 5.2(a)(i) or (ii) hereof or any Excluded
Liability;

(iv) Any and all Environmental Liabilities related to,
arising out of or resulting from the Hotels or the operations thereof,
any franchise agreement, any building code or life/safety code
violations, or any requirement or award relating to course of
employment, working conditions, wages and/or compensation or benefits
of employees or former employees at the Hotels; and/or

(v) Any and all violations of the ADA or WARN.

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<PAGE> 51
(b) Subject to Sections 5.1, Crossroads and the
Partnership will indemnify, defend and hold harmless Companies and McNeill and
their respective Affiliates, directors, officers, partners, employees, agents
and representatives from and against any and all Indemnifiable Losses relating
to, resulting from or arising out of any of the following:

(i) Any breach by Crossroads and the Partnership of any
of their representations or warranties contained in this Agreement;

(ii) Any breach by Crossroads and the Partnership of any
covenant of Crossroads and the Partnership contained in this
Agreement; and/or

(iii) Any Third Party Claim related to or arising out of any
matter described in Section 5.2(b)(i) or (ii).

5.3. Defense of Claims. (a) If any Indemnitee receives
notice of the assertion or commencement of any Third Party Claim against such
Indemnitee with respect to which an Indemnifying Party is obligated to provide
indemnification under this Agreement, the Indemnitee will give such
Indemnifying Party reasonably prompt written notice thereof, but in any event
not later than 15 calendar days after receipt of such notice of such Third
Party Claim. Such notice will describe the Third Party Claim in reasonable
detail, will include copies of all material

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<PAGE> 52
written evidence thereof and will indicate the estimated amount, if reasonably
practicable, of the Indemnifiable Loss that has been or may be sustained by the
Indemnitee. The Indemnifying Party will have the right to participate in, or,
by giving written notice to the Indemnitee, to assume, the defense of any Third
Party Claim at such Indemnifying Party's own expense and by such Indemnifying
Party's own counsel (reasonably satisfactory to the Indemnitee), and the
Indemnitee will cooperate in good faith in such defense.

(b) If, within 10 calendar days after giving notice of a
Third Party Claim to an Indemnifying Party pursuant to Section 5.3(a), an
Indemnitee receives written notice from the Indemnifying Party that the
Indemnifying Party has elected to assume the defense of such Third Party Claim
as provided in the last sentence of Section 5.3(a), the Indemnifying Party will
not be liable for any legal expenses subsequently incurred by the Indemnitee in
connection with the defense thereof; provided, however, that if the
Indemnifying Party fails to take reasonable steps necessary to defend
diligently such Third Party Claim within 10 calendar days after receiving
written notice from the Indemnitee that the Indemnitee believes the
Indemnifying Party has failed to take such steps or if the Indemnifying Party
has not undertaken fully to indemnify the Indemnitee in respect of all
Indemnifiable Losses relating to the matter, the Indemnitee may assume its own
defense, and the Indemnifying Party will be liable for all reasonable costs or
expenses paid or incurred in

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<PAGE> 53
connection therewith. Without the prior written consent of the Indemnitee, the
Indemnifying Party will not enter into any settlement of any Third Party Claim
which would lead to liability or create any financial or other obligation on
the part of the Indemnitee for which the Indemnitee is not entitled to
indemnification hereunder. If a firm offer is made to settle a Third Party
Claim without leading to liability or the creation of a financial or other
obligation on the part of the Indemnitee for which the Indemnitee is not
entitled to indemnification hereunder and the Indemnifying Party desires to
accept and agree to such offer, the Indemnifying Party will give written notice
to the Indemnitee to that effect. If the Indemnitee fails to consent to such
firm offer within 10 calendar days after its receipt of such notice, the
Indemnitee may continue to contest or defend such Third Party Claim and, in
such event, the maximum liability of the Indemnifying Party as to such Third
Party Claim will not exceed the amount of such settlement offer, plus costs and
expenses paid or incurred by the Indemnitee through the end of such 10 calendar
day period.

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<PAGE> 54
to such Direct Claim. If the Indemnifying Party does not so respond within
such 15 calendar day period, the Indemnifying Party will be deemed to have
rejected such claim, in which event the Indemnitee will be free to pursue such
remedies as may be available to the Indemnitee on the terms and subject to the
provisions of this Article V.

(d) A failure to give timely notice or to include any
specified information in any notice as provided in Sections 5.2(a) or 5.2(b)
will not affect the rights or obligations of any party hereunder except and
only to the extent that such failure is actually prejudicial to the rights or
obligations of the Indemnifying Party.

VI. MISCELLANEOUS PROVISIONS

6.1. Notices. All notices and other communications required
or permitted hereunder will be in writing and, unless otherwise provided in
this Agreement, will be deemed to have been duly given when delivered in person
or when dispatched by telegram or electronic facsimile transfer (confirmed in
writing by mail simultaneously dispatched) or one business day after having
been dispatched by a nationally recognized overnight courier service to the
appropriate party at the address specified below:

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<PAGE> 55
(a) If to Crossroads and the Partnership, to:

Interstate Hotels Corporation
Foster Plaza Ten, 680 Andersen Drive
Pittsburgh, PA 15220-8126
Facsimile No.: 412-937-3265
Attention: Kevin P. Kilkeary

With a copy to:

Interstate Hotels Corporation
Foster Plaza Ten, 680 Andersen Drive
Pittsburgh, Pennsylvania 15220-8126
Facsimile No.: (412)937-3116
Attention: Marvin I. Droz, Esquire, Vice President
and General Counsel

(b) If to Companies or McNeill, to:

4735 Spottswood #102
Memphis, TN 38117
Facsimile No.: 901-761-3945
Attention: Mr. Phillip H. McNeill, Sr.

With a copy to:

Bogatin Law Firm
860 Ridge Lake Blvd., Suite 360
Memphis, TN 38120
Facsimile No.: 901-767-1234
Attention: G. Patrick Arnoult, Esq.

or to such other address or addresses as any such party may from time to time
designate as to itself by like notice.

6.2. Successors and Assigns. This Agreement will be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, but will not be assignable or delegable by
any party without the prior written consent of the other party.

6.3. Waiver. Crossroads and the Partnership on the one hand,
and McNeill and Companies on the other hand, by written

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<PAGE> 56
notice to the other may (a) extend the time for performance of any of the
obligations or other actions of the other under this Agreement, (b) waive any
inaccuracies in the representations or warranties of the other contained in
this Agreement, (c) waive compliance with any of the conditions or covenants of
the other contained in this Agreement, or (d) waive or modify performance of
any of the obligations of the other under this Agreement; provided, however,
that no such party may, without the prior written consent of such other party,
make or grant such extension of time, waiver of inaccuracies or compliance or
waiver or modification of performance with respect to its (or any of its
Affiliates') representations, warranties, conditions or covenants hereunder.
Except as provided in the immediately preceding sentence, no action taken
pursuant to this Agreement will be deemed to constitute a waiver of compliance
with any representations, warranties or covenants contained in this Agreement
and will not operate or be construed as a waiver of any subsequent breach,
whether of a similar or dissimilar nature.

6.4. Entire Agreement. This Agreement (including the
Schedules and Exhibits hereto) and the Master Agreement (including the
Schedules and Exhibits thereto) supersede any other agreement, whether written
or oral, that may have been made or entered into by any party (or by any
director, officer or representative thereof) including that certain letter
agreement dated September 18, 1996 relating to the matters contemplated hereby.
This Agreement (together with the Schedules and Exhibits

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<PAGE> 57
hereto) and the Master Agreement (including the Schedules and Exhibits thereto)
constitute the entire agreement by and among the parties hereto and thereto and
there are no agreements or commitments by or among such parties or their
Affiliates except as expressly set forth herein and therein.

6.5. Amendments, Supplement. This Agreement may be amended
or supplemented at any time by additional written agreements signed by all of
the parties hereto.

6.6. Rights of the Parties. Except as provided in Article V,
nothing expressed or implied in this Agreement is intended or will be construed
to confer upon or give any person or entity other than the parties hereto and
their respective Affiliates any rights or remedies under or by reason of this
Agreement or any transaction contemplated hereby.

6.7. Further Assurances. From time to time, as and when
requested by any party hereto, the other parties will execute and deliver, or
cause to be executed and delivered, all such documents and instruments as may
be reasonably necessary to consummate the transactions contemplated by this
Agreement.

6.8. Transfers. Crossroads, McNeill and Companies will
cooperate and take such action as may be reasonably requested by the other in
order to effect an orderly contribution

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<PAGE> 58
of the Companies' Assets with a minimum of disruption to the operations and
employees of the Hotels.

6.9. Applicable Law. This Agreement and the legal relations
among the parties hereto will be governed by and construed in accordance with
the substantive Laws of the Commonwealth of Pennsylvania, without giving effect
to the principles of conflict of laws thereof. Any action arising out of this
Agreement may be brought in the state or federal courts of Pennsylvania. The
parties hereby irrevocably submit to the exclusive jurisdiction of the
appropriate state or federal court in Pennsylvania for the purpose of any suit,
action, proceeding or judgement relating to or arising out of this Agreement.
Each of Crossroads, the Partnership, McNeill and Companies further agrees that
service of any process, summons, notice or document by U.S. registered mail to
such party's respective address set forth above shall be effective service of
process for any action, suit or proceeding in Pennsylvania with respect to any
matters to which it has submitted to jurisdiction as set forth above in the
immediately preceding sentence. Each of Crossroads, the Partnership, McNeill
and Companies irrevocably and unconditionally waives any objection to the
laying of venue of any action, suit or proceeding arising out of this Agreement
or the transactions contemplated hereby in (a) the Supreme Court of the
Commonwealth of Pennsylvania, or (b) the United States District Court for the
Western District of Pennsylvania, and hereby further irrevocably and
unconditionally waives and agrees

- 54 -
<PAGE> 59
not to plead or claim in any such court that any such action, suit or
proceeding brought in any such court has been brought in an inconvenient forum.
In addition, the parties hereby unconditionally waive trial by jury in any
action or proceeding arising out of this Agreement or the transactions
contemplated hereby.

6.10. Execution in Counterparts. This Agreement may be
executed in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
agreement.

6.11. Titles and Headings. Titles and headings to Sections
herein are inserted for convenience of reference only, and are not intended to
be a part of or to affect the meaning or interpretation of this Agreement.

6.12. Certain Interpretive Matters and Definitions. (a)
Unless the context otherwise requires, (i) all references to Sections,
Articles, Schedules or Exhibits are to Sections, Articles, Schedules or
Exhibits of or to this Agreement, (ii) each term defined in this Agreement has
the meaning assigned to it, (iii) each accounting term not otherwise defined in
this Agreement has the meaning assigned to it in accordance with GAAP, (iv)
"or" is disjunctive but not necessarily exclusive and (v) words in the singular
include the plural and vice versa. All

- 55 -
<PAGE> 60
references to "$" or dollar amounts will be to lawful currency of the United
States of America.

(b) No provision of this Agreement will be
interpreted in favor of, or against, any of the parties hereto by reason of the
extent to which any such party or its counsel participated in the drafting
thereof or by reason of the extent to which any such provision is inconsistent
with any prior draft hereof or thereof.

6.13. Survival. To the extent that any obligations of
Crossroads, the Partnership, Companies or McNeill under this Agreement requires
action or involves liability or obligation after the Closing, such obligation
shall survive the Closing.

6.14. Joint and Several. The obligations of McNeill and the
Companies hereunder shall be joint and several in all respects.

6.15. Invalid Provisions. If any provision hereof is held to
be illegal, invalid or unenforceable under present or future laws, such
provision shall be fully severable; this Agreement shall be construed and
enforced as if such illegal, invalid or unenforceable provision has never
comprised a part hereof; and the remaining provisions hereof shall remain in
full force and effect and shall not be affected by the illegal, invalid or
unenforceable provision or by its severance herefrom.

- 56 -
<PAGE> 61
In lieu of such illegal, invalid or unenforceable provision there shall be
added automatically as a part hereof a provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible and be legal,
valid and enforceable.

6.16. Time of the Essence. Time is of the essence with
respect to each provision of this Agreement.

6.17. Risk of Loss/Insurance/Condemnation. (a) Risk of loss
of the Companies' Assets will remain upon Companies until Closing. Companies
shall maintain in effect until the date of Closing insurance policies with
respect to the Companies' Assets in an amount and type consistent with
Companies' past practice. Companies shall notify Crossroads in writing
promptly (and in no event later than five (5) days after the occurrence) of any
casualty to the Companies' Assets, or any portion thereof. Crossroads will
then, at Crossroads' sole option and discretion, either: (i) terminate this
Agreement by giving notice to Companies within thirty (30) days after
Companies' notifying Crossroads in writing of such casualty; or (ii) proceed
with this Agreement, in which case any and all insurance proceeds not
previously applied shall be assigned to the Partnership and any uninsured
damage or deductible shall be paid by the Companies to the Partnership at
Closing and the Companies shall fully enforce their rights under the Leases
with respect to such casualty which rights will be assigned to Partnership at
Closing; or (iii) proceed with this Agreement, but exclude from the

- 57 -
<PAGE> 62
Companies' Assets the Hotel or Hotels which suffered the casualty and reduce
the value associated with the Companies' Assets by the mutually agreed upon
allocated value of such excluded Hotel or Hotels.

(b) In the event that, during the period between the date
hereof and the Closing, any part of the Hotels is taken in condemnation
proceedings or by exercise of any right of eminent domain or by agreement,
Crossroads and Partnership shall have the right, at their option, either (i) to
terminate this Agreement by notice to Companies without any further obligation
or liability to Companies hereunder; or (ii) to proceed with the transactions
set forth herein with respect to those Hotels (or portions thereof) remaining
following such taking and the Companies shall fully enforce their rights under
the Leases with respect to such condemnation which rights will be assigned to
Partnership at Closing; or (iii) proceed with this Agreement, but exclude from
the Companies' Assets the Hotel or Hotels which were condemned and reduce the
value associated with the Companies' Assets by the mutually agreed upon
allocated value of such excluded Hotel or Hotels. If Crossroads and
Partnership shall proceed with the transactions in accordance with this Section
6.17(b) following such taking, any and all condemnation awards shall be
assigned to Partnership.

- 58 -
<PAGE> 63
VII. DEFINITIONS

Unless otherwise expressly defined herein, the following terms
shall have the following meanings:

"Accounts Payable" shall mean the trade accounts payable of the
Companies related to the operations of the Hotels which existed as of the Cutoff
Time and which were incurred in the ordinary course of business and in arm's
length commercial transactions.

"Affiliate" shall have the meaning given to such term in Rule
1-02 of Regulation S-X under the Securities Act of 1933.

"Assumed Liabilities" shall mean only the liabilities and
obligations of the Companies arising after the Closing Date under the Contracts
(other than liabilities or obligations to the extent related to or attributable
to any act, omission or failure by Companies or the prior lessee or manager to
comply with the terms thereof) and the liability to satisfy the Accounts
Payable.

"Booking" shall mean a contract or reservation for the use of
guest rooms, banquet facilities or meeting rooms in a Hotel.

- 59 -
<PAGE> 64
the future could pose a hazard or threat to human health or the environment,
and the past, current and future effects of such intentional or unintentional
emission, discharge, release or threatened emission, discharge or release of
Hazardous Substances to, on, onto or into the environment.

"Contracts" shall have the meaning ascribed to such term in
Section 1.3(b).

"Cutoff Time" shall mean 12:01 a.m. on the Closing Date.

"Environmental Laws" shall mean all Laws (including, without
limitation, Permits, directives, guidelines, standards or the equivalent issued
by any Governmental Authority and relating to or addressing Contamination,
protection of the environment and/or occupation or human health and safety.

"Environmental Liability" shall mean any and all liabilities,
losses, claims, penalties, damages, expenses or costs (including, without
limitation, reasonable attorneys, consultants and engineers fees and expenses)
arising from or relating to compliance with any Environmental Law or arising
under any theory of Law or in equity relating to or arising from any
Contamination or the use, treatment, storage, disposal, transport, generation
or handling of any Hazardous Substances.

- 60 -
<PAGE> 65
"Franchise Agreements" shall mean those certain franchise
agreements designated as such on Schedule 1.3(b) hereof.

"GAAP" Shall mean United States generally accepted accounting
principles.

"Governmental Authority" shall mean any nation, or any
political subdivision thereof, or any agency, court or body of any such
government exercising executive, legislative, judicial, regulatory or
administrative functions

"Guest Ledger Receivables" shall mean amounts, including,
without limitation, room charges, accrued to the accounts of guests occupying
rooms in the Hotels as of the Cutoff Time.

"Hazardous Substances" shall mean any substance or material
that, whether by its nature or use, could be considered toxic or hazardous or
the exposure to which could pose a hazard or threat to human health or the
environment, or which is or contains petroleum, gasoline, diesel fuel or
another petroleum hydrocarbon product or friable asbestos or asbestos
containing materials or PCBs.

"Hotel Leases" shall have the meaning ascribed hereto in
Section 1.3(b).

- 61 -
<PAGE> 66
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as the same may be amended from time to time.

"Indemnifiable Losses" shall mean any and all claims, demands
or suits (by any person or entity, including without limitation any
Governmental Authority), losses (including, direct, indirect, consequential or
actual), liabilities, damages, costs and expenses, including without limitation
the costs and expenses of any and all actions, suits, proceedings, demands,
assessments, judgments, settlements and compromises relating thereto and
reasonable attorneys', accountants', expert witness' or consultants' fees and
expenses in connection therewith.

"Indemnifying Party" shall mean any person or entity required
to provide indemnification under this Agreement.

"Indemnitee" shall mean any person or entity entitled to
indemnification under this Agreement.

"Indemnity Payment" shall mean any amount of Indemnifiable
Losses required to be paid pursuant to this Agreement.

"Laws" shall mean any law, decree, rule, order, regulation or
other governmental requirement of any governmental department, commission,
board, agency or instrumentality,

- 62 -
<PAGE> 67
domestic or foreign, having jurisdiction over it or its assets or business or
operations.

"Liens" shall mean any mortgages, liens, security interests,
leases, pledges, encumbrances, equities, claims, charges, options,
restrictions, rights of first refusal, title retention agreements or other
exceptions to title.

"Master Agreement" shall have the meaning ascribed to such term in Section 4.1.

"Permits" shall mean any and all Licenses, franchises,
approvals, permits and other governmental authorizations.

"Subsidiary" shall have the meaning ascribed to such term in
Rule 1-02 of Regulation S-X under the Securities Act of 1933.

"Third Party Claim" shall mean any claim, action or proceeding
made or brought by any person or entity who or which is not a party to this
Agreement or an Affiliate of a party to this Agreement.

- 63 -
<PAGE> 68
IN WITNESS WHEREOF, the parties have executed and delivered
this Agreement as of the day and year first above written.

CROSSROADS/MEMPHIS COMPANY, L.L.C.

By: /s/ Kevin P. Kilkeary
---------------------------------
Title: President

CROSSROADS/MEMPHIS PARTNERSHIP, L.P.

By: CROSSROADS/MEMPHIS COMPANY,
L.L.C., its general partner

By: /s/ Kevin P. Kilkeary
---------------------------------
Title: President

TRUST LEASING, INC.

By: /s/ Phillip McNeill, Jr.
---------------------------------
Title:
------------------------------

TRUST MANAGEMENT INC.

By: /s/ David Levine
---------------------------------
Title: President

/s/ Phillip McNeill
------------------------------------
Phillip H. McNeill, Sr.

<PAGE> 1
Exhibit 10.18(a)(2)

FIRST AMENDMENT TO CONTRIBUTION AGREEMENT

THIS FIRST AMENDMENT TO CONTRIBUTION AGREEMENT ("Amendment") is made as of
the 4th day of November, 1996 by and among CROSSROADS/MEMPHIS COMPANY, L.L.C.,
a Delaware limited liability company ("Crossroads"), CROSSROADS/MEMPHIS
PARTNERSHIP, L.P., a Delaware limited partnership (the "Partnership"), TRUST
LEASING, INC., a Tennessee Corporation and TRUST MANAGEMENT INC., a Tennessee
Corporation (collectively, the "Companies") and PHILLIP H. MCNEILL, SR., an
individual resident of the State of Tennessee ("McNeill").

WITNESSETH:

WHEREAS, Crossroads, the Partnership, the Companies and McNeill entered into
that certain Contribution Agreement, dated October 4, 1996 ("Contribution
Agreement"); and

WHEREAS, the parties wish to amend the Contribution Agreement in the manner
set forth in this Amendment;

NOW, THEREFORE, for valuable consideration, receipt of which is hereby
acknowledged, and intending to be legally bound, the parties hereto agree as
follows:

1. DEFINITIONS. Unless otherwise defined herein, capitalized terms used in
this Amendment have the definitions ascribed to them in the Contribution
Agreement.

2. EXCHANGE AGREEMENT. Exhibit A to the Exchange Agreement is hereby
deleted in its entirety and is replaced with Exhibit A to this Amendment.

3. PLEDGE/ESCROW AGREEMENT. At the Closing and as security for payment
of any claims for Indemnifiable Losses made by the Partnership, the Companies
shall pledge to the Partnership a portion of their interest in the Partnership
with a value equal to at least Five Hundred Thousand Dollars ($500,000)
("Pledged Interest"), pursuant to the terms of a Pledge Agreement, as agreed
prior to the Closing to by the parties ("Pledge Agreement"). In the event, on
or before the eighteen month anniversary of the Closing, the Companies desire
to exchange the Pledged Interest as provided for in the Partnership Agreement
or convert into cash the property received upon such exchange, then the
Companies shall deposit the property received in exchange for such Pledged
Interest into escrow ("Escrow Deposit") pursuant to the terms and conditions of
an Escrow Agreement, substantially in the form of Exhibit B, attached hereto
("Escrow Agreement") which agreement shall be executed and delivered by the
parties thereto.

<PAGE> 2
4. REPRESENTATIONS AND WARRANTIES/DELIVERIES. (a) The following is
hereby added to the end of Section 2.1.4 of the Contribution Agreement: " and
the owner of the Hotels is not in material violation of any Laws in connection
with or arising out of the ownership of the Hotels."

(b) The following is hereby added after the phrase "rights of way" in the
third sentence of Section 2.1.10 of the Contribution Agreement: "Liens,". The
following is hereby added to the end of Section 2.1.10 of the Contribution
Agreement: "The owner of the Hotels has good and marketable title to the
Hotels in fee simple subject only to Liens of record."

(c) The following new Section 4.2.5 (g) is hereby added to the Contribution
Agreement: "(g) The Pledge Agreement, as executed and delivered by all of the
parties thereto, shall have been delivered to Partnership."

5. EFFECT OF AMENDMENT. Except as expressly modified hereunder, the
Contribution Agreement shall remain in full force and effect.

6. HEADINGS. The headings of the paragraphs herein are included solely for
convenience of reference and shall not control the meaning of the
interpretation of any provision of this Amendment.

7. MERGER. The Contribution Agreement, as amended by this Amendment,
contains the entire understanding between the parties hereto and supersedes any
prior or contemporaneous contracts, agreement, understandings and/or
negotiations, whether oral or written.

<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the day and the year first above-written.

CROSSROADS/MEMPHIS COMPANY, L.L.C.

By: /s/ KEVIN P. KILKEARY
---------------------------------
Title: President

CROSSROADS/MEMPHIS PARTNERSHIP, L.P.

By: CROSSROADS/MEMPHIS COMPANY,
L.L.C., its general partner

By: /s/ KEVIN P. KILKEARY
---------------------------------
Title:
------------------------------

TRUST LEASING, INC.

By: /s/ PHILLIP MCNEILL, JR.
---------------------------------
Title:
------------------------------

TRUST MANAGEMENT INC.

By: /s/ DAVID LEVINE
---------------------------------
Title: President

/s/ PHILLIP MCNEILL
------------------------------------
Phillip H. McNeill, Sr.

<PAGE> 4
EXHIBIT A

Revised Registration Rights and
Shareholders Agreement

<PAGE> 1
Exhibit 10.18(a)(3)

SECOND AMENDMENT TO CONTRIBUTION AGREEMENT

THIS SECOND AMENDMENT TO CONTRIBUTION AGREEMENT ("Amendment") is made as of
the 15th day of November, 1996 by and among CROSSROADS/MEMPHIS COMPANY, L.L.C.,
a Delaware limited liability company ("Crossroads"), CROSSROADS/MEMPHIS
PARTNERSHIP, L.P., a Delaware limited partnership (the "Partnership"), TRUST
LEASING, INC., a Tennessee Corporation and TRUST MANAGEMENT INC., a Tennessee
Corporation (collectively, the "Companies") and PHILLIP H. MCNEILL, SR., an
individual resident of the State of Tennessee ("McNeill").

WITNESSETH:

WHEREAS, Crossroads, the Partnership, the Companies and McNeill entered into
that certain Contribution Agreement, dated October 4, 1996, as amended by that
certain First Amendment to Contribution Agreement dated as of November 4, 1996
("Contribution Agreement"); and

WHEREAS, the parties wish to amend the Contribution Agreement in the manner
set forth in this Amendment;

NOW, THEREFORE, for valuable consideration, receipt of which is hereby
acknowledged, and intending to be legally bound, the parties hereto agree as
follows:

1. DEFINITIONS. Unless otherwise defined herein, capitalized terms used in
this Amendment have the definitions ascribed to them in the Contribution
Agreement.

2. FEES. Section 1.6(c) of the Contribution Agreement is hereby deleted in
its entirety and replaced with the following:

"(c) The Companies will pay any out-of-pocket expenses incurred to obtain a
transfer or assignment of any franchises, licenses or permits necessitated
by the transactions contemplated by this Agreement, the Partnership
Agreement or the Exchange Agreement, whether payable before or after the
Closing; provided, however, that upon the request of the Companies, the
Partnership will reimburse the Companies for fifty percent (50%) of such
fees up to a maximum reimbursement of Five Hundred Thousand Dollars
($500,000)."

3. MANAGEMENT AGREEMENT. The following is hereby added to the end of
Section 4.2.5 (d) of the Contribution Agreement:

<PAGE> 2
"In the event the Companies are unable to obtain, prior to Closing, the
consent of Jackson Inn, Ltd., ("Owner") to the assignment of that certain
Hotel Management Agreement dated as of December 15, 1994 by and between
Trust Management Inc. (formerly known as McNeill Hospitality Corporation)
and Owner ("Jackson Management Agreement"), the Companies shall use their
best efforts to obtain such consent after the Closing. If such consent is
not obtained and the Jackson Management Agreement is not properly assigned
to the Partnership within six (6) months of the Closing, the Companies shall
pay to Partnership on the six (6) month anniversary of the Closing the
present value of the management fees to be paid under the Jackson Management
Agreement for the original term of such agreement, in immediately available
funds."

4. COMPANIES' ASSETS. (a) The following are hereby added to Schedule
1.3(b) and will be included as Companies' Assets for purposes of the
Contribution Agreement and the schedules and exhibits thereto: (i) All of the
issued and outstanding shares of capital stock of Equity Bluefield, Inc., a
West Virginia corporation and (ii) a fifty percent (50%) interest (including in
the profits, losses and capital) in the State College BBQ/Concord Joint
Venture.

(b) The following is hereby added as a lease agreement for a hotel located
in Arizona in Section A of Schedule 1.3(b) to the Contribution Agreement:
Homewood Suites, Camelback, Arizona.

(c) The following is hereby added as an agreement listed on Schedule 1.3(b)
to the Contribution Agreement: Joint Venture Agreement dated September 5, 1992
by and between State College BBQ Limited Partnership and Trust Leasing, Inc.,
as amended.

5. REPRESENTATIONS AND WARRANTIES/DELIVERIES. (a) The following is
hereby added to the end of Section 2.1.1 of the Contribution Agreement:

"(d) Equity Bluefield, Inc., a West Virginia corporation ("Bluefield") is a
corporation duly organized, validly existing and in good standing under the
laws of the State of West Virginia and has the requisite corporate power and
authority to own, lease or otherwise hold the assets owned, leased or
otherwise held by it and to carry on its business as presently conducted by
it. State College BBQ/Concord Joint Venture ("Joint Venture") is a joint
venture duly organized and validly existing and has the requisite power and
authority to own, lease or otherwise hold the assets owned, leased or
otherwise held by it and to carry on its business as presently conducted by
it.

<PAGE> 3
"(e) Trust Leasing, Inc. is the only shareholder of Bluefield. Trust
Leasing, Inc., and State College BBQ Limited Partnership are the only joint
venturers in the Joint Venture and each owns a fifty percent (50%) interest
in the profits, losses and capital of the Joint Venture. Neither Bluefield
nor the Joint Venture has any employees. Neither Bluefield nor Joint
Venture is a party to, nor to the knowledge of McNeill or Companies, is
threatened to be made a party to, any lawsuit, claim, administrative or
other proceeding."

(b) The following new Section 4.2.5(h) is hereby added to the Contribution
Agreement:

"(h) The following shall have been delivered to the Partnership:

(i) Original stock certificates representing all of the issued and
outstanding shares of stock in Bluefield, duly endorsed or with duly
executed stock powers;

(ii) True, correct and complete copies of the organizational documents
for Bluefield, certified by the secretary of Trust Leasing, Inc.;

(iii) Certificate of the Secretary of the State of West Virginia to
the effect that Bluefield is validly existing and in good standing and
dated as of a date not more than ten (10) days prior to Closing;

(iv) A duly executed Assignment of Trust Leasing, Inc.'s interest in
the Joint Venture, together with the consent of the other joint venturer to
such assignment;

(v) True, correct and complete copies of the organizational documents
of the Joint Venture, certified by the Secretary of Trust Leasing, Inc.;
and

(vi) Any and all corporate and other books and records of Joint
Venture and Bluefield."

6. CLOSING DATE/CLOSING STATEMENT. (a) The date "November 1, 1996"
contained in Section 1.7 of the Contribution Agreement is hereby deleted and
replaced with "November 15, 1996."

(b) The phrase "no later than five (5) days prior to" is hereby deleted
from the third sentence of Section 1.8(c)(i) of the Contribution Agreement and
is hereby replaced with the following phrase: "within a reasonable time after".

<PAGE> 4
7. EFFECT OF AMENDMENT. Except as expressly modified hereunder, the
Contribution Agreement shall remain in full force and effect.

8. HEADINGS. The headings of the paragraphs herein are included solely for
convenience of reference and shall not control the meaning of the
interpretation of any provision of this Amendment.

9. MERGER. The Contribution Agreement, as amended by this Amendment,
contains the entire understanding between the parties hereto and supersedes any
prior or contemporaneous contracts, agreement, understandings and/or
negotiations, whether oral or written.

<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the day and the year first above-written.

CROSSROADS/MEMPHIS COMPANY, L.L.C.

By: /s/ KEVIN P. KILKEARY
---------------------------------
Title: President

CROSSROADS/MEMPHIS PARTNERSHIP, L.P.

By: CROSSROADS/MEMPHIS COMPANY,
L.L.C., its general partner

By: /s/ KEVIN P. KILKEARY
---------------------------------
Title: President

TRUST LEASING, INC.

By: /s/ PHILLIP MCNEILL, JR.
---------------------------------
Title:
------------------------------

TRUST MANAGEMENT INC.

By: /s/ DAVID LEVINE
---------------------------------
Title: President

/s/ PHILLIP MCNEILL
------------------------------------
Phillip H. McNeill, Sr.

<PAGE> 1
Exhibit 10.18(b)(1)

MASTER AGREEMENT

BY AND AMONG

EQUITY INNS PARTNERSHIP, L.P.,

INTERSTATE HOTELS CORPORATION,

EQUITY INNS, INC.,

CROSSROADS/MEMPHIS PARTNERSHIP, L.P.

and

CROSSROADS FUTURE COMPANY, L.L.C.

dated as of

NOVEMBER 4, 1996

<PAGE> 2
TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
I. THE TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

1.1 Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

1.2 Amendment and Assignment of Existing Leases . . . . . . . . . . . . . . . . . . . . . . . . . 2

1.3 REIT Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

1.4 Financial Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

1.5 Right of First Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

1.6 Purchase Option in Favor of EIP for IHC Hotels . . . . . . . . . . . . . . . . . . . . . . . . 13

1.7 Right of First Offer in Favor of EIP for IHC Hotels; Future Acquisition Opportunities . . . . 16

1.8 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

1.9 Expenses of Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

1.10 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

1.11 Non-Public Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

II. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

2.1 Representations and Warranties of EIP and ENNS . . . . . . . . . . . . . . . . . . . . . . . . 21

2.1.1 Organizational Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

2.1.2 Authorization and Effect of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 23

2.1.3 No Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

2.1.5 Litigation; Decrees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

2.1.6 Existing Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

2.2 Representations and Warranties of IHC, New Lessee and Partnership . . . . . . . . . . . . . . 25

2.2.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

2.2.2 Authorization and Effect of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 26

2.2.3 No Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

2.2.4 No Brokerage or Finder's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

2.2.5 Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

2.2.6 IHC Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

2.2.7 Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

2.2.8 Litigation; Decrees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

III. COVENANTS PENDING CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

3.1 Investigation by IHC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

3.2 No Announcement/Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

3.3 Regulatory Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

3.4 Operation of the Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

3.5 Satisfaction of Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

3.6 No Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

IV. THE CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

4.1 Conditions Precedent to Obligations of Parties . . . . . . . . . . . . . . . . . . . . . . . . 31

4.2 Additional Conditions Precedent to Obligations of the Partnership, New Lessee and IHC . . . . 32

4.2.1 No Material Misrepresentation or Breach . . . . . . . . . . . . . . . . . . . . . . . . . 33

4.2.2 Closing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

4.3 Additional Conditions Precedent to Obligations of EIP and ENNS . . . . . . . . . . . . . . . . 34
</TABLE>

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<PAGE> 3
TABLE OF CONTENTS
(cont'd)

<TABLE>
<CAPTION>
Page
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<S> <C>
4.3.1 No Material Misrepresentation or Breach . . . . . . . . . . . . . . . . . . . . . . . . . 35

4.3.2 Closing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

4.3.3 Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

4.3.4 Promus Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

4.3.5 Subordination Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

V. SURVIVAL AND INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

5.1 Survival; Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

5.2 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

5.3 Defense of Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

VI. MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

6.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

6.2 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

6.3 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

6.4 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

6.5 Amendments, Supplement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

6.6 Rights of the Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

6.7 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

6.8 Time of Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

6.9 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

6.10 Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

6.11 Titles and Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

6.12 Certain Interpretive Matters and Definitions . . . . . . . . . . . . . . . . . . . . . . . . 48

6.13 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

6.14 Invalid Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

6.15 Securitization Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

VII. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

EXHIBITS
- --------

Exhibit A -- Consolidated Lease Amendment
Exhibit B -- Consent to Assignment
Exhibit C -- Purchase and Sale Agreement
Exhibit D -- Matters to be Covered by Legal Opinion of Hunton &
Williams
Exhibit E -- Matters to be Covered by Legal Opinion of Jones,
Day, Reavis & Pogue
Exhibit F -- IHC Guarantees
Exhibit G -- Subordination Agreement
</TABLE>

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<PAGE> 4
TABLE OF CONTENTS
(cont'd)

SCHEDULES
Page
----
<S> <C> <C>
Schedule 1.4 -- Forms of Daily Operating and Financial
Reports for Leased Hotels
Schedule 1.6 -- IHC Development Hotels
Schedule 1.6a -- Hotel Brands
Schedule 2.1.3 -- EIP Approvals, Consents for Transfer
Schedule 2.2.3 -- Approvals, Consents for Transfer
Schedule 4.3.2 -- Foreign Qualifications for Partnership
Schedule VIIa -- Current Hotels
Schedule VIIb -- Existing Leases
</TABLE>

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<PAGE> 5
MASTER AGREEMENT

THIS MASTER AGREEMENT (the "Agreement") is made as of this 4th day of
November, 1996 by and among EQUITY INNS PARTNERSHIP, L.P., a Tennessee limited
partnership ("EIP"), INTERSTATE HOTELS CORPORATION, a Pennsylvania corporation
("IHC"), EQUITY INNS, INC., a Tennessee corporation ("ENNS"), CROSSROADS FUTURE
COMPANY, L.L.C., a Delaware limited liability company ("New Lessee") and
CROSSROADS/MEMPHIS PARTNERSHIP, L.P., a Delaware limited partnership (the
"Partnership").
WITNESSETH:

WHEREAS, EIP owns the Leased Hotels which have been leased to Trust Leasing,
Inc., a Tennessee corporation ("TLI"), pursuant to the Existing Leases;

WHEREAS, a wholly-owned subsidiary of ENNS serves as sole general partner of
EIP and an indirect wholly-owned subsidiary of IHC serves as sole general
partner of the Partnership;

WHEREAS, pursuant to the Contribution Agreement, TLI has agreed to
contribute and assign to the Partnership and the Partnership has agreed to
assume all of the Existing Leases with EIP affecting the Leased Hotels, as
amended by the Consolidated Lease Amendment, as described herein;

NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto, intending to be legally
bound, hereby agree as follows:

<PAGE> 6
I. THE TRANSACTIONS

1.1 Defined Terms. Certain capitalized terms used herein shall have the
meanings given to such terms in Article VII hereof.

1.2 Amendment and Assignment of Existing Leases. (a) At the Closing, EIP
and the Partnership will amend and restate each of the Existing Leases
effective as of the Closing Date pursuant to a Consolidated Lease Amendment
in the form attached hereto as Exhibit A ("Consolidated Lease Amendment").

(b) At or prior to the Closing Date, EIP and ENNS will consent to the
contribution and assignment of the Existing Leases to the Partnership, such
consent to be in the form attached hereto as Exhibit B.

1.3 REIT Status. (a) Each of IHC, New Lessee and the Partnership
acknowledges the restrictions under the Code and under the amended and restated
charter of ENNS relating to the ownership of equity securities of ENNS (which
may require ownership of ENNS equity securities by IHC, New Lessee, the
Partnership and certain of their Affiliates, including their officers and
directors, to be aggregated for purposes of the foregoing restrictions).

(b) For purposes of this Agreement, the following shall constitute the
"REIT Requirements":

(i) The average of the adjusted tax bases of EIP's personal property
that is leased to the Partnership or New Lessee under each Lease at the
beginning and end of a calendar year cannot exceed 15% of the average of the

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<PAGE> 7
aggregate adjusted tax bases of all of EIP's property that is leased to the
Partnership or New Lessee under such Lease at the beginning and end of such
calendar year.

(ii) The Partnership and New Lessee cannot sublet the property that is
leased to it by EIP, or enter into any similar arrangement, on any basis such
that the rental or other amounts paid by the sublessee thereunder would be
based, in whole or in part, on either (x) the net income or profits derived
by the business activities of the sublessee or (y) any other formula such
that any portion of the rent paid by the Partnership or New Lessee to EIP
would fail to quality as "rents from real property" within the meaning of
Section 856(d) of the Code.

(iii) The Partnership and New Lessee cannot sublease the property leased
to it by EIP to, or enter into any similar arrangement with, any person in
which ENNS owns, directly or indirectly, a 10% or more interest, within the
meaning of Section 845(d)(2)(B) of the Code.

(iv) ENNS cannot own, directly or indirectly, a 10% or more interest in
IHC, the Partnership or New Lessee, within the meaning of Section
856(d)(2)(B) of the Code.

(v) No person can own, directly or indirectly, capital stock of ENNS
that exceeds the "Limit" (as defined in ENNS' Charter, as amended and
restated).

(c) IHC, New Lessee and Partnership agree that during the period
beginning on the Closing and ending on the earlier to occur of (x) the date no
Lease remains in effect, and (y) ENNS

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<PAGE> 8
ceases to be qualified as a real estate investment trust under the Code (the
"Notice Period"), to notify ENNS, and to cause any of their Affiliates which
are direct or indirect wholly-owned Subsidiaries of IHC to notify ENNS, in
advance of any direct purchase by it of equity securities of ENNS, and to use
their reasonable efforts to permit the REIT Requirements to be satisfied,
including but not limited to, providing ENNS with information regarding the
ownership of IHC, the Partnership and New Lessee and their direct or indirect
wholly owned Subsidiaries, if and to the extent the satisfaction of the REIT
Requirements is with the reasonable control of IHC, New Lessee or Partnership,
all at the expense of ENNS. Upon request by ENNS made during the Notice Period
and at the expense of ENNS, IHC, New Lessee and the Partnership agree to
cooperate with ENNS and agree to take reasonable steps requested by ENNS
necessary to maintain the REIT Requirements. Notwithstanding the foregoing,
neither IHC nor the Partnership nor New Lessee shall be obligated to take any
action which could reasonably be expected to materially adversely affect IHC,
New Lessee or the Partnership. Notwithstanding anything to the contrary
contained in this Agreement, in no event shall IHC, New Lessee or the
Partnership be liable to ENNS or EIP for any consequential damages relating to,
resulting from or arising out of a breach or alleged breach of this
Section 1.3.

1.4 Financial Reports. (a) During the period beginning on the Closing and
ending on the date no Lease remains in effect, IHC, New Lessee and the
Partnership agree to provide

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<PAGE> 9
to ENNS the following financial reports and information within the specified
time periods at the Partnership's or New Lessee's expense (so as to permit ENNS
to file its required 1934 Act reports and file and have declared effective its
1933 Act registration statements):

(i) Not more than 30 days following the end of each of the first
three calendar quarters of each year, quarterly unaudited financial statements,
including a balance sheet, statement of operations, statement of shareholders'
equity, statement of cash flows, and related schedules for the Partnership and
New Lessee for the most recently ended calendar quarter, calendar year to date
and comparable prior year periods prepared in conformity with GAAP;

(ii) Not more than 60 days following the end of each calendar year,
audited annual financial statements and schedules for the Partnership and New
Lessee for the most recently ended calendar year prepared in accordance with
GAAP, audited by a national accounting firm;

(iii) During the time periods set forth in (i) and (ii) above, any
historical financial information necessary to re-state historical financial
information of the Partnership or New Lessee to conform to the presentation of
the Partnership's or New Lessee's audited and unaudited financial statements at
any future time; and

(iv) On a timely basis, at EIP's or ENNS' expense, any other
information with respect to the Partnership, New Lessee or the Leased Hotels
necessary to permit ENNS to file

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<PAGE> 10
on a timely basis its audited annual (calendar fiscal year) and unaudited
quarterly financial statements and schedules for EIP (but not separate
financial statements for the Leased Hotels) with the Securities and Exchange
Commission.

(b) If requested by ENNS, and at EIP's or ENNS' expense, IHC, New Lessee
and the Partnership will permit ENNS and EIP and their independent public
accountants, counsel, financial advisors, underwriters, underwriters' counsel,
rating agencies and lenders to continue to have access (during normal business
hours and upon three business days notice) to review (i) the financial records
of the Leased Hotels and perform generally accepted auditing procedures with
respect to the Partnership, New Lessee and the Leased Hotels and (ii) such
other records and documents with respect to each Leased Hotel as ENNS or EIP
may reasonably request.

(c) The Partnership and New Lessee shall use their reasonable best
efforts to cause the independent public accountants preparing audits of the
Partnership and New Lessee to provide ENNS and the Partnership with all
consents of such accountants required for ENNS' or EIP's filings with the SEC
under the 1933 Act and the 1934 Act or to have ENNS' or EIP's registration
statements declared effective by the SEC under the 1933 Act.

(d) IHC, the Partnership and New Lessee shall continue to provide EIP
and ENNS true and accurate daily operating and financial reports in the form
set forth on Schedule 1.4 with respect to each Leased Hotel.

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<PAGE> 11
1.5 Right of First Offer. Effective as of the Closing, EIP hereby grants
to New Lessee a right of first offer (the "Right of First Offer") to lease and
manage any hotel, motel, inn, resort or similar property which is acquired or
for which a purchase contract has been entered into or for which development
has commenced by EIP or any of its Affiliates during the five (5) year period
following the Closing (subject to Section 1.8 hereof), as follows:

(a) During the term of the Right of First Offer, with respect to each
hotel, motel, inn, resort or similar property proposed to be acquired by EIP or
an Affiliate (an "Acquisition Hotel") or developed by EIP or a third party and
acquired by EIP or an Affiliate (a "Development Hotel") (other than any hotel
proposed to be acquired from IHC or any of its Affiliates), EIP shall promptly
notify New Lessee of such proposed acquisition or development and submit the
following to New Lessee with such a notice ("Notice") (or if not then
available, as soon as EIP obtains the same): (i) such historical financial
(including gross operating profit and net operating income) and operating
information (including ADR, occupancy and REVPAR) with respect to the
Acquisition Hotel or projected financial and operating information (including
related assumptions) for the Development Hotel, if any, as is reasonably
available to EIP, (ii) any market study information obtained or developed by
EIP with respect to the Acquisition Hotel or Development Hotel, (iii) the
proposed base rent and percentage rent terms for the lease of the Acquisition
Hotel or Development

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<PAGE> 12
Hotel (the "Proposed Rent Terms"), (iv) notice of the right of New Lessee to
commence due diligence on such Acquisition Hotel or Development Hotel
simultaneously with EIP's performance of due diligence (provided that New
Lessee agrees, in an appropriate writing or writings, (A) to be bound by such
confidentiality agreements regarding such hotel to which EIP has agreed to be
bound, (B) to indemnify the owner of such hotel, ENNS, EIP, and such other
parties as appropriate, against damage to property or injuries to persons
occurring as the result of a negligent or willful act or omission of the New
Lessee's employees, agents, or consultants while conducting diligence
activities at such hotel), and (C) to agree to be bound by such other
agreements, conditions and limitations regarding such hotel as EIP is bound as
a condition of it conducting due diligence), and (v) copies of all
environmental, structural, engineering, title reports and commitments, surveys
and other reports and studies ("Studies") performed by, on behalf of or at the
request of EIP, and will use its reasonable efforts to obtain letters from any
third parties performing the Studies stating that New Lessee and its Affiliates
may rely upon the Studies as if New Lessee and/or its Affiliates had ordered
the Studies with any additional cost for such letters to be paid for by New
Lessee. In addition, New Lessee will provide to EIP copies of all of the
Studies performed by, on behalf of or at the request of New Lessee and will, at
EIP's request, use its reasonable efforts to obtain from any third parties
performing the Studies letters stating that EIP and its Affiliates may rely on
such Studies as if EIP and/or its

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<PAGE> 13
Affiliates had ordered the Studies with any additional cost for such letters to
be paid for by EIP. IHC and New Lessee agree to advise EIP and ENNS
immediately upon receipt of any Notice, if IHC, New Lessee or any Affiliate
thereof, is reviewing or pursuing the acquisition of the Acquisition Hotel or
Development Hotel which is the subject of the Notice on behalf of themselves or
any Affiliate. Notwithstanding the foregoing, neither EIP nor ENNS shall be
required to provide IHC or New Lessee any lease sensitivity analyses or similar
analytical information prepared by EIP or ENNS with respect to an Acquisition
Hotel or Development Hotel.

(b) New Lessee will perform its own due diligence, at its own expense,
with respect to any Acquisition Hotel or Development Hotel and EIP and ENNS
will make no representations as to the adequacy or accuracy of any information
provided to New Lessee as to any Acquisition Hotel or any Development Hotel;
provided, however, EIP will use its reasonable efforts to include in the
purchase agreement for any Acquisition Hotel or a Development Hotel developed
by someone other than EIP and ENNS an express acknowledgement by the seller of
such Acquisition Hotel or Development Hotel that New Lessee may rely upon all
representations and warranties contained in such purchase agreement as if New
Lessee was the purchaser under such purchase agreement.

(c) New Lessee and IHC (and their Affiliates and agents) shall maintain
in strictest confidence any confidential information received from EIP in
connection with a proposed

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<PAGE> 14
Acquisition Hotel or Development Hotel in accordance with any confidentiality
agreement to which EIP is a party for a period of one year from the date of
receipt of such information and will not use such information (x) other than to
evaluate New Lessee's proposed lease of the Acquisition Hotel or Development
Hotel and will not provide any such information to any other party, including
without limitation, any potential acquiror of the Acquisition Hotel or
Development Hotel, (y) unless required by law or necessary to comply with
federal, state or local regulatory requirements or (z) except as permitted by
clause (x) or (y), for a period of ninety (90) days following disclosure of
such information by EIP to New Lessee or thereafter during the one-year period
described above unless following such 90-day period EIP fails to diligently
pursue the consummation of the acquisition of the Acquisition Hotel or
Development Hotel. Nothing contained herein shall preclude IHC or New Lessee
or any of their Affiliates from acquiring any Acquisition Hotel or Development
Hotel for which EIP has notified New Lessee in writing that EIP is no longer
interested in acquiring.

(d) New Lessee shall have twenty-one (21) business days following receipt
of the Notice and all of the information set forth in Section 1.5(a)(i)-(iv),
including the Proposed Rent Terms for any single Acquisition Hotel or
Development Hotel or portfolio of two (2) to four (4) Acquisition Hotels or
Development Hotels proposed to be acquired in a single transaction, to (A)
agree in writing with EIP to the Proposed Rent Terms (in which event it shall
execute a Lease or Leases

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<PAGE> 15
incorporating such terms) or (B) propose to EIP alternative rental terms, reach
an agreement with EIP as to such terms and execute a Lease incorporating such
terms and (c) cause a Subordination Agreement and IHC Guarantees (but without
cross default provisions) to be executed and delivered to EIP with respect
thereto. New Lessee may exercise the Right of First Offer by (i) delivering
written notice of its election to do so to EIP and (ii) executing and
delivering a Lease with respect thereto and (iii) delivering to EIP a
Subordination Agreement and IHC Guarantees (but without cross default
provisions) within the twenty-one (21) business day period as described above.
If EIP and New Lessee fail to agree, after negotiating in good faith, to rent
terms and execute a Lease incorporating such rent terms within the twenty-one
(21) business day period described above, EIP may thereafter lease the
Acquisition Hotel or Development Hotel to an unrelated third party which is not
an Affiliate of ENNS or EIP (an "Alternative Lessee") on terms no more
favorable to the Alternative Lessee than the terms which New Lessee has
rejected, subject to the requirement to again present to New Lessee Proposed
Rent Terms as set forth in the last sentence of this Section. With respect to
EIP's proposed acquisition of five (5) or more Acquisition Hotels or
Development Hotels in a single transaction, New Lessee and EIP shall have
twenty-five (25) business days to (A) agree upon the Proposed Rent Terms, (B)
execute Leases for such hotels and (C) cause a Subordination Agreement and IHC
Guarantees (without cross default provisions) to be executed and delivered to
EIP with respect thereto. If EIP

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<PAGE> 16
does not enter into a lease with an Alternative Lessee for any such Acquisition
Hotel or Development Hotel within sixty (60) days after the date on which New
Lessee delivers notice to EIP of its lack of interest in leasing such
Acquisition Hotel or Development Hotel (or if it fails to deliver such notice,
within 60 days after expiration of the 21 business day or 25 business day
periods described above), EIP will be required to again present to New Lessee
Proposed Rent Terms for such Acquisition Hotel or Development Hotel and provide
New Lessee with the opportunity to update its due diligence review of such
hotel and Lessee shall again have the twenty one (21) business day or twenty
five (25) business day time periods described above to agree to such Proposed
Rent Terms and execute a Lease and deliver to EIP an executed Subordination
Agreement and IHC Guarantees (without cross default provisions) with respect
thereto before EIP may lease such Acquisition Hotel or Development Hotel to an
Alternative Lessee.

(e) The lease agreement for all Acquisition Hotels and Development Hotels
leased by New Lessee pursuant to this Section 1.5 shall be substantially in the
form of the Consolidated Lease Amendment, but shall not be cross-defaulted with
the Consolidated Lease Amendment.

(f) Notwithstanding the foregoing, the Right of First Offer will not
apply to: (i) EIP's acquisition of an Acquisition Hotel or Development Hotel
where (x) a seller/developer, as a condition of sale, requires that the
seller/developer, an affiliate or existing management become or

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<PAGE> 17
remain the lessee of the hotel or (y) an Acquisition Hotel is subject to a
hotel lease which cannot be terminated without the payment of liquidated
damages or the imposition of other financial penalties and the New Lessee does
not agree, in its sole discretion, to pay such damages, or (ii) any of the
hotels currently subject to the Promus Agreements.

1.6 Purchase Option in Favor of EIP for IHC Hotels.

(a) Effective as of the Closing, during the five (5) year period
following the Closing ("Development Option Period"), IHC hereby grants to EIP
an option ("Development Option") to purchase all budget, economy, upper economy
or midscale hotels, motels or inns of the brands listed on Schedule 1.6a
(excluding any developments subject to a joint venture or partnership agreement
with parties who are not Affiliates of IHC) which IHC plans to develop and
which IHC notifies EIP prior to the commencement of construction thereof of its
intention to sell after completion of construction (the "IHC Development
Hotels") for a purchase price equal to one hundred five percent (105%) of IHC's
budgeted Development Costs (including appropriate contingency and development
fees), provided that IHC will develop and offer EIP at least five (5) of the
hotels listed on Schedule 1.6 in accordance with the Development Option. As
notification of IHC's intention to sell an IHC Development Hotel, IHC shall
deliver to EIP as soon as available (i) the proposed Development Cost budget,
(ii) any market study information related to such IHC Development Hotel
obtained or developed by IHC, and (iii)

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<PAGE> 18
copies of any Studies related to an IHC Development Hotel obtained or developed
by IHC.

(b) EIP will perform its own due diligence, at its own expense, with
respect to any IHC Development Hotel. EIP will maintain in strictest
confidence any confidential information received from IHC in connection with an
IHC Development Hotel and will not use such information (i) other than to
evaluate EIP's proposed acquisition of the IHC Development Hotel or (ii) unless
required by law or necessary to comply with federal, state or local regulatory
requirements.

(c) Within twenty-one (21) business days after receipt of the information
to be delivered under Section 1.6(a) ("Development Option Period"), EIP may
exercise its option to purchase such IHC Development Hotel and shall provide
IHC with written notice stating that it exercises such option. New Lessee
shall have the right to lease any IHC Development Hotel sold to EIP pursuant to
the exercise of the Development Option and EIP shall deliver to New Lessee
prior to or with such written notice the Proposed Rent Terms for such IHC
Development Hotel. New Lessee shall have fifteen (15) business days following
receipt of the Proposed Rent Terms to (i) agree in writing with EIP to the
Proposed Rent Terms and execute a Lease incorporating such terms, or (ii) to
propose alternative rental terms, reach an agreement with EIP as to such rental
terms and execute a Lease containing such terms, (but without cross-default
provisions) and deliver to EIP an executed Subordination Agreement and IHC
Guarantees

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<PAGE> 19
(without cross default provisions) with respect thereto. If EIP does not
provide such notice of exercise within the Development Option Period or if EIP
and New Lessee are unable to agree, after negotiating in good faith, to rent
terms and execute a lease incorporating such rent terms within the Development
Option Period, EIP shall have waived any and all rights with respect to such
IHC Development Hotel under this Section 1.6(c) and IHC may retain or sell such
hotel as it determines in its sole discretion.

(d) If a Development Option is properly exercised, EIP shall,
simultaneously with the execution and delivery by EIP and IHC of an agreement
of purchase and sale substantially in the form of Exhibit C attached hereto
("Sales Agreement"), deposit in escrow with a bank or other financial
institution acceptable to IHC as escrowee an earnest money deposit in cash in
an amount equal to $100,000 which shall be applied to the purchase price and
the parties shall promptly execute and deliver a Lease in substantially the
form of the Consolidated Lease Amendment (but without cross-default provisions)
and IHC shall cause to be executed and delivered to EIP a Subordination
Agreement and IHC Guarantees (without cross default provisions) with respect
thereto, which shall be effective upon closing under the Sales Agreement.

(e) In the event IHC's actual Development Costs ("Actual Costs") for an
IHC Development Hotel exceed the budgeted Development Costs set forth in the
Sales Agreement ("Purchase Costs") for such Hotel, EIP shall have the right,
but not the

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<PAGE> 20
obligation, to purchase such Hotel for a purchase price equal to the sum of (i)
105% of the Purchase Costs and (ii) the amount by which the Actual Costs exceed
the Purchase Costs ("New Cost"). If EIP does not elect to so purchase such
IHC Development Hotel, then IHC shall have the right, but not the obligation,
to sell such IHC Development Hotel to EIP for a purchase price equal to 105% of
the Purchase Costs. If EIP elects to proceed to purchase such IHC Development
Hotel for the New Cost, the parties shall in good faith renegotiate the rent
terms for such Hotel to reflect the increased purchase price prior to the
closing of the purchase and sale of the IHC Development Hotel.

(f) The Right of First Offer described in Section 1.7 hereof shall not
apply to any IHC Development Hotel which IHC offers to EIP under this Section
1.6 and which EIP does not ultimately purchase in accordance with the
provisions of this Section 1.6, for any reason whatsoever.

(g) In the event that during the Development Option Period, IHC has not
offered to EIP at least five (5) IHC Development Hotels, the Development Option
Period will be extended until such time as IHC has offered to EIP at least five
(5) IHC Development Hotels in accordance with the Development Option.

1.7 Right of First Offer in Favor of EIP for IHC Hotels; Future Acquisition
Opportunities.

(a) Effective as of the Closing and for the five (5) year period
following the Closing, IHC hereby grants to EIP a right of first offer to
acquire all budget, economy, upper

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<PAGE> 21
economy or midscale hotels of the brands listed on Schedule 1.6a which IHC or
any direct or indirect wholly-owned Subsidiary owns as of the Closing or
acquires or develops ("IHC First Offer Hotel") during the five (5) year period
following the Closing. EIP acknowledges that the Holiday Inn Brentwood
(Tennessee) is the only hotel presently owned by IHC or any of its direct or
indirect wholly-owned Subsidiaries that falls within the foregoing
classification and to which the right of first offer shall apply as of the
Closing.

(b) Prior to offering an IHC First Offer Hotel for sale, IHC shall give
EIP written notice ("Sale Notice") of its intent to sell or market such IHC
First Offer Hotel, together with occupancy, ADR and REVPAR, stating IHC's
proposed cash purchase price together with copies of all financial statements
of the IHC First Offer Hotel during IHC's ownership period therefor. IHC will
also provide EIP with such other information in IHC's possession regarding the
IHC First Offer Hotel as EIP reasonably requests. EIP will perform its own due
diligence, at its own expense, with respect to any IHC First Offer Hotel. EIP
will maintain in strictest confidence any confidential information received
from IHC in connection with an IHC First Offer Hotel and will not use such
information (i) other than to evaluate EIP's proposed acquisition of the IHC
First Offer Hotel or (ii) unless required by law or necessary to comply with
any and all federal, state or local regulatory requirements. Within twenty-one
(21) business days after its receipt of the Sale Notice and any requested
historical financial (including gross

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<PAGE> 22
operating profit and net operating income) and operating information (including
ADR, occupancy and REVPAR) reasonably available to IHC and any market study
information reasonably available to IHC, EIP may elect, by delivering written
notice to IHC, to purchase such IHC First Offer Hotel at the price set forth in
the Sale Notice. New Lessee shall have the right to lease any IHC First Offer
Hotel sold to EIP hereunder and EIP shall deliver to New Lessee prior to or
with such written notice the Proposed Rent Terms for such IHC First Offer
Hotel. New Lessee shall have fifteen (15) business days following receipt of
the Proposed Rent Terms to (i) agree in writing with EIP to the Proposed Rent
Terms and execute a Lease incorporating such terms or (ii) to propose
alternative rental terms, reach agreement regarding such terms with EIP and
execute a Lease incorporating such terms, and deliver to EIP an executed a
Subordination Agreement and IHC Guarantees (without cross default provisions).
A failure by EIP to notify IHC of its exercise of the right of first offer
within such twenty-one (21) day period or a failure of EIP and New Lessee to
agree, after negotiating in good faith, upon rent terms and execute a Lease
(without cross-default provisions) incorporating such terms within such period
shall constitute a waiver of any or all of EIP's rights hereunder.

(c) In the event that EIP shall have elected to purchase the IHC First
Offer Hotel in accordance with the provisions of the preceding subsection (b),
EIP shall deposit in escrow with a bank, title company or other financial
institution acceptable to IHC as escrowee an earnest money deposit in cash in

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<PAGE> 23
an amount equal to $100,000 which shall be applied to the purchase price,
simultaneously with the execution and delivery by IHC and EIP of a Sales
Agreement for such hotel.

(d) If EIP elects or is deemed to have elected not to purchase the IHC
First Offer Hotel, then at any time within one hundred ninety- five (195) days
from the date of the Sale Notice, IHC may sell such IHC First Offer Hotel for a
purchase price which is equal to or greater than 95% of the price contained in
the Sale Notice. In determining the application of the 95% as stated herein,
only the stated purchase price shall be relevant and no adjustments offered to
EIP shall be considered in respect of the other terms or conditions of a
proposed sale. Should IHC desire to sell such IHC First Offer Hotel at a price
which is less than 95% of the price set forth in the Sale Notice, or should the
one hundred ninety five (195) day time period expire, IHC shall again comply
with the requirements set forth in this Section prior to marketing or
soliciting for sale any such IHC First Offer Hotel.

(e) Effective as of the Closing and during the five (5) year period
following the Closing, IHC, the Partnership and their Affiliates which are
direct or indirect wholly-owned Subsidiaries will use their reasonable efforts
but subject to any confidentiality agreements to which they are a party, to
direct to EIP all opportunities presented to them for acquisitions of budget,
economy, upper economy or midscale hotels, motels, or inns of the brands listed
on Schedule 1.6a which they do not

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<PAGE> 24
intend to purchase for their own account, through an Affiliate, or as part of a
joint venture or partnership.

1.8 Termination. (a) The Right of First Offer granted pursuant to
Section 1.5 may be terminated by EIP: (i) subject to the satisfaction
of the requirements set forth in Article XLII of the Leases, upon termination
of ENNS' status as a real estate investment trust for federal income tax
purposes; or (ii) in the event of a Default by the Partnership or New Lessee
hereunder or under the Leases; or (iii) in the event of a Default under the IHC
Guarantees.

(b) The purchase option and right of first offer granted pursuant to
Sections 1.6 and 1.7 hereof may be terminated by the Partnership or New Lessee
in the event of a Default by EIP or ENNS hereunder or under the Leases.

(c) For purposes hereof, a Default shall be (i) a failure to comply with
any material provision of this Agreement for a period of thirty (30) days after
notification by a nondefaulting party of such failure to comply, or (ii) an
Event of Default as defined in the Leases or the IHC Guarantees.

1.9 Expenses of Transaction. Except as otherwise provided herein, each
party hereto shall bear its own costs and expenses incurred in connection with
entering into this Agreement and consummating the transactions contemplated
herein including without limitation, all fees of counsel, accountants and
consultants; provided, however, that notwithstanding anything contained herein
to the contrary, EIP and/or ENNS shall be solely responsible for any and all
costs or expenses associated with any

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<PAGE> 25

property improvement program imposed and/or required as a result of the
transactions contemplated herein and in the Contribution Agreement.

1.10 Closing. Subject to the fulfillment or waiver of the conditions
precedent specified in Sections 4.1, 4.2 and 4.3, the consummation of the
transactions contemplated hereby (the "Closing") will take place on November
13, 1996 or such other date as agreed to by the parties (the "Closing Date").
The Closing will take place at 10:00 a.m., E.S.T. on the Closing Date at the
offices of Jones, Day, Reavis & Pogue at 500 Grant Street, Pittsburgh,
Pennsylvania.

1.11 Non-Public Information. To the extent that, EIP or ENNS, on the one
hand, or IHC, the Partnership or New Lessee on the other hand, obtains
information or becomes aware of material information concerning the other that
has not been disclosed in a public announcement or filing under the 1933 Act or
1934 Act, each party agrees that it shall not improperly disclose or unlawfully
utilize such information or otherwise act unlawfully with respect thereto.

II. REPRESENTATIONS AND WARRANTIES.

2.1 Representations and Warranties of EIP and ENNS. As used herein, the
term "to the knowledge of" or similiar phrase, shall mean actual knowledge of
an executive officer of ENNS or the general partner of EIP based solely on a
written notice or notification to ENNS or EIP from a third party and does not
include any knowledge any such officer may have obtained in

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<PAGE> 26
any other capacity. EIP and ENNS each hereby represents and warrants to the
Partnership, New Lessee and IHC as follows:

2.1.1 Organizational Matters. (a) EIP is a limited partnership duly
organized, validly existing and in good standing under the laws of the
State of Tennessee and has the requisite partnership power and authority to
own, lease or otherwise hold the assets owned, leased or otherwise held by it
and to carry on its business as presently conducted by it. EIP is duly
qualified to do business as a foreign limited partnership under the laws of the
jurisdictions where such qualification is necessary or required to operate its
assets and/or conduct its business.

(b) Equity Inns Trust, a Maryland real estate investment trust ("General
Partner") and a wholly owned subsidiary of ENNS is the sole general partner of
EIP. ENNS is a corporation and General Partner is a Maryland real estate
investment trust, duly organized, validly existing and in good standing under
the laws of the State of Tennessee and the State of Maryland, respectively and
have the requisite corporate and trust power and authority to own, lease or
otherwise hold the assets owned, leased or otherwise held by them and to carry
on their respective business as presently conducted by them. ENNS is duly
qualified to do business as a foreign corporation under the laws of the
jurisdictions where such qualification is necessary or required to operate its
assets and/or conduct its business. The General Partner is duly qualified to
do business as a foreign trust where such qualification is necessary or
required to operate its assets and/or conduct its business.

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<PAGE> 27
2.1.2 Authorization and Effect of Agreement. Each of ENNS and EIP has the
requisite corporate or partnership power and authority to execute and deliver
this Agreement, and EIP has the requisite partnership power to execute and
deliver the Consolidated Lease Amendment and each Lease and to perform the
transactions contemplated hereby and thereby to be performed by each of them.
The execution and delivery by EIP and ENNS of this Agreement and the execution
and delivery by EIP of the Consolidated Lease Amendment and the performance by
EIP and ENNS of the transactions contemplated hereby and thereby to be
performed by it have been duly authorized by all necessary action on the part
of EIP and ENNS. This Agreement has been duly executed and delivered by EIP
and ENNS, and the Consolidated Lease Amendment will be duly executed and
delivered by EIP and, assuming the due execution and delivery of this Agreement
and the Consolidated Lease Amendment by the Partnership, New Lessee and IHC,
constitute (or as to the Consolidated Lease Amendment, will contitute) valid
and binding agreements of EIP and ENNS enforceable in accordance with their
respective terms.

2.1.3 No Restrictions. The execution and delivery of this Agreement by EIP
and ENNS and execution and delivery of the Consolidated Lease Amendment by EIP
and the performance by EIP and ENNS of the transactions contemplated hereby and
thereby to be performed by each of them will not violate any law, rule,
regulation, judgment, order or decree applicable to EIP or ENNS or conflict
with, or result in any violation of, or constitute a default (with or without
notice or lapse of time, or both) under,

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<PAGE> 28
or give rise to a right of termination, cancellation or acceleration of any
obligation or to the loss of a material benefit under, any provision of the
partnership agreement of EIP or the charter or bylaws of ENNS or any material
agreement, contract, lease, or other instrument or obligation to which EIP or
ENNS is a party or by which its assets are bound (subject to obtaining the
consents described on Schedule 2.1.3). Except as set forth on Schedule 2.1.3,
no material consent, approval, order or authorization of, notice to or
registration, declaration or filing with, any Governmental Authority or other
entity, domestic or foreign or other third party is required to be obtained or
made by or with respect to EIP or ENNS in connection with the execution and
delivery of this Agreement or the Consolidated Lease Amendment by EIP or the
performance by EIP or ENNS of the transactions contemplated hereby or thereby
to be performed by it.

2.1.4 No Brokerage or Finder's Fees. Neither EIP nor ENNS has incurred any
liability to any broker, finder or agent for any brokerage fees, finder's fees
or commissions with respect to the transactions contemplated by this Agreement.

2.1.5 Litigation; Decrees. To the knowledge of EIP and ENNS there are no
lawsuits, claims, administrative or other proceedings pending or threatened
which seek to enjoin or otherwise affect the transactions contemplated by this
Agreement, or the Consolidated Lease Amendment or relate to the conduct of the
Current Hotels or against or affecting EIP or ENNS or the Current Hotels which,
if determined adversely, would have a

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<PAGE> 29
material adverse effect on the Current Hotels. Neither EIP nor ENNS is in
default under any judgment, order or decree of any Governmental Authority
applicable to the ownership, of the Current Hotels.

2.1.6 Existing Leases. Each Existing Lease is a valid and binding
obligation of EIP and is in full force and effect. EIP has performed all
obligations required to be performed by it under the Existing Leases and is not
(with or without the lapse of time or the giving of notice, or both) in breach
or default in any respect thereunder. EIP has made available to IHC true,
correct and complete copies of each Existing Lease.

2.2 Representations and Warranties of IHC, New Lessee and Partnership.
IHC, New Lessee and the Partnership hereby represent and warrant to EIP and
ENNS as follows:

2.2.1 Organization. (a) IHC and New Lessee are a corporation and a limited
liability company, respectively, duly organized, validly existing and in good
standing under the laws of the Commonwealth of Pennsylvania and the State of
Delaware, respectively, and have the requisite corporate or company power as
applicable and authority to own, lease or otherwise hold their properties and
assets and to carry on their business as presently conducted and as proposed to
be conducted under the Consolidated Lease Amendment.

(b) Partnership is a limited partnership duly organized, validly existing
and in good standing under the laws of the State of Delaware and has the
requisite partnership power and authority to own, lease or otherwise hold its
properties and

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<PAGE> 30
assets and to carry on its business as presently conducted. A wholly owned
subsidiary of IHC owns all of the outstanding equity interests of the sole
general partner of the Partnership and at the Closing, the Partnership and the
sole general partner will be qualified to do business and will be in good
standing as a foreign limited partnership or foreign limited liability company,
respectively, in each state in which a Leased Hotel is located. The New Lessee
is an indirect, wholly owned subsidiary of IHC. IHC is a wholly-owned
subsidary of Company.

2.2.2 Authorization and Effect of Agreement. IHC, New Lessee and the
Partnership have the requisite corporate or partnership power, as applicable,
and authority to execute and deliver this Agreement, the Partnership has the
requisite partnership power to execute and deliver the Consolidated Lease
Amendment and New Lessee has the requisite company power to execute and deliver
the Leases and to perform the transactions contemplated hereby and thereby to
be performed by each of them. The execution and delivery by IHC, New Lessee
and the Partnership of this Agreement and the execution and delivery by the
Partnership of the Consolidated Lease Amendment and the performance by IHC, New
Lessee and the Partnership of the transactions contemplated hereby and thereby
to be performed by it have been duly authorized by all necessary action on the
part of IHC, New Lessee and the Partnership. This Agreement has been duly
executed and delivered by IHC, New Lessee and the Partnership and the
Consolidated Lease Amendment will be duly executed and delivered by the
Partnership and, assuming the due

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<PAGE> 31
execution and delivery of this Agreement and the Consolidated Lease Amendment
by ENNS and EIP, constitute (or as to the Consolidated Lease Amendment, will
constitute) valid and binding agreements of IHC, New Lessee and the
Partnership, enforceable in accordance with their respective terms.

2.2.3 No Restrictions. The execution and delivery of this Agreement and
the Consolidated Lease Amendment by IHC, New Lessee and the Partnership and the
performance by IHC, New Lessee and the Partnership of the transactions
contemplated hereby to be performed by each of them will not violate any law,
rule, regulation, judgment, order or decree applicable to IHC, New Lessee or
Partnership or conflict with, or result in any violation of, or constitute a
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any obligation or to
the loss of a material benefit under, any provision of the articles of
incorporation or bylaws of Company or IHC or the certificate of limited
partnership and partnership agreement of the Partnership or any material
agreement, contract, lease or other instrument to which Company, IHC, New
Lessee or the Partnership is a party or by which any of their assets are bound.
Except as set forth on Schedule 2.2.3, no material consent, approval, order or
authorization of, or registration, declaration or filing with, any Governmental
Authority or other entity domestic or foreign or other third party is required
to be obtained or made by or with respect to IHC, New Lessee or the Partnership
in connection with the execution and delivery of this

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<PAGE> 32
Agreement or the Consolidated Lease Amendment by IHC, New Lessee or the
Partnership or the performance by IHC, New Lessee or the Partnership of the
transactions contemplated hereby or thereby to be performed by each of them.

2.2.4 No Brokerage or Finder's Fees. Neither IHC nor the Partnership nor
New Lessee has incurred any liability to any broker, finder or agent for any
brokerage fees, finder's fees or commissions with respect to the transactions
contemplated by this Agreement.

2.2.5 Leases. The execution and delivery of the Consolidated Lease
Amendment and the performance by the Partnership of the transactions
contemplated thereby to be performed by the Partnership have been duly
authorized by all necessary action on the part of the Partnership. Upon
execution and delivery of the Consolidated Lease Amendment by the Partnership
and EIP, the Consolidated Lease Amendment will constitute a valid and binding
obligation of the Partnership, enforceable in accordance with its terms.

2.2.6 IHC Guarantees. The execution and delivery of the IHC Guarantees (as
defined in Section 4.3.3 below) have been authorized by all necessary action on
the part of IHC and Company and, upon execution and delivery of the IHC
Guarantees by Company and IHC, each of the IHC Guarantees will constitute a
valid and binding obligation of Company and IHC, respectively, enforceable in
accordance with their respective terms.

2.2.7 Real Property. IHC, the Partnership and New Lessee have had access
to such deeds, title policies,

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<PAGE> 33
environmental reports, structural or other engineering reports and surveys
with respect to the Current Hotels as IHC, the Partnership or New Lessee has
deemed necessary to its review.

2.2.8 Litigation; Decrees. To the knowledge of IHC, New Lessee or the
Partnership, there are no lawsuits, claims, administrative or other proceedings
pending or threatened which seek to enjoin or otherwise affect the transactions
contemplated by this Agreement, the Contribution Agreement or the Consolidated
Lease Amendment.

III. COVENANTS PENDING CLOSING

3.1 Investigation by IHC. Prior to the Closing, upon reasonable notice
from IHC to EIP given in accordance with this Agreement, EIP and ENNS will
afford to the officers, attorneys, accountants or other authorized
representatives of IHC reasonable access during normal business hours to the
facilities and the books and records of EIP and ENNS relating to the Existing
Leases and/or Current Hotels so as to afford IHC full opportunity to make such
review, examination and investigation of the Existing Leases and/or Current
Hotels as IHC reasonably may desire to make (including, without limitation,
environmental audits of the Current Hotels). IHC will be permitted to make
extracts from or to make copies of such books and records as may be necessary.

3.2 No Announcement/Confidentiality. Upon execution of this Agreement,
ENNS, EIP, Partnership, New Lessee and IHC agree to make a mutually agreed upon
press releases. Prior to the Closing Date, no party shall publish or permit any
of its Affiliates to publish any other press release or similar public

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<PAGE> 34
announcement with respect to the transactions contemplated by this Agreement
without prior written consent of all of the other parties, other than as the
person making such disclosure may determine in good faith to be required by
law, rule, regulation, judicial or administrative process (in which case the
disclosing party shall use reasonable efforts to give notice to all of the
other parties prior to making such disclosure and, if reasonably practicable in
the circumstances, give such other parties the opportunity to review and
comment upon the proposed disclosure).

3.3 Regulatory Filings. Each of the parties will use its reasonable best
efforts to obtain, and to cooperate with the other in obtaining, all
authorizations, consents, orders and approvals of Governmental Authorities that
may be or become necessary in connection with the consummation of the
transactions contemplated by this Agreement including, without limitation,
filings required under the HSR Act and to take all reasonable actions to avoid
the entry of any order or decree by any Governmental Authority prohibiting the
consummation of the transactions contemplated hereby.

3.4 Operation of the Business. Prior to the Closing, EIP will:

(a) Use best efforts to keep the Existing Leases intact and not take or
permit to be taken or do or suffer to be done anything other than in the
ordinary course of EIP's business as presently conducted, and use reasonable
best efforts to maintain the goodwill associated with the Current Hotels; and

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<PAGE> 35
(b) Except as provided in Section 1.2, terminate, amend or modify any
of the Existing Leases.

3.5 Satisfaction of Conditions. Without limiting the generality or effect
of any provision of Article IV, prior to the Closing, each of the parties
hereto will use reasonable efforts with due diligence and in good faith to
satisfy promptly all conditions required hereby to be satisfied by such party
in order to expedite the consummation of the transactions contemplated hereby.

3.6 No Solicitation. Prior to the Closing, neither EIP nor ENNS, nor its
respective employees, officers, agents or representatives shall directly or
indirectly (a) solicit, initiate or encourage any inquiries, proposals or
offers from any person relating to any lease or purchase of any of the Current
Hotels, or (b) with respect to any effort or attempt by any other person to do
or seek any of the foregoing (i) participate in any discussions or
negotiations, (ii) furnish to any other person any confidential information
with respect to the Current Hotels, or (iii) otherwise cooperate in any way
with, or assist or participate in, or facilitate or encourage any such effort.

IV. THE CLOSING

4.1 Conditions Precedent to Obligations of Parties. The obligations of
each of EIP, ENNS, IHC, New Lessee and the Partnership under this Agreement to
consummate the transactions contemplated hereby will be subject to the
satisfaction, at or prior to Closing, of the conditions that (a) each
governmental approval, liquor license and other approvals, consents or waivers

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<PAGE> 36
identified on Schedule 2.1.3 or Schedule 2.2.3 as being a condition of the
Closing shall have been obtained (or in the case of liquor licenses,
consummation of an arrangement deemed acceptable by IHC in its sole discretion
under the applicable liquor laws allowing the continuation of liquor service
pending the approval of the license transfer application) including, without
limitation, under the HSR Act, (b) there shall not have been entered a
preliminary or permanent injunction, temporary restraining order or other
judicial or administrative order or decree in any domestic jurisdiction, the
effect of which prohibits the Closing, and (c) all conditions to the closing
under that certain Contribution Agreement dated as of October 4, 1996 by and
among TLI, Trust Management, Inc., Phillip H. McNeill Sr. and the Partnership
("Contribution Agreement") shall have been satisfied other than the obligations
hereunder and (d) approval of ENNS' line of credit lender shall have been
obtained and (e) approval of the Franchisors shall have been obtained and (f)
the approval of Credit Lyonnais shall have been obtained and (g) the approval
of Merrill Lynch & Co. shall have been obtained. Any of the foregoing
conditions may be waived, (i) insofar as it is a condition to the obligations
of the Partnership or IHC, by IHC at its option and (ii) insofar as it is a
condition to the obligations of EIP or ENNS, by EIP at its option.

4.2 Additional Conditions Precedent to Obligations of the Partnership, New
Lessee and IHC. The obligations of the Partnership, New Lessee and IHC under
this Agreement to

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<PAGE> 37
consummate the transactions contemplated hereby will be subject to the
satisfaction, at or prior to the Closing, of all of the following conditions,
any one or more of which may be waived at the option of the Partnership, New
Lessee and IHC:

4.2.1 No Material Misrepresentation or Breach. There shall have been no
material breach by EIP or ENNS in the performance of any of their covenants
herein to be performed by them in whole or in part prior to the Closing, and
the representations and warranties of EIP and ENNS contained in this Agreement
shall be true and correct in all respects as of the Closing Date, except for
representations or warranties made as of a specified date, which shall be true
and correct in all respects as of the specified date, and EIP and ENNS shall
have delivered to the Partnership, New Lessee and IHC a certificate certifying
each of the foregoing, dated the Closing Date and signed by its president and
chief financial officer on its behalf.

4.2.2 Closing Documents. There shall have been delivered to the
Partnership, New Lessee and IHC by EIP and ENNS the following documents as
executed by EIP, ENNS and the other parties thereto:

(a) Incumbency and Specimen Signature Certificate of EIP and ENNS;

(b) Resolutions of the Board of Directors of ENNS authorizing the
execution and delivery of this Agreement and the consummation of the
transactions contemplated by it, certified by the Secretary of ENNS;

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<PAGE> 38
(c) Certificate of (i) the Secretary of State of the State of Tennessee
(with respect to EIP and ENNS) and (ii) the Department of Assessments and
Taxation of the State of Maryland (with respect to the General Partner), dated
as of a date no more than ten (10) days prior to Closing, to the effect that
EIP, ENNS and the General Partner, as the case may be, is validly existing and
in good standing in such jurisdiction;

(d) True and correct copies of the organizational documents of EIP and
ENNS certified by the Secretaries of the general partners of EIP and ENNS;

(e) The opinion of Hunton & Williams, counsel for EIP and ENNS, to cover
the matters set forth in Exhibit D, attached hereto;

(f) The Consolidated Lease Amendment; and

(g) The consents provided in Section 1.2(b), consents from ground lessors
for applicable Hotels , if such consent is, in the Partnership's and EIP's
reasonable judgment, required for the Partnership to become lessee of the
Current Hotels without default, penalty, change in terms or charges and
evidence that any other required consents have been obtained.

4.3 Additional Conditions Precedent to Obligations of EIP and ENNS. The
obligations of EIP and ENNS under this Agreement to consummate the transactions
contemplated hereby will be subject to the satisfaction, at or prior to the
Closing, of all the following conditions, any one or more of which may be
waived at the option of EIP and ENNS.

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<PAGE> 39
4.3.1 No Material Misrepresentation or Breach. There shall have been no
material breach by the Partnership, New Lessee or IHC in the performance of any
of their covenants herein to be performed by them in whole or in part prior to
the Closing, and the representations and warranties of the Partnership, New
Lessee and IHC contained or referred to in this Agreement shall be true and
correct in all respects as of the Closing Date, except for representations or
warranties made as of a specified date, which shall be true and correct in all
respects as of the specified date, and the Partnership, New Lessee and IHC
shall have delivered to EIP and ENNS a certificate certifying each of the
foregoing, dated the Closing Date and signed by its president and chief
financial officer on its behalf.

4.3.2 Closing Documents. There shall have been delivered to EIP and ENNS
by the Partnership, New Lessee and IHC the following documents as executed by
IHC, the Partnership, New Lessee and the other parties thereto:

(a) Incumbency and Specimen Signature Certificate of Partnership, New
Lessee and IHC;

(b) Certificates of the Secretary of State of the State of Delaware and
the Commonwealth of Pennsylvania, respectively, to the effect that the
Partnership, New Lessee, Company and IHC are validly existing and in good
standing and certificates from various state authorities to the effect the
Partnership is in good standing as a foreign jurisdiction in each state listed
in Schedule 4.3.2 dated as of a date not more than ten (10) days prior to
Closing;

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<PAGE> 40
(c) Resolutions of the Board of Directors of New Lessee, Company, IHC and
the general partner of the Partnership authorizing the execution and delivery
of this Agreement, the execution and delivery by Company and IHC of the IHC
Guarantees and the consummation of the transactions contemplated herein and
therein.

(d) True and correct copies of the organizational documents of IHC, New
Lessee and the Partnership certified by the Secretaries of New Lessee, IHC and
the general partner of Partnership;

(e) The opinion of Jones, Day, Reavis & Pogue, counsel for the
Partnership, New Lessee and IHC, to cover the matters set forth in Exhibit E
attached hereto; and

(f) The Consolidated Lease Amendment.

4.3.3 Guarantees. At the Closing, IHC shall have caused Company to have
executed and delivered to EIP and IHC shall have executed and delivered to EIP
a Guaranty Agreement in the form of Exhibit F attached hereto (collectively
"IHC Guarantees"). At any time prior to or after the Closing, if requested by
EIP or ENNS, IHC shall execute and deliver and IHC shall cause Company to
execute and deliver one or more separate guarantees in the form of Exhibit F
evidencing the guarantee of any single Lease or group of Leases for any Leased
Hotels.

4.3.4 Promus Agreements. The Partnership or an Affiliate reasonably
acceptable to EIP and Promus Hotels Corp. ("Promus"), shall have assumed all of
the duties and obligations of TLI arising after the Closing Date under (a) the
Development

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<PAGE> 41
Agreement dated May 31, 1996 among ENNS, EIP, TLI and Promus and (b) any
Management Agreements entered into between TLI and Promus (collectively, the
"Promus Agreements") and Promus shall have consented in writing to the
assumption of such obligations under the Promus Agreements.

4.3.5 Subordination Agreement. At the Closing, IHC shall have caused
Crossroads Hospitality Company, L.L.C. to have executed and delivered to EIP
and ENNS a Subordination Agreement substantially in the form of Exhibit G
attached hereto ("Subordination Agreement").

4.4 Termination. Notwithstanding anything contained in this Agreement to
the contrary, this Agreement may be terminated at any time prior to the
Closing:

(a) By the mutual written consent of Partnership, New Lessee, IHC, ENNS
and EIP;

(b) By any of the Partnership, New Lessee, IHC, ENNS or EIP by notice to
the other parties hereto if the Closing shall not have occurred on or before
December 1, 1996, provided that the party (or an Affiliate thereof) so
terminating is not in default of its obligations hereunder; or

(c) By either the Partnership, IHC, New Lessee, ENNS or EIP if there
shall have been entered a final, nonappealable order or injunction of any
Governmental Authority restraining or prohibiting the consummation of the
transactions contemplated hereby or any material part thereof. In the event of
termination of this Agreement under this Section 4.4 each party hereto will pay
all of its own fees and

- 37 -
<PAGE> 42
expenses. There will be no further liability hereunder on the part of any
party hereto if this Agreement is so terminated, except by reason of a material
breach of any covenant contained in this Agreement.

V. SURVIVAL AND INDEMNIFICATION.

5.1 Survival; Definitions. (a) Each of the representations and warranties
contained in Article II, will survive the Closing and remain in full force and
effect until June 30, 1998. Any claim for indemnification with respect to any
of such matters which is not asserted by notice given as herein provided within
such specified period of survival may not be pursued. Any claim for an
Indemnifiable Loss asserted within such period of survival as herein provided
will be timely made for purposes hereof.

(b) Unless a specified period is set forth in this Agreement (in which
event such specified period will control), the covenants contained herein will
survive the Closing and remain in effect indefinitely.

5.2 Indemnification. (a) Subject to Section 5.1, EIP and ENNS will
indemnify, defend and hold harmless the Partnership, New Lessee, IHC and its
Affiliates and their respective directors, officers, partners, employees,
agents and representatives from and against any and all Indemnifiable Losses
relating to, resulting from or arising out of:

(i) Any breach by EIP or ENNS of any of the representations or
warranties of EIP or ENNS

- 38 -
<PAGE> 43
contained in this Agreement or in any Sales Agreement;

(ii) Any breach by EIP or ENNS of any covenant of EIP or ENNS
contained in this Agreement;

(iii) Any Third Party Claim relating to or arising out of the
ownership (but not the operation or management) of the Current Hotels on or
prior to the Closing Date;

(iv) The 1934 Act reports or the 1933 Act registration statements of
ENNS or EIP, other than Indemnifiable Losses arising out of inaccurate
information provided to EIP or ENNS by Partnership or New Lessee; and/or

(v) Any and all violations of the ADA other than those caused by the
Partnership's, IHC's or the New Lessee's negligence or willful misconduct.

(b) Subject to Section 5.1, the Partnership, New Lessee and IHC will
indemnify, defend and hold harmless EIP and ENNS and their respective
Affiliates, directors, officers, partners, employees, agents and
representatives from and against any and all Indemnifiable Losses relating to,
resulting from or arising out of any of the following:

(i) Any breach by the Partnership, New Lessee or IHC of any of the
representations or warranties of the Partnership or IHC

- 39 -
<PAGE> 44
contained in this Agreement or in any Sales Agreement; and/or

(ii) Any breach by Partnership, New Lessee or IHC of any covenant of
the Partnership, New Lessee or IHC contained in this Agreement.

5.3 Defense of Claims. (a) If any Indemnitee receives notice of the
assertion or commencement of any Third Party Claim against such Indemnitee
with respect to which an Indemnifying Party is obligated to provide
indemnification under this Agreement, the Indemnitee will give such
Indemnifying Party reasonably prompt written notice thereof, but in any event
not later than 20 calendar days after receipt of such notice of such Third
Party Claim. Such notice will describe the Third Party Claim in reasonable
detail, will include copies of all material written evidence thereof and will
indicate the estimated amount, if reasonably practicable, of the Indemnifiable
Loss that has been or may be sustained by the Indemnitee. The Indemnifying
Party will have the right to participate in, or, by giving written notice to
the Indemnitee, to assume, the defense of any Third Party Claim at such
Indemnifying Party's own expense and by such Indemnifying Party's own counsel
(reasonably satisfactory to the Indemnitee), and the Indemnitee will cooperate
in good faith in such defense.

(b) If, within ten (10) calendar days after giving notice of a Third
Party Claim to an Indemnifying Party pursuant to Section 5.3(a), an Indemnitee
receives written notice

- 40 -
<PAGE> 45
from the Indemnifying Party that the Indemnifying Party has elected to assume
the defense of such Third Party Claim as provided in the last sentence of
Section 5.3(a), the Indemnifying Party will not be liable for any legal
expenses subsequently incurred by the Indemnitee in connection with the defense
thereof; provided, however, that if the Indemnifying Party fails to take
reasonable steps necessary to defend diligently such Third Party Claim within
ten (10) calendar days after receiving written notice from the Indemnitee that
the Indemnitee believes the Indemnifying Party has failed to take such steps or
if the Indemnifying Party has not undertaken fully to indemnify the Indemnitee
in respect of all Indemnifiable Losses relating to the matter, the Indemnitee
may assume its own defense, and the Indemnifying Party will be liable for all
reasonable costs or expenses paid or incurred in connection therewith. Without
the prior written consent of the Indemnitee, the Indemnifying Party will not
enter into any settlement of any Third Party Claim which would lead to
liability or create any financial or other obligation on the part of the
Indemnitee for which the Indemnitee is not entitled to indemnification
hereunder. If a firm offer is made to settle a Third Party Claim without
leading to liability or the creation of a financial or other obligation on the
part of the Indemnitee for which the Indemnitee is not entitled to
indemnification hereunder and the Indemnifying Party desires to accept and
agree to such offer, the Indemnifying Party will give written notice to the
Indemnitee to that effect. If the Indemnitee fails to consent to such firm
offer within ten (10)

- 41 -
<PAGE> 46
calendar days after its receipt of such notice, the Indemnitee may continue to
contest or defend such Third Party Claim and, in such event, the maximum
liability of the Indemnifying Party as to such Third Party Claim will not
exceed the amount of such settlement offer, plus costs and expenses paid or
incurred by the Indemnitee through the end of such ten (10) calendar day
period.

(c) Any claim by an Indemnitee on account of an Indemnifiable Loss which
does not result from a Third Party Claim (a "Direct Claim") will be asserted by
giving the Indemnifying Party reasonably prompt written notice thereof, but in
any event not later than twenty (20) calendar days after the Indemnitee becomes
aware of such Direct Claim, and the Indemnifying Party will have a period of
twenty (20) calendar days within which to respond in writing to such Direct
Claim. If the Indemnifying Party does not so respond within such twenty (20)
calendar day period, the Indemnifying Party will be deemed to have rejected
such claim, in which event the Indemnitee will be free to pursue such remedies
as may be available to the Indemnitee on the terms and subject to the
provisions of this Article VI.

(d) A failure to give timely notice or to include any specified
information in any notice as provided in Sections 5.2(a) or 5.2(b) will not
affect the rights or obligations of any party hereunder except and only to the
extent that such failure is actually prejudicial to the rights or obligations
of the Indemnifying Party.

- 42 -
<PAGE> 47
(e) Any liability for any indemnification hereunder shall be net of any
insurance proceeds received by an Indemnitee with respect to any Third Party
Claim.

VI. MISCELLANEOUS PROVISIONS.

6.1 Notices. All notices and other communications required or permitted
hereunder will be in writing and, unless otherwise provided in this Agreement,
will be deemed to have been duly given when delivered in person or when
dispatched by telegram or electronic facsimile transfer (confirmed in writing
by mail simultaneously dispatched) or one business day after having been
dispatched by a nationally recognized overnight courier service to the
appropriate party at the address specified below:

(a) If to the Partnership, New Lessee or IHC, to:

Interstate Hotels Corporation
Foster Plaza Ten, 680 Andersen Drive
Pittsburgh, PA 15220-8126
Facsimile No.: 412-937-8055
Attention: Kevin P. Kilkeary

With a copy to:

Interstate Hotels Corporation
Foster Plaza, 680 Andersen Drive
Pittsburgh, PA 15220-8126
Facsimile No.: 412-937-3116
Attention: Marvin I. Droz, Esquire
Senior Vice President and
General Counsel

(b) If to EIP or ENNS, to:

c/o Equity Inns, Inc.
4735 Spottswood, Suite 102
Memphis, TN 38117
Facsimile No.: (901) 761-3945
Attention: Chairman of the Board

- 43 -
<PAGE> 48
With a copy to:

Hunton & Williams
2000 Riverview Tower
900 S. Gay Street
Knoxville, TN 37902
Facsimile No.: (423) 549-7704
Attention: David C. Wright, Esq.

6.2 Successors and Assigns. This Agreement will be binding upon and inure
to the benefit of the parties hereto and their respective successors and
permitted assigns. This Agreement may not be assigned by IHC, New Lessee or
the Partnership and the Leases may not be assigned by New Lessee or the
Partnership without the prior written consent of EIP and ENNS (except to an
entity under the control of (i) IHC or Company, (ii) the then senior management
of IHC, or (iii) Crossroads Hospitality Company L.L.C.), provided that in
connection with any such transaction, any transferee, assignee, successor in
interest to IHC, New Lessee or the Partnership agrees in writing with EIP and
ENNS to assume all of IHC's, New Lessee's and the Partnership's obligations
hereunder. During the term of the Leases, IHC, New Lessee and Partnership
agree that there will be no change in control of New Lessee or the Partnership
(except to an entity under the control of (i) IHC or Company, (ii) the then
senior management of IHC, or (iii) Crossroads Hospitality Company L.L.C.) and
any such change in control shall be deemed an assignment of the Leases and this
Agreement and which shall require the prior written consent of EIP and ENNS.
In no event shall a change in control, merger, consolidation or sale of all or
substantially all of the assets of IHC or Company or any

- 44 -
<PAGE> 49
successor be deemed to be an assignment hereunder or under the Leases.

6.3 Waiver. IHC, New Lessee and the Partnership, on the one hand, and ENNS
and EIP, on the other hand, by written notice to the other may (a) extend the
time for performance of any of the obligations or other actions of the other
under this Agreement, (b) waive any inaccuracies in the representations or
warranties of the other contained in this Agreement, (c) waive compliance with
any of the conditions or covenants of the other contained in this Agreement, or
(d) waive or modify performance of any of the obligations of the other under
this Agreement; provided, however, that no such party may, without the prior
written consent of such other party, make or grant such extension of time,
waiver of inaccuracies or compliance or waiver or modification of performance
with respect to its (or any of its Affiliates') representations, warranties,
conditions or covenants hereunder. Except as provided in the immediately
preceding sentence, no action taken pursuant to this Agreement will be deemed
to constitute a waiver of compliance with any representations, warranties or
covenants contained in this Agreement and will not operate or be construed as a
waiver of any subsequent breach, whether of a similar or dissimilar nature.

6.4 Entire Agreement. This Agreement (including the Schedules and Exhibits
hereto) and as to the Partnership the Contribution Agreement (including the
Schedules and Exhibits thereto, to which EIP is neither a party nor is bound)
supersedes any other agreement, whether written or oral, that may have been

- 45-
<PAGE> 50
made or entered into by any party (or by any director, officer or
representative thereof) including that certain letter agreement dated September
12, 1996 relating to the matters contemplated hereby. This Agreement (together
with the Schedules and Exhibits hereto) and as to the Partnership, the
Contribution Agreement (together with the Schedules and Exhibits thereto)
constitute the entire agreement by and among the parties hereto and thereto and
there are no agreements or commitments by or among such parties except as
expressly set forth herein and therein.

6.5 Amendments, Supplement. This Agreement may be amended or supplemented
at any time by additional written agreements signed by all of the parties
hereto.

6.6 Rights of the Parties. Except as specifically set forth herein,
nothing expressed or implied in this Agreement is intended or will be construed
to confer upon or give any person or entity other than the parties hereto and
where applicable, their respective Affiliates, successors and permitted assigns
any rights, duties, obligations or remedies under or by reason of this
Agreement or any transaction contemplated hereby.

6.7 Further Assurances. From time to time, as and when requested by any
party hereto, the other parties will execute and deliver, or cause to be
executed and delivered, all such documents and instruments as may be reasonably
necessary to consummate the transactions contemplated by this Agreement.

6.8 Time of Essence. Time shall be of the essence for all provisions of
this Agreement.

- 46 -
<PAGE> 51
6.9 Applicable Law. This Agreement and the legal relations among the
parties hereto will be governed by and construed in accordance with the
substantive Laws of the Commonwealth of Pennsylvania, without giving effect to
the principles of conflict of laws thereof. Any action arising out of this
Agreement may be brought in the state or federal courts of Pennsylvania or
Tennessee. The parties hereby irrevocably submit to the exclusive jurisdiction
of the appropriate state or federal court in Pennsylvania for the purpose of
any suit, action, proceeding or judgement relating to or arising out of this
Agreement. Each of the Partnership, IHC, New Lessee, ENNS and EIP further
agrees that service of any process, summons, notice or document by U.S.
registered mail to such party's respective address set forth above shall be
effective service of process for any action, suit or proceeding in Pennsylvania
with respect to any matters to which it has submitted to jurisdiction as set
forth above in the immediately preceding sentence. Each of the Partnership,
New Lessee, IHC, ENNS and EIP irrevocably and unconditionally waives any
objection to the laying of venue of any action, suit or proceeding arising out
of this Agreement or the transactions contemplated hereby in (a) the Supreme
Court of the Commonwealth of Pennsylvania or the State of Tennessee, or (b) the
United States District Court for the Western District of Pennsylvania or
Tennessee, and hereby further irrevocably and unconditionally waives and agrees
not to plead or claim in any such court that any such action, suit or
proceeding brought in any such court has been brought in an inconvenient forum.
The

- 47 -
<PAGE> 52
parties hereto unconditionally waive any right to a jury trial for any action,
suit or proceeding arising out of this Agreement or the transactions
contemplated hereby.

6.10 Execution in Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same agreement.

6.11 Titles and Headings. Titles and headings to Sections herein are
inserted for convenience of reference only, and are not intended to be a part
of or to affect the meaning or interpretation of this Agreement.

6.12 Certain Interpretive Matters and Definitions. (a) Unless the context
otherwise requires, (i) all references to Sections, Articles, Schedules or
Exhibits are to Sections, Articles, Schedules or Exhibits of or to this
Agreement, (ii) each term defined in this Agreement has the meaning assigned to
it, (iii) each accounting term not otherwise defined in this Agreement has the
meaning assigned to it in accordance with GAAP, (iv) "or" is disjunctive but
not necessarily exclusive and (v) words in the singular include the plural and
vice versa. All references to "$" or dollar amounts will be to lawful currency
of the United States of America.

(b) No provision of this Agreement will be interpreted in favor of, or
against, any of the parties hereto by reason of the extent to which any such
party or its counsel participated in the drafting thereof or by reason of the
extent

- 48 -
<PAGE> 53
to which any such provision is inconsistent with any prior draft hereof or
thereof.

6.13 Survival. To the extent that any obligations under this Agreement
requires action or involves liability or obligation after the Closing, such
obligation shall survive the Closing.

6.14 Invalid Provisions. If any provision hereof is held to be illegal,
invalid or unenforceable under present or future laws, such provision shall be
fully severable; this Agreement shall be construed and enforced as if such
illegal, invalid or unenforceable provision has never comprised a part hereof;
and the remaining provisions hereof shall remain in full force and effect and
shall not be affected by the illegal, invalid or unenforceable provision or by
its severance herefrom. In lieu of such illegal, invalid or unenforceable
provision there shall be added automatically as a part hereof a provision as
similar in terms to such illegal, invalid or unenforceable provision as may be
possible and be legal, valid and enforceable.

6.15 Securitization Financing. If requested by EIP, IHC, the Partnership
and New Lessee agree to cooperate in good faith with EIP, including considering
forming a new bankruptcy-remote lessee entity to serve as the lessee for one or
more Hotels owned by EIP which are leased to the Partnership or New Lessee, in
connection with a securitized financing by EIP or ENNS; provided that the
business terms and the legal liabilities imposed upon the Partnership, New
Lessee or IHC shall not be materially different from those under the
arrangements

- 49 -
<PAGE> 54
contemplated by this Agreement, in the reasonable judgment of the Partnership,
IHC and/or New Lessee.

VII. DEFINITIONS

Unless otherwise expressly defined herein, the following terms shall have
the following meanings:

"ADR" shall mean total hotel room revenues divided by occupied rooms.

"Affiliate" shall have the meaning given to such term in Rule 1-02 of
Regulation S-X under the 1933 Act.

"Code" shall mean the Internal Revenue Code of 1986, as amended.

"Company" shall mean Interstate Hotels Company, a Pennsylvania corporation.

"Contamination" shall mean the intentional or unintentional emission,
discharge, release or threatened emission, discharge or release of any
Hazardous Substance to, on, onto or into the environment in any concentration
that now or in the future could pose a hazard or threat to human health or the
environment, and the past, current and future effects of such intentional or
unintentional emission, discharge, release or threatened emission, discharge or
release of Hazardous Substances to, on, onto or into the environment.

"Current Hotels" shall mean those hotels listed in Schedule VIIa.

"Contribution Agreement" shall have the meaning given to such term in
Section 4.1.

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<PAGE> 55
"Development Costs" shall mean all land acquisition costs and any and all
hard and soft construction and preconstruction costs.

"Environmental Laws" shall mean all Laws (including, without limitation,
Permits, directives, guidelines, standards or the equivalent issued by any
Governmental Authority and relating to or addressing Contamination,
protection of the environment and/or occupation or human health and safety.

"Environmental Liability" shall mean any and all liabilities, losses,
claims, penalties, damages or expenses costs (including, without limitation,
reasonable attorneys, consultants and engineers fees and expenses) arising from
or relating to compliance with any Environmental Law or arising under any
theory of Law or in equity relating to or arising from any Contamination or the
use, treatment, storage, disposal, transport, generation or handling of any
Hazardous Substances.

"Existing Leases" shall mean the leases for the Hotels between EIP and TLI
described on Schedule VIIb attached hereto.

"Franchisors" shall mean the franchisors with respect to the Leased Hotels.

"GAAP" shall mean generally accepted accounting principles, consistently
applied.

"Governmental Authority" shall mean any nation, or any political subdivision
thereof, or any agency, court or body of any such government exercising
executive, legislative, judicial, regulatory or administrative functions.

- 51 -
<PAGE> 56
"Hazardous Substances" shall mean any substance or material that, whether by
its nature or use, could be considered toxic or hazardous or the exposure to
which could pose a hazard or threat to human health or the environment, or
which is or contains petroleum, gasoline, diesel fuel or another petroleum
hydrocarbon product or friable asbestos or asbestos containing materials or
PCBs.

"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as the same may be amended from time to time.

"IHC Guarantees" shall have the meaning given to such term in
Section 4.3.3 hereof.

"Indemnifiable Losses" shall mean any and all claims, demands or suits
(by any person or entity, including without limitation any Governmental
Authority), losses (including, direct, indirect, consequential or
actual), liabilities, damages, costs and expenses, including without limitation
the costs and expenses of any and all actions, suits, proceedings, demands,
assessments, judgments, settlements and compromises relating thereto and
reasonable attorneys', accountants', expert witness' or consultants' fees and
expenses in connection therewith.

"Indemnitee" shall mean any person or entity entitled to indemnification
under this Agreement.

"Indemnity Payment" shall mean any amount of Indemnifiable Losses required
to be paid pursuant to this Agreement.

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<PAGE> 57
"Laws" shall mean any law, decree, rule, order, regulation or other
governmental requirement of any governmental department, commission, board,
agency or instrumentality, domestic or foreign, having jurisdiction over it or
its assets or business or operations.

"Leased Hotels" shall mean all of the Current Hotels, together with any
hotels subject to a Lease by and between EIP and New Lessee or an Affiliate of
IHC.

"Leases" shall mean the Consolidated Lease Amendment and/or any lease of a
hotel or motel entered into by and between EIP and Partnership or New Lessee or
an Affiliate of IHC.

"Liens" shall mean any mortgages, liens, security interests, leases,
pledges, encumbrances, equities, claims, charges, options, restrictions, rights
of first refusal, title retention agreements or other exceptions to title.

"Permits" shall mean any and all Licenses, franchises, approvals, permits
and other governmental authorizations.

"Promus Agreements" shall have the meaning set forth in Section 4.3.

"REVPAR" shall mean total room revenues divided by the number of available
room nights, net of any room nights for which a room is out of service.

"SEC" shall mean the Securities and Exchange Commission.

"Subordination Agreement" shall mean an agreement in the form of Exhibit G
hereto.

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<PAGE> 58
"Subsidiary" shall have the meaning ascribed to such term in Rule 1-02 of
Regulation S-X under the 1933 Act.

"Third Party Claim" shall mean any claim, action or proceeding made or
brought by any person or entity who or which is not a party to this Agreement
or an Affiliate of a party to this Agreement.

"Transfer" shall mean sell, transfer, convey, pledge, assign and/or deliver.

"1933 Act" shall mean the Securities Act of 1933, as amended.

"1934 Act" shall mean the Securities Exchange Act of 1934, as amended.

- 54 -
<PAGE> 59
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day
and year first above written.

EQUITY INNS PARTNERSHIP, L.P.

By: EQUITY INNS TRUST,
general partner

By: /s/ PHILLIP H. MCNEILL
---------------------------------
Title:
------------------------------

CROSSROADS/MEMPHIS PARTNERSHIP, L.P.

By: CROSSROADS/MEMPHIS COMPANY, L.L.C.
its general partner

By: /s/ KEVIN P. KILKEARY
---------------------------------
Title: President

INTERSTATE HOTELS CORPORATION

By: /s/ MARVIN I. DROZ
---------------------------------
Title:
------------------------------

EQUITY INNS, INC.

By: /s/ PHILLIP H. MCNEILL
---------------------------------
Title:
------------------------------

CROSSROADS FUTURE COMPANY, L.L.C.

By: /s/ KEVIN P. KILKEARY
---------------------------------
Title: President

<PAGE> 1
Exhibit 10.18(b)(2)

FIRST AMENDMENT TO MASTER AGREEMENT

THIS FIRST AMENDMENT TO MASTER AGREEMENT ("Amendment") is made as of the
15th day of November, 1996 by and among CROSSROADS/FUTURE COMPANY, L.L.C., a
Delaware limited liability company ("New Lessee"), CROSSROADS/MEMPHIS
PARTNERSHIP, L.P., a Delaware limited partnership (the "Partnership"),
INTERSTATE HOTELS CORPORATION, a Pennsylvania corporation ("IHC"), EQUITY INNS
PARTNERSHIP, L.P., a Tennessee limited partnership ("EIP") and EQUITY INNS,
INC., a Tennessee corporation ("ENNS")

WITNESSETH:

WHEREAS, New Lessee, the Partnership, IHC, EIP and ENNS entered into that
certain Master Agreement, dated November 4, 1996 ("Master Agreement"); and

WHEREAS, the parties wish to amend the Master Agreement in the manner set
forth in this Amendment;

NOW, THEREFORE, for valuable consideration, receipt of which is hereby
acknowledged, and intending to be legally bound, the parties hereto agree as
follows:

1. DEFINITIONS. Unless otherwise defined herein, capitalized terms used in
this Amendment have the definitions ascribed to them in the Master Agreement.

2. EXHIBITS. (a) Exhibit A (Consolidated Lease Amendment) to the Master
Agreement is hereby deleted in its entirety and replaced with Exhibit A
attached to this Amendment.

(b) Exhibit F (IHC Guarantees) to the Master Agreement is hereby deleted
in its entirety and replaced with Exhibit F attached to this Amendment (which
shall include the Acknowledgment of Collateral Assignment of Guaranty of Lease
when requested by EIP).

3. CROSS-DEFAULT. (a) All of the Lessee's obligations under the Leases
shall be cross-defaulted. The phrase "but shall not be cross- defaulted with
the Consolidated Lease Amendment" is hereby deleted from Section 1.5(e) of the
Master Agreement.

(b) The parentheticals "(but without cross-default provisions)" or
"(without cross-default provisions)" are hereby deleted from (i) the third
sentence of Section 1.6(c) of the Master Agreement; (ii) Section 1.6(d) of the
Master

<PAGE> 2
Agreement; and (iii) each of the seventh and eighth sentences of Section 1.7(b)
of the Master Agreement.

4. CREDIT AGREEMENT THIRD AMENDMENT. With respect to the Third Amendment
to Credit Agreement and Other Credit Facility Documents dated as of November
14, 1996 (the "Credit Amendment"), among EIP, Smith Barney Mortgage Capital
Group, Inc. and the other "Co-Lenders" (as defined in the Credit Agreement),
IHC, New Lessee and the Partnership agree to execute and deliver, and cause
Interstate Hotels Company and their "Affiliates" (as defined in the Master
Agreement) to execute and deliver, when applicable to and required by the
appropriate party, all as required by the Credit Agreement, (a) in the event of
an assignment of the Lessee's interest under a Lease in accordance with the
terms thereof, (i) an assumption by such successor Lessee of the Lessee's
obligations under the Lease, (ii) a subordination, nondisturbance and
attornment agreement in the form attached as Exhibit S to the Credit Agreement
and (iii) lease guarantees in the form of the IHC Guarantees attached as
Exhibit R-1 to the Credit Agreement and Exhibit F to this Amendment, (b) a
subordination, nondisturbance and attornment agreement in the form of Exhibit S
to the Credit Agreement upon the entering into of an Additional Lease and (c)
an acknowledgement of collateral assignment of guaranty of lease in form
attached as Exhibit T to the Credit Amendment and Exhibit F to this Amendment
to the Credit Agreement and Exhibit F to this Amendment, upon the execution and
delivery of any future IHC Guarantees of any leases entered into under the
Master Agreement.

5. MISCELLANEOUS. (a) The date "November 13, 1996" set forth in Section
1.10 of the Master Agreement is deleted and replaced with "November 15, 1996."

(b) The word "not" is hereby added immediately before the word "terminate"
in Section 3.4(b) of the Master Agreement.

6. EFFECT OF AMENDMENT. Except as expressly modified hereunder, the Master
Agreement shall remain in full force and effect.

7. HEADINGS. The headings of the paragraphs herein are included solely for
convenience of reference and shall not control the meaning of the
interpretation of any provision of this Amendment.

8. MERGER. The Master Agreement, as amended by this Amendment, contains
the entire understanding between the parties hereto and supersedes any prior or
contemporaneous contracts, agreement, understandings and/or negotiations,
whether oral or written.

- 2 -
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the day and the year first above-written.

EQUITY INNS PARTNERSHIP, L.P.

By: EQUITY INNS TRUST,
general partner

By: /s/ PHILLIP MCNEILL
---------------------------------
Title: CEO

CROSSROADS/MEMPHIS PARTNERSHIP, L.P.

By: CROSSROADS/MEMPHIS COMPANY, L.L.C.
its general partner

By: /s/ KEVIN P. KILKEARY
---------------------------------
Title:
------------------------------

INTERSTATE HOTELS CORPORATION

By: /s/ KEVIN P. KILKEARY
---------------------------------
Title:
------------------------------

EQUITY INNS, INC.

By: /s/ PHILLIP MCNEILL
---------------------------------
Title: CEO

CROSSROADS FUTURE COMPANY, L.L.C.

By: /s/ KEVIN P. KILKEARY
---------------------------------
Title:
------------------------------

- 3 -

<PAGE> 1
EXHIBIT 21.1

INTERSTATE HOTELS COMPANY

LIST OF SUBSIDIARIES

STATE OF
SUBSIDIARY INFORMATION
- ---------- -----------
CHR Consulting Company, L.L.C. Delaware
CHR Services Company, L.L.C. Delaware
Colony de Mexico, S.A. de C.V. Mexico
Colony Hotels and Resorts Company Delaware
Colony International Management Company, L.L.C. Delaware
Continental Design & Supplies Company, L.L.C. Delaware
Crossroads Development Company Delaware
Crossroads Future Company, L.L.C. Delaware
Crossroads Future Corporation Delaware
Crossroads Hospitality Company, L.L.C. Delaware
Crossroads Hospitality Tenant Company, L.L.C. Delaware
Crossroads/Memphis Company, L.L.C. Delaware
Crossroads/Memphis Partnership, L.P. Delaware
Don CeSar Resort Hotel, Ltd. Florida
Hilltop Equipment Leasing Company, L.P. Delaware
Host/Interstate Partnership, L.P. Delaware
Huntington Hotel Partners, L.P. Delaware
IHC/Atlanta Corporation Delaware
IHC/Blacksburg Corporation Delaware
IHC/Blacksburg Partnership, L.P. Delaware
IHC/Brentwood Corporation Delaware
IHC/Brentwood Partnership, L.P. Delaware
IHC/Burlington Corporation Vermont
IHC Capital Corporation Delaware
IHC/CG Portfolio Corporation Delaware
IHC/Colorado Springs Corporation Delaware
IHC/Conshohocken Corporation Delaware
IHC/Denver Corporation Delaware
IHC/Houston Corporation Delaware
IHC/Huntington Corporation Delaware
IHC/Interstone Corporation Delaware
IHC/Interstone Partnership, L.P. Delaware
IHC/Interstone Partnership II, L.P. Delaware
IHC/Lisle Corporation Delaware
IHC Member Corporation Delaware
IHC/Miami Beach Corporation Delaware
IHC/Pittsburgh Partnership, L.P. Delaware
IHC/Roanoke Corporation Delaware
IHC/Roanoke Partnership, L.P. Delaware
IHC Services Company, L.L.C. Delaware
IHC Title Agency Corporation Delaware
IHC/Westborough Corporation Delaware
IHC/Westborough Partnership, L.P. Delaware
IHC/Williamsburg Corporation Delaware
Interstate Hotels Corporation Pennsylvania
Interstone/Atlanta Partnership, L.P. Delaware
Interstone/CGL Partners, L.P. Delaware
Interstone/Colorado Springs Partnership, L.P. Delaware
Interstone/Conshohocken Partnership, L.P. Delaware
Interstone/Denver Partnership, L.P. Delaware
Interstone/Houston Partnership, L.P. Delaware
Interstone/Huntington Partnership, L.P. Delaware
Interstone/Lisle Partnership, L.P. Delaware
Interstone Partners I L.P. Delaware
Interstone Three Partners I L.P. Delaware
Interstone Three Partners II L.P. Delaware
Interstone Three Partners III L.P. Delaware
Interstone Three Partners IV L.P. Delaware
Interstone/Williamsburg Partnership, L.P. Delaware
Northridge Insurance Company Cayman Islands
Orange Hotel Development Limited Partnership Delaware
Syracuse Realty Associates, L.P. Delaware
Cambridge Hotel Associates Pennsylvania
HMG Beverage, Inc. Texas
DFW/H&R, Inc. Texas

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in this Registration Statement on Form S-1 of
our reports on the Consolidated Financial Statements of Interstate Hotels
Company and Predecessor Entity as of December 31, 1994 and 1995 and for the
years ended December 31, 1993, 1994 and 1995 dated April 10, 1996, except for
the third paragraph of Note 9, as to which the date is April 22, 1996, except
for the first paragraph of Note 1, as to which the date is June 25, 1996 and
except for Note 17, as to which the date is October 29, 1996; the Combined
Financial Statements of Interstone I Property Partnerships and Predecessor
Entities as of December 31, 1994 and 1995 and for the years ended December 31,
1993, 1994 and 1995 dated April 10, 1996, except for paragraph 2 of Note 1, as
to which the date is June 25, 1996; the Combined Financial Statements of
Interstone/CGL Partners, L.P. and Predecessor Entity as of December 31, 1994,
December 14, 1995 and December 31, 1995 and for the years ended December 31,
1993 and 1994, for the period from January 1, 1995 to December 14, 1995 and for
the period from December 15, 1995 to December 31, 1995, dated April 10, 1996,
except for paragraph 2 of Note 1, as to which the date is June 25, 1996; the
Financial Statements of Boston Marriott Westborough Hotel as of December 31,
1994 and 1995 and for the three years ended December 31, 1995, dated May 2,
1996, except for paragraph 3 of Note 1, as to which the date is July 1, 1996;
the Combined Financial Statements of Carter Associates and Carter Associates,
Inc. as of December 31, 1995 and for the year then ended, dated November 20,
1996; the Financial Statements of OBR Limited, L.P. as of December 31, 1995 and
for the year then ended, dated April 12, 1996, except for Note 12 as to which
the date is October 12, 1996; and the Combined Financial Statements of Trust
Management, Inc. and Trust Leasing, Inc. as of December 31, 1995 and for the
year then ended, dated October 14, 1996, except for Note 9, as to which the date
is November 15, 1996. We also consent to the reference to our firm under the
caption "Experts".

/s/ COOPERS & LYBRAND L.L.P.

Pittsburgh, PA

December 6, 1996

<PAGE> 1

Exhibit 23.3

[PANNELL KERR FORSTER LETTERHEAD]

Consent of Independent Public Accountants
-----------------------------------------

We consent to the inclusion in this Registration Statement on Form S-1 (File
No. 333-15507) of our report dated February 16, 1996, except for Paragraphs 1
and 4 of Note 1, as to which the date is November 25, 1996, on our audit of the
financial statements of Fountain Suites Hotel. We also consent to the reference
to our firm under the caption "Experts."

/s/ PANNELL KERR FORSTER

December 6, 1996