CAPSTAR HOTEL INVESTORS INC, 424B1, 1996-08-22

CAPSTAR HOTEL INVESTORS INC
424B1, 1996-08-22
HOTELS & MOTELS

Previous: XIONICS DOCUMENT TECHNOLOGIES INC, S-1/A, 1996-08-22

Next: ACACIA NATIONAL VARIABLE ANNUITY SEPARATE ACCOUNT II, N-4 EL/A, 1996-08-22

Pursuant to Rule 424(b)(1)
Registration No. 333-6583
PROSPECTUS
9,250,000 SHARES

[CAPSTAR LOGO]

COMMON STOCK
-------------------

CapStar Hotel Company ("CapStar" or the "Company") is a hotel investment and
management company which acquires, owns, renovates, repositions and manages
hotels throughout the United States. CapStar owns 12 upscale, full-service
hotels (the "Owned Hotels") which contain 3,516 rooms. The Company has entered
into a contract to acquire five additional hotels (the "Additional Hotels")
which contain 1,121 rooms. Including the Owned Hotels, the Company manages 49
hotels (the "Hotels") with 9,044 rooms. The Company's business strategy is to
identify and acquire hotel properties with the potential for cash flow growth
and to renovate, reposition and operate each hotel according to a business
plan specifically tailored to the characteristics of the hotel and its market.

Of the 9,250,000 shares of common stock, par value $.01 per share (the
"Common Stock") offered hereby, 1,850,000 shares are initially being offered
outside the United States and Canada (the "International Offering") by the
International Managers (as defined herein) and 7,400,000 shares are being
offered in the United States and Canada (the "U.S. Offering") by the U.S.
Underwriters (as defined herein). See "Underwriting". Of the shares of Common
Stock offered, 6,750,000 are being sold by the Company and 2,500,000 are being
sold by the Selling Stockholder (as defined herein). See "Principal Stockholders
and Selling Stockholder." Prior to the Offering (as defined herein), there has
been no public market for the Common Stock. See "Underwriting" for a discussion
of the factors considered in determining the initial public offering price.

The Common Stock has been approved for listing on the New York Stock
Exchange ("NYSE"), under the symbol "CHO," subject to official notice of
issuance.

FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" COMMENCING ON PAGE
11.
-------------------
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>
PROCEEDS TO
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO SELLING
PUBLIC AND COMMISSIONS(1) COMPANY(2) STOCKHOLDER(2)
<S> <C> <C> <C> <C>
Per Share....... $18.00 $1.17 $16.83 $16.83
Total(3)........ $166,500,000 $10,822,500 $113,602,500 $42,075,000
</TABLE>

(1) The Company and the Selling Stockholder have agreed to indemnify the several
U.S. Underwriters and International Managers against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company and the Selling Stockholder
estimated at $2,569,500 and $225,000, respectively.
(3) The Company has granted the U.S. Underwriters and the International Managers
a 30-day option to purchase up to 1,387,500 additional shares on the same
terms and conditions as set forth above solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, and Proceeds to the Company will be
$191,475,000, $12,445,875 and $136,954,125, respectively. See
"Underwriting."
-------------------

The shares of Common Stock offered by this Prospectus are offered by the
several U.S. Underwriters, subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by the
U.S. Underwriters and to certain further conditions. It is expected that
delivery of the shares will be made at the offices of Lehman Brothers Inc., in
New York, New York on or about August 23, 1996.
-------------------
LEHMAN BROTHERS
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
SMITH BARNEY
INC.
-------------------
August 20, 1996.
<PAGE>

[PHOTOGRAPHS/MAPS AND CAPTIONS]

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK 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.

2
<PAGE>
PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Unless otherwise indicated, the information in this Prospectus assumes (i) the
completion of the Formation Transactions (as defined herein) and (ii) that the
over-allotment option granted to the Underwriters will not be exercised. Unless
the context otherwise requires, references herein to "CapStar" or the "Company"
include CapStar Hotel Company and its subsidiaries, and, for the periods prior
to the Formation Transactions, CapStar Management Company, L.P. ("CapStar
Management"), EquiStar Hotel Investors, L.P. ("EquiStar") and the limited
liability companies and limited partnerships that own the Owned Hotels (as
defined herein). The offering by the Company and the Selling Stockholder of an
aggregate of 9,250,000 shares of Common Stock in the U.S. Offering and
International Offering is referred to herein as the "Offering." All statistics
in this Prospectus relating to the lodging industry generally (other than
Company statistics) are from, or have been derived from, information published
or provided by Smith Travel Research, an independent industry research
organization. Smith Travel Research has not consented to the use of the data
presented in this Prospectus. Smith Travel Research has not provided any form of
consultation, advice or counsel regarding any aspect of the Offering, and is in
no way associated with the Offering.

THE COMPANY

CapStar is a hotel investment and management company which acquires, owns,
renovates, repositions and manages hotels throughout the United States. CapStar
owns 12 upscale, full-service hotels (the "Owned Hotels") which contain 3,516
rooms. Including the Owned Hotels, the Company manages 49 hotels (the "Hotels")
with 9,044 rooms. The Company's business strategy is to identify and acquire
hotel properties with the potential for cash flow growth and to renovate,
reposition and operate each hotel according to a business plan specifically
tailored to the characteristics of the hotel and its market. Each of the Owned
Hotels is located in a market which has recently experienced strong economic
growth, including Atlanta, Charlotte, Chicago, Cleveland, Dallas, Los Angeles,
Salt Lake City, Seattle and Washington, D.C. The Owned Hotels include hotels
operated under nationally recognized brand names such as Hilton(R), Sheraton(R),
Westin(R), Marriott(R), Holiday Inn(R) and Radisson(R), and one hotel operated
under an independent brand name. In the six months ended June 30, 1996, on a pro
forma basis, the operating performance of the Owned Hotels improved
significantly, as demonstrated by the 7.5% increase in revenues, 14.1% increase
in gross operating profit, and 12.5% increase in revenue per available room
("RevPAR") over the comparable year earlier period. Because the Company did not
own the Additional Hotels (as defined herein) during such periods, the pro forma
data presented does not include the Additional Hotels.

<TABLE>
<CAPTION>
PRO FORMA
SIX MONTHS ENDED
JUNE 30,
--------------------- PERCENTAGE
1996 1995 INCREASE
------- ------- ----------
<S> <C> <C> <C>
Revenues (in thousands)....................... $58,099 $54,036 7.5%
Gross operating profit (in thousands)......... $17,594 $15,415 14.1%
Average Occupancy............................. 73.3% 71.9% 1.9%
Average Daily Rate ("ADR").................... $ 82.47 $ 74.73 10.4%
RevPAR........................................ $ 60.45 $ 53.73 12.5%
</TABLE>

Additionally, the performance of the Owned Hotels compares favorably with
that of the industry in general. For the five months ended May 31, 1996 (the
most recent period for which industry information is currently available),
RevPAR for the Owned Hotels increased 12.6%, while RevPAR for all upscale
hotels, as reported by Smith Travel Research, increased 5.8%.

3
<PAGE>
As a fully integrated owner and manager, CapStar intends to capitalize on
its management experience and expertise by continuing to make opportunistic
acquisitions of full-service hotels, securing additional management contracts
and improving the operating performance of the Hotels. The Company's senior
management team has successfully managed hotels in all segments of the lodging
industry, with particular emphasis on upscale, full-service hotels. Senior
management has an average of approximately 19 years of experience in the hotel
industry. Since the inception of the Company's management business in 1987, the
Company has achieved consistent growth, even during periods of relative industry
weakness. The Company attributes its management success to its ability (i) to
analyze each hotel as a unique property and identify those particular cash flow
growth opportunities which each hotel presents, (ii) to create and implement
marketing plans that properly position each hotel within its local market, and
(iii) to develop management programs that emphasize guest service, labor
productivity, revenue yield and cost control. The Company has a distinct
management culture that stresses creativity, loyalty and entrepreneurship and
was developed to emphasize operations from an owner's perspective. This culture
is reinforced by the fact that 33 members of management will own an aggregate of
7.6% of the Company's equity upon completion of the Offering. See "Principal
Stockholders and Selling Stockholder."

The Company is in the process of renovating and repositioning the Owned
Hotels based on strategic plans designed to address the opportunities presented
by each hotel and local market. Management selects renovations intended to
result in a high return on investment and to extend the Owned Hotels' appeal to
a broader range of market segments. Examples of these revenue generating
renovations include the following: enhancing meeting and banquet facilities to
attract lucrative group conferences and conventions; upgrading guest rooms to
meet the needs of business travelers and to increase ADRs; renovating
restaurants and introducing new food and beverage concepts to attract additional
guests and local patrons; and completing necessary repairs and upgrades of
interior and exterior spaces to ensure high levels of quality and guest
satisfaction. During the 18 months ended June 30, 1996, the Company spent a
total of $14.0 million on renovations at the Owned Hotels and intends to spend
an additional $15.8 million completing the renovation programs.

The Company believes that the upscale, full-service segment of the lodging
industry is the most attractive segment in which to acquire, own and manage
hotels and further believes that there are currently many attractive
opportunities to acquire properties in this segment of the industry at prices
below replacement cost. The upscale, full-service segment is attractive for
several reasons. First, the Company expects that there will be no significant
increases in the supply of upscale, full-service hotels in the next several
years because the cost of new construction generally does not justify new hotel
development. Second, upscale, full-service hotels appeal to a wide variety of
customers, thus reducing the risk of decreasing demand from any particular
customer group. Additionally, such hotels have particular appeal to both
business executives and upscale leisure travelers, customers who are generally
less price sensitive than travelers who use limited-service hotels. Third,
because full-service hotels have a higher proportion of fixed costs to variable
costs than other segments of the lodging industry, full-service hotels afford
greater operating leverage than limited-service hotels, resulting in
increasingly higher profit margins as revenues increase. Finally, full-service
hotels require a greater depth of management expertise than limited-service
hotels, and the Company believes that its superior management skills provide it
with a significant competitive advantage in their operation.

In connection with its growth strategy, the Company has entered into a
binding contract with MBL Life Assurance Corporation ("MBL") to acquire five
upscale, full-service hotels (the "Additional Hotels") which contain 1,121
rooms, for a purchase price of $68.4 million. Four of the Additional Hotels have
been managed by the Company since 1991. Since assuming management of these four
hotels, the Company has improved the operating performance of the properties.
However, the Company believes that, with appropriate capital spending, the
Additional Hotels can achieve further improvements in revenue and cash flow. The
Company plans to spend approximately $3.7 million subsequent to the acquisition
to renovate and reposition the Additional Hotels. The acquisition is scheduled
to close,

4
<PAGE>
subject to customary closing conditions, in December 1996. There can be no
assurance, however, that the closing will occur. See "Risk Factors--Risks
Associated with Expansion" and "Business and Properties--The Properties--The
Additional Hotels."

BUSINESS AND PROPERTIES

The Company seeks to increase shareholder value by (i) continuing to acquire
upscale, full-service hotels below replacement cost in selected markets
throughout the United States and (ii) implementing its operating strategy to
improve hotel operations and increase cash flow.

ACQUISITION STRATEGY

The Company intends to continue acquiring upscale, full-service hotels. In
addition to the direct acquisition of hotels, the Company anticipates that it
may make investments in hotels through joint ventures with strategic business
partners or through equity contributions or secured loans. The Company
identifies acquisition candidates located in markets with economic, demographic
and supply dynamics favorable to hotel owners and operators. Through its
extensive due diligence process, the Company chooses those acquisition targets
where it believes selective capital improvements and intensive management will
increase the hotel's ability to attract key demand segments, enhance hotel
operations and increase long-term value. In order to evaluate the relative
merits of each investment opportunity, senior management and individual
operations teams create detailed plans covering all areas of renovation and
operation. These plans serve as the basis for the Company's acquisition
decisions and guide subsequent renovation and operating plans. At the Owned
Hotels, the Company has been able to implement these plans and apply its system
of management to create improvements in revenue and profitability.

The Company expects that its relationships throughout the industry and its
acquisition staff located on both coasts of the United States will continue to
provide it with a competitive advantage in identifying, evaluating and
purchasing hotels which meet its acquisition criteria. The Company has a record
of successfully renovating and repositioning hotels, both at the Owned Hotels
and at the Hotels that are managed, but not owned, by the Company (the "Managed
Hotels"), varying in levels of service, room rates and market types. As a public
company, the Company believes it will have improved access to various debt and
equity financing sources to fund acquisitions. In addition, in consummating
acquisitions the Company expects that it will benefit from its ability to
utilize units of limited partnership interest in its subsidiary Operating
Partnership (as defined herein) as an alternative to cash. The Company is
currently negotiating with Bankers Trust Company ("Bankers Trust"), The First
National Bank of Boston and Wells Fargo Bank (together the "Banks") to obtain a
new $225 million revolving credit facility (the "Credit Facility"), under which
capital will be available to pursue acquisitions and make capital investments in
subsequently acquired hotels. See "Risk Factors--Risk of Debt Financing; No
Limits on Indebtedness." The Company currently expects to retain earnings for
future acquisitions and the renovation and maintenance of the hotels it owns.

OPERATING STRATEGY

The Company's principal operating objectives are to generate higher RevPAR
and to increase net operating income while providing its hotel guests with
high-quality service and value. The Company seeks to achieve these objectives by
creating and executing management plans that are specifically tailored for each
individual Hotel rather than by implementing an operating strategy that is
designed to maintain a uniform corporate image or brand. The Company believes
that its custom-tailored business plans are the most effective means of
addressing the needs of a given hotel or market. The Company believes that
skilled management of hotel operations is the most critical element in
maximizing revenue and cash flow in full-service hotels.

5
<PAGE>
The Company's corporate headquarters carries out financing and acquisition
activities and provides services to support as well as monitor the Company's
on-site operating executives. Each of the Company's executive departments,
including Sales and Marketing, Human Resources and Training, Food and Beverage,
Technical Services, Development, and Corporate Finance, is headed by an
executive with significant experience in that area. These departments support
decentralized decision-making by the hotel operating executives by providing
accounting and budgeting services, property management software and other
resources which cannot be economically maintained at the individual Hotels.

THE PROPERTIES

The following table sets forth certain information for each of the Owned
Hotels and the Additional Hotels for the 12 months ended June 30, 1996:

<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
JUNE 30, 1996
--------------------
GUEST AVERAGE
HOTEL LOCATION ROOMS ADR OCCUPANCY
- --------------------------------------------- --------------------- ----- ------- ---------
<S> <C> <C> <C> <C>
OWNED HOTELS
Orange County Airport Hilton................. Irvine, CA 290 $ 73.61 65.1%
Sheraton Hotel............................... Colorado Springs, CO 502 63.57 68.5
The Latham Hotel............................. Washington, DC 143 102.60 73.2
The Westin Hotel, Atlanta Airport............ Atlanta, GA 496 71.64 84.1
Radisson Hotel............................... Schaumburg, IL 202 69.23 62.7
Marriott Hotel............................... Somerset, NJ 434 96.49 72.3
Sheraton Airport Plaza....................... Charlotte, NC 226 79.02 73.9
Holiday Inn.................................. Cleveland, OH 237 66.96 75.2
Hilton Hotel................................. Arlington, TX 310 79.01 75.1
Salt Lake Airport Hilton..................... Salt Lake City, UT 287 75.13 71.3
Hilton Hotel................................. Arlington, VA 209 105.35 76.3
Hilton Hotel................................. Bellevue, WA 180 86.31 78.1
----- ------- ---
Total/Weighted Average--Owned Hotels........ 3,516 $ 78.89 73.2%

ADDITIONAL HOTELS
Hilton Hotel................................. Sacramento, CA 326 $ 74.53 71.2%
Santa Barbara Inn............................ Santa Barbara, CA 71 125.13 84.0
Holiday Inn.................................. Colorado Springs, CO 201 56.54 72.3
Embassy Row Hotel............................ Washington, DC 195 113.88 58.0
Hilton Hotel & Towers........................ Lafayette, LA 328 67.90 72.3
----- ------- ---
Total/Weighted Average--Additional Hotels... 1,121 $ 78.72 70.3%
----- ------- ---
Total/Weighted Average 4,637 $ 78.85 72.5%
----- ------- ---
----- ------- ---
</TABLE>

The Company's principal executive offices are located at 1010 Wisconsin
Avenue, N.W., Suite 650, Washington, DC 20007, and its telephone number is (202)
965-4455.

6
<PAGE>
STRUCTURE OF THE COMPANY

Upon consummation of the Formation Transactions, the Company's structure
will be as follows:

CAPSTAR HOTEL COMPANY(1)

Non-affiliated
Limited Partners

0% L.P.(2) 100% General and Limited
Partner Interest

CapStar Management Company, L.P.
("Capstar Management" or the "Operating Partnership")

100%

The Owned Hotels(3)

- ------------
(1) For a description of the transactions relating to the organization of the
Company and its structure, see "Formation Transactions."

(2) Immediately following the Formation Transactions, no limited partnership
units will be held by non-affiliated limited partners. However, in the
future, the Company may seek to acquire additional properties and issue
limited partnership units in payment of some or all of the purchase price
therefor. Such units may be redeemed, subject to certain conditions, for
cash or shares of Common Stock.

(3) Immediately following the closing of the Offering, all of the Owned Hotels
(except The Westin Hotel, Atlanta Airport (the "Westin Atlanta Airport"))
will be wholly-owned by the Company through separate limited liability
company and partnership subsidiaries. The Westin Atlanta Airport is
majority-owned by the Company through a partnership in which the Company
holds an 85.2% limited partner interest, 1% general partner interest and a
mortgage which together provide the Company a 92% economic interest in the
hotel.

7
<PAGE>
THE OFFERING

<TABLE>
<CAPTION>
<S> <C>
Common Stock Offered by the
Company............................. 6,750,000 shares
Common Stock Offered by the
Selling Stockholder............... 2,500,000 shares(1)
Common Stock to be Outstanding after
the Offering........................ 12,754,321 shares(2)
Use of Proceeds..................... The net proceeds of the Offering to be received by
the Company will be used to repay a portion of the
Company's currently outstanding indebtedness under a
credit facility that was provided by Lehman Brothers
Holdings, Inc. ("Lehman Holdings"), an affiliate of
Lehman Brothers Inc. ("Lehman").
NYSE Symbol......................... "CHO"
</TABLE>

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

(1) The Company will not receive any of the proceeds from the sale of Common
Stock by the Selling Stockholder in the Offering.

(2) Does not include up to 1,387,500 shares of Common Stock subject to an
over-allotment option granted to the Underwriters. See "Underwriting."

8
<PAGE>
SUMMARY FINANCIAL AND OTHER INFORMATION

Prior to the Formation Transactions and the Offering, the business of the
Company was conducted through EquiStar Hotel Investors, L.P. ("EquiStar"), which
owned 11 of the Owned Hotels, and CapStar Management Company, L.P. ("CapStar
Management"), which managed the Hotels. CapStar Management has been in the hotel
management business since 1987. EquiStar, however, was not formed until January
12, 1995 and the Company did not own any hotels in any prior periods. Therefore,
the Company's financial statements prior to 1995 reflect only the management
business of CapStar Management. In 1994, the Company began to invest in
additional professional staff and incurred related costs in order to position
itself to acquire hotel properties. From January 12, 1995 through June 30, 1996,
the Company acquired 11 hotels on various dates. Thus, the historical financial
statements for the period ended December 31, 1995 and the six months ended June
30, 1996 and 1995 reflect differing numbers of Owned Hotels throughout the
periods. The unaudited pro forma financial statements for 1995 and the six
months ended June 30, 1996 reflect the operations of the Owned Hotels and the
Additional Hotels for the entire periods.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------- ----------------------------
PRO PRO
FORMA FORMA
1991 1992 1993 1994 1995 1995(A) 1995 1996 1996(A)
------ ------ ------ ------ --------- --------- ------- -------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Revenues:
Rooms.......................... $ 0 $ 0 $ 0 $ 0 $ 14,456 $ 91,861 $ 1,929 $ 28,121 $ 49,642
Food, beverage and other....... 0 0 0 0 7,471 51,919 754 16,049 26,768
Management services and other
revenues...................... 2,692 3,479 4,234 4,418 4,436 3,274 2,128 2,087 1,681
------ ------ ------ ------ --------- --------- ------- -------- ---------
Total revenues............. 2,692 3,479 4,234 4,418 26,363 147,054 4,811 46,257 78,091
------ ------ ------ ------ --------- --------- ------- -------- ---------
Operating costs and expenses:
Departmental expenses:
Rooms.......................... 0 0 0 0 4,190 24,214 528 7,365 12,613
Food, beverage and other....... 0 0 0 0 5,437 40,790 506 11,391 20,476
Undistributed operating costs:
Selling, general and
administrative................ 2,239 2,836 4,065 4,508 8,078 31,808 2,463 9,457 15,600
Property operating costs....... 0 0 0 0 3,934 21,681 511 7,497 12,381
Depreciation and
amortization.................. 16 12 14 23 2,098 11,867 303 3,919 5,979
------ ------ ------ ------ --------- --------- ------- -------- ---------
Total operating costs and
expenses................. 2,255 2,848 4,079 4,531 23,737 130,360 4,311 39,629 67,049
------ ------ ------ ------ --------- --------- ------- -------- ---------
Operating income/(loss)......... 437 631 155 (113) 2,626 16,694 500 6,628 11,042
Interest expense, net........... 28 0 0 0 2,413 10,691 334 7,290 5,292
Minority interest............... 0 0 0 0 (17) (59) 0 (68) (31)
Provision for income taxes(B)... 0 0 0 0 0 2,425 0 0 2,313
Income/(loss) before
extraordinary item.............. 409 631 155 (113) 230 3,637 166 (594) 3,468
Extraordinary item(C)........... 0 0 0 0 (887) 0 0 0 0
Net income/(loss)............... 409 631 155 (113) (657) 3,637 166 (594) 3,468
------ ------ ------ ------ --------- --------- ------- -------- ---------
------ ------ ------ ------ --------- --------- ------- -------- ---------
Net income per common share..... -- -- -- -- -- $ 0.29 -- -- $ 0.27

OTHER FINANCIAL DATA:
EBITDA(D)...................... $ 453 $ 643 $ 169 $ (90) $ 4,724 $ 28,561 $ 803 $ 10,547 $ 17,021
Net cash provided by (used in)
operating activities........... 182 87 (101) 66 4,357 19,566 90 3,891 11,262
Net cash used in investing
activities..................... (16) (65) (24) (41) (116,573) (282,963) (46,108) (95,625) (173,741)
Net cash provided by (used in)
financing activities........... 19 (219) 244 0 119,048 282,809 47,900 89,809 173,370

BALANCE SHEET DATA:
Property and equipment, gross... $ 98 $ 110 $ 134 $ 176 $ 110,883 -- $40,703 $195,304 $ 283,558
Total assets.................... 740 586 1,458 1,232 132,650 -- 54,113 231,736 308,420
Long term obligations........... 219 0 0 0 73,574 -- 25,680 164,892 130,096
</TABLE>

9
<PAGE>
SUMMARY FINANCIAL AND OTHER INFORMATION
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------- ---------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995(A) 1995 1996 1996(A)
------- -------- -------- -------- -------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Owned Hotels:
Number of hotels........... -- -- -- -- 6 17 3 11 17
Number of guest rooms...... -- -- -- -- 2,101 4,637 991 3,307 4,637
Total revenues (in
thousands)................ -- -- -- -- $ 21,927 $ 143,780 $ 2,683 $44,170 $76,410
Average occupancy.......... -- -- -- -- 72.3% 71.8% 76.8% 72.7% 73.0%
ADR(E)..................... -- -- -- -- $ 71.58 $ 75.59 $ 72.28 $ 80.56 $ 81.99
RevPAR(F).................. -- -- -- -- $ 51.75 $ 54.27 $ 55.51 $ 58.57 $ 59.85
All Hotels(G):
Number of hotels(H)........ 23 34 34 39 46 -- -- -- --
Number of guest rooms(H)... 3,893 5,918 5,971 5,847 7,895 -- -- -- --
Total revenues (in
thousands)................ $65,405 $109,837 $123,124 $128,151 $170,888 -- -- -- --
Certain Managed Hotels(I):
Number of hotels........... -- -- 18 18 18 -- -- -- --
Number of guest rooms...... -- -- 2,967 2,967 2,967 -- -- -- --
Total revenues (in
thousands)................ -- -- $ 40,691 $ 44,453 $ 46,905 -- -- -- --
Average occupancy.......... -- -- 69.7% 70.6% 70.7% -- -- -- --
ADR(E)..................... -- -- $ 56.99 $ 60.33 $ 63.71 -- -- -- --
RevPAR(F).................. -- -- $ 39.72 $ 42.59 $ 45.04 -- -- -- --
</TABLE>

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

<TABLE>
<C> <S>
(A) The pro forma Operating Results, Other Financial Data and Operating Data for the six
months ended June 30, 1996 and for the year ended December 31, 1995 have been prepared
as if the Formation Transactions, the Offering, the acquisition of the Owned Hotels and
the Additional Hotels, and the execution of the Credit Facility had been consummated at
the beginning of the periods presented, and the pro forma Balance Sheet Data as of June
30, 1996 has been prepared as if the Formation Transactions, the Offering, the
acquisition of the Owned Hotels and the Additional Hotels, and the execution of the
Credit Facility had been consummated on such date.

(B) No provision for federal income taxes is included in the historical data because CapStar
Management and EquiStar are partnerships and all federal income tax liabilities were
passed through to the individual partners.

(C) During 1995, the Company's loan facility was refinanced, and the write-off of deferred
costs associated with the prior facility was recorded as an extraordinary loss.

(D) EBITDA represents earnings before interest expense, income taxes, depreciation and
amortization. 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.

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

(F) Represents total room revenues divided by total available rooms, net of rooms out of
service due to significant renovations.

(G) Represents operating data for all hotels managed by the Company during all or a portion
of the periods presented.

(H) As of December 31 for the periods presented.

(I) Represents operating data for those hotels managed by the Company during all of the
periods presented.
</TABLE>

10
<PAGE>
RISK FACTORS

An investment in the Common Stock involves material risks. In addition to
general investment risk and those factors set forth elsewhere in this
Prospectus, prospective investors should carefully consider, among other things,
the following risks before making an investment.

RISKS ASSOCIATED WITH THE LODGING INDUSTRY

Operating Risks. The Company's business is subject to all of the operating
risks inherent in the lodging industry. These risks include the following:
changes in general and local economic conditions; cyclical overbuilding in the
lodging industry; varying levels of demand for rooms and related services;
competition from other hotels, motels and recreational properties; changes in
travel patterns; the recurring need for renovations, refurbishment and
improvements of hotel properties; changes in governmental regulations that
influence or determine wages, prices and construction and maintenance costs; and
changes in interest rates and the availability of credit. Demographic,
geographic or other changes in one or more of the Company's markets could impact
the convenience or desirability of the sites of certain hotels, which would in
turn affect the operations of those hotels. In addition, due to the level of
fixed costs required to operate full-service hotels, certain significant
expenditures necessary for the operation of hotels generally cannot be reduced
when circumstances cause a reduction in revenue.

Competition in the Lodging Industry. The lodging industry is highly
competitive. There is no single competitor or small number of competitors of the
Company that are dominant in the industry. The Hotels operate in areas that
contain numerous competitors, many of which have substantially greater resources
than the Company. Competition in the lodging industry is based generally on
location, room rates and range and quality of services and guest amenities
offered. New or existing competitors could significantly lower rates or offer
greater conveniences, services or amenities or significantly expand, improve or
introduce new facilities in markets in which the Hotels compete, thereby
adversely affecting the Company's operations.

Seasonality. The lodging industry is seasonal in nature. Generally, hotel
revenues are greater in the second and third quarters than in the first and
fourth quarters. This seasonality can be expected to cause quarterly
fluctuations in the revenues of the Company. Quarterly earnings also may be
adversely affected by events beyond the Company's control, such as extreme
weather conditions, economic factors and other considerations affecting travel.

Franchise Agreements. Upon completion of the Offering, all but one of the
Owned Hotels will be operated pursuant to existing franchise or license
agreements (the "Franchise Agreements"). The Franchise Agreements generally
contain specific standards for, and restrictions and limitations on, the
operation and maintenance of a hotel in order to maintain uniformity within the
franchisor system. Those limitations may conflict with the Company's philosophy
of creating specific business plans tailored to each Owned Hotel and to each
market. Such standards are often subject to change over time, in some cases at
the discretion of the franchisor, and may restrict a franchisee's ability to
make improvements or modifications to a hotel without the consent of the
franchisor. In addition, compliance with such standards could require a
franchisee to incur significant expenses or capital expenditures. In connection
with changing the franchise affiliation of an Owned Hotel or a subsequently
acquired hotel, the Company may be required to incur significant expenses or
capital expenditures. The Franchise Agreements covering the Owned Hotels expire
or terminate, without specified renewal rights, at various times and have
differing remaining terms. As a condition to renewal, the Franchise Agreements
frequently contemplate a renewal application process, which may require
substantial capital improvements to be made to the hotel.

11
<PAGE>
RISKS ASSOCIATED WITH EXPANSION

Competition for Expansion Opportunities. The Company competes for the
acquisition of hotels with entities that have substantially greater financial
resources than the Company. The Company believes that, as a result of the
downturn experienced by the lodging industry from the late 1980s through the
early 1990s and the significant number of foreclosures and bankruptcies created
thereby, the prices for many hotels have for several years been at historically
low levels and often well below the cost to build new hotels. The recent
economic recovery in the lodging industry and the resulting increase in funds
available for hotel acquisitions may cause additional investors to enter the
hotel acquisition market, which may in turn cause hotel acquisition costs to
increase and the number of attractive hotel acquisition opportunities to
decrease.

Failure to Consummate Acquisitions. The Company has entered into a binding
contract to acquire the Additional Hotels and in the future may enter into
contracts to acquire other hotels as well. There can be no assurance that the
Company will be able to consummate the acquisition of any such hotels. Failure
to consummate such acquisitions could affect the Company's ability to implement
its acquisition strategy.

Integration Risks. To successfully implement its acquisition strategy, the
Company must be able to continue to successfully integrate new hotels into its
existing operations. The consolidation of functions and integration of
departments, systems and procedures of the new hotels with the Company's
existing operations presents a significant management challenge, and the failure
to integrate new hotels into the Company's management and operating structures
could have a material adverse effect on the results of operations and financial
condition of the Company. There can be no assurance that the Company will be
able to achieve operating results in its new hotels comparable to the historical
performance of its hotels.

RISKS ASSOCIATED WITH OWNING REAL ESTATE

The Company currently owns 12 hotels and has entered into a contract to
acquire the five Additional Hotels. Accordingly, the Company will be subject to
varying degrees of risk generally incident to the ownership of real estate.
These risks include, among other things, changes in national, regional and local
economic conditions, changes in local real estate market conditions, changes in
interest rates and in the availability, cost and terms of financing, the
potential for uninsured casualty and other losses, the impact of present or
future environmental legislation and adverse changes in zoning laws and other
regulations. Many of these risks are beyond the control of the Company. In
addition, real estate investments are relatively illiquid, resulting in a
limited ability of the Company to vary its portfolio of hotels in response to
changes in economic and other conditions.

HOTEL RENOVATION RISKS

The renovation of hotels involves risks associated with construction and
renovation of real property, including the possibility of construction cost
overruns and delays due to various factors (including the inability to obtain
regulatory approvals, inclement weather, labor or material shortages and the
unavailability of construction and permanent financing) and market or site
deterioration after acquisition or renovation. Any unanticipated delays or
expenses in connection with the renovation of hotels could have an adverse
effect on the results of operations and financial condition of the Company.

RISK OF DEBT FINANCING; NO LIMITS ON INDEBTEDNESS

As described under "Use of Proceeds," the Company will use substantially all
of the net proceeds of the Offering to repay a portion of its outstanding
indebtedness to Lehman Holdings. After giving effect to such repayment, the
Company's outstanding indebtedness to Lehman Holdings will be approximately
$58.9 million. Under the terms of its agreement with Lehman Holdings, such
remaining indebtedness will be due 90 days following the closing of the
Offering, which may be extended for an

12
<PAGE>
additional 60 days by the Company if it is not in default. The Company has
entered into negotiations with the Banks to obtain the Credit Facility in the
maximum principal amount of $225 million. Borrowings under the Credit Facility
will be used by the Company to repay existing indebtedness owed to Lehman
Holdings, to fund the acquisition of hotels (including completing the
acquisition of the Additional Hotels), to fund renovations and capital
improvements to hotels and for general working capital needs. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." There can be no assurance that the
Company's negotiations with the Banks will ultimately be successfully concluded.
Failure to enter into the Credit Facility or to obtain other financing required
to repay the Company's indebtedness to Lehman Holdings could have a material
adverse effect on the Company and could result in the Company being required to
liquidate one or more of its hotel investments and/or risk loss of some or all
of its assets which secure its obligations.

Neither the Company's Certificate of Incorporation nor its By-laws limit the
amount of indebtedness that the Company may incur. Subject to limitations in its
debt instruments, including those expected to be included in the Credit
Facility, the Company expects to incur additional debt in the future to finance
acquisitions and renovations. The Company's continuing substantial indebtedness
could increase its vulnerability to general economic and lodging industry
conditions (including increases in interest rates) and could impair the
Company's ability to obtain additional financing in the future and to take
advantage of significant business opportunities that may arise. The Company's
indebtedness is, and will likely continue to be, secured by mortgages on all of
the Owned Hotels and by the equity of certain subsidiaries of the Company. There
can be no assurances that the Company will be able to meet its debt service
obligations and, to the extent that it cannot, the Company risks the loss of
some or all of its assets, including the Owned Hotels and the Additional Hotels,
to foreclosure. Adverse economic conditions could cause the terms on which
borrowings become available to be unfavorable. In such circumstances, if the
Company is in need of capital to repay indebtedness in accordance with its terms
or otherwise, it could be required to liquidate one or more investments in
hotels at times which may not permit realization of the maximum return on such
investments.

It is anticipated that the Credit Facility will contain a number of
significant covenants that, among other things, restrict the ability of the
Company and its subsidiaries to (i) acquire or dispose of assets or businesses,
(ii) incur additional indebtedness, (iii) make capital expenditures, (iv) pay
dividends, (v) create liens on assets, (vi) enter into leases, investments or
acquisitions, (vii) engage in mergers or consolidations, or (viii) engage in
certain transactions with subsidiaries and affiliates, and otherwise restrict
corporate activities of the Company (including its ability to acquire additional
hotels, hotel businesses or assets, certain changes of control and asset sale
transactions) without the consent of the lenders. In addition, the Company will
be required to maintain specified financial ratios and comply with tests,
including minimum interest coverage ratios, maximum leverage ratios, minimum net
worth and minimum equity capitalization requirements.

Upon completion of the Offering, all of the Company's outstanding
indebtedness will bear interest at a variable rate. It is also anticipated that
the Company's indebtedness under the Credit Facility will bear interest at a
variable rate. Economic conditions could result in higher interest rates, which
could increase debt service requirements on variable rate debt and could reduce
the amount of cash available for various corporate purposes. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

CONTROLLING STOCKHOLDERS

Upon consummation of the Offering, Acadia Partners, L.P., a private
investment partnership, and related entities ("Acadia Partners"), and certain
members of management will beneficially own an aggregate of 27.5% (24.8% if the
over-allotment option is exercised in full) of the issued and outstanding shares
of Common Stock. See "Formation Transactions--Background" and "Principal and
Selling Stockholders." So long as Acadia Partners and such members of management
beneficially own a

13
<PAGE>
substantial interest in the Company, they may have the ability to elect or
remove members of the Board of Directors of the Company (the "Board"), and
thereby control the management and affairs of the Company, and may have the
power to approve or block most actions requiring approval of the stockholders of
the Company. See "Principal Stockholders and Selling Stockholder" and
"Description of Capital Stock."

SUBSTANTIAL RELIANCE ON KEY PERSONNEL

The Company will place substantial reliance on the lodging industry
knowledge and experience and the continued services of its senior management,
led by Paul W. Whetsell and David E. McCaslin. The Company's future success and
its ability to manage future growth depend in large part upon the efforts of
these persons and on the Company's ability to attract and retain 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. The loss of services of Messrs. Whetsell or McCaslin or the
Company's inability to attract and retain other highly qualified personnel may
adversely affect the results of operations and financial condition of the
Company. The Company currently has employment agreements with Messrs. Whetsell
and McCaslin for terms of three years each, which contain certain non-compete
clauses. See "Management--Employment Agreements."

POTENTIAL FOR CONFLICTS OF INTEREST

Mr. Whetsell and Mr. McCaslin and corporations owned by them own, directly
or indirectly, (i) a leasehold interest, expiring on December 31, 2001, in one
of the Managed Hotels and (ii) minority equity interests in eight of the Managed
Hotels. Mr. Whetsell and Mr. McCaslin exercise management control over the
entities that own five of these Managed Hotels (the "Affiliated Owners") through
their ownership of certain entities which serve as general partners of the
Affiliated Owners. Such interests were acquired prior to the formation of
EquiStar and CapStar Management. During 1995, the Company received approximately
$826,000 in management fees from the nine hotels in which Messrs. Whetsell and
McCaslin own an equity interest, including approximately $630,000 in management
fees from the Affiliated Owners.

Conflicts may arise in the future between the Company and the Affiliated
Owners with respect to certain Management Agreements (as defined below) between
the Company and such Affiliated Owners. These conflicts may arise in connection
with the exercise of any rights or the conduct of any negotiations to extend,
renew, terminate or amend such agreements. There can be no assurance that such
conflicts will be resolved in favor of the Company. Transactions involving the
Company and the Affiliated Owners will be passed on for the Company by a
majority of the Independent Directors (as defined herein) of the Board.

Although none of the Managed Hotels owned by Affiliated Owners now competes
with the Owned Hotels, the Company may in the future acquire a hotel in a market
in which a hotel owned by an Affiliated Owner now operates. See "Certain
Relationships and Related Transactions--Ownership Interests in Certain Managed
Hotels."

Under the terms of their employment agreements, Messrs. Whetsell and
McCaslin are prohibited from hereafter acquiring any interests in hotels or
hotel management companies while they serve as officers of the Company. See
"Management--Employment Agreements."

TERMINATION OF MANAGEMENT AGREEMENTS

The Company operates the 37 Managed Hotels pursuant to third party
management agreements (the "Management Agreements") with the owners of such
Managed Hotels. The Management Agreements have remaining terms ranging from one
month to nine years. Substantially all of the Management Agreements permit the
owners of the Managed Hotels to terminate such agreements prior to the stated
expiration dates if the applicable hotel is sold, and several of the Management
Agreements

14
<PAGE>
permit the owners of the Managed Hotels to terminate such agreements prior to
the stated expiration date without cause or by reason of the failure of the
applicable hotel to obtain specified levels of performance. For 1995, the
Company's pro forma revenue from Management Agreements was $3.3 million
constituting 2.3% of the Company's total revenue for such period. No single
Management Agreement currently accounts for more than 5% of the total revenue
from the Management Agreements on a pro forma basis. Additionally, no group of
Management Agreements for hotels under common ownership or control currently
accounts for more than 13% of the total revenue from the Management Agreements
on a pro forma basis. The early termination of the Management Agreements or the
inability of the Company to negotiate renewals of Management Agreements upon the
expiration of their stated terms would have an adverse impact on the revenues
received by the Company from its management business.

ENVIRONMENTAL RISKS

Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. In addition, the presence of contamination from
hazardous or toxic substances, or the failure to properly remediate such
contaminated property, may adversely affect the owner's ability to sell or rent
such real property or to borrow using such real property as collateral. Persons
who arrange for the disposal or treatment of hazardous or toxic substances may
also be liable for the costs of removal or remediation of such substances at the
disposal or treatment facility, whether or not such facility is or ever was
owned or operated by such person. The operation and removal of certain
underground storage tanks are also regulated by federal and state laws. In
connection with the ownership and operation of the Hotels, the Company could be
held liable for the costs of remedial action with respect to such regulated
substances and storage tanks and claims related thereto. Activities have been
undertaken to close or remove storage tanks located on the property of two of
the Owned Hotels.

All of the Owned Hotels have undergone Phase I environmental site
assessments ("Phase Is"), which generally provide a physical inspection and
database search but not soil or groundwater analyses, by a qualified independent
environmental engineer within the last 18 months. The purpose of the Phase Is is
to identify potential sources of contamination for which the Owned Hotels may be
responsible and to assess the status of environmental regulatory compliance. The
Phase Is have not revealed any environmental liability or compliance concerns
that the Company believes would have a material adverse effect on the Company's
results of operation or financial condition, nor is the Company aware of any
such liability or concerns.

In addition, the Owned Hotels have been inspected to determine the presence
of asbestos. Federal, state and local environmental laws, ordinances and
regulations also require abatement or removal of certain asbestos-containing
materials ("ACMs") and govern emissions of and exposure to asbestos fibers in
the air. Limited quantities of ACMs are present in various building materials
such as sprayed-on ceiling treatments, roofing materials or floor tiles at the
Owned Hotels. 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. Based on third party
environmental assessments and due diligence investigations recently conducted by
the Company and its lenders, the Company believes that the presence of ACMs in
its Owned Hotels will not have a material adverse effect on the Company's
results of operations or financial condition. However, there can be no assurance
that this will be the case. Any liability resulting from non-compliance or other
claims relating to environmental matters could have a material adverse effect on
the Company's results of operations or financial condition.

15
<PAGE>
GOVERNMENTAL REGULATION

A number of states regulate the licensing of hotels and restaurants,
including liquor license grants, by requiring registration, disclosure
statements and compliance with specific standards of conduct. The Company
believes that it is substantially in compliance with these 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 could reduce the revenue and profitability of the Owned Hotels and could
otherwise adversely affect the Company's results of operations or financial
condition.

Under the Americans with Disabilities Act (the "ADA"), all public
accommodations are required to meet certain requirements related to access and
use by disabled persons. These requirements became effective in 1992. Although
significant amounts have been and continue to be invested in ADA required
upgrades to the Owned Hotels, a determination that the Company is not in
compliance with the ADA could result in a judicial order requiring compliance,
imposition of fines or an award of damages to private litigants. The Company is
likely to incur additional costs of complying with the ADA; however, such costs
are not expected to have a material adverse effect on the Company's results of
operations or financial condition.

ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY IN STOCK PRICE

The initial public offering price has been determined by negotiations among
the Company and the representatives of the several Underwriters and may not be
indicative of the market price of the Common Stock after the Offering. Prior to
the Offering, there has been no public market for the Common Stock. Accordingly,
there can be no assurance that an active trading market for the Common Stock
will develop and continue upon consummation of the Offering or that the market
price of the Common Stock will not decline below the initial public offering
price. Following consummation of the Offering, the market price of the Common
Stock could be subject to significant fluctuations in response to variations in
results of operations, general economic and market conditions and other factors.

IMMEDIATE AND SUBSTANTIAL DILUTION

Purchasers of shares of Common Stock sold in the Offering will experience
immediate dilution of $6.06 per share in the net tangible book value per share
of Common Stock from the initial public offering price. See "Dilution."

SHARES AVAILABLE FOR FUTURE SALE

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 12,754,321
shares of Common Stock (assuming no exercise of the over-allotment option).
Except for the 9,250,000 shares sold in the Offering, all of these shares will
be Restricted Securities (as defined below) under Rule 144 under the Securities
Act of 1933, as amended (the "Securities Act"). The Company has granted certain
registration rights to the recipients of restricted securities issued in
connection with the Formation Transactions, which registration rights cover all
of the securities issued in connection with the Formation Transactions. The
Company and Acadia Partners (who beneficially owns 2,514,804 shares of Common
Stock) have agreed not to offer, sell, contract to sell or otherwise dispose of
any such shares of Common Stock or any securities convertible into or
exercisable for Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of Lehman. Certain entities
controlled by members of management (who beneficially own an aggregate of
989,517 shares of Common Stock) have agreed not to offer, sell, contract to sell
or otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable for Common Stock for a period of 360 days after the date of
this Prospectus without the prior written consent of Lehman. There can be no
assurance that Lehman will not grant any such consent. See "Shares Available for
Future Sale."

16
<PAGE>
THE FORMATION TRANSACTIONS

BACKGROUND

CapStar Hotels, Inc. ("CHI"), a hotel management and investment company, was
founded in 1987 by Paul W. Whetsell and certain other investors. Acadia Partners
was formed in 1987 by a group of institutional investors, including commercial
banks, insurance companies and money managers. Acadia Partners pursues both
leveraged acquisitions and selected securities investments. Since its inception,
Acadia Partners has sponsored or co-sponsored 25 leveraged acquisitions with a
combined value of $7 billion in a variety of industries including financial
services, insurance, food and consumer products, retailing information services
and industrial manufacturing. Acadia Partners also manages active portfolios of
public high-yield bonds, common stock and distressed securities in excess of $1
billion.

In January 1995, CHI, Acadia Partners and their respective affiliates formed
EquiStar and CapStar Management. EquiStar was formed to acquire upscale,
full-service hotels throughout the United States and completed its first
acquisition in March 1995. CapStar Management was formed to acquire and continue
the hotel management business of CHI and its affiliates. In connection with the
formation of CapStar Management, all of the Management Agreements of CHI and its
affiliates were assigned to CapStar Management. Prior to the completion of
Formation Transactions, CapStar Management was owned approximately 61% by Acadia
Partners and approximately 39% by entities owned by members of Company
management, and EquiStar was owned approximately 87% by Acadia Partners and
approximately 13% by entities owned by members of Company management.

FORMATION TRANSACTIONS

Pursuant to agreements executed prior to the initial filing of the Company's
Registration Statement with respect to the Offering, each of the following
events will occur immediately prior to the closing of the Offering (the
"Closing"):

. a limited partner of CapStar Management will contribute its partnership
interest in CapStar Management to the Company in exchange for shares of
Common Stock;

. the Company will contribute such partnership interest to CapStar LP
Corporation, a wholly-owned subsidiary of the Company ("CapStar Sub");

. the remaining partners of CapStar Management (including its general
partner but not including CapStar Sub) and the partners of EquiStar will
contribute their respective partnership interests in CapStar Management
and EquiStar to the Company in exchange for shares of Common Stock;

. the Company will contribute all the assets of EquiStar to CapStar
Management and CapStar Management will assume all of the liabilities of
EquiStar; and

. the Agreement of Limited Partnership of CapStar Management will be amended
and restated to reflect the fact that CapStar Management has succeeded to
the business of EquiStar and as otherwise necessary to permit it to
function as the Company's operating partnership (the "Operating
Partnership").

As a result of these transactions (the "Pre-Closing Transactions"), the
Company and CapStar Sub will be the sole partners of the Operating Partnership
and the Operating Partnership will own (directly or indirectly) all of the
assets currently owned by EquiStar and CapStar Management. Simultaneously with
the Closing, the Company will acquire (i) by a deed in lieu of foreclosure, the
Hilton Hotel, Arlington, Virginia, which is currently encumbered by a mortgage
owned by the Company (the "Arlington Acquisition"), and (ii) a 100% beneficial
interest in a $24 million mortgage note secured by the Westin Atlanta Airport
(the "Atlanta Mortgage Acquisition") which mortgage ranks senior to the equity
interest of the partners of the limited partnership that owns such hotel,
including the Company's 1% general partnership interest and 85.2% limited
partnership interest. The Pre-Closing Transactions, the Arlington Acquisition
and the Atlanta Mortgage Acquisition are together referred to as the "Formation
Transactions."

17
<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the Offering are estimated to be
approximately $111.0 million (approximately $134.3 million if the over-allotment
option is exercised in full) after giving effect to estimated underwriting
discounts and commissions and offering expenses payable by the Company. The
Company will not receive any of the proceeds from the sale of Common Stock by
the Selling Stockholder in the Offering.

The Company expects to use the net proceeds of $111.0 million from the
Offering to repay a portion of the outstanding indebtedness under a credit
facility that is provided by Lehman Holdings, an affiliate of Lehman.

The indebtedness to be repaid bears interest at fixed and variable rates,
with a weighted average annual rate at June 30, 1996 of 11.5%, and matures at
various times through March 1999, with a weighted average maturity at June 30,
1996 of two years and six months. All of the indebtedness being repaid was
incurred since March 3, 1995 to finance the acquisition and renovation of the
Owned Hotels.

DIVIDEND POLICY

The Company has not paid any cash dividends on the Common Stock and does not
anticipate that it will do so in the foreseeable future. The Company intends to
retain earnings to provide funds for the continued growth and development of the
Company's business. The Credit Facility is expected to restrict the Company's
ability to pay 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.

18
<PAGE>
DILUTION

The net tangible book value of the Company, as adjusted to give effect to
the Pre-Closing Transactions, at June 30, 1996 was $42.4 million, or
approximately $7.07 per share of Common Stock based on 6,004,321 shares
outstanding. Net tangible book value per share represents the amount of tangible
assets of the Company, less total liabilities and minority interest, divided by
the number of shares of Common Stock outstanding prior to the Offering. After
giving effect to the Formation Transactions, including the sale by the Company
and the Selling Stockholder of the 9,250,000 shares of Common Stock offered
hereby (after deduction of underwriting discounts and commissions and other
estimated offering expenses and the application of the estimated net proceeds
therefrom), the pro forma net tangible book value of the Company at June 30,
1996 would have been $152.3 million, or $11.94 per share. This represents an
immediate increase in net tangible book value of $4.87 per share of Common Stock
to existing stockholders and an immediate dilution of approximately $6.06 per
share to new investors purchasing shares in the Offering. The sale of shares of
Common Stock by the Selling Stockholder in the Offering will have no effect on
dilution. The following table illustrates the per share dilution to new
investors:

<TABLE>
<S> <C> <C>
Initial public offering price per share.................... $18.00
Net tangible book value per share after the Pre-Closing
Transactions as of June 30, 1996........................... $7.07
Increase per share attributable to new investors........... 4.87
-----
Pro forma net tangible book value per share after the
Formation Transactions and the Offering.................... 11.94
------
Dilution per share to new investors........................ $ 6.06
------
------
</TABLE>

The following table summarizes, on a pro forma basis as of June 30, 1996,
the difference between the number of shares of Common Stock held by the existing
equity holders and the net book value of the assets and liabilities contributed
by the existing equity holders in the Pre-Closing Transactions, in the aggregate
and on a per share basis, and the number of shares of Common Stock purchased by
the investors in this Offering and the consideration paid, in the aggregate and
on a per share basis, by the investors purchasing shares of Common Stock in this
Offering (after deducting underwriting discounts and commissions and estimated
Offering expenses):

<TABLE>
<CAPTION>
NET BOOK VALUE OF
ASSETS
SHARES HELD OR OR CASH
ACQUIRED (IN THOUSANDS) AVERAGE
--------------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Equity Holders.................... 6,004,321 47.1% $ 47,872 30.1% $ 7.97
New Investors.............................. 6,750,000 52.9 111,033 69.9 16.45
---------- ------- -------- ------- ---------
Total................................ 12,754,321 100.0% $158,905 100.0% $ 12.46
---------- ------- -------- ------- ---------
---------- ------- -------- ------- ---------
</TABLE>

19
<PAGE>
CAPITALIZATION

The following table sets forth the actual capitalization of the Company as
of June 30, 1996 and the pro forma capitalization of the Company before and
after the acquisition of the Additional Hotels. The information below should be
read in conjunction with the combined financial statements and notes thereto and
the pro forma financial statements and notes thereto contained elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
(IN THOUSANDS)
-------------------------------------------------
PRO FORMA AFTER
PRO FORMA BEFORE ACQUISITION OF
ACQUISITION OF THE THE ADDITIONAL
ACTUAL ADDITIONAL HOTELS HOTELS
-------- ------------------ ---------------

DEBT:

<S> <C> <C> <C>
Total long-term debt............................... $168,112 $ 61,696 $ 130,096
Minority interest.................................. 576 576 576

STOCKHOLDERS' EQUITY:

Preferred Stock ($.01 par value, 25,000,000 shares
authorized, no shares issued or outstanding)....... -- -- --
Common Stock ($.01 par value, 49,000,000 shares
authorized, 12,754,321 shares issued and
outstanding)..................................... -- 127 127
Additional paid-in capital......................... 49,123 161,016 161,016
Retained earnings (deficit)........................ (1,251) (4,288) (4,288)
-------- ---------- ---------------
-------- ---------- ---------------
Total stockholders' equity................... 47,872 156,855 156,855
-------- ---------- ---------------
Total capitalization......................... $216,560 $219,127 $ 287,527
-------- ---------- ---------------
-------- ---------- ---------------
</TABLE>

20
<PAGE>
SELECTED FINANCIAL AND OTHER DATA

The following table sets forth selected historical and pro forma financial
information for the Company. The following information should be read in
conjunction with the historical combined financial statements and notes thereto
for the Company, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and the unaudited pro forma financial statements and
notes thereto included elsewhere in this Prospectus. The selected financial data
of the Company as of June 30, 1996 and December 31, 1995 and 1994 and for the
six months ended June 30, 1996, the period from January 12, 1995 to December 31,
1995 and the years ended December 31, 1994 and 1993, have been derived from
audited financial statements which are included elsewhere in this Prospectus.
The comparable data for the balance sheets of the Company as of June 30, 1995
and December 31, 1993, 1992 and 1991 and for the statements of income and cash
flows for the six months ended June 30, 1995 and the years ended December 31,
1992 and 1991 have been derived from financial statements that are not required
to be included in this Prospectus.

The pro forma operating data and other data for the six months ended June
30, 1996 and for the year ended December 31, 1995 have been prepared as if the
Offering, the Formation Transactions, the acquisition of the Owned Hotels and
the Additional Hotels, and the execution of the Credit Facility had been
consummated at the beginning of the periods presented, and the pro forma balance
sheet data as of June 30, 1996 has been prepared as if the Offering, the
Formation Transactions, the acquisition of the Owned Hotels and the Additional
Hotels, and the execution of the Credit Facility had been consummated on such
date. The pro forma financial information 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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------- ----------------------------
PRO PRO
FORMA FORMA
1991 1992 1993 1994 1995 1995(A) 1995 1996 1996(A)
------ ------ ------ ------ --------- --------- ------- -------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Revenues:
Rooms.......................... $ 0 $ 0 $ 0 $ 0 $ 14,456 $ 91,861 $ 1,929 $ 28,121 $ 49,642
Food, beverage and other....... 0 0 0 0 7,471 51,919 754 16,049 26,768
Management services and other
revenues........................ 2,692 3,479 4,234 4,418 4,436 3,274 2,128 2,087 1,681
------ ------ ------ ------ --------- --------- ------- -------- ---------
Total revenues............. 2,692 3,479 4,234 4,418 26,363 147,054 4,811 46,257 78,091
------ ------ ------ ------ --------- --------- ------- -------- ---------
Operating costs and expenses:
Departmental expenses:
Rooms.......................... 0 0 0 0 4,190 24,214 528 7,365 12,613
Food, beverage and other....... 0 0 0 0 5,437 40,790 506 11,391 20,476
Undistributed operating costs:
Selling, general and
administrative.................. 2,239 2,836 4,065 4,508 8,078 31,808 2,463 9,457 15,600
Property operating costs....... 0 0 0 0 3,934 21,681 511 7,497 12,381
Depreciation and
amortization.................... 16 12 14 23 2,098 11,867 303 3,919 5,979
------ ------ ------ ------ --------- --------- ------- -------- ---------
Total operating costs and
expenses........................ 2,255 2,848 4,079 4,531 23,737 130,360 4,311 39,629 67,049
------ ------ ------ ------ --------- --------- ------- -------- ---------
Operating income/(loss)......... 437 631 155 (113) 2,626 16,694 500 6,628 11,042
Interest expense, net........... 28 0 0 0 2,413 10,691 334 7,290 5,292
Minority interest............... 0 0 0 0 (17) (59) 0 (68) (31)
Provision for income taxes(B)... 0 0 0 0 0 2,425 0 0 2,313
Income/(loss) before
extraordinary item.............. 409 631 155 (113) 230 3,637 166 (594) 3,468
Extraordinary item(C)........... 0 0 0 0 (887) 0 0 0 0
Net income/(loss)............... 409 631 155 (113) (657) 3,637 166 (594) 3,468
------ ------ ------ ------ --------- --------- ------- -------- ---------
------ ------ ------ ------ --------- --------- ------- -------- ---------
Net income per common share..... -- -- -- -- -- $ 0.29 -- -- $ 0.27

OTHER FINANCIAL DATA:
EBITDA(D)....................... $ 453 $ 643 $ 169 $ (90) $ 4,724 $ 28,561 $ 803 $ 10,547 $ 17,021
Net cash provided by (used in)
operating activities........... 182 87 (101) 66 4,357 19,566 90 3,891 11,262
Net cash used in investing
activities...................... (16) (65) (24) (41) (116,573) (282,963) (46,108) (95,625) (173,741)
Net cash provided by (used in)
financing activities........... 19 (219) 244 0 119,048 282,809 47,900 89,809 173,370

21
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------- ---------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995(A) 1995 1996 1996(A)
------- -------- -------- -------- -------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Owned Hotels:
Number of hotels........... -- -- -- -- 6 17 3 11 17
Number of guest rooms...... -- -- -- -- 2,101 4,637 991 3,307 4,637
Total revenues (in
thousands).................. -- -- -- -- $ 21,927 $ 143,780 $ 2,683 $44,170 $76,410
Average occupancy.......... -- -- -- -- 72.3% 71.8% 76.8% 72.7% 73.0%
ADR(E)..................... -- -- -- -- $ 71.58 $ 75.59 $ 72.28 $ 80.56 $ 81.99
RevPAR(F).................. -- -- -- -- $ 51.75 $ 54.27 $ 55.51 $ 58.57 $ 59.85
All Hotels(G):
Number of hotels(H)........ 23 34 34 39 46 -- -- -- --
Number of guest rooms(H)... 3,893 5,918 5,971 5,847 7,895 -- -- -- --
Total revenues (in
thousands).................. $65,405 $109,837 $123,124 $128,151 $170,888 -- -- -- --
Certain Managed Hotels(I):
Number of hotels........... -- -- 18 18 18 -- -- -- --
Number of guest rooms...... -- -- 2,967 2,967 2,967 -- -- -- --
Total revenues (in
thousands).................. -- -- $ 40,691 $ 44,453 $ 46,905 -- -- -- --
Average occupancy.......... -- -- 69.7% 70.6% 70.7% -- -- -- --
ADR(E)..................... -- -- $ 56.99 $ 60.33 $ 63.71 -- -- -- --
RevPAR(F).................. -- -- $ 39.72 $ 42.59 $ 45.04 -- -- -- --
</TABLE>

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

(C) During 1995, the Company's loan facility was refinanced, and the write-off of deferred
costs associated with the prior facility was recorded as an extraordinary loss.

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

(F) Represents total room revenues divided by total available rooms, net of rooms out of
service due to significant renovations.

(G) Represents operating data for all hotels managed by the Company during all or a portion
of the periods presented.

(H) As of December 31 for the periods presented.

(I) Represents operating data for those hotels managed by the Company during all of the
periods presented.
</TABLE>

22
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS

The unaudited Pro Forma Balance Sheet of the Company as of June 30, 1996 is
presented assuming: (i) the Formation Transactions, the Offering and the
application of the net proceeds, and the execution of the Credit Facility, had
been completed on June 30, 1996; and (ii) the Owned Hotels and the Additional
Hotels were owned on June 30, 1996.

The unaudited Pro Forma Statements of Operations of the Company for the six
months ended June 30, 1996 and for the year ended December 31, 1995 present the
results of operations of the Company assuming: (i) all of the Owned Hotels and
the Additional Hotels had been acquired at the beginning of the periods
presented; and (ii) the Formation Transactions, the Offering and the execution
of the Credit Facility were completed as of the beginning of the periods
presented.

In management's opinion, all material adjustments necessary to reflect the
transactions are presented in the pro forma adjustments columns, which are
further described in the notes to the unaudited Pro Forma Financial Statements.

The unaudited Pro Forma Financial Statements are not necessarily indicative
of what the Company's financial position or results of operations actually would
have been if all the Owned Hotels and Additional Hotels were, in fact, acquired
on such dates and if the Formation Transactions, the Offering, and the execution
of the Credit Facility had, in fact, occurred on such dates. Additionally, the
pro forma information does not purport to project the Company's financial
position or results of operations at any future date or for any future period.
The unaudited Pro Forma Financial Statements should be read in conjunction with
the audited historical combined financial statements and related notes thereto
of EquiStar and CapStar Management, which are included elsewhere in this
Prospectus.

23
<PAGE>
CAPSTAR HOTEL COMPANY
PRO FORMA BALANCE SHEET
JUNE 30, 1996

<TABLE>
<CAPTION>
(B) PRO FORMA (H)
OWNED OFFERING AND BEFORE ADDITIONAL PRO FORMA
HOTELS PRO OTHER PRO ACQUISITION OF HOTELS AFTER
(A) FORMA FORMA ADDITIONAL PRO FORMA ACQUISITION OF
HISTORICAL ADJUSTMENTS ADJUSTMENTS HOTELS ADJUSTMENTS ADDITIONAL HOTELS
------------ ----------- ------------ -------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash.................... $ 4,907,234 -- (857,304)(C) 4,049,930 -- 4,049,930
Escrows and restricted
funds.................. 18,793,399 -- (14,943,227)(D) 3,850,172 -- 3,850,172
Property and equipment,
net:
Land................... 37,142,485 2,731,142 -- 39,873,627 19,822,514 59,696,141
Buildings and
improvements.......... 125,072,821 14,826,199 -- 139,899,020 45,870,124 185,769,144
Furniture, fixtures and
equipment............. 21,786,534 1,950,816 -- 23,737,350 3,711,255 27,448,605
Construction-in-progress. 6,321,996 -- -- 6,321,996 -- 6,321,996
------------ ----------- ------------ -------------- ----------- -----------------
Total property and
equipment, net........ 190,323,836 19,508,157 209,831,993 69,403,893 279,235,886
Other assets............ 17,711,578 2,549,268 (932,500)(E) 19,328,346 1,956,141 21,284,487
------------ ----------- ------------ -------------- ----------- -----------------
Total assets............ $231,736,047 22,057,425 (16,733,031) 237,060,441 71,360,034 308,420,475
------------ ----------- ------------ -------------- ----------- -----------------
------------ ----------- ------------ -------------- ----------- -----------------
LIABILITIES, MINORITY
INTEREST AND EQUITY
Other liabilities....... 15,175,635 2,757,425 -- 17,933,060 2,960,034 20,893,094
Long-term debt:

Notes payable.......... 167,254,954 19,300,000 (123,852,227)(D) 61,695,727 68,400,000 130,095,727
(1,007,000)(F)

Capital lease
obligations........... 857,304 -- (857,304)(C) -- -- --
------------ ----------- ------------ -------------- ----------- -----------------
Total liabilities....... 183,287,893 22,057,425 (125,716,531) 79,628,787 71,360,034 150,988,821
Minority interest....... 576,314 -- -- 576,314 -- 576,314
Equity.................. 47,871,840 -- 108,983,500(G) 156,855,340 -- 156,855,340
------------ ----------- ------------ -------------- ----------- -----------------
Total liabilities,
minority interest and
equity................ $231,736,047 22,057,425 (16,733,031) 237,060,441 71,360,034 308,420,475
------------ ----------- ------------ -------------- ----------- -----------------
------------ ----------- ------------ -------------- ----------- -----------------
</TABLE>

24
<PAGE>
CAPSTAR HOTEL COMPANY
NOTES TO PRO FORMA BALANCE SHEET
JUNE 30, 1996

<TABLE>
<C> <S>
(A) Reflects the historical combined balance sheet of EquiStar and CapStar Management as of
June 30, 1996.

(B) Reflects the following: EquiStar's cost basis and financing for one hotel acquired
subsequent to June 30, 1996 (Hilton Hotel, Arlington, Virginia).

(D) A reconciliation of gross proceeds from the Offering to net proceeds is as follows:
</TABLE>

<TABLE>
<S> <C> <C>
Gross proceeds at $18.00 per share.......................... $ 121,500,000
Underwriting, advisory and other transaction expenses....... (10,467,000)
-------------
Net cash proceeds from Offering............................. $ 111,033,000
-------------

A schedule of sources and uses of funds related to the Offering and the
Formation Transactions are as follows:

SOURCES
Net cash proceeds from Offering............................. $ 111,033,000
Release of escrow funds related to existing debt
facilities.................................................. 14,943,227
Proceeds from notes receivable from management for capital
contributions............................................... 987,500
Proceeds from the Credit Facility........................... 61,695,727
-------------
Total sources............................................... $ 188,659,454
-------------
USES
Repayment of outstanding amounts on certain existing debt
facilities.................................................. $(185,547,954)
Payment of prepayment penalties on existing debt to be paid
off......................................................... (299,000)
Payment of closing costs for Credit Facility................ (2,812,500)
-------------
Total uses.................................................. $(188,659,454)
-------------
A reconciliation of existing debt facilities to be repaid to pro forma
long-term debt is as follows:

Total notes payable outstanding immediately preceding the Offering (Columns
(A) and (B) from unaudited Pro Forma Balance Sheet)........................ $ 186,554,954
Less: Existing debt to be repaid............................................ (185,547,954)
Accrued financing fees on existing debt to be forgiven.................. (1,007,000)
-------------
Existing debt to remain in place........................................ --
Add: Proceeds from Credit Facility 61,695,727
-------------
Pro forma long-term debt before purchase of Additional
Hotels...................................................... $ 61,695,727
</TABLE>

<TABLE>
<C> <S>
The Pro forma balance sheet assumes that the proceeds from the Credit Facility are
drawn on June 30, 1996. The Company expects the borrowings under the existing debt
facility with Lehman Holdings will remain in place for up to 90 days after the closing
of the Offering.

(E) Reflects write-off of deferred financing fees ($3,745,000) related to existing debt
facilities to be paid off and deferral of financing fees paid ($2,812,500) for the
Credit Facility.

(F) Reflects lender's forgiveness of accrued financing fees on existing debt facilities.

(G) The components of the adjustment are as follows:
</TABLE>

<TABLE>
<S> <C> <C>
Net cash proceeds from the Offering......................... $ 111,033,000
Add: Forgiven accrued financing fees........................ 1,007,000
Repayment of notes receivable from management for capital
contributions.............................................. 987,500
Less: Write off of deferred financing fees.................. (3,745,000)
Prepayment penalties.................................... (299,000)
-------------
Total adjustment........................................ $ 108,983,500
-------------
</TABLE>

<TABLE>
<C> <S>
(H) Reflects the estimated cost basis and financing for the Additional Hotels which
EquiStar has under contract to purchase for $68,400,000.
</TABLE>

25
<PAGE>
CAPSTAR HOTEL COMPANY
PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996

<TABLE>
<CAPTION>
PRO FORMA
(B) BEFORE (J) PRO FORMA
OWNED OFFERING AND ACQUISITION ADDITIONAL AFTER
HOTELS PRO OTHER PRO OF HOTELS PRO ACQUISITION OF
(A) FORMA FORMA ADDITIONAL FORMA ADDITIONAL
HISTORICAL ADJUSTMENTS ADJUSTMENTS HOTELS ADJUSTMENTS HOTELS
----------- ----------- ------------ ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenue from hotel
operations:
Rooms....................... $28,120,664 9,622,905 -- 37,743,569 11,898,784 49,642,353
Food and beverage........... 12,988,951 4,287,691 -- 17,276,642 5,580,911 22,857,553
Other revenue............... 3,059,994 18,568 -- 3,078,562 831,891 3,910,453
Hotel management and other
fees........................ 2,086,931 -- (39,581)(C) 2,047,350 (366,456) 1,680,894
----------- ----------- ------------ ----------- ----------- --------------
Total revenue................ 46,256,540 13,929,164 (39,581) 60,146,123 17,945,130 78,091,253
----------- ----------- ------------ ----------- ----------- --------------
Hotel operating expenses by
department:
Rooms....................... 7,364,570 2,300,265 9,664,835 2,947,864 12,612,699
Food and beverage........... 10,302,012 3,603,560 -- 13,905,572 4,654,082 18,559,654
Other operating
departments................ 1,089,381 382,136 -- 1,471,517 444,994 1,916,511
Undistributed operating
expenses:
Administrative and
general.................... 9,457,210 2,742,002 500,000(D) 12,699,212 2,901,110 15,600,322
Management fees............. -- 439,660 (439,660)(E) -- -- --
Property operating costs.... 5,380,675 1,117,620 -- 6,498,295 2,317,051 8,815,346
Property taxes, insurance
and other.................. 2,116,498 776,400 -- 2,892,898 673,014 3,565,912
Depreciation and
amortization............... 3,919,035 968,127 146,817(F) 5,033,979 944,599 5,978,578
----------- ----------- ------------ ----------- ----------- --------------
Total operating expenses..... 39,629,381 12,329,770 207,157 52,166,308 14,882,714 67,049,022
----------- ----------- ------------ ----------- ----------- --------------
Interest expense, net........ 7,290,258 1,772,503 (6,516,935)(G) 2,545,826 2,746,260 5,292,086
----------- ----------- ------------ ----------- ----------- --------------
Total expenses............... 46,919,639 14,102,273 (6,309,778) 54,712,134 17,628,974 72,341,108
----------- ----------- ------------ ----------- ----------- --------------
Income (loss) before minority
interests and income
taxes....................... (663,099) (173,109) 6,270,197 5,433,989 316,156 5,750,145
Minority interests........... (68,771) -- 37,761(H) (31,010) -- (31,010)
----------- ----------- ------------ ----------- ----------- --------------
Income (loss) before income
taxes....................... (594,328) (173,109) 6,232,436 5,464,999 316,156 5,781,155
Income taxes................. -- -- 2,186,000(I) 2,186,000 126,661 2,312,661
----------- ----------- ------------ ----------- ----------- --------------
Net income (loss)............ $ (594,328) (173,109) 4,046,436 3,278,999 189,495 3,468,494
----------- ----------- ------------ ----------- ----------- --------------
----------- ----------- ------------ ----------- ----------- --------------
Pro forma income per share... $ 0.27
Pro forma weighted average
shares outstanding.......... 12,754,321
</TABLE>

26
<PAGE>
CAPSTAR HOTEL COMPANY
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996

During the twelve month period subsequent to the Formation Transactions, the
Offering and the execution of the Credit Facility, the Company expects to incur
prepayment penalties to repay existing debt ($299,000) and expenses associated
with the write-off of deferred financing costs related to existing debt to be
repaid ($3,745,000). These non-recurring costs are expected to be charged to
operations as incurred. Such costs have not been included in the unaudited Pro
Forma Statements of Operations.

<TABLE>
<C> <S>
(A) Reflects historical combined statement of operations of EquiStar and CapStar Management
for the six months ended June 30, 1996.

(B) Reflects the pre-acquisition operations of the Owned Hotels to provide a full six
months of hotel operations for the unaudited Pro Forma Statement of Operations. For
each Owned Hotel, the 1996 pre-acquisition operations were obtained from the hotel's
audited pre-acquisition financial statements included elsewhere in this Prospectus.
Also reflects adjustments to (i) include the operations of the Westin Atlanta Airport
during the period from January 1, 1996 through February 29, 1996, when this hotel was
leased to a third-party operator, and (ii) eliminate the related lease revenue earned
by EquiStar during this period. On February 29, 1996, the lease was terminated and
EquiStar assumed management of hotel operations.

(C) Reflects the elimination of management fee income for the Owned Hotels managed by
CapStar Management prior to acquisition ($39,581).

(D) Reflects the estimated incremental general and administrative expenses associated with
public ownership. These additional expenses include insurance, additional executive
salaries, directors' fees and related expenses, legal expenses, expenses associated
with preparing quarterly and annual reports, and other miscellaneous expenses.

(E) Management services for the Owned Hotels are provided by the Company and any
intercompany management fee charges will be eliminated for financial reporting
purposes.

(F) Reflects the net of the following adjustments:
</TABLE>

<TABLE>
<S> <C>
Elimination of depreciation on hotels for pre-acquisition period............ $ (968,127)
Depreciation on hotels for pre-acquisition period based on EquiStar's cost
basis...................................................................... 1,213,820
Elimination of amortization of deferred financing costs on existing debt
facilities to be repaid..................................................... (573,876)
Amortization of deferred financing costs related to the Credit Facility..... 475,000
-----------
Net adjustment.............................................................. $ 146,817
-----------
</TABLE>

<TABLE>
<C> <S>
(G) Reflects the net of the following adjustments:
</TABLE>

<TABLE>
<S> <C>
Elimination of interest on existing debt facilities to be paid off and
interest from pre-acquisition operations................................... $(9,154,018)
Interest on $61,695,727 outstanding under the Credit Facility at interest
rate of LIBOR plus 2.25% (average rate for six months was 8.03 percent)
plus Credit Facility maintenance fee of $160,000............................ 2,637,083
-----------
Net adjustment.............................................................. $(6,516,935)
-----------
</TABLE>

<TABLE>
<C> <S>
(H) Reflects the effect of the other pro forma adjustments on the interest of minority
owners in pro forma income before minority interest and income taxes for the
partnership that owns the Westin Atlanta Airport. After the adjustments, minority
interest is calculated as follows:
</TABLE>

<TABLE>
<CAPTION>
PRO FORMA
LOSS BEFORE
MINORITY PERCENTAGE
INTEREST MINORITY MINORITY
AND INCOME TAXES INTEREST INTEREST
---------------- ---------- --------
<S> <C> <C> <C>
Westin Atlanta Airport.................................. $ (224,710) 13.8% $(31,010)
</TABLE>

<TABLE>
<C> <S>
(I) Historical combined financial data does not include a provision for income taxes
because both EquiStar and CapStar Management were partnerships not subject to income
taxes. The pro forma adjustment reflects federal and state income taxes (assuming a 40%
combined effective rate) as if these entities had been taxed as a C-corporation during
the six months.

(J) Reflects the historical operations of the Additional Hotels adjusted for (i)
depreciation on the new cost basis ($944,599), (ii) interest on the debt to finance the
purchase ($2,746,260), and (iii) income taxes ($126,661). Also reflects the elimination
of management fees earned by CapStar Management for managing four of the five
Additional Hotels in 1996 ($366,456). Historical operations of the Additional Hotels
before adjustments were obtained from the hotels' audited combined financial statements
included elsewhere in this Prospectus.
</TABLE>

27
<PAGE>
CAPSTAR HOTEL COMPANY
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995

<TABLE>
<CAPTION>
PRO FORMA
(B) OFFERING BEFORE (J) PRO FORMA
OWNED AND ACQUISITION ADDITIONAL AFTER
HOTELS PRO OTHER PRO OF HOTELS PRO ACQUISITION OF
(A) FORMA FORMA ADDITIONAL FORMA ADDITIONAL
HISTORICAL ADJUSTMENTS ADJUSTMENTS HOTELS ADJUSTMENTS HOTELS
----------- ----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenue from hotel
operations:
Rooms....................... $14,456,387 55,478,217 69,934,604 21,925,991 91,860,595
Food and beverage........... 5,900,238 28,426,328 34,326,566 10,442,474 44,769,040
Other revenue............... 1,570,295 3,966,397 5,536,692 1,613,934 7,150,626
Hotel management and other
fees......................... 4,436,428 -- (235,524)(C) 4,200,904 (926,737) 3,274,167
----------- ----------- ----------- ----------- ----------- --------------
Total revenue................ 26,363,348 87,870,942 (235,524) 113,998,766 33,055,662 147,054,428
----------- ----------- ----------- ----------- ----------- --------------
Hotel operating expenses by
department:
Rooms....................... 4,190,299 14,271,915 -- 18,462,214 5,751,406 24,213,620
Food and beverage........... 4,923,790 22,926,491 -- 27,850,281 9,198,740 37,049,021
Other operating
departments.................. 512,791 2,324,689 -- 2,837,480 904,143 3,741,623
Undistributed operating
expenses:
Administrative and
general...................... 8,078,304 17,005,542 1,062,000(D) 26,145,846 5,662,170 31,808,016
Management fees............. -- 3,152,729 (3,152,729)(E) -- -- --
Property operating costs.... 2,623,626 7,002,261 -- 9,625,887 4,407,863 14,033,750
Property taxes, insurance
and other................. 1,310,517 4,946,569 -- 6,257,086 1,390,174 7,647,260
Depreciation and
amortization................. 2,097,512 7,267,137 613,267(F) 9,977,916 1,889,198 11,867,114
----------- ----------- ----------- ----------- ----------- --------------
Total operating expenses..... 23,736,839 78,897,333 (1,477,462) 101,156,710 29,203,694 130,360,404
----------- ----------- ----------- ----------- ----------- --------------
Interest expense, net........ 2,413,348 11,115,784 (8,468,270)(G) 5,060,862 5,630,540 10,691,402
----------- ----------- ----------- ----------- ----------- --------------
Total expenses............... 26,150,187 90,013,117 (9,945,732) 106,217,572 34,834,234 141,051,806
----------- ----------- ----------- ----------- ----------- --------------
Income (loss) before minority
interest and income taxes.... 213,161 (2,142,175) 9,710,208 7,781,194 (1,778,572) 6,002,622
Minority interest............ (17,415) (24,985) (16,636)(H) (59,036) -- (59,036)
----------- ----------- ----------- ----------- ----------- --------------
Income (loss) before income
taxes........................ 230,576 (2,117,190) 9,726,844 7,840,230 (1,778,572) 6,061,658
Income taxes................. -- -- 3,136,092(I) 3,136,092 (711,429) 2,424,663
----------- ----------- ----------- ----------- ----------- --------------
Net income (loss)............ $ 230,576 (2,117,190) 6,590,752 4,704,138 (1,067,143) 3,636,995
----------- ----------- ----------- ----------- ----------- --------------
----------- ----------- ----------- ----------- ----------- --------------
Pro forma income per share... $ 0.29
Pro forma weighted average
shares outstanding.......... 12,754,321
</TABLE>

28
<PAGE>
CAPSTAR HOTEL COMPANY
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995

<TABLE>
<C> <S>
(A) Reflects historical combined statement of operations of EquiStar and CapStar Management
for the year ended December 31, 1995.

(B) Reflects the pre-acquisition operations of the Owned Hotels to provide a full year of
hotel operations for the unaudited Pro Forma Statement of Operations. For each hotel,
except for the Radisson Hotel, Schaumburg, Illinois, the 1995 pre-acquisition
operations were obtained from the hotel's audited pre-acquisition financial statements
included elsewhere in this Prospectus. As the financial records of the Radisson Hotel,
Schaumburg, Illinois were not available, its pre-acquisition operations ($2,501,548 of
revenues and $2,605,619 of expenses) were estimated based on the hotel's operating
budget for the same period in 1996.

(C) Reflects the elimination of management fee income for the Owned Hotels managed by
CapStar Management prior to acquisition ($235,524).

(E) Management services for the Owned Hotels are provided by the Company and any
intercompany management fee charges will be eliminated for financial reporting
purposes.

(F) Reflects the net of the following adjustments:
</TABLE>

<TABLE>
<S> <C>
Elimination of depreciation on hotels for pre-acquisition period........... $ (7,267,137)
Depreciation on hotels for pre-acquisition period based on EquiStar's cost
basis...................................................................... 7,013,940
Elimination of amortization of deferred financing fees on existing debt
facilities to be repaid.................................................... (83,536)
Amortization of deferred financing costs related to the Credit Facility.... 950,000
------------
Net adjustment............................................................ $ 613,267
------------
</TABLE>

<TABLE>
<C> <S>
(G) Reflects the net of the following adjustments:
</TABLE>

<TABLE>
<S> <C>
Elimination of interest on existing debt facilities to be paid off and
interest from pre- acquisition operations................................. $(13,865,828)
Interest on $61,695,727 outstanding on the Credit Facility at an interest
rate of LIBOR
plus 2.25% (average rate for 1995 was 8.23%) plus the Credit Facility
maintenance fee of
$320,000.................................................................. 5,397,558
------------
Net adjustment............................................................ $ (8,468,270)
------------
</TABLE>

(J) Reflects the historical operations of the Additional Hotels adjusted for (i)
depreciation on the new cost basis ($1,889,198) (ii) interest on the debt to finance
the purchase ($5,630,540), and (iii) income taxes ($711,429 benefit). Also reflects the
elimination of management fee income earned by CapStar Management for managing four of
the five Additional Hotels in 1995 ($926,737). Historical operations of the Additional
Hotels before adjustments were obtained from the hotels' audited combined financial
statements included elsewhere in this Prospectus.
</TABLE>

29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

GENERAL

Prior to the Formation Transactions and the Offering, the business of the
Company was conducted through EquiStar, which owned the Owned Hotels, and
CapStar Management, which managed the Hotels. CapStar Management has been in the
hotel management business since 1987. EquiStar, however, was not formed until
January 12, 1995 and the Company did not own any hotels in any prior periods.
Therefore, the Company's financial statements prior to 1995 reflect only the
management business of CapStar Management. The economics of the management
business are based on fees paid to the Company for management services and the
costs related to the performance of these services. The fee management business
is labor intensive and requires relatively little capital.

Beginning in 1994, the Company began to invest in additional professional
staff and incurred related costs in order to position itself to acquire hotel
properties. From January 12, 1995 through June 30, 1996, the Company acquired 11
hotels on the following dates: March 3, 1995; June 30, 1995 (two hotels), August
4, 1995, October 3, 1995, November 15, 1995, February 2, 1996, February 16,
1996, February 22, 1996, March 8, 1996 and April 17, 1996. Thus, the historical
financial statements for the year ended December 31, 1995 and the six months
ended June 30, 1996 and 1995 reflect differing numbers of Owned Hotels
throughout the periods. The economics associated with the acquisition and
ownership of hotels is significantly different from the fee management business
in that capital is required to both acquire and maintain hotels. Due to the
timing and magnitude of the acquisitions made in 1995 and 1996, it is difficult
to compare results of these periods either to each other or to prior years.

The pro forma financial statements for 1995 and the six months ended June
30, 1996 reflect the operations of the Owned Hotels and the Additional Hotels
for the entire periods. For some or all of such periods, such hotels were owned
and/or operated by other companies. Furthermore, it is the Company's policy to
seek to acquire underperforming hotels where intensive management and selective
capital improvements can increase revenue and cash flow. Therefore, the Company
does not believe it is meaningful to compare its results of operations for 1995
and the first six months of 1996 with comparable prior periods. Except as noted
in the following period to period comparison discussions, the changes in
historical income statement items between periods are attributable to the
changes in the Company's business.

RESULTS OF OPERATIONS
PRO FORMA RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 COMPARED
WITH THE HISTORICAL RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995

On a pro forma basis, after giving effect to the acquisition of the Owned
Hotels and the Additional Hotels and the Offering, pro forma total revenues
increased to $147.1 million for 1995 from $26.4 million for the same historical
period. The increase resulted from the recognition of revenue for the Owned
Hotels and Additional Hotels as if they had been acquired at the beginning of
the period. Management services and other revenues are reduced by $1.2 million
to reflect the elimination of management fee revenues from the Owned Hotels
prior to acquisition and from those Additional Hotels which were managed by the
Company during that period. The pro forma revenues for the period prior to
acquiring each Owned Hotel and the Additional Hotels (except for the Radisson
Hotel, Schaumburg, Illinois, where such revenues were estimated based on the
hotel's operating budget for 1996) reflect the actual revenues of the previous
owners.

Pro forma expenses give effect to the acquisition of the Owned Hotels and
the Additional Hotels and the Offering. Total pro forma operating expenses
increased to $130.4 million for 1995 from $23.7

30
<PAGE>
million for the same historical period. Departmental, selling, general,
administrative and other operating expenses reflect the actual costs incurred by
the previous owners prior to each acquisition and the actual costs incurred by
the Company thereafter. Depreciation, amortization, interest and income taxes
reflect the expenses that would have been incurred by the Company if the
Offering and the Formation Transactions had taken place at the beginning of the
period.

Pro forma EBITDA improved to $28.6 million for 1995 from $4.7 million for
the same historical period. Pro forma EBITDA as a percentage of revenue
increased to 19.4% for 1995 from 17.9% for the same historical period.
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, and 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 operating performance.

SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1995

Total revenues increased to $46.3 million in the six months ended June 30,
1996 from $4.8 million in the six months ended June 30, 1995. Room revenues for
the six months ended June 30, 1996 increased to $28.1 million from $1.9 million
while food, beverage and other department revenues increased to $16.0 million
from $0.7 million predominantly due to the acquisition of 10 Owned Hotels and
the inclusion of an eleventh Owned Hotel acquired on March 3, 1995 for the
entire 1996 period.

Operating costs and expenses increased to $39.6 million in the six months
ended June 30, 1996 from $4.3 million in the six months ended June 30, 1995,
resulting from the acquisition of 10 Owned Hotels and the inclusion of an
eleventh hotel for the entire 1996 period. The costs related to management of
the Managed Hotels remained relatively constant.

Operating income increased to $6.6 million for the six months ended June 30,
1996 from $0.5 million for the six months ended June 30, 1995. Operating income
as a percentage of revenue increased to 14.3% for the six months ended June 30,
1996 from 10.4% for the six months ended June 30, 1995, resulting from increased
operating efficiencies.

Net interest expense increased to $7.3 million in the six months ended June
30, 1996 from $0.3 million in the six months ended June 30, 1995, resulting from
the debt incurred related to the acquisition of 10 Owned Hotels and the
inclusion of an eleventh hotel acquired on March 3, 1995 for the entire 1996
period.

The net loss of $0.6 million for the six months ended June 30, 1996 is a
decrease from the net income of $0.2 million for the six months ended June 30,
1995 and is due to the acquisition of 10 Owned Hotels. This loss was caused
primarily by increased interest expense incurred to acquire the properties.

EBITDA increased to $10.6 million for the six months ended June 30, 1996
from $0.8 million for the six months ended June 30, 1995. EBITDA as percentage
of revenue increased to 22.8% for the six months ended June 30, 1996 from 16.7%
for the six months ended June 30, 1995.

YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994

Total revenues increased to $26.4 million in 1995 from $4.4 million in 1994.
Room revenues and food, beverage and other hotel department revenues for 1995
reflect the operating revenues of five Owned Hotels acquired during the period.
There were no Owned Hotels acquired during 1994.

31
<PAGE>
Operating costs and expenses increased to $23.7 million in 1995 from $4.5
million in 1994. Departmental expenses and property operating costs for 1995
reflect the operations of five Owned Hotels acquired during the period. Selling,
general and administrative costs and depreciation expense reflect increases due
to the acquisition of five Owned Hotels and the interest in the Westin Atlanta
Airport during 1995. The costs related to management of the Managed Hotels
remained relatively constant between the periods.

Operating income increased to $2.6 million for the period from 1995 from a
loss of $0.1 million in 1994. The increase from 1994 is due to the operating
income by the Owned Hotels and to increased efficiencies in the management of
the Managed Hotels.

Net interest expense of $2.4 million for 1995 results from the debt incurred
related to the acquisition of the Owned Hotels.

The Company incurred an extraordinary loss on extinguishment of debt during
1995 from the write-off of deferred financing fees in connection with a
refinancing transaction.

The net loss increased to $0.7 million for 1995 from $0.1 million for 1994.
The primary reason for the extraordinary loss was the extinguishment of debt.

YEAR ENDED DECEMBER 31, 1994 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1993

Management services and other revenues increased to $4.4 million in 1994
from $4.2 million in 1993, due to the improved performance of the Managed
Hotels. The Management Agreements provide for incentive payments based on the
favorable performance of the Managed Hotels.

Operating costs and expenses increased to $4.5 million in 1994 from $4.1
million in 1993. Selling, general and administrative costs reflect increases due
to the addition of development, accounting and administrative personnel and
leased office space as the Company began to actively seek acquisitions of hotel
properties.

The net loss for 1994 was $0.1 million compared to net income of $0.2
million in 1993. The variance in net operating results was due to the additional
operating costs incurred.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal sources of liquidity are cash on hand, cash
generated from operations and borrowings under credit facilities as well as the
proceeds from the Offering. The Company's continuing operations are funded
through cash generated from hotel operations. Hotel acquisitions are financed
through a combination of internally generated cash and borrowings under credit
facilities.

At June 30, 1996, the Company had $4.9 million in cash and cash equivalents,
a decrease of $1.9 million from the balance of $6.8 million on December 31,
1995. During the 18 months ended June 30, 1996, the Company invested $14.0
million in capital improvements in connection with renovations of the Owned
Hotels. The Company plans to spend an additional $13.7 million in 1996 and $2.1
million in 1997 for the completion of the renovation of the Owned Hotels.
Renovations on the Additional Hotels will commence after consummation of their
acquisition at the end of 1996 and are projected to total $3.7 million. Capital
for renovation work has been and will be provided by a combination of internally
generated cash and borrowings under credit facilities. The Company is committed
to reinvesting adequate capital on an ongoing basis to maintain the quality of
the hotels it owns. Once existing planned renovation programs are complete, the
Company expects to spend approximately 4% of revenues on an annual basis for
ongoing capital expenditures, including room and facilities refurbishments,
renovations and furniture and equipment replacements. The Company believes that
these investments will enhance the Company's competitive position.

32
<PAGE>
The Company has entered into negotiations with the Banks, led by Bankers
Trust, to obtain the Credit Facility in the maximum principal amount of $225
million. Borrowings under the Credit Facility will be used by the Company to
repay existing indebtedness (including $58.9 million of indebtedness owed to
Lehman Holdings that will remain outstanding following consummation of the
Offering and the application of proceeds therefrom), to acquire and renovate
upscale, full-service hotels in the United States, and for other corporate
purposes. It is anticipated that the Company's ability to borrow under the
Credit Facility will be subject, among other things, to a borrowing base test
calculated with the reference to the cash flow from hotel properties, the
relative contribution to the borrowing base of the values attributable to the
different hotel properties, the appraised values of such hotel properties and
certain other factors.

It is anticipated that the term of the Credit Facility will be three years,
subject to two one-year extensions upon the satisfaction of certain conditions.
The Company anticipates that it will not be entitled to borrow additional
advances or reborrow during the extension period. The Company will be required
to pay customary fees in connection with the structuring of the Credit Facility,
a commitment fee on the unused portion of the Credit Facility and a fee on
outstanding letters of credit.

It is anticipated that the Credit Facility will be a direct obligation of
CapStar Management and will be fully and unconditionally guaranteed by the
Company and certain subsidiaries of CapStar Management, including the
subsidiaries owning hotel properties. It is anticipated that the Credit Facility
will be secured by substantially all the real and personal property of CapStar
Management and its subsidiaries.

The Credit Facility will contain convenants that impose certain limitations
on the Company in respect of, among other things, (i) the payment of dividends
and other distributions, (ii) acquisitions of additional hotel properties, (iii)
the creation or incurrence of liens, (iv) the incurrence of indebtedness, lease
obligations or contingent liabilities, (v) the acquisition of investments in and
securities issued by joint ventures and other entities, (vi) transactions with
affiliates, (vii) management or similar agreements delegating to another person
substantial authority over the operation or maintenance of its hotel properties,
(viii) mergers, acquisitions, divestitures or reorganizations, (ix) the issuance
of preferred stock and (x) sale leaseback transactions involving any of its
hotel properties. The Credit Facility will also contain covenants that will
subject the Company to certain operating requirements and that require the
maintenance of certain financial levels, such as consolidated net worth, and
certain financial ratios, such as consolidated hotel indebtedness to market
equity capitalization and shareholders' equity, consolidated cash flow to
interest and consolidated total indebtedness to consolidated cash flow.

While the Company expects to enter into the Credit Facility following the
consummation of the Offering, and prior to the maturity of its indebtedness to
Lehman Holdings, there can be no assurance that the Company will be successful
in entering into the Credit Facility and, if so, on the terms described above or
otherwise. See "Risk Factors--Risk of Debt Financing; No Limit on Indebtedness."

SEASONALITY

Demand at many of the Hotels is affected by recurring seasonal patterns.
Demand is lower in the winter months due to decreased travel and higher in the
spring and summer months during peak travel season. Accordingly, the Company's
operations are seasonal in nature, with lower revenue, operating profit and cash
flow in the first and fourth quarters and higher revenue, operating profit and
cash flow in the second and third quarters.

INFLATION

The rate of inflation has not had a material effect on the revenues or
operating results of the Company during the three most recent fiscal years.

33
<PAGE>
THE COMPANY

CapStar is a hotel investment and management company which acquires, owns,
renovates, repositions and manages hotels throughout the United States. CapStar
owns 12 upscale, full-service Owned Hotels which contain 3,516 rooms. Including
the Owned Hotels, the Company manages 49 Hotels with 9,044 rooms. The Company's
business strategy is to identify and acquire hotel properties with the potential
for cash flow growth and to renovate, reposition and operate each hotel
according to a business plan specifically tailored to the characteristics of the
hotel and its market. Each of the Owned Hotels is located in a market which has
recently experienced strong economic growth, including Atlanta, Charlotte,
Chicago, Cleveland, Dallas, Los Angeles, Salt Lake City, Seattle and Washington,
D.C. The Owned Hotels include hotels operated under nationally recognized brand
names such as Hilton, Sheraton, Westin, Marriott, Holiday Inn and Radisson, and
one hotel operated under an independent brand name. In the six months ended June
30, 1996, on a pro forma basis, the operating performance of the Owned Hotels
improved significantly, as demonstrated by the 7.5% increase in revenues, 14.1%
increase in gross operating profit, and 12.5% increase in RevPAR over the
comparable year earlier period. Because the Company did not own the Additional
Hotels during such periods, the pro forma data presented does not include the
Additional Hotels.
<TABLE>
<CAPTION>
PRO FORMA
SIX MONTHS ENDED
JUNE 30,
--------------------
PERCENTAGE
1996 1995 INCREASE
------- --------- ----------
<S> <C> <C> <C>
Revenues (in thousands)........................ $58,099 $54,036 7.5%
Gross operating profit (in thousands).......... $17,594 $15,415 14.1%
Average Occupancy.............................. 73.3% 71.9% 1.9%
ADR............................................ $ 82.47 $ 74.73 10.4%
RevPAR......................................... $ 60.45 $ 53.73 12.5%
</TABLE>

Additionally, the performance of the Company's Owned Hotels compares
favorably with that of the industry in general. For the five months ended May
31, 1996 (the most recent period for which industry information is currently
available), RevPAR for the Owned Hotels increased 12.6%, while RevPAR for all
upscale hotels, as reported by Smith Travel Research, increased 5.8%.

As a fully integrated owner and manager, CapStar intends to capitalize on
its management experience and expertise by continuing to make opportunistic
acquisitions of full-service hotels, securing additional management contracts
and improving the operating performance of the hotels. The Company's senior
management team has successfully managed hotels in all segments of the lodging
industry, with particular emphasis on upscale, full-service hotels. Senior
management has an average of approximately 19 years of experience in the hotel
industry. Since the inception of the Company's management business in 1987, the
Company has achieved consistent growth, even during periods of relative industry
weakness. The Company attributes its management success to its ability (i) to
analyze each hotel as a unique property and identify those particular cash flow
growth opportunities which each hotel presents, (ii) to create and implement
marketing plans that properly position each hotel within its local market, and
(iii) to develop management programs that emphasize guest service, labor
productivity, revenue yield and cost control. The Company has a distinct
management culture that stresses creativity, loyalty and entrepreneurship and
was developed to emphasize operations from an owner's perspective. This culture
is reinforced by the fact that 33 members of management will hold, directly or
indirectly, an aggregate of 7.6% of the Company's equity upon completion of the
Offering. See "Principal and Selling Stockholders."

34
<PAGE>
Owned Hotels' appeal to a broader range of market segments. Examples of these
revenue generating renovations include the following: enhancing meeting and
banquet facilities to attract lucrative group conferences and conventions;
upgrading guest rooms to meet the needs of business travelers and to increase
ADRs; renovating restaurants and introducing new food and beverage concepts to
attract additional guests and local patrons; and completing necessary repairs
and upgrades of interior and exterior spaces to ensure high levels of quality
and guest satisfaction. During the 18 months ended June 30, 1996, the Company
spent a total of $14.0 million on renovations at the Owned Hotels and currently
intends to spend an additional $15.8 million completing the renovation programs.

The Company believes that the upscale, full-service segment of the lodging
industry is the most attractive segment in which to acquire, own and manage
hotels and further believes that there are currently many attractive
opportunities to acquire properties in this segment of the industry at prices
below replacement cost. The upscale, full-service segment is attractive for
several reasons. First, the Company expects that there will be no significant
increases in the supply of upscale, full-service hotels in the next several
years because the cost of new construction generally does not justify new hotel
development. Second, upscale, full-service hotels appeal to a wide variety of
customers, thus reducing the risk of decreasing demand from any particular
customer group. Additionally, such hotels have particular appeal to business
executives and upscale leisure travelers, customers who are generally less price
sensitive than travelers who use limited-service hotels. Third, because
full-service hotels have a higher proportion of fixed costs to variable costs
than other segments of the lodging industry, full-service hotels afford greater
operating leverage than limited-service hotels, resulting in increasingly higher
profit margins as revenues increase. Finally, full-service hotels require a
greater depth of management expertise than limited-service hotels, and the
Company believes that its superior management skills provide it with a
significant competitive advantage in their operation.

In connection with its growth strategy, the Company has entered into a
binding contract with MBL to acquire the five Additional Hotels which contain
1,121 rooms, for a purchase price of $68.4 million. Four of the Additional
Hotels have been managed by the Company since 1991. Since assuming management of
these four hotels, the Company has improved the operating performance of the
properties. The Company, however, believes that with appropriate capital
spending the Additional Hotels can achieve further improvements in revenue and
cash flow. The Company plans to spend approximately $3.7 million subsequent to
the acquisition to renovate and reposition the Additional Hotels. The
acquisition is scheduled to close in December 1996. There can be no assurance,
however, that the closing will occur. See "Risk Factors--Risks Associated with
Expansion" and "Business and Properties--The Properties--The Additional Hotels."

BUSINESS AND PROPERTIES

ACQUISITION STRATEGY

35
<PAGE>
management and individual operations teams create detailed plans covering all
areas of renovation and operation. These plans serve as the basis for the
Company's acquisition decisions and guide subsequent renovation and operating
plans. At the Owned Hotels, the Company has been able to implement these plans
and apply its system of management to create improvements in revenue and
profitability.

The Company will seek to acquire and invest in hotels that meet the
following criteria:

MARKET CRITERIA

Economic Growth. The Company focuses on metropolitan areas that are
approaching, or have already entered, periods of economic growth. Such areas
generally show above average growth in the business community as measured by (i)
job formation rates, (ii) population growth rates, (iii) tourism and convention
activity, (iv) airport traffic volume, (v) local commercial real estate
occupancy, and (vi) retail sales volume. Markets that exhibit these
characteristics typically have strong demand for hotel facilities and services.

Supply Constraints. The Company seeks lodging markets with favorable supply
dynamics for hotel owners and operators, including an absence of current new
hotel development and barriers to future development such as zoning constraints,
the need to undergo lengthy local development approval processes and a limited
number of suitable sites. Other factors limiting the supply of new hotels are
the current lack of financing available for new development and the inability to
generate adequate returns on investment to justify new development.

Geographic Diversification. The Company seeks to maintain a geographically
diverse portfolio of hotels to offset the effects of regional economic cycles.
The Hotels are located in 23 states across the nation, with 11 Hotels located in
California, four in Virginia, three in Colorado, three in Maryland, three in New
Jersey, two in Arizona, two in Indiana, two in Louisiana, two in New York, two
in Washington, D.C., two in Pennsylvania and one Hotel each in 12 additional
states.

HOTEL CRITERIA

Location and Market Appeal. The Company seeks to acquire upscale,
full-service hotels that are situated near both business and leisure centers
which generate a broad base of demand for hotel accommodations and facilities.
These demand generators include (i) business parks, (ii) airports, (iii)
shopping centers and other retail areas, (iv) convention centers, (v) sports
arenas and stadiums, (vi) major highways, (vii) tourist destinations, (viii)
major universities, and (ix) cultural and entertainment centers with nightlife
and restaurants. The confluence of nearby business and leisure centers enables
the Company to attract both weekday business travelers and weekend leisure
guests. Attracting a balanced mix of business, group and leisure guests to the
Hotels helps to maintain stable occupancy rates and high ADRs.

Size and Facilities. The Company seeks to acquire well-constructed hotels
that are less than 20 years old, contain 200 to 500 guest rooms and include
accommodations and facilities that are, or are capable of being made, attractive
to key demand segments such as business, group and leisure travelers. These
facilities typically include large, upscale guest rooms, food and beverage
facilities, extensive meeting and banquet space, and amenities such as health
clubs, swimming pools and adequate parking.

Potential Performance Improvements. The Company seeks to acquire
underperforming hotels where intensive management and selective capital
improvements can increase revenue and cash flow. Underperforming hotels
typically serve less than their "fair share" of lodging industry demand (as
measured by RevPAR), achieve lower profit margins than the Company believes it
can maintain and receive inadequate funding to make needed capital improvements.
These hotels represent opportunities where a systematic management approach and
targeted renovations should result in improvements in

36
<PAGE>
revenue and cash flow. The Company's ability to improve operations is
demonstrated by the fact that RevPAR at the Owned Hotels increased 12.6% from
the five month period ended May 31, 1995 to the five month period ended May 31,
1996, as compared to an increase of only 5.8% for the upscale, full-service
hotel segment as reported by Smith Travel Research over the comparable period
(the most recent industry information available).

The Company expects that its relationships throughout the industry and its
acquisition staff located on both coasts of the United States will continue to
provide it with a competitive advantage in identifying, evaluating and
purchasing hotels which meet its acquisition criteria. The Company has a record
of successfully renovating and repositioning hotels, both at the Owned Hotels
and at the Managed Hotels (varying in levels of service, room rates and market
types). As a public company, the Company believes it will have improved access
to various debt and equity financing sources to fund acquisitions. In addition,
in consummating acquisitions the Company expects that it will benefit from its
ability to utilize units of limited partnership interest in its subsidiary
Operating Partnership as an alternative to cash. The Company is currently
negotiating with the Banks, led by Bankers Trust, to obtain the new $225 million
Credit Facility, under which capital will be available to pursue acquisitions
and make capital investments in subsequently acquired hotels. See "Risk
Factors--Risks of Debt Financing; No Limits on Indebtedness." The Company
currently expects to retain earnings for future acquisitions and the renovation
and maintenance of the hotels it owns.

OPERATING STRATEGY

The Company's principal operating objectives are to generate higher RevPAR
and to increase net operating income while providing its hotel guests with
high-quality service and value. The Company seeks to achieve these objectives by
creating and executing management plans that are specifically tailored for each
individual Hotel rather than by implementing an operating strategy that is
designed to maintain a uniform corporate image or brand. Management believes
that its custom-tailored business plans are the most effective means of
addressing the needs of a given hotel or market. The Company believes that
skilled management of hotel operations is the most critical element in
maximizing revenue and cash flow in full-service hotels.

The Company's corporate headquarters carries out financing and acquisition
activities and provides services to support as well as monitor the Company's
on-site hotel operating executives. Each of the Company's executive departments,
including Sales and Marketing, Human Resources and Training, Food and Beverage,
Technical Services, Development, and Corporate Finance, is headed by an
executive with significant experience in that area. These departments support
decentralized decision-making by the hotel operating executives by providing
accounting and budgeting services, property management software and other
resources which cannot be economically maintained at the individual Hotels.

Key elements of the Company's management programs include the following:

Comprehensive Budgeting and Monitoring. The Company's operating strategy
begins with an integrated budget planning process that is implemented by
individual on-site managers and monitored by the Company's corporate staff.
Management sets targets for cost and revenue categories at each of the Hotels
based on historical operating performance, planned renovations, operational
efficiencies and local market conditions. On-site managers coordinate with the
central office staff to ensure that such targets are realistic. Through
effective and timely use of its comprehensive financial information and
reporting systems, the Company can monitor actual performance and rapidly adjust
prices, staffing levels and sales efforts to take advantage of changes in the
market and to improve yield.

Targeted Sales and Marketing. The Company employs a systematic approach
toward identifying and targeting segments of demand for each Hotel in order to
maximize market penetration. Executives at the Company's corporate headquarters
and property-based managers divide such segments into

37
<PAGE>
smaller subsegments, typically ten or more for each Hotel, and develop narrowly
tailored marketing plans to suit each such segment. The Company supports each
Hotel's local sales efforts with corporate sales executives who develop new
marketing concepts and monitor and respond to specific market needs and
preferences. These executives are active in implementing on-site marketing
programs developed in the central management office. The Company employs
computerized revenue yield management systems to manage each Hotel's use of the
various distribution channels in the lodging industry. Management control over
those channels, which include franchisor reservation systems and "800" numbers,
travel agent and airline global distribution systems, corporate travel offices
and office managers, and convention and visitor bureaus, enables the Company to
maximize revenue yields on a day-to-day basis. Sales teams are recruited locally
and receive incentive-based compensation bonuses. All of the Company's sales
managers complete a highly developed sales training program.

Strategic Capital Improvements. The Company plans renovations primarily to
enhance a Hotel's appeal to targeted market segments, thereby attracting new
customers and generating increased revenue and cash flow. During the 18 months
ended June 30, 1996, the Company spent a total of $14.0 million on renovations
at the Owned Hotels and currently intends to spend an additional $15.8 million
completing the renovation programs. For example, at all of the Owned Hotels, the
Company has renovated banquet and meeting spaces and upgraded guest rooms with
computer ports and comfortable work spaces to better accommodate the needs of
business travelers and to increase ADRs. Capital spending decisions are based on
both strategic needs and potential rate of return on a given capital investment.

Selective Use of Multiple Brand Names. The Company believes that the
selection of an appropriate franchise brand is essential in positioning a hotel
optimally within its local market. The Company selects brands based on local
market factors such as local presence of the franchisor, brand recognition,
target demographics and efficiencies offered by franchisors. The Company
believes that its relationships with many major hotel franchisors, established
both as a manager and an owner of hotels operated under their respective
franchises, places the Company in a favorable position when dealing with those
franchisors and allows it to negotiate favorable franchise agreements with
franchisors. The Company believes that its growth through acquisition of
additional hotels will further strengthen its relationship with franchisors.

38
<PAGE>
The following chart summarizes certain information with respect to the
national franchise affiliations of the Hotels and the Additional Hotels:

<TABLE>
<CAPTION>
PERCENTAGE OF
COMPANY'S TOTAL
GUEST ROOMS--
PERCENTAGE OF OWNED
NUMBER OF NUMBER OF COMPANY'S TOTAL HOTELS AND
FRANCHISE HOTELS GUEST ROOMS GUEST ROOMS ADDITIONAL HOTELS
- ------------------------------------ --------- ----------- --------------- -----------------
<S> <C> <C> <C> <C>
Hilton.............................. 7 1,930 21.3% 41.6%
Sheraton............................ 4 1,137 12.6 15.7
Holiday Inn......................... 7 1,132 12.6 9.4
Best Western(R)..................... 6 728 8.0 --
Ramada(R)........................... 4 725 8.0 --
Westin.............................. 1 496 5.5 10.7
Marriott............................ 1 434 4.8 9.4
Radisson............................ 2 328 3.6 4.4
Days Inn(R)......................... 2 277 3.1 --
Quality(R).......................... 2 277 3.1 --
Doubletree(R)....................... 1 208 2.3 --
Clarion(R).......................... 1 194 2.1 --
Comfort Suites(R)................... 1 119 1.3 --
Residence Inn(R).................... 1 104 1.1 --
Independent......................... 9 955 10.6 8.8
--
----- ----- -----
Total............................... 49 9,044 100.0% 100.0%
--
--
----- ----- -----
----- ----- -----
</TABLE>

Emphasis on Food and Beverage. Management believes popular food and beverage
ideas are a critical component in the overall success of a hotel. The Company
utilizes its food and beverage operations to create local awareness of its hotel
facilities, to improve the profitability of its hotel operations and to enhance
customer satisfaction. The Company is committed to competing for patrons with
restaurants and catering establishments by offering high-quality restaurants
that garner positive reviews and strong local and/or national reputations. The
Company has engaged food and beverage experts to develop several proprietary
restaurant concepts. The Owned Hotels contain restaurants ranging from Michel
Richard's highly acclaimed CITRONELLE(R), to Morgan's, a Company-designed
concept which offers popular, moderately-priced American cuisine. The Company
has also successfully placed national food franchises such as Starbuck's
Coffee(R) and "TCBY"(R) Yogurt in casual, delicatessen-style restaurants in
several of the Owned Hotels. Popular food concepts have strengthened the
Company's ability to attract business travelers and group meetings and improved
the name recognition of the Owned Hotels.

Commitment to Reinvestment. The Company is committed to reinvesting adequate
capital on an ongoing basis to maintain the quality of the hotels it owns.
Reinvestment is expected to include room and facilities refurbishments,
renovations and furniture and equipment replacements that are designed to
maintain attractive accommodations, updated restaurants and modern equipment.
The Company believes that these investments will enhance the Company's
competitive position.

Computerized Reporting Systems. The Company employs computerized reporting
systems at each of the Hotels and at its corporate offices to monitor the
financial and operating performance of the Hotels. Management information
services have been fully integrated through the installation of Novell and Unix
networks. Management also utilizes programs like Data Plus(R) and cc:Mail(R) to
facilitate daily communication. Such programs have enabled the Company to create
and implement detailed reporting systems at each of the Hotels and its corporate
headquarters. Corporate executives utilize information systems that track each
of the Hotel's daily occupancy, ADR, and revenue from rooms, food and

39
<PAGE>
beverage. By having the latest hotel operating information available at all
times, management is better able to respond to changes in the market of each
Hotel.

Commitment to Service and Value. The Company is dedicated to providing
exceptional service and value to its customers on a consistent basis. The
Company conducts extensive employee training programs to ensure personalized
service at the highest levels. Programs such as "Be A Star" have been created
and implemented by the Company to ensure the efficacy and uniformity of its
employee training. The Company's practice of tracking customer comments, through
the recording of guest comment cards and the direct solicitation (during
check-in and check-out) of guest opinions regarding specific items, allows
investment in services and amenities where they are most effective. The
Company's focus on these areas has enabled it to attract lucrative group
business.

Distinct Management Culture. The Company has a distinct management culture
that stresses creativity, loyalty and entrepreneurship and was developed to
emphasize operations from an owner's perspective. Management believes in
realistic solutions to problems, and innovation is always encouraged. Incentive
programs and awards have been established to encourage individual property
managers to seek new ways of increasing revenues and operating cash flow. This
creative, entrepreneurial spirit is prevalent from the corporate staff and the
general managers down to the operations staff. Individual general managers work
closely with the corporate staff and they and their employees are rewarded for
achieving target operating and financial goals.

IMPLEMENTATION OF STRATEGIES

Since January 1, 1995, CapStar has implemented its acquisition and operating
strategies by acquiring and assuming management of 12 upscale, full-service
hotels containing approximately 3,500 rooms and contracting to acquire
Additional Hotels containing approximately 1,125 rooms. The Company believes
that it has improved the performance of each of the Owned Hotels since acquiring
them between March 1995 and June 1996. The following three examples illustrate
the manner in which the Company has implemented its acquisition and operating
strategies at the Owned Hotels:

Westin Atlanta Airport. Built in 1982, the 496-room hotel is located on
Interstate 85 near Interstate 285, Atlanta's central highway, and adjacent to
Hartsfield International Airport (the nation's third busiest airport). After
acquiring the hotel, the Company completed extensive renovations which enabled a
Westin franchise to become effective as of July 1996. The hotel's facilities and
amenities feature over 15,000 square feet of meeting and banquet space, an
indoor/outdoor pool, a health club, a voice mail telephone answering system, a
gift shop, a business center, a club lounge, two restaurants, a lounge and a
nightclub. The economy of greater Atlanta, host of the 1996 Summer Olympic
Games, is among the strongest in the nation.

Prior to the Company's acquisition, the hotel had been leased to a tenant
that was involved in prolonged disputes with the hotel's owners, which had
resulted in inadequate maintenance of the hotel's physical plant and generally
poor employee morale. The Company acquired the first mortgage loan on this hotel
from a major insurance company during 1995 and in November 1995 acquired a
majority limited partnership interest and the sole general partner interest in
the limited partnership that owns the hotel (the limited partnership was in its
fourth year of Chapter 11 reorganization at the time). The Company took over
management of the hotel in March 1996 after confirmation of the hotel's
reorganization plan and has implemented an operating strategy (outlined in the
chart below) which includes a $7.1 million renovation program that is expected
to be substantially completed by November 1996.

40
<PAGE>

<TABLE>
<CAPTION>
BUSINESS PLAN ELEMENT BUSINESS PLAN STRATEGY STATUS
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>

1. Change franchise brand . Complete property Westin franchise became
affiliation from improvements specified by effective in July 1996.
Renaissance(R) to Westin. Westin.

2. Replace property . Install new management New general manager and
management committee to team. executive staff installed.
facilitate shift in
marketing and management
direction.

3. Shift demand segment from . Renovate 250 guest rooms to Club room and telephone
heavily-discounted airline Westin Premier(R) standard system installed. Westin
crew business to premium and install Guest Office Premier rooms completed and
business and leisure features. remaining rooms in process of
travelers. . Install dedicated club room being renovated (as airline
for top tier guests. contracts expire).
. Upgrade remaining guest
rooms.
. Replace telephone system.
. Repair health club
equipment and pool area.

4. Increase group meeting . Renovate meeting and Renovations complete and
use. banquet space in marketing plan under way.
coordination with local and
national Westin sales office
system.

5. Execute accelerated . Repair and upgrade HVAC and Deferred maintenance programs
capital improvement plan to mechanical system. underway.
address defined maintenance . Refinish guest room
program. corridors.
. Repair building exterior
and grounds.
</TABLE>

Marriott Hotel, Somerset, NJ. Built in 1978, the 434-room hotel is centrally
located on Interstate 287, approximately 25 miles from Newark International
Airport, 40 minutes from midtown Manhattan and convenient to all major traffic
arteries in Northern New Jersey. The hotel's facilities and amenities feature
over 9,000 square feet of meeting and banquet space, tennis courts, volleyball
courts, an indoor/outdoor pool, a sauna/whirlpool, an exercise room, a
shuffleboard/badminton court, two restaurants and a pool-side bar. The hotel is
surrounded by a significant number of corporate headquarters, commercial office
buildings, retail centers, an affluent residential community and extensive,
well-maintained local highways and road systems. Somerset and its neighboring
communities have been experiencing moderate economic growth in recent years.

Prior to the Company's acquisition, a widely syndicated investment
partnership owned the hotel and contracted the management to Marriott
International, Inc. That owner limited the amount of capital for building
renovations available to Marriott International, Inc., which necessitated a
marketing strategy that did not allow management to penetrate the multiple
demand segments that the Company believes the hotel can successfully serve. Data
from Smith Travel Research indicated that the hotel was operating at above its
fair share of demand among the competitive set of area hotels during 1994 and
1995, but at a significantly lower premium than it had consistently maintained
during prior years, which the Company believes was a direct result of inadequate
on-going capital investment. Since acquiring the hotel in October 1995, the
Company has implemented an operating strategy (outlined in the chart below)
which includes a $3.3 million renovation program that is expected to be
substantially completed by October 1996.

41
<PAGE>

<TABLE>
<CAPTION>
BUSINESS PLAN ELEMENT BUSINESS PLAN STRATEGY STATUS
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>

1. Pursue higher ADR through . Convert 180 guest rooms to Renovations and conversions
modified room rate Marquis(R) level. to be completed by August
structure in premium . Redecorate the lobby and 1996 (time table based on
commercial segment. the corporate club. vacancy patterns so that
. Reduce number of premium premium room service
guest rooms available at interruption is minimized).
discounts.

2. Increase weekend . Target leisure demand Direct sales and marketing
occupancy. segment with direct sales plans in place.
and advertising.

3. Pursue higher food and . Convert formal dining room Renovations completed.
beverage sales. to banquet space to attract
local catering demand.
. Enlarge cocktail lounge to
attract non-restaurant
demand.

4. Reduce operating expenses . Install computer network Achieved gross operating
by restructuring staff and for more efficient profit margin of 34.5% for
training programs. management oversight. the six months ended June 30,
1996.

5. Execute accelerated . Replace HVAC units in 140 Deferred maintenance programs
capital improvement plan to guest rooms. underway.
address deferred . Refinish corridors.
maintenance program. . Install fire sprinkler
system.
</TABLE>

Salt Lake Airport Hilton. Built in 1980, the 287-room hotel is centrally
located within a commercial office park, approximately five minutes from the
Salt Lake City International Airport and 15 minutes from downtown Salt Lake
City. The hotel's facilities and amenities feature 10,000 square feet of meeting
and banquet facilities, indoor and outdoor pools, a basketball court, lake and
dock facilities, a putting green, a health club, a video room and a restaurant
and lounge with 150 seats. The hotel is well-positioned to serve strong business
segment demand generated by the commercial office park, as well as leisure
segment demand from visitors to nearby attractions like the Mormon Temple, the
Great Salt Lake and seven world-class ski resorts in the Wasatch Range of the
Rocky Mountains. Salt Lake City has experienced strong economic growth in recent
years as a result of a growing high-tech business community, the renovation and
expansion of the Salt Palace Convention Center and the selection of the city as
the site of the 2002 Winter Olympic Games.

Prior to the Company's acquisition, the Salt Lake Airport Hilton was owned
and operated by its original developer, a local development company that owned
no other hotel properties. The hotel's first mortgage had passed its original
maturity date. The hotel suffered from deferred maintenance, a deteriorating
market share and low employee morale. Specific operational deficiencies included
the lack of a yield management system, a low operating margin in the rooms
department and an inefficient marketing plan that failed to attract upscale
business travelers and group business. Data from Smith Travel Research indicated
that the hotel was operating at approximately 83% of its fair share of demand
among its competitive set of area hotels during 1994. However, the Company felt
that the hotel had a fundamentally sound physical plant, facilities and
amenities to serve a full range of lodging demand segments and strong marketing
support from the Hilton reservation system. Since acquiring the hotel in March
1995, the Company has implemented an operating strategy (outlined in the chart
below) which includes a $1.8 million renovation program that is substantially
completed.

42
<PAGE>

<TABLE>
<CAPTION>
BUSINESS PLAN ELEMENT BUSINESS PLAN STRATEGY STATUS
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
1. Recapture business . Upgrade 48 guest rooms to Renovations completed and new
travelers in premium rate create corporate floor with restaurant operating.
segment during peak business services and
business periods. dedicated club room.
. Redecorate lobby and small
meeting rooms.
. Install new restaurant.
2. Generate higher revenues . Fully renovate meeting Renovations completed and
from group demand segment facilities. local/corporate sales program
in rooms and food & . Install cocktail lounge. continuing.
beverage department. . Upgrade VIP and hospitality
suites.
3. Apply yield management . Install new computer system Completed and in effect.
practices. and upgrade software.
4. Reduce Rooms Department . Reduce payroll costs. Rooms Department profit
expense margin. . Scale back on excessive margin increased from 34.4%
guest premium program. for the six months ended June
30, 1995 to 36.9% for the six
months ended June 30, 1996.
5. Eliminate unproductive . Redirect promotional Program underway.
promotional costs. dollars to priority business
plan items.
</TABLE>

THE PROPERTIES

The Owned Hotels and the Additional Hotels feature, or after the Company's
renovation program has been completed will feature, comfortable, modern guest
rooms, extensive meeting and convention facilities and full-service restaurant
and catering facilities that attract meeting and convention functions from
groups and associations, upscale business and vacation travellers as well as
banquets and receptions from the local community.

43
<PAGE>
The following table sets forth certain information with respect to the Owned
Hotels and the Additional Hotels for the 12 months ended June 30, 1996:

<TABLE>
<CAPTION>
PLANNED OR TWELVE MONTHS ENDED
COMPLETED JUNE 30, 1996
NUMBER OF RENOVATION ----------------------------
GUEST YEAR MONTH EXPENDITURE(1) AVERAGE
HOTEL LOCATION ROOMS BUILT ACQUIRED (000'S) OCCUPANCY ADR REVPAR(2)
- --------------------------------- ----------------- --------- ----- -------- -------------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OWNED HOTELS
Orange County Airport Hilton..... Irvine, CA 290 1976 2/96 $ 2,006 65.1% $73.61 $ 47.92
Sheraton Hotel................... Colorado Springs,
CO 502 1974 6/95 3,393 68.5 63.57 43.55
The Latham Hotel................. Washington, DC 143 1981 3/96 802 73.2 102.60 75.10
Westin Atlanta Airport(3)........ Atlanta, GA 496 1982 11/95 7,100 84.1 71.64 60.25
Radisson Hotel................... Schaumburg, IL 202 1979 6/95 1,652 62.7 69.23 43.41
Marriott Hotel................... Somerset, NJ 434 1978 10/95 3,311 72.3 96.49 69.76
Sheraton Airport Plaza........... Charlotte, NC 226 1985 2/96 1,529 73.9 79.02 58.40
Holiday Inn...................... Cleveland, OH 237 1978 2/96 2,900 75.2 66.96 50.35
Hilton Hotel..................... Arlington, TX 310 1983 4/96 2,700 75.1 79.01 59.34
Salt Lake Airport Hilton......... Salt Lake City,
UT 287 1980 3/95 1,823 71.3 75.13 53.57
Hilton Hotel..................... Arlington, VA 209 1990 6/96 1,500 76.3 105.35 80.38
Hilton Hotel..................... Bellevue, WA 180 1979 8/95 1,063 78.1 86.31 67.41
--- ------ ---- ------ ------
Total/Weighted Average--Owned Hotels............. 3,516 $ 29,779 73.2% $78.89 $ 57.75

ADDITIONAL HOTELS
Hilton Hotel..................... Sacramento, CA 326 1983 12/96 $ 750 71.2% $74.53 $ 53.07
Santa Barbara Inn................ Santa Barbara, CA 71 1959 12/96 450 84.0 125.13 105.11
Holiday Inn...................... Colorado Springs,
CO 201 1974 12/96 200 72.3 56.54 40.88
Embassy Row Hotel................ Washington, DC 195 1969 12/96 2,033 58.0 113.88 66.05
Hilton Hotel & Towers............ Lafayette, LA 328 1981 12/96 249 72.3 67.90 49.09
--- ------ ---- ------ -------
Total/Weighted Average--Additional Hotels........ 1,121 $ 3,682 70.3% $78.72 $ 55.34

Total/Weighted Average........................... 4,637 $ 33,461 72.5% $78.85 $ 57.17
----- -------- ---- ------ -------
----- -------- ---- ------ -------
</TABLE>

- ------------
(1) Represents the total planned or completed capital expenditures at each
hotel. As of June 30, 1996, $14.0 million had been spent and an additional
$15.8 million was planned for the Owned Hotels and $3.7 million was planned
for the Additional Hotels.

(2) Represents total room revenue divided by total available rooms, net of rooms
out of service due to significant renovations.

(3) The Westin Atlanta Airport is majority-owned by the Company through a
partnership in which the Company holds an 85.2% limited partner interest, 1%
general partner interest and a mortgage which together provide the Company a
92% economic interest in the hotel.

THE OWNED HOTELS

The following is a brief description of each of the Owned Hotels and their
respective locations:

Orange County Airport Hilton, Irvine, CA. Built in 1976, the 290-room hotel
is centrally located across the street from the John Wayne International Airport
in an area densely developed with Class A commercial office space, upscale
retail establishments and high density residential housing. The hotel's
facilities and amenities feature over 11,000 square feet of banquet and meeting
space, an outdoor pool, two tennis courts, a health and fitness center, a
business center, valet services, a gift shop and a grill restaurant. Orange
County has experienced minimal economic growth during the 1990s and has trailed
the national average during that time due to (i) the negative impact of cutbacks
in defense spending and (ii) sharp declines in the value of certain investments
that led Orange County to seek bankruptcy protection. The Company believes that
Orange County and nearby Los Angeles are currently emerging from recession,
demonstrated by the fact that these counties are projected to lead the state in
job growth during 1996. As of June 30, 1996, the Company had spent $0.2 million
on renovations at the hotel with an additional $1.8 million planned.

44
<PAGE>
Sheraton Hotel, Colorado Springs, CO. Built in 1974, the 502-room hotel is
centrally located approximately eight miles from Colorado Springs International
Airport, three miles from downtown Colorado Springs and adjacent to Interstate
25. The hotel's facilities and amenities feature over 42,000 square feet of
meeting and banquet space (one of the largest meeting and banquet facilities in
Colorado), a health club, a putting green, three pools, two restaurants and a
lobby bar. Colorado Springs has experienced strong economic growth in recent
years which has led to a major airport expansion program which was completed in
1995. Such growth is attributable to a number of factors, including a low
regional average cost of living and a rapidly expanding, young population. As of
June 30, 1996, the Company had spent $2.8 million on renovations at the hotel
with an additional $0.6 million planned.

The Latham Hotel, Washington, D.C. Built in 1981, the 143-room hotel is
located in the center of Georgetown, an historic district in central Washington,
D.C. The hotel is approximately 15 minutes from Washington National Airport and
convenient to several of Washington's commercial office concentrations,
particularly those in the area of Georgetown, the West End and the Golden
Triangle. The hotel's facilities and amenities feature 3,400 square feet of
meeting and banquet space, valet services, secretarial services, concierge
services, a roof top pool and deck and the renowned CITRONELLE restaurant. The
hotel is also surrounded by upscale retail establishments, restaurants,
galleries, museums and historic homes, making it broadly appealing to business
travelers, as well as group meetings and leisure travelers. The economy of the
Washington, D.C. metropolitan area is currently among the strongest in the
nation and economic growth is forecast to continue into the near future. A major
new convention center downtown is expected to open within four years. As of June
30, 1996, the Company had spent $0.2 million on renovations at the hotel with an
additional $0.6 million planned.

Radisson Hotel, Schaumburg, IL. Built in 1979, the 202-room hotel is
centrally located on an important arterial road a quarter mile west of
interstate 290, approximately 20 minutes from O'Hare International Airport (the
nation's busiest airport) and 40 minutes from downtown Chicago. The hotel's
facilities and amenities feature over 7,400 square feet of meeting and banquet
space (with the addition of new space planned), a complimentary breakfast
buffet, complimentary airport and local transportation service, valet parking
and dry cleaning, an outdoor pool and whirlpool, a fitness center, a jogging
trail, a restaurant and a sports bar/dance club. After Chicago, Schaumburg
contains the second highest concentration of commercial, office, retail and
residential space in the Midwest. The suburban areas surrounding Schaumburg have
experienced strong economic growth in recent years, based on employment figures,
office space occupancy rates, air traffic levels and retail sales volume. As of
June 30, 1996, the Company had spent $1.4 million on renovations at the hotel
with an additional $0.3 million planned.

Marriott Hotel, Somerset, NJ. Built in 1978, the 434-room hotel is centrally
located on Interstate 287, approximately 25 miles from Newark International
Airport, 40 minutes from midtown Manhattan and convenient to all major traffic
arteries in Northern New Jersey. The hotel's facilities and amenities feature
over 12,000 square feet of meeting and banquet space, tennis courts, an
indoor/outdoor pool, a sauna/whirlpool, volleyball courts, an exercise room, a
shuffleboard/badminton court, two restaurants and a pool-side bar. The hotel is
surrounded by a significant number of corporate headquarters, commercial office
buildings, retail centers, an affluent residential community and extensive,
well-maintained local highways and road systems. Somerset and its neighboring
communities have been

45
<PAGE>
experiencing moderate economic growth in recent years. As of June 30, 1996, the
Company had spent $1.4 million on renovations at the hotel with an additional
$1.9 million planned.

Sheraton Airport Plaza, Charlotte, NC. Built in 1985, the 226-room hotel is
the only upscale, full-service hotel at Charlotte Douglas International Airport
(which is USAir's main operating hub and the nation's 14th busiest airport). The
hotel is located north of the airport, approximately five miles from the
Charlotte Coliseum and seven miles from downtown Charlotte. The hotel's
facilities and amenities feature over 12,500 square feet of meeting and banquet
space, airport shuttle service, a fitness center, a pool with sauna and
whirlpool, a restaurant and a lounge/nightclub. The Charlotte region has grown
in recent years to become the second largest financial center in the U.S. (after
New York City) and has experienced a continued influx of foreign companies
establishing U.S. operations. Economic growth has been strong over the past
fifteen years due to Charlotte's attractive climate, low cost of living, young
and well-educated workforce and accessibility by all forms of transportation. As
of June 30, 1996, the Company had spent $0.5 million on renovations at the hotel
with an additional $1.0 million planned.

Holiday Inn, Cleveland, OH. Built in 1978, the 237-room hotel is located on
Interstate 71 in Middleburg Heights, approximately three miles from Cleveland's
Hopkins International Airport and approximately 15 miles from downtown
Cleveland. The hotel's facilities and amenities feature over 14,000 square feet
of meeting and banquet space, an indoor pool, a fitness spa, 24-hour airport
shuttle service and a restaurant specializing in seafood and regional cuisine.
The Cleveland metropolitan area and the cities surrounding the airport have
experienced strong economic growth in recent years as the greater Cleveland
economy has shifted from an economic base weighted toward heavy manufacturing to
one focused on services, technology and manufacturing. As of June 30, 1996, the
Company had spent $0.1 million on renovations at the hotel with an additional
$2.8 million planned.

Hilton Hotel, Arlington, TX. Built in 1983, the 310-room hotel is located at
the intersection of Interstate 30 and Route 360, near the center of the
Dallas/Fort Worth Metroplex. The hotel is well-positioned to serve both business
and leisure segments due to its proximity to (i) a surrounding commercial
development, (ii) nearby leisure attractions, including The Ballpark at
Arlington and the original Six Flags amusement park, (iii) a regional convention
center located one mile away, and (iv) the Dallas/Fort Worth International
Airport (the nation's second busiest), approximately eight miles away. The
commercial office concentrations of downtown Dallas and Fort Worth are each
approximately 15 miles away. The Dallas-Forth Worth Metroplex is the sixth most
populous metropolitan area in the U.S. and, notwithstanding a state recession in
the 1980s caused by the collapse of oil prices and a nationwide recession during
the early 1990s, has been experiencing strong economic growth in recent years,
as measured by airport activity, office space occupancy rates, employment rates
and population figures. As of June 30, 1996, the Company had spent $0.1 million
on renovations with an additional $2.6 million planned.

Hilton Hotel, Arlington, VA. Built in 1990, the 209-room hotel is part of
Ballston Metro Center, a mixed use development consisting of hotel, residential
condominium, office, retail and parking uses,

46
<PAGE>
which is located approximately four miles outside of downtown Washington, D.C.
in the Interstate 66 corridor. Ballston Metro Center incorporates the Ballston
station of Washington's 100 mile regional subway system. The hotel's facilities
and amenities feature more than 7,500 square feet of banquet and meeting space,
garage parking, a restaurant and lounge, a club floor with deluxe guest rooms
and special services available, an indoor pool with exercise and health
facilities, an atrium walkway leading to the integrated office building and
retail outlets, and an enclosed connection to the office building across the
street and the regional mall one block away. The Company has a commitment from
Hilton Hotels Corporation to reflag the hotel (which was operated as a
Renaissance hotel prior to the Company's acquisition) as a Hilton. In connection
with the reflagging, the Company intends to spend an additional $1.5 million on
renovations at the hotel.

Hilton Hotel, Bellevue, WA. Built in 1979, the 180-room hotel is centrally
located approximately 13 miles from Seattle-Tacoma International Airport, nine
miles from downtown Seattle and blocks from downtown Bellevue. The hotel's
facilities and amenities feature over 7,750 square feet of meeting and banquet
space, an indoor pool with a jacuzzi and sauna, a fitness club, laundry/valet
services, a business center and a restaurant and lounge. After Seattle, Bellevue
contains the highest concentration of commercial, office, retail and residential
space in Washington and has been experiencing economic growth above the national
average. Economic growth in the Bellevue market area has been strong over the
last 15 years as numerous computer, aerospace and communications companies,
including Microsoft Corporation, have located there. As of June 30, 1996, the
Company had spent $0.9 million on renovations at the hotel with an additional
$0.2 million planned.

THE ADDITIONAL HOTELS

The Company has entered into a binding contract with MBL to acquire the
Additional Hotels which contain 1,121 rooms, for a purchase price of $68.4
million. Four of the Additional Hotels have been managed by the Company since
1991. Since assuming management of these four hotels, the Company has improved
the performance of the properties. However, the Company believes that, with
appropriate capital spending, the Additional Hotels can achieve further
improvements in revenue and cash flow. The Company plans to spend approximately
$3.7 million subsequent to the acquisition to renovate and reposition the
Additional Hotels. The acquisition is scheduled to close in December 1996.

The following is a brief description of each of the Additional Hotels and
their respective locations:

Hilton Hotel, Sacramento, CA. Built in 1983, the 326-room hotel is located
in suburban Sacramento, near the interchange of Interstate 80 and Route 160 in
an area which is well developed with commercial office space, upscale retail and
residential uses. The hotel's facilities and amenities feature over 17,000
square feet of banquet and meeting space, an indoor-outdoor pool, volleyball
courts, a health and fitness center, a business center, valet services, a gift
shop and two restaurants. The greater Sacramento market has experienced strong
economic growth during the 1990s. The Company plans to spend $0.8 million on
renovations.

Santa Barbara Inn, Santa Barbara, CA. Built in 1959, the 71-room hotel is
located on the Pacific Coast Highway directly across from a wide, publicly
maintained beach. The hotel's facilities and amenities feature the renowned
CITRONELLE restaurant, two meeting rooms, an outdoor pool and deck, tennis
courts and valet services. The Santa Barbara market is a popular residential and
resort area. The Company plans to spend $0.5 million on renovations at the
hotel.

Holiday Inn, Colorado Springs, CO. Built in 1974, the 201-room hotel is
located on Interstate 25, approximately five miles north of downtown Colorado
Springs and approximately eight miles north of an Owned Hotel, the Sheraton
Hotel, Colorado Springs. The hotel's facilities and amenities feature more than
8,700 square feet of banquet and meeting space, a health club and jogging track,
an outdoor pool, tennis courts, a restaurant, a gift shop and valet services.
Colorado Springs has experienced strong economic growth in recent years which
has led to a major airport expansion program completed in 1995. Such growth is
attributable to a number of factors, including the region's low average cost of
living and

47
<PAGE>
a rapidly expanding, young population. The Company plans to spend $0.2 million
on renovations at the hotel.

The Embassy Row Hotel, Washington, D.C. Built in 1969, the 195-room hotel is
located in downtown Washington, D.C. on Massachusetts Avenue, which is known as
"Embassy Row" because of the many embassies, chanceries and offices of foreign
governments located in the area. The hotel's facilities and amenities feature
over 7,500 square feet of banquet and meeting space, a rooftop pool and deck, a
health and fitness center, a business center, valet services and a restaurant. A
major new convention center is expected to open in downtown within four years.
The Company assumed management of the hotel in July 1996 and plans to spend $2.0
million on renovations after acquiring the hotel. In conjunction with the
renovation, the Company plans to obtain a franchise for the hotel.

Hilton Hotel & Towers, Lafayette, LA. Built in 1981, the 328-room hotel is
centrally located on Pinhook Road, a major business artery linking downtown
Lafayette with the local airport. The hotel's facilities and amenities feature
over 17,000 square feet of banquet and meeting space, an outdoor pool, an
exercise room, a business center, valet services, a gift shop and a restaurant.
Lafayette serves as a major center for offshore oil drilling and production, and
has experienced strong job growth during the 1990s. The Company plans to spend
$0.2 million on renovations at the hotel.

THE MANAGED HOTELS

The Company operates 37 Managed Hotels containing 5,528 rooms. Of the
Managed Hotels, 25 are full-service properties, nine are limited-service
properties and three are extended stay properties. 31 of the Managed Hotels are
operated under nationally-recognized brand names and six are independent
properties. The brand names of the Managed Hotels include Hilton, Sheraton,
Clarion and Holiday Inn. See "Certain Relationships and Related Transactions"
and "Risk Factors--Potential Conflicts of Interest."

The Management Agreements have remaining terms ranging from one month to
nine years. Substantially all of the Management Agreements permit the owners of
the Managed Hotels to terminate such agreements prior to the stated expiration
dates if the applicable hotel is sold and several of the Management Agreements
permit the owners of the Managed Hotels to terminate such agreements prior to
the stated expiration date without cause or by reason of the failure of the
applicable hotel to obtain specified levels of performance. For 1995, the
Company's pro forma revenue from Management Agreements was $3.3 million
constituting 2.3% of the Company's total revenue for such period. No single
Management Agreement currently accounts for more than 5% of the total revenue
from the Management Agreements on a pro forma basis. Additionally, no group of
Management Agreements for hotels under common ownership or control currently
accounts for more than 13% of the total revenue from the Management Agreements
on a pro forma basis. See "Risk Factors--Termination of Management Agreements."

The Company intends to continue its efforts to add to its portfolio of
Managed Hotels by aggressively pursuing new management agreements. The Company
believes that, in addition to adding to the Company's revenues and profits, the
business of operating hotels for third parties benefits the Company by (i)
increasing the Company's operating experience in, and knowledge of, hotel
markets throughout the United States, (ii) broadening the Company's
relationships with hotel owners and thus enhancing the Company's opportunities
to identify, evaluate and negotiate hotel acquisitions prior to the active
marketing of a hotel for sale, and (iii) improving the Company's ability to
attract, train and retain highly-qualified operating employees by offering them
the opportunity to work in a broader variety of hotels and markets.

THE HOTEL INDUSTRY

The hotel industry is currently recovering from a period of low demand and
high supply that led to industry-wide decreases in ADRs, numerous hotel failures
and decreased levels of profit. It was the

48
<PAGE>
rapid increase in room supply during the 1980s that drove ADRs and industry
profitability down, but 1991 marked a reversal of this trend. The following
charts, based on data provided by Smith Travel Research, demonstrate the rise
that has occurred in hotel industry average occupancy and ADRs since 1991:
<TABLE>

Average Occupancy Average Daily Rate
Total U.S. Hotel Rooms Total U.S. Hotel Rooms
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>

70% $70

65% $65

[GRAPH] [GRAPH]

60% $60

55% $55

1991 1992 1993 1994 1995 1991 1992 1993 1994 1995

</TABLE>

The hotel industry is one of the most management intensive sectors of the
real estate industry. The last 15 years have been characterized by increased
product segmentation and greater marketing and cost control sophistication. Even
as the importance of sophisticated management has increased, however, hotel
owners have continued to rely upon fee-based third parties to manage their
hotels. As an integrated owner and operator focused on maximizing long-term
asset value and increasing profit, the Company believes that it distinguishes
itself from those owners who do not possess in-house management capabilities.

The lodging industry as a whole has shown significant improvement in recent
years. Industry reports indicate that the lodging industry marked its third
consecutive year of profitability in 1995, earning pre-tax profits of $5.5
billion. The improved profitability resulted from a favorable industry
supply/demand relationship, with increases in room demand exceeding supply
growth in 1992, 1993, 1994 and 1995. This excess of demand growth over supply
growth has given the lodging industry a significant and increasing degree of
pricing power. This pricing power has resulted in significant industry-wide
growth in average room rate from 1992 through 1995. According to Coopers &
Lybrand's "Hospitality Directions", these trends are expected to continue, with
demand projected to increase at 2.4% annually from 1995 to 1998 compared to only
a 1.8% growth in supply. This favorable supply/demand position is projected to
lead to growth of 4% to 5% in average room rate annually through 1998 (a rate
that is projected to exceed the inflation rate), coupled with an increase in
average occupancy rate from 65.4% in 1995 to 70% by 1998. Average RevPAR is
expected to increase 6.8% annually from 1995 to 1998. However, demand
historically has been sensitive to shifts in economic activity which has
resulted in cyclical room and occupancy rates and there is no assurance that
industry projections will be met.

The Company believes that the lodging industry pricing power described above
is likely to be strongest and most sustained in the full-service segment in
which the Company operates. Two primary factors underlying this projected
strength are (i) the lower consumer sensitivity to increases in room rates in
the full-service segment due to customer emphasis on service and brand loyalty
and (ii) an expectation by industry experts that there will be no significant
additions to the full-service room base over the next few years. No significant
increase in the full-service sector's room base is projected because (i) the
cost of constructing hotels in the full-service segment is substantially higher
than other industry segments, (ii) financing available for full-service hotel
construction projects is generally higher in cost and more limited in nature,
(iii) construction of full-service hotels involves longer lead times, and (iv)
construction cost for new hotels, in most cases, remain substantially higher
than the costs of acquiring existing full-service hotels.

49
<PAGE>
COMPETITION

The Company competes primarily in the upscale and mid-priced sectors of the
full-service segment of the lodging industry. In each geographic market in which
the Hotels are located, there are other full-and limited-service hotels that
compete with the Hotels. In addition, the Company's food and beverage operations
compete with local free-standing restaurants and bars. Competition in the U.S.
lodging industry is based generally on convenience of location, price, range of
services and guest amenities offered and quality of customer service and overall
product.

EMPLOYEES

As of June 30, 1996, the Company employed approximately 5,325 persons, of
whom approximately 4,431 were compensated on an hourly basis. Approximately 58
employees work at the corporate headquarters.

Employees at five of the Hotels are represented by labor unions. Management
believes that labor relations with its employees are good.

TRADEMARKS

The Company employs a flexible branding strategy based on a particular
Hotel's market environment and the Hotel's unique characteristics. Accordingly,
the Company uses various national trade names pursuant to licensing arrangements
with national franchisors.

HILTON(R) AND THE STYLIZED "H" ARE REGISTERED TRADEMARKS OF HILTON HOTELS
CORPORATION ("HILTON HOTELS"). NEITHER HILTON INNS, INC. ("HILTON INNS") NOR
HILTON HOTELS, NOR ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, AGENTS OR
EMPLOYEES (COLLECTIVELY, THE "HILTON ENTITIES") SHALL IN ANY WAY BE DEEMED AN
ISSUER OR UNDERWRITER OF THE SHARES OF COMMON STOCK OFFERED HEREBY NOR HAVE ANY
OF THE HILTON ENTITIES ENDORSED OR APPROVED THE OFFERING. THE HILTON ENTITIES
HAVE NOT ASSUMED AND SHALL NOT HAVE ANY LIABILITY OR RESPONSIBILITY FOR ANY
FINANCIAL STATEMENTS OR OTHER FINANCIAL INFORMATION CONTAINED HEREIN OR ANY
PROSPECTUS OR ANY WRITTEN OR ORAL COMMUNICATIONS REGARDING THE SUBJECT MATTER
HEREOF. A GRANT OF A HILTON INNS FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS
NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED
APPROVAL OR ENDORSEMENT BY ANY OF THE HILTON ENTITIES (OR ANY OF THEIR
AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE COMMON STOCK
OFFERED HEREBY.

HOLIDAY INN(R) IS A REGISTERED TRADEMARK OF HOLIDAY INNS FRANCHISING, INC.
("HOLIDAY INNS"). HOLIDAY INNS HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY
OF THE FINANCIAL RESULTS OF THE HOTELS SET FORTH IN THIS PROSPECTUS NOR DOES
HOLIDAY INNS HAVE ANY INTEREST IN THE COMPANY OR THE COMMON STOCK OFFERED
HEREBY, EXCEPT AS A FRANCHISOR. A GRANT OF A HOLIDAY INN FRANCHISE LICENSE FOR
CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN
EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY HOLIDAY INNS (OR ANY OF ITS
AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE COMMON STOCK
OFFERED HEREBY.

RADISSON(R) IS A REGISTERED TRADEMARK OF RADISSON HOTELS INTERNATIONAL, INC.
("RADISSON HOTELS"), WHICH HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF
THE FINANCIAL RESULTS OF THE HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A
RADISSON FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND
SHOULD NOT BE INTERPRETED AS, AN

50
<PAGE>
EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY RADISSON HOTELS (OR ANY OF ITS
AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE COMMON STOCK
OFFERED HEREBY.

MARRIOTT(R) IS A REGISTERED TRADEMARK OF MARRIOTT INTERNATIONAL, INC., WHICH
HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF THE FINANCIAL RESULTS OF THE
HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A MARRIOTT FRANCHISE LICENSE FOR
CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN
EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY MARRIOTT INTERNATIONAL, INC. (OR
ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE COMMON
STOCK OFFERED HEREBY.

SHERATON(R) IS A REGISTERED TRADEMARK OF ITT SHERATON CORPORATION, WHICH HAS
NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF THE FINANCIAL RESULTS OF THE
HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A SHERATON FRANCHISE LICENSE FOR
CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN
EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY ITT SHERATON CORPORATION (OR ANY
OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE COMMON STOCK
OFFERED HEREBY.

WESTIN(R) IS A REGISTERED TRADEMARK OF WESTIN HOTEL COMPANY AND IS LICENSED
THROUGH WESTIN LICENSE COMPANY. NEITHER WESTIN HOTEL COMPANY NOR WESTIN LICENSE
COMPANY HAS ENDORSED OR APPROVED THE OFFERING OR ANY OF THE FINANCIAL RESULTS OF
THE HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A WESTIN FRANCHISE LICENSE
FOR CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS,
AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY WESTIN HOTEL COMPANY OR WESTIN
LICENSE COMPANY (OR ANY OF THEIR RESPECTIVE AFFILIATES, SUBSIDIARIES OR
DIVISIONS) OF THE COMPANY OR THE COMMON STOCK OFFERED HEREBY.

LEGAL PROCEEDINGS

The Company is involved in various lawsuits arising in the normal course of
business. The Company believes that the ultimate outcome of these lawsuits will
not have a material adverse effect on the Company.

GOVERNMENTAL REGULATION

Under the ADA, all public accommodations are required to meet certain
requirements related to access and use by disabled persons. These requirements
became effective in 1992. Although significant amounts have been and continue to
be invested in ADA required upgrades to the Owned Hotels, a determination that
the Company is not in compliance with the ADA could result in a judicial order
requiring compliance, imposition of fines or an award of damages to private
litigants. The Company is likely to incur additional costs of complying with the
ADA; however, such costs are not expected to have a material adverse effect on
the Company's results of operations or financial condition. See "Risk
Factors--Governmental Regulation."

For a description of certain environmental regulations to which the Company
is subject, see "Risk Factors--Environmental Risks."

51
<PAGE>
MANAGEMENT

The following table sets forth certain information with respect to the
Company's directors and executive officers as of the date of this Prospectus.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Paul W. Whetsell.......................... 45 President, Chief Executive Officer and
Chairman of the Board
David E. McCaslin......................... 39 Chief Operating Officer and Director
William M. Karnes......................... 50 Senior Executive Vice President, Finance
and Chief Financial Officer
John E. Plunket........................... 40 Executive Vice President, Finance and
Development
John Emery................................ 32 Treasurer and Secretary
Michael T. George......................... 37 Senior Vice President, Operations
D. Scott Livchak.......................... 41 Senior Vice President, Operations
Robert Gauthier........................... 42 Senior Vice President, Operations
Daniel L. Doctoroff....................... 37 Director
Bradford E. Bernstein..................... 29 Director
William S. Janes.......................... 43 Director
Joseph McCarthy........................... 64 Director
Edward L. Cohen........................... 50 Director
Edwin T. Burton, III...................... 54 Director
Edward P. Dowd............................ 53 Director
</TABLE>

Paul W. Whetsell has served as President and Chief Executive Officer of the
Company since its founding in 1987. From 1981 to 1986, Mr. Whetsell served as
Vice President of Development for Lincoln Hotels in Dallas, Texas. Prior to
that, from 1973 to 1981, Mr. Whetsell worked for Quality Inns in various
capacities in its franchise division, culminating in Vice President of
Franchise.

David E. McCaslin has served as Chief Operating Officer of the Company since
1994. Mr. McCaslin joined the Company in 1987 as a General Manager and was named
Vice President of Operations in 1988. From 1985 to 1987, Mr. McCaslin served as
General Manager for Lincoln Hotels. Prior to that, from 1979 to 1985, he worked
for Westin Hotels in various capacities, including Assistant General Manager,
Rooms Division Manager and Food & Beverage Manager.

William M. Karnes has served as Senior Executive Vice President, Finance and
Chief Financial Officer of the Company since April 1996. From 1994 to April
1996, Mr. Karnes served as Senior Vice President and Chief Financial Officer of
Tucker Properties Corporation, a publicly traded real estate investment trust.
From 1991 to 1994, Mr. Karnes served as Senior Vice President Finance and
Administration for Banyan Management Corp., a company that provides management
services for five public real estate investment trusts and three master limited
partnerships. Prior to that, from 1989 to 1991, Mr. Karnes served as Chief
Operating Officer of Miglin-Beitler, Inc., a private real estate development,
management and leasing firm.

John E. Plunket has served as Executive Vice President, Finance and
Development since November 1993. From September 1991 to October 1993, Mr.
Plunket served as Vice President and Principal Broker for CIG International, an
investment and hotel asset management company. From February 1988 to August
1991, Mr. Plunket served as Managing Director of Cassidy & Pinkard Inc., a
commercial real estate services company. From 1985 to 1987, Mr. Plunket served
as Senior Vice President for Oxford Development Corporation. Prior to that, from
December 1979 to April 1985, Mr. Plunket worked for Marriott Corporation in
various capacities, culminating in Director of Project Finance.

52
<PAGE>
John Emery has served as Treasurer and Secretary of the Company since March
1996. From September 1995 to March 1996, he served as Director of Finance of the
Company. Prior to that, from January 1987 to September 1995, he worked for
Deloitte & Touche LLP in various capacities, culminating with Senior Manager for
the hotel and real estate industries.

Michael T. George has served as Senior Vice President, Operations since
1995. From 1992 to 1995, Mr. George served as Chief Operating Officer for Devon
Hotels in Montreal. From 1989 to 1992, Mr. George served as Vice President for
Radisson Hotels International, Inc. Prior to that, from 1986 to 1989, Mr. George
served as Vice President for Sheraton Hotels in Toronto.

D. Scott Livchak has served as Senior Vice President, Operations since 1990.
From 1985 to 1989 Mr. Livchak served as a General Manager for The Adam's Mark
Hotel in Washington, DC, owned by HBE Corporation. From 1983 to 1985, Mr.
Livchak worked for the Sheraton Atlanta Hotel in the capacity of Resident
Manager. From 1977 to 1983, Mr. Livchak held various management positions with
Sheraton Corporation.

Robert Gauthier has served as Senior Vice President, Operations and General
Manager of the Sheraton, Colorado Springs since 1996. From 1993 to 1996, he
served as Vice President, Operations for CapStar Management. Prior to that, from
1987 to 1993, Mr. Gauthier served as Area Manager and General Manager for Drexel
Burnham Lambert Realty, Inc.

Daniel L. Doctoroff has been Managing Director of Oak Hill Partners, Inc.
(Acadia Partners' investment advisor) and its predecessor since August 1987;
Vice President and Director of Acadia Partners MGP, Inc. since March 1992; Vice
President of Keystone, Inc. since March, 1992; and a Managing Partner of
Insurance Partners Advisors, L.P. since February 1994. All of such entities are
affiliates of Acadia Partners. Mr. Doctoroff is also a Director of Bell & Howell
Holdings Company, National Re Corporation, Transport Holdings, Inc., Kemper
Corporation and Specialty Foods Corporation.

Bradford E. Bernstein has served as a Vice President and an Associate of Oak
Hill Partners, Inc. (Acadia Partners' investment advisor) since 1992. From 1991
until 1992, Mr. Bernstein worked at Patricof & Co. Ventures. Prior to that, from
1989 to 1991, he worked at Merrill, Lynch & Co. Mr. Bernstein serves as a
director of Pinnacle Brands, Inc. and Payroll Transfers, Inc.

William S. Janes has served as a Principal and Director of RMB Realty, Inc.
since 1990. Prior to that, from 1984 to 1989, Mr. Janes served as Regional
General Partner of Lincoln Property Company. Mr. Janes serves as a Director of
Paragon Group, Inc., a publicly-traded real estate investment trust, as well as
Brazos Asset Management, Brazos Fund, Paragon Property Services, Inc. and Carr
Real Estate Services. Mr. Janes maintains professional affiliations as a member
of the National Association of Real Estate Investment Trusts, the Society of
Industrial and Office Realtors and the Urban Land Institute.

Joseph McCarthy has been retired since 1994. From 1993 to 1994 he has served
as Chairman of the Board for Motel 6. From 1985 to 1993, he served as President
and Chief Executive Officer for Motel 6. From 1980 to 1985, he served as
President and Chief Executive Officer of Lincoln Hotels. From 1976 to 1980, he
served as President and Chief Executive Officer of Quality Inns International.
Prior to that, from 1971 to 1976, he served as Senior Vice President of the
Sheraton Corporation.

Edward L. Cohen has served as an Executive Officer of Lerner Corporation, a
real estate management and leasing company located in Bethesda, Maryland, since
1985. Mr. Cohen is also a Principal of Lerner Enterprises, a real estate
development and investment company. Prior to his participation with the Lerner
organization, he was a lawyer in private practice in Washington, D.C.

Edwin T. Burton, III has served as President of Windermere Consulting
Company since April 1995 and Trustee of the Commonwealth of Virginia Retirement
System since March 1994. From 1994 to April 1995, he served as Managing Director
and a member of the Board of Interstate Johnson

53
<PAGE>
Lane, Inc. Prior to that, from 1987 to 1993, he was President of Rothschild
Financial Services, Inc. Mr. Burton is a Visiting Professor of Economics at the
University of Virginia in Charlotesville, Virginia.

Edward P. Dowd has served as Senior Vice President of John Hancock Real
Estate Investment Group of John Hancock Financial Services since 1992. Prior to
that, from 1970 to 1992, Mr. Dowd served in various capacities at John Hancock
Realty. Mr. Dowd serves as Director of John Hancock Realty Investors, Inc., John
Hancock Realty Services Inc. and Maritime Life Assurance Co.

EXECUTIVE COMPENSATION

The following table sets forth the annual base salaries that the Company
intends to pay in 1996 to its Chief Executive Officer and the four most highly
compensated executive officers during such year:

<TABLE>
<CAPTION>
NAME POSITION BASE SALARY(1)
- -------------------------------------- -------------------------------------- --------------
<S> <C> <C>
Paul W. Whetsell...................... President, Chief Executive Officer and
Chairman of the Board $225,000(2)
David E. McCaslin..................... Chief Operating Officer and Director $215,000(2)
William M. Karnes..................... Senior Executive Vice President,
Finance and Chief Financial Officer $215,000(3)
John E. Plunket....................... Executive Vice President, Finance and
Development $150,000(2)
Michael T. George..................... Senior Vice President, Operations $132,000
</TABLE>

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

(1) Pursuant to Compensation Committee policy, such executive officers are also
eligible to earn bonuses of up to 100% of their annual base salary. Under
the terms of such policy the total of such bonuses may not exceed $300,000
during 1996.

(2) Under the terms of their employment agreement Messrs. Whetsell, McCaslin and
Plunket will also be paid a minimum bonus in 1996 of $30,000, $15,000 and
$4,500, respectively.

(3) Under the terms of his employment agreement, Mr. Karnes will also be paid a
minimum bonus of $30,000 in 1996 and will be reimbursed by the Company for
certain moving expenses.

Following the Offering, Messrs. Whetsell, McCaslin, Plunket, Karnes and
George also will receive options to purchase 150,000, 87,500, 73,129, 50,000 and
18,282 shares of Common Stock, respectively. The terms of such options are
described under "--Compensation Plans--Equity Incentive Plan." All of such
options will vest over three years, except 10,000 of the options granted to Mr.
Plunket, which will vest immediately upon their grant.

COMPENSATION OF DIRECTORS

Any director who is not an employee of the Company will be paid an annual
fee of $12,000. In addition, each such director will be paid $750 for attendance
at each meeting of the Board and $500 for attendance at each meeting of a
committee of the Board of which such director is a member. Directors who are
employees of the Company will not receive any fees for their service on the
Board or a committee thereof. In addition, the Company will reimburse directors
for their out-of-pocket expenses in connection with their service on the Board.
Upon the effectiveness of the Registration Statement, each director who is not
an employee of the Company (an "Independent Director") will be granted options
to purchase 5,000 shares of Common Stock at the initial public offering price.
Thereafter, on the date of the annual meeting of the Company's shareholders
beginning with the annual meeting held in 1997, each Independent Director will
be granted options to purchase 5,000 shares of Common Stock at the then current
market price. All options granted to directors will vest over three years. Any
non-employee director who ceases to be a director will forfeit the right to
receive any options not previously vested or granted.

54
<PAGE>
COMMITTEES

The Board will initially have an Audit Committee, a Compensation Committee
and an Investment Committee, the members of which will be determined at the
first meeting of the Board following completion of the Offering. The Audit
Committee will consist of three Independent Directors. The Audit Committee will
make recommendations concerning the engagement of independent public
accountants, review with the independent public accountants the plans and
results of the audit engagement, approve professional services provided by the
independent public accountants, review the independence of the independent
public accountants, consider the range of audit and non-audit fees and review
the adequacy of the Company's internal accounting controls. The Compensation
Committee will consist of three Independent Directors and will determine
compensation of the Company's executive officers and administer the Company's
Equity Incentive Plan (as defined below). The Investment Committee will consist
of the Chairman of the Board and three Independent Directors, and will review
and approve investments proposed to be made by the Company.

COMPENSATION PLANS

Management Bonus Plan. The Company and the Compensation Committee may award
bonuses to certain employees of the Company from time to time.

Stock Purchase Plan. Each employee of the Company customarily employed at
least 20 hours or more per week by the Company or an affiliate (as defined in
the Stock Purchase Plan), other than an employee who owns beneficially 5% or
more of the outstanding Common Stock, is eligible to participate in the
Company's stock purchase plan (the "Stock Purchase Plan"). Under the Stock
Purchase Plan, participating employees may elect to authorize the Company to
withhold a minimum of $200 per quarter and a maximum of 8% or $25,000 (whichever
is less) of the participating employee's base pay, which amounts will be used to
purchase Common Stock from the Company on a monthly basis. The purchase price of
Common Stock will equal a designated percentage from 85% to 100% of the closing
sales price for Common Stock as reported on the Composite Transactions Tape of
the NYSE (except as described below) on the first trading day of the month or on
the last trading day of the month, whichever is less. The designated percentage
will be established annually by the Compensation Committee which is responsible
for the administration of the Stock Purchase Plan.

The Company has reserved 500,000 shares of Common Stock for issuance under
the Stock Purchase Plan. Such shares may be from authorized and unissued shares,
treasury shares or a combination thereof. The Stock Purchase Plan will remain in
effect until terminated by the Board, or until all shares authorized for
issuance thereunder have been issued. 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 anti-dilution provisions of the
Stock Purchase Plan) without further approval by the Company's shareholders.

Equity Incentive Plan. The Company's Equity Incentive Plan (the "Equity
Incentive Plan") is designed to attract and retain qualified directors, officers
and other key employees of the Company and its affiliates (as defined in the
Equity Incentive Plan). The Equity Incentive Plan authorizes the grant of
options to purchase shares of Common Stock ("Options"), stock appreciation
rights ("Appreciation Rights") and restricted shares ("Restricted Shares"). The
Compensation Committee administers the Equity Incentive Plan and determines to
whom Options, Appreciation Rights and Restricted Shares are to be granted and
the terms and conditions thereof, including the number of shares relating to
each award and the period of exerciseability or restricted period, as the case
may be. Notwithstanding the foregoing, the Board may resolve to administer the
Equity Incentive Plan itself, in which case the term Compensation Committee
shall be deemed to mean the Board.

55
<PAGE>
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 1,740,000 shares. To the extent that an award is canceled,
terminates, expires or lapses for any reason without the payment of
consideration, any shares of Common Stock subject to the award will again be
available for the grant of awards. Common Stock subject to Appreciation Rights
that are settled in cash will thereafter be available for the grant of awards.
Common Stock issued under the Equity Incentive Plan may be from authorized and
unissued shares, treasury shares or a combination thereof. Awards may be granted
to directors, officers or other key employees of the Company or an affiliate, as
determined by the Compensation Committee.

At the time of the Offering, the Company intends to grant to certain
executive officers and other members of management options to purchase up to
745,254 shares of Common Stock at the initial public offering price. Certain of
these options will be exercisable immediately upon their grant, while the
remaining options will become exercisable in three annual installments.

The Compensation Committee may grant Options at a per share price equal to,
greater than or less than fair market value of the Common Stock on the date of
grant. The exercisability of Options may be conditioned on continued service
and/or the achievement of specified performance objectives ("Management
Objectives"). Subject to adjustment as provided in the Equity Incentive Plan, no
participant shall be granted awards relating to more than 200,000 shares during
any calendar year. The Compensation Committee shall determine the method of
exercising options and the form of payment, which may include, without
limitation, cash, shares of Common Stock that are already owned by the optionee,
other property or "cashless exercise" arrangements. Any grant may provide for
automatic "reload option rights", except that the term of any reload options
shall not extend beyond the term of the Options originally exercised. The
Compensation Committee may specify at the time Options 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. Options granted under
the Equity Incentive Plan may be intended to qualify as "incentive stock
options" within the meaning of Section 422 of the Code, or Options that are not
intended to so qualify. No incentive stock option may be exercised more than ten
years from the date of grant. Each grant must specify the period, if any, of
continuous service with the Company or any affiliate that is necessary before
the Options will become exercisable and may provide for the earlier exercise of
the Options in the event of a change of control of the Company or other event.
More than one grant may be made to the same optionee.

Appreciation Rights granted under the Equity Incentive Plan may be either
free-standing Appreciation Rights or Appreciation Rights that are granted in
tandem with Options. 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, greater than or less than the fair market value of a
share of Common Stock on the date of grant, must specify the period of
continuous service 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 event) and, in the case of an
Appreciation Right awarded in tandem with an incentive stock option, 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. In addition, any grant may
specify that an Appreciation Right may be exercised only in the event of a
change in control

56
<PAGE>
of the Company. The Compensation Committee may condition the award of
Appreciation Rights on continued service and/or the achievement of one or more
Management Objectives.

The Compensation Committee may award Restricted Shares to participants in
such amounts and subject to such terms and conditions as may be determined by
the Compensation Committee. The participant may be entitled to voting, dividend
and other ownership rights prior to the vesting of the shares. The Compensation
Committee may condition the vesting of an award on the achievement of specified
Management Objectives.

No Options, Appreciation Rights or other awards are transferable by a
participant except by will or the laws of descent and distribution. Options 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.

In the event of certain stock dividends, stock splits, combinations of
shares, recapitalizations, mergers, consolidations, spin-offs, reorganizations,
liquidations, issuances of rights or warrants, and similar transactions or
events, the Compensation Committee, in its sole discretion, may adjust (i) the
maximum number of shares that may be issued or transferred under the Equity
Incentive Plan, (ii) the number of shares covered by outstanding awards, (iii)
the exercise price of outstanding options and (iv) base prices of outstanding
SARs. 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 Options and Appreciation Rights
granted to any one participant during any calendar year.

In connection with its administration of the Equity Incentive Plan, the
Compensation Committee is authorized to interpret the Equity Incentive Plan,
related agreements and other documents. With the approval of the Board, 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 total number of shares of Common Stock that
may be issued under the Equity Incentive Plan (except as otherwise provided in
the plan), (ii) modify the Equity Incentive Plan's eligibility requirements or
(iii) materially increase the benefits accruing to participants under the Equity
Incentive Plan.

EMPLOYMENT AGREEMENTS

Each of Paul Whetsell, David McCaslin, William Karnes and John Plunket are
parties to employment agreements with the Company which will expire on December
31, 1999. Mr. Whetsell's and Mr. McCaslin's agreements provide for automatic one
year extensions thereafter unless either the executive or the Company gives
notice to the other at least 120 days prior to the end of any such period that
he or it, as the case may be, does not wish to extend the agreement for an
additional period. The employment agreements provide for annual base salaries of
$225,000, in the case of Mr. Whetsell, $215,000, in the case of Mr. McCaslin and
Mr. Karnes, and $150,000, in the case of Mr. Plunket, subject, in each such
case, to periodic increases. Each executive will be eligible to receive annual
bonuses and will be entitled to participate in all existing or future plans for
the benefit of the Company's employees and management, on the same basis as
other senior executive officers of the Company.

Under the employment agreements of Messrs. Whetsell and McCaslin, each is
entitled to receive (i) a lump sum payment equal to the product of (a) his total
cash compensation for the previous fiscal year and (b) the greater of (1) the
number of full and fractional years remaining in the agreement and (2) the
number two, if his employment is terminated by the Company without Cause (as
defined below) or is terminated by the executive for Good Reason (as defined
below), or (ii) a lump sum payment equal to two times his total cash
compensation for the previous fiscal year if the Company elects not to extend

57
<PAGE>
his contract for an additional year at the end of its initial term (which ends
December 31, 1999) or any subsequent term. The events constituting "Good Reason"
include the assignment to the executive of duties materially inconsistent with
his position and a material breach of the employment agreement by the Company.
As used in the employment agreements of Messrs. Whetsell and McCaslin, the term
"Cause" includes (i) the executive's willful and intentional failure or refusal
to perform or observe any of his material duties set forth in his employment
agreement, if such breach is not cured within 30 days of notice from the
Company; (ii) any willful and intentional act of the executive involving theft,
fraud, embezzlement or dishonesty affecting the Company; and (iii) the
executive's conviction of an offense which is a felony in the jurisdiction
involved. Messrs. Whetsell's and McCaslin's employment agreements also provide
that if (i) the executive elects to terminate his employment within six months
of a Change in Control (as defined below) of the Company or (ii) within one year
of any such change in control, the executive is terminated without Cause or the
executive terminates his employment for Good Reason, the executive is entitled
to receive a lump sum payment equal to the product of (a) his total cash
compensation for the previous fiscal year and (b) the greater of (1) the number
of full and fractional years remaining in the agreement and (2) the number
three. As used in the employment agreements of Messrs. Whetsell and McCaslin,
the term "Change in Control" means the occurrence of one of the following
events: (i) any person or entity other than Acadia Partners becoming beneficial
owner of greater than 35% of the Common Stock; (ii) the Company adopts a plan of
liquidation; (iii) the Company merges or combines with another company and,
immediately thereafter, the stockholders of the Company prior to the merger or
combination hold 50% or less of the Common Stock; (iv) the Company sells all or
substantially all of its assets; or (v) the Company ceases to act as general
partner of CapStar Management. Amounts received by the executive upon
termination of employment will increase to compensate the executive for any
excise tax payable by him under the Code. These employment agreements prohibit
the executives from using or disclosing any confidential information about the
Company and its operations for a period of three years after the term of
employment and from engaging in any competitive hotel business for a period of
one year after the term of employment.

Under the employment agreements of Messrs. Karnes and Plunket, each is
entitled to receive a lump some payment equal to his annual base salary for the
greater of one year or the remaining unexpired term of employment, if his
employment is terminated by the Company without Cause (as defined below). Each
of these executives will be entitled receive his annual base salary for a period
of two years if his employment is terminated by the executive as a result of the
occurrence of a Material Adverse Change (as defined below) or likely occurrence
of a Material Adverse Change following a Change in Control (as defined below).
The events constituting "Cause" under the employment agreements of Messrs.
Karnes and Plunket include: (i) the executive's inability to perform his duties
under the agreement for more than a 120-day period, whether or not continuous,
during any 365-day period; (ii) acts of willful misfeasance or gross negligence
in connection with the executive's employment; (iii) the executive's conviction
of (or plea of no contest to) an offense which is a felony in the jurisdiction
involved; (iv) repeated failure, after written notice thereof, by the executive
to perform any of his duties under the employment agreement; and (v) a breach of
a specific provision of the employment agreement and, if such breach is curable,
failure to cure same within 30 days of written notice thereof. As used in the
employment agreements of Messrs. Karnes and Plunket, the term "Change in
Control" means: any person or entity, other than Acadia Partners, becoming
beneficial owner of greater than 35% of the Common Stock, so long as no Change
in Control will be deemed to have occurred if the executive continues to report
to Paul W. Whetsell. As used in the employment agreements of Messrs. Karnes and
Plunket, the term "Material Adverse Change" means a material reduction or
material adverse change in the executive's working conditions if, after such
reduction or change, the executive's authority or working conditions are not
commensurate with those of executives holding chief financial officer positions
at companies comparable to the Company in the lodging industry.

58
<PAGE>
PRINCIPAL STOCKHOLDERS AND SELLING STOCKHOLDER

The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of the Offering and as adjusted to reflect the sale
of 9,250,000 shares of Common Stock by the Company, and Acadia Partners, L.P.
(the "Selling Stockholder") in the Offering by (i) all persons known by the
Company to own beneficially more than 5% of the Company's Common Stock, (ii)
each director who is a stockholder, (iii) each of the named executive officers,
(iv) all directors and executive officers as a group, and (v) the Selling
Stockholder.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OFFERING OWNED AFTER OFFERING
----------------------- SHARES BEING -----------------------
NAME & ADDRESS OF BENEFICIAL OWNER NUMBER PERCENTAGE SOLD NUMBER PERCENTAGE
- ------------------------------------- --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Acadia Partners, L.P.(1)
201 Main Street
Suite 3100
Fort Worth, TX 76102............. 3,926,102 65.4% 2,500,000 1,426,102 11.2%
Paul W. Whetsell(2)................ 970,503 16.2% -- 970,503 7.6%
David E. McCaslin(3)............... 472,236 7.9% -- 472,236 3.7%
John E. Plunket(3)................. 462,729 7.7% -- 462,729 3.6%
William M. Karnes(4)............... 0 -- -- 0 --
John Emery(4)...................... 0 -- -- 0 --
Michael T. George(4)............... 0 -- -- 0 --
D. Scott Livchak(4)................ 0 -- -- 0 --
Robert Gauthier(4)................. 0 -- -- 0 --
Daniel L. Doctoroff(4)............. 0 -- -- 0 --
Bradford E. Bernstein(4)........... 0 -- -- 0 --
William S. Janes(4)................ 0 -- -- 0 --
Joseph McCarthy(4)................. 0 -- -- 0 --
Edward L. Cohen.................... 0 -- -- 0 --
Edwin T. Burton, III............... 0 -- -- 0 --
Edward P. Dowd..................... 0 -- -- 0 --
All directors and executive
officers as a group
(15 persons)..................... 980,010 16.3% -- 980,010 7.6%
</TABLE>

- ------------
(1) Includes 3,873,034 shares owned prior to the offering by Acadia Partners,
L.P. and 53,068 shares owned by Cherwell Investors, Inc., a wholly owned
subsidiary of Acadia Partners, L.P. ("Cherwell"). The general partner of
Acadia Partners, L.P. is Acadia FW Partners, L.P., the managing general
partner of which is Acadia MGP, Inc. ("Acadia MGP"). J. Taylor Crandall is
the sole stockholder of Acadia MGP and may be deemed to beneficially own the
shares owned by Acadia Partners, L.P. and Cherwell. In addition, Mr.
Crandall is the sole stockholder of each of PTJ, Inc. ("PTJ") and Group 31,
Inc. ("Group 31"). PTJ is the managing general partner of PTJ Merchant
Banking Partners, L.P., which is the general partner of Penobscot Partners,
L.P. ("Penobscot"), which together with MC Investment Corporation ("MC
Investment"), Penobscot's wholly owned subsidiary, owns 275,299 shares.
Group 31 is the general partner of FWHY Coinvestments VIII Partners, L.P.
("FWHY"), which owns 406,702 shares. As a result of his ownership of PTJ and
Group 31, Mr. Crandall may also be deemed to beneficially own the 732,951
shares owned by Penobscot, MC Investment and FWHY, which shares are not
included in the number of shares set forth as being owned by Acadia
Partners, L.P. in the Principal Stockholders and Selling Stockholder chart,
above. Mr. Crandall's address is 201 Main Street, Suite 3100 Fort Worth, TX
76102. The number of shares set forth as being owned by Acadia Partners,
L.P. in the Principal Stockholders and Selling Stockholder chart above also
excludes 406,701 shares held by OHP EquiStar Partners, L.P. ("OHP") and OHP
EquiStar Partners II, L.P. ("OHP II"). Oak Hill Partners, Inc., which is the
investment advisor to Acadia Partners, L.P., is the general partner of each
of OHP and OHP II.

(2) Includes shares held by entities over which Mr. Whetsell has beneficial
ownership within the meaning of Rule 13d-3 of the Securities Exchange Act of
1934, as amended ("Rule 13d-3").

(3) Includes shares held by entities over which Messrs. McCaslin and Plunket
have beneficial ownership within the meaning of Rule 13d-3.

(4) Such individuals own interests in entities which own shares of Common Stock,
but these individuals do not have beneficial ownership of such shares of
Common Stock within the meaning of Rule 13d-3.

59
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ACQUISITIONS

In March 1996, the Company acquired The Latham Hotel in Washington, D.C. for
a purchase price of $12,000,000 from LCP Hotel Ventures, L.P. ("LCP"). At the
time of the acquisition, the general partner of LCP was Latham Hotels, Inc.
("LHI"), a corporation owned 80% by Paul W. Whetsell, President and Chief
Executive Officer of the Company, and 10% by David E. McCaslin, Chief Operating
Officer of the Company. Including their interests in LHI, Mr. Whetsell and Mr.
McCaslin owned, directly or indirectly, 9.18% and 0.52%, respectively, of the
beneficial interest in LCP and received $763,000 and $42,000, respectively, of
the net proceeds of the purchase price paid to LCP. The purchase price for the
Latham Georgetown was determined through arm's-length negotiations between the
Company, on the one hand, and representatives of the holders of the majority of
the beneficial interests in LCP, on the other hand; such representatives are not
affiliated with the Company.

Since November 1995, the Company has acquired 85.2% of the limited
partnership interests in the partnership that owns the Westin Atlanta Airport
("Atlanta Partners"). In November 1995, the Company acquired, for a purchase
price of $56,000, the 1% general partnership interest in Atlanta Partners
previously held by a corporation in which E. Robert Roskind owned an equity
interest ("LHP"). At the time of such acquisition Mr. Roskind was a principal of
both CapStar Management and EquiStar. LHP was also paid a fee of $893,000 in
connection with the acquisition of the partnership interests in Atlanta
Partners, and is entitled to an additional $161,000 upon the ultimate
disposition of Atlanta Partners. The LCP Group, L.P., in which Mr. Roskind owns
an equity interest is entitled to an annual fee of $30,000 for providing certain
administrative services relating to the outside limited partners of the Westin
Atlanta Airport. All of the compensation paid or payable to affiliates of Mr.
Roskind in connection with the Westin Atlanta Airport transaction was negotiated
between Mr. Roskind, on the one hand, and other principals of EquiStar, on the
other hand, who believed the compensation to have been at fair market value. Mr.
Roskind is no longer associated with the Company.

OWNERSHIP INTERESTS IN CERTAIN MANAGED HOTELS

Mr. Whetsell and Mr. McCaslin and corporations owned by them own, directly
or indirectly, (i) a leasehold interest, expiring on December 31, 2001, in one
of the Managed Hotels and (ii) minority equity interests in eight of the Managed
Hotels. Mr. Whetsell and Mr. McCaslin exercise management control over the
Affiliated Owners of five of these Managed Hotels through their ownership of
certain entities which serve as general partners of the Affiliated Owners. Such
interests were acquired prior to the formation of EquiStar and CapStar
Management. During 1995, the Company received approximately $826,000 in
management fees from those Managed Hotels in which Messrs. Whetsell and McCaslin
own an equity interest, including approximately $630,000 in management fees from
the Affiliated Owners. Under the terms of their employment agreements, Messrs.
Whetsell and McCaslin are prohibited from hereafter acquiring any interests in
hotels or hotel management companies while they serve as officers of the
Company. See "Management--Employment Agreements."

INDEBTEDNESS OF CERTAIN MEMBERS OF MANAGEMENT

In connection with the initial formation and capitalization of EquiStar,
CapStar Management made loans to certain directors and executive officers of the
Company, which loans were used by such individuals to make capital contributions
to EquiStar. Such loans were made from August 1995 through April 1996 and bore
interest at the prime rate through December 31, 1995 and at a rate of 1.5% above
the prime rate thereafter. The largest aggregate amounts of the loans to such
directors and executive officers outstanding at any time (where such aggregate
amount exceeded $60,000) were $300,000 to Mr. Whetsell and $147,500 to Mr.
McCaslin. All such loans will be repaid immediately prior to the Offering.

60
<PAGE>
SHARES AVAILABLE FOR FUTURE SALE

Upon consummation of the Offering (assuming the over-allotment option is not
exercised), the Company will have 12,754,321 shares of Common Stock outstanding.
Of these shares, all of the shares of Common Stock sold in the Offering will be
freely transferable by persons other than "affiliates" of the Company without
restriction or limitation under the Securities Act. The remaining 3,504,321
shares are "restricted securities" within the meaning of Rule 144 under the
Securities Act (the "Restricted Shares") 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. The Company has
granted certain registration rights to the recipients of Restricted Shares
issued in connection with the Formation Transactions, which registration rights
cover all of the securities issued in connection with the Formation
Transactions.

In general, under Rule 144, if two years have elapsed since the later of the
date of acquisition of Restricted Shares 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 Securities and Exchange Commission. Sales under Rule 144 are also subject to
certain manner 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 Shares 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. The
Securities and Exchange Commission has proposed amendments to Rule 144 to reduce
the two and three year holding periods to one and two years, respectively.

The Company and Acadia Partners (who beneficially owns 2,514,804 shares of
Common Stock) have agreed that, for a period of 180 days from the date of this
Prospectus, they will not, without the prior written consent of Lehman, offer,
sell, contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exercisable for Common Stock. Certain entities
controlled by members of management (who beneficially own an aggregate of
989,517 shares of Common Stock) have agreed that, for a period of 360 days from
the date of this Prospectus, they will not, without the prior written consent of
Lehman, offer, sell, contract to sell or otherwise dispose of any shares of
Common Stock or any securities convertible into or exercisable for Common Stock.
There can be no assurance that Lehman will not grant any such consent. In
connection with the Offering, certain directors and executive officers of the
Company, who were recipients of Restricted Shares, will pledge Restricted Shares
as guarantees for loans to be made to them by Lehman. These loans will be made
in connection with the repayment of loans previously made to such individuals by
CapStar Management. The Company has agreed that Lehman will be entitled to
exercise registration rights in respect of any Restricted Shares that may be
acquired by Lehman in the event of a default on a loan to any such individual.

Prior to the Offering, there has been no public market for the Common Stock.
The Company can make no predictions as to the effect, if any, that future sales
of Restricted Shares, or the availability of such Restricted Shares 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 Shares in the public market could have an adverse effect on the
market price of the Common Stock.

The Company has adopted an Equity Incentive Plan and Stock Purchase Plan for
the purpose of attracting, retaining and motivating executive officers of the
Company, other key employees and directors. The Company has reserved 1,740,000
shares of Common Stock for issuance under such plans.

61
<PAGE>
The Board expects to grant options to purchase an aggregate of 745,254 shares of
Common Stock at the initial public offering price under the Equity Incentive
Plan to certain key personnel. The Company intends to file a registration
statement under the Securities Act to register shares of Common Stock issuable
upon the exercise of stock options granted under the Equity Incentive Plan or
the Stock Purchase Plan. Shares issued upon exercise of stock options after the
effective date of such registration statement generally will be available for
sale in the open market.

DESCRIPTION OF CAPITAL STOCK

The following summary information is qualified in its entirety by the
provisions of the Company's Certificate of Incorporation and By-laws, copies of
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part. See "Additional Information."

The authorized capital stock of the Company consists of 49,000,000 shares of
Common Stock, par value $.01 per share, and 25,000,000 shares of preferred
stock, par value $.01 per share ("Preferred Stock"), of which 6,004,321 shares
of Common Stock and no shares of Preferred Stock are outstanding. Upon
completion of the Offering, 12,754,321 shares of Common Stock and no shares of
Preferred Stock will be outstanding.

Prior to the Offering, there has been no public market for the Common Stock.
See "Risk Factors-- Absence of Prior Public Market."

COMMON STOCK

Voting Rights. The Company's Certificate of Incorporation provides that
holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of stockholders. The stockholders are not entitled to vote
cumulatively for the election of directors.

Dividends. Each share of Common Stock is entitled to receive dividends if,
as and when declared by the Board. Under Delaware law, a corporation may declare
and pay dividends out of surplus, or if there is no surplus, out of net profits
for the fiscal year in which the dividend is declared and/or the preceding year.
No dividends may be declared, however, if the capital of the corporation has
been diminished by depreciation in the value of its property, losses or
otherwise to an amount less than the aggregate amount of capital represented by
any issued and outstanding stock having a preference on the distribution of
assets. See "Dividend Policy."

Other Rights. Stockholders of the Company have no preemptive or other rights
to subscribe for additional shares. Subject to any rights of the holders of any
Preferred Stock that may be issued subsequent to the Offering, all holders of
Common Stock are entitled to share equally on a share-for-share basis in any
assets available for distribution to stockholders on liquidation, dissolution or
winding up of the Company. No shares of Common Stock are subject to redemption
or a sinking fund. All outstanding shares of Common Stock are, and the Common
Stock to be outstanding upon completion of the Offering will be, fully paid and
nonassessable.

PREFERRED STOCK

The Company's Board is authorized to issue, without further authorization
from stockholders, up to 25,000,000 shares of Preferred Stock in one or more
series and to determine, at the time of creating each series, the distinctive
designation of, and the number of shares in, the series, its dividend rate, the
number of votes, if any, for each share of such series, the price and terms on
which such shares may be redeemed, the terms of any applicable sinking fund, the
amount payable upon liquidation, dissolution or winding up, the conversion
rights, if any, and such other rights, preferences and priorities of such series
as the Board may be permitted to fix under the laws of the State of Delaware as
in effect at the time such series is created. The issuance of Preferred Stock
could adversely affect the voting power of the holders of Common Stock and could
have the effect of delaying, deferring or preventing a change in control of the
Company. The Company has no current plan to issue any shares of Preferred Stock.

62
<PAGE>
SECTION 203 OF THE DELAWARE LAW

Section 203 of the Delaware General Corporation Law (the "Delaware Law")
prohibits publicly held Delaware corporations from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date of the transaction in which the person or entity became an
interested stockholder, unless (i) prior to such date, either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder is approved by the Board, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the outstanding
voting stock of the corporation (excluding for this purpose certain shares owned
by persons who are directors and also officers of the corporation and by certain
employee benefit plans) or (iii) on or after such date the business combination
is approved by the Board and by the affirmative vote (and not by written
consent) of at least 66 2/3% of the outstanding voting stock which is not owned
by the interested stockholder. For the purposes of Section 203, a "business
combination" is broadly defined to include mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within the immediately preceding three years did own) 15%
or more of the corporation's voting stock.

REGISTRATION RIGHTS

Contemporaneously with the Formation Transactions, the Company will enter
into a registration rights agreement with persons receiving shares of Common
Stock in connection with the Formation Transactions (the "Registration Rights
Agreement"), pursuant to which the Company will agree (subject to certain
limitations and under certain circumstances) to register for sale any shares of
Common Stock that are held by the parties thereto (collectively, the
"Registrable Securities"). See "Formation Transactions." All of the shares of
Common Stock issued in the Formation Transactions will be Registrable
Securities. The Registration Rights Agreement provides that any holder of
Registrable Securities may require the Company to register such Registrable
Securities for sale (a "Demand Registration"), provided that the total amount of
Registrable Securities to be included in the Demand Registration has a market
value of at least $10 million and provided that notice is not given prior to six
months after the effective date of a previous Demand Registration. If
Registrable Securities are going to be registered by the Company pursuant to a
Demand Registration, the Company must provide written notice to the other
holders of Registrable Securities and permit them to include any or all
Registrable Securities that they hold in the Demand Registration, provided that
the amount of Registrable Securities requested to be registered may be limited
by the underwriters in an underwritten offering based on such underwriters'
determination that inclusion of the total amount of Registrable Securities
requested for registration would materially and adversely affect the success of
the offering. Upon notice of a Demand Registration, the Company is required to
file a registration statement within 60 days of the date on which notice is
given, although the Company may postpone the filing for up to 90 days under
certain circumstances. Subject to the conditions stated or referred to above,
the holders of Registrable Securities may request an unlimited number of Demand
Registrations. Acadia Partners and its affiliates that will receive shares in
the Formation Transactions have agreed not to exercise any Demand Registration
rights for a period of six months from the date of execution of the Registration
Rights Agreement. Certain management-controlled entities that will receive
shares in the Formation Transactions have a one-time right to require the
Company to register the Registrable Securities that they hold in connection with
the distribution of the Registrable Securities to their members or in connection
with a resale of such shares. In order to demand any such registration the
market value of the securities to be sold by such entities must be at least $2
million. The management-controlled entities will not be entitled to include
their Registrable Securities in any such registration prior to one year from the
Closing, although a pledgee of such Registrable Securities may, upon a default
by a management-controlled entity under a loan secured by the pledge, exercise
the management-controlled entity's registration rights during such one-year
period.

63
<PAGE>
The Registration Rights Agreement also provides that, subject to certain
exceptions, in the event the Company proposes to file a registration statement
with respect to an offering of any class of equity securities, other than an LLC
Registration and certain other types of registrations, the Company will offer
the holders of Registrable Securities the opportunity to register the number of
Registrable Securities they request to include (the "Piggyback Registration"),
provided that the amount of Registrable Securities requested to be registered
may be limited by the underwriters in an underwritten offering based on such
underwriters' determination that inclusion of the total amount of Registrable
Securities requested for registration would materially and adversely affect the
success of the offering. The Company is generally required to pay all of the
expenses of Demand Registrations, an LLC Registration and Piggyback
Registrations, other than underwriting discounts and commissions.

TRANSFER AGENT AND REGISTRAR

The Company has appointed The First National Bank of Boston as the transfer
agent and registrar for the Common Stock.

64
<PAGE>
UNDERWRITING

The Underwriters of the U.S. Offering of Common Stock (the "U.S.
Underwriters"), for whom Lehman, Goldman, Sachs & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Smith Barney Inc. are serving as representatives
(the "Representatives") have severally agreed, subject to the terms and
conditions of the underwriting agreement, the form of which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part (the
"U.S. Underwriting Agreement"), to purchase from the Company and the Selling
Stockholder, and the Company and the Selling Stockholder have agreed to sell to
the U.S. Underwriters, the aggregate number of shares of Common Stock set forth
opposite their respective names below.

<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITERS OF SHARES
- ----------------- ---------
<S> <C>
Lehman Brothers Inc............................................. 1,252,500
Goldman, Sachs & Co............................................. 1,252,500
Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................................... 1,252,500
Smith Barney Inc................................................ 1,252,500
Alex. Brown & Sons Incorporated................................. 120,000
CS First Boston Corporation..................................... 120,000
Dean Witter Reynolds Inc........................................ 120,000
A.G. Edwards & Sons, Inc. ...................................... 120,000
Everen Securities, Inc.......................................... 120,000
Montgomery Securities........................................... 120,000
Morgan Stanley & Co. Incorporated............................... 120,000
PaineWeber Incorporated......................................... 120,000
Salomon Brothers Inc ........................................... 120,000
Schroder Wertheim & Co. Incorporated............................ 120,000
Advest, Inc..................................................... 70,000
Fahnestock & Co. Inc. .......................................... 70,000
First Southwest Company......................................... 70,000
Hanifen, Imhoff Inc............................................. 70,000
Interstate/Johnson Lane Corporation............................. 70,000
Edward D. Jones & Co. .......................................... 70,000
Legg Mason Wood Walker, Incorporated............................ 70,000
McDonald & Company Securities, Inc. ............................ 70,000
Morgan Keegan & Company, Inc.................................... 70,000
Piper Jaffray Inc............................................... 70,000
Principal Financial Securities, Inc............................. 70,000
Raymond James & Associates, Inc. ............................... 70,000
The Robinson-Humphrey Company, Inc. ............................ 70,000
Sands Brothers & Co., Ltd....................................... 70,000
Scott & Stingfellow, Inc........................................ 70,000
Wheat, First Securities, Inc.................................... 70,000
The Williams Capital Group, L.P. ............................... 70,000
---------
Total........................................................... 7,400,000
---------
---------
</TABLE>

65
<PAGE>
The managers of the International Offering named below (the "International
Managers") for whom Lehman Brothers International (Europe), Goldman Sachs
International, Merrill Lynch International Limited, and Smith Barney Inc. are
acting as lead managers, have severally agreed, subject to the terms and
conditions of the International Underwriting Agreement, the form of which has
been filed as an exhibit to the Registration Statement (the "International
Underwriting Agreement"), to purchase from the Company and the Selling
Stockholder, and the Company and the Selling Stockholder have agreed to sell to
the International Managers, the aggregate number of shares of Common Stock set
forth opposite their respective names below.

<TABLE>
<CAPTION>
NUMBER
INTERNATIONAL MANAGERS OF SHARES
- ---------------------------------------------------------------- ---------
<S> <C>
Lehman Brothers International (Europe).......................... 462,500
Goldman Sachs International..................................... 462,500
Merrill Lynch International Limited............................. 462,500
Smith Barney Inc. .............................................. 462,500
---------
Total..................................................... 1,850,000
---------
---------
</TABLE>

The U.S. Underwriting Agreement and the International Underwriting Agreement
(collectively, the "Underwriting Agreements") provide that the obligations of
the U.S. Underwriters and the International Managers, respectively, to purchase
shares of Common Stock, are subject to the approval of certain legal matters by
counsel and to certain other conditions and that if any of the shares of Common
Stock are purchased by the U.S. Underwriters pursuant to the U.S. Underwriting
Agreement or by the International Managers pursuant to the International
Underwriting Agreement, all the shares of Common Stock agreed to be purchased by
either the U.S. Underwriters or the International Managers, as the case may be,
pursuant to their respective Underwriting Agreements, must be so purchased. The
offering price and underwriting discounts and commissions for the U.S. Offering
and the International Offering are identical. The closing of the International
Offering is a condition to the closing of the U.S. Offering and the closing of
the U.S. Offering is a condition to the closing of the International Offering.

The Company has been advised that the U.S. Underwriters and the
International Managers propose to offer shares of Common Stock directly to the
public initially at the public offering price set forth on the cover page of
this Prospectus and to certain selected dealers (who may include the U.S.
Underwriters and International Managers) at such public offering price less a
selling concession not to exceed $0.71 per share. The selected dealers may
reallow a concession not to exceed $0.10 per share. After the initial offering
of the Common Stock, the concession to selected dealers and the reallowance to
other dealers may be changed by the U.S. Underwriters and the International
Managers.

The U.S. Underwriters and the International Managers have entered into an
Agreement Among U.S. Underwriters and International Managers (the "Agreement
Among") pursuant to which each U.S. Underwriter has agreed, that, as part of the
distribution of the shares of Common Stock offered in the U.S. Offering, (a) it
is not purchasing any of such shares for the account of anyone other than a U.S.
or Canadian Person (as defined below) and (b) it has not offered or sold, and
will not offer, sell, resell or deliver, directly or indirectly, any of such
shares or distribute any prospectus relating to the U.S. Offering outside the
United Sates or Canada or to anyone other than a U.S. or Canadian Person. In
addition, pursuant to the Agreement Among, each International Manager has agreed
that, as part of the distribution of the shares of Common Stock offered in the
International Offering, (a) it is not purchasing any of such shares for the
account of any U.S. or Canadian Person and (b) it has not offered or sold, and
will not offer, sell, resell or deliver, directly or indirectly, any of such
shares or distribute any prospectus relating to the International Offering
within the United States or Canada or to any U.S. or Canadian Person. The
foregoing limitations do not apply to stabilization transactions or to certain
other transactions specified in the Underwriting Agreements and the Agreement
Among, including: (i) certain purchases and sales between the U.S. Underwriters
and the International Managers;

66
<PAGE>
(ii) certain offers, sales, resales, deliveries or distributions to or through
investment advisors or other persons exercising investment discretion; (iii)
purchases, offers or sales by a U.S. Underwriter who is also acting as an
International Manager or by an International Manager who also is acting as a
U.S. Underwriter; and (iv) other transactions specifically approved by the U.S.
Underwriters and International Managers. As used herein, "U.S. or Canadian
Person" means any resident or citizen of the United States or Canada, any
corporation, pension, profit sharing or other trust or other entity organized
under or governed by the laws of the United States or Canada or any political
subdivision thereof (other than the foreign branch of the United States or
Canadian Person), any estate or trust the income of which is subject to United
States or Canadian federal income taxation regardless of the source of its
income, and any United States or Canadian branch of a person other than a United
States or Canadian Person. The term "United States" means the United States of
America (including the states thereof and the District of Columbia) and its
territories, its possessions and other areas subject to its jurisdiction. The
term "Canada" means the provinces of Canada, its territories, its possessions
and other areas subject to its jurisdiction.

Pursuant to the Agreement Among, sales may be made among the U.S.
Underwriters and the International Managers of such number of shares of Common
Stock as may be mutually agreed. The price of any shares so sold shall be the
public offering price as then in effect for Common Stock being sold by the U.S.
Underwriters and International Managers, less an amount not greater than the
selling concession unless otherwise determined by mutual agreement. To the
extent that there are sales pursuant to the Agreement Among, the number of
shares initially available for sale by the U.S. Underwriters and the
International Managers may be more or less than the amount specified on the
cover page of this Prospectus.

Each International Manager has represented and agreed that: (i) it has not
offered or sold and, prior to the date six months after the date of issuance of
the shares of Common Stock, will not offer or sell any shares of Common Stock to
persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom 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, to any person in the United Kingdom, any document
received by it in connection with the issuance of the Common Stock if that
person is of a kind described in Article 11(3) of the Financial Services Act of
1986 (Investment Advertisements) (Exemptions) Order 1995.

Purchasers of the shares offered pursuant to the Offerings 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.

The Company has agreed to indemnify the U.S. Underwriters and International
Managers against certain liabilities, including liabilities under the Securities
Act, or to contribute to the payments they may be required to make in respect
thereto.

The Company and the Selling Stockholder have agreed to pay Lehman a fee for
advisory services in connection with the Formation Transactions in an amount of
up to 0.50% of the public offering price of the respective shares being sold by
them in the Offering.

The Company has granted to the U.S. Underwriters and the International
Managers options to purchase up to an additional 1,110,000 and 277,500 shares of
Common Stock, at the initial public offering price, less the aggregate
underwriting discounts and commissions, shown on the cover page of this
Prospectus, solely to cover over-allotments, if any. Such options may be
exercised at any time within

67
<PAGE>
30 days after the date of the Underwriting Agreement. To the extent the U.S.
Underwriters or International Managers exercise such options, each of the U.S.
Underwriters and International Managers, as the case may be, will be committed,
subject to certain conditions, to purchase a number of the additional shares of
Common Stock proportionate to such U.S. Underwriter's or International Manager's
initial commitment as indicated in the preceding table.

In connection with the Offering, the Company and Acadia Partners have agreed
not to offer, sell, contract to sell or otherwise dispose of any shares of
Common Stock or any securities convertible into or exercisable for Common Stock
for a period of 180 days after the date of this Prospectus without the prior
written consent of Lehman. In addition, certain entities controlled by members
of management have agreed not to offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exercisable for Common Stock for a period of 360 days after the date of this
Prospectus without the prior written consent of Lehman. Such restriction will
not apply to any shares purchased in the Offering or otherwise on the open
market. See "Risk Factors--Shares Available for Future Sale."

The Common Stock has been approved for listing on the NYSE subject to
official notice of issuance. To meet one of the requirements for listing on the
NYSE, the Underwriters have undertaken to sell lots of 100 or more shares to a
minimum of 2,000 beneficial owners.

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

Prior to the Offering, there has been no active market for the Common Stock.
The initial public offering price was determined by negotiations among the
Company and the Representatives. Among the factors considered in such
negotiations are the Company's recent results of operations, the future
prospects of the Company and its industry in general, the price-earnings ratios
and market prices of securities of companies engaged in activities similar to
those of the Company and prevailing conditions in the securities markets.

On December 21, 1995, Lehman Holdings, an affiliate of Lehman, provided to
the Company a $202,500,000 credit facility ($151,815,394 was outstanding
thereunder as of June 30, 1996), which facility is expected to be partially
repaid with the net proceeds of the Offering. See "Use of Proceeds." In
connection with the formation of EquiStar, CapStar Management made loans to
certain directors and executive officers of the Company, which loans currently
total approximately $1.0 million. Lehman has agreed to extend loans to these
directors and executive officers to repay CapStar Management all amounts
currently outstanding under the loans. The loans from Lehman will be guaranteed
by pledges of Common Stock held by such directors and executive officers. See
"Shares Available for Future Sale."

An affiliate of Lehman owns a minority equity interest in Acadia Partners.

Because an affiliate of Lehman will receive more than 10% of the net
proceeds of the Offering in repayment of currently outstanding indebtedness, the
Offering is being conducted in accordance with Rule 2710(c)(8) of the Conduct
Rules of the National Association of Securities Dealers, Inc. In accordance with
these requirements, Merrill Lynch, Pierce, Fenner & Smith Incorporated (the
"Independent Underwriter") is assuming the responsibilities of acting as
"qualified independent underwriter" and will recommend the maximum initial
public offering price for the shares of Common Stock in compliance with the
requirements of the Conduct Rules. In connection with the Offering, the
Independent Underwriter is performing due diligence investigations and is
reviewing and participating in the preparation of this Prospectus and the
Registration Statement of which this Prospectus forms a part. The initial public
offering price of the Common Stock will be no higher than the price recommended
by the Independent Underwriter.

68
<PAGE>
LEGAL MATTERS

The validity of the Common Stock will be passed upon for the Company by
Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York. Certain legal
matters will be passed upon for the Underwriters by Hogan & Hartson L.L.P.,
Washington, D.C.

EXPERTS

The financial statements and schedule included herein and in the
Registration Statement, to the extent and for the periods indicated therein,
have been included in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein and upon
the authority of said firm as experts in accounting and auditing.

The combined financial statements of the Holiday Inn, Cleveland, Ohio for
the period from January 1, 1996 to February 16, 1996 and the years ended
December 31, 1995, 1994 and 1993 included herein and in the Registration
Statement have been audited by Bober, Markey & Company, independent certified
public accountants, and are included herein in reliance upon the authority of
said firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange 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
and schedules 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 and schedules 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 World Wide Web site that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Commission. The address of such site
is "http://www.sec.gov".

Statements contained in this Prospectus as to the contents of any contract
or other document which is filed as an exhibit to the Registration Statement are
not necessarily complete, and each such statement is qualified in its entirety
by reference to the full text of such contract or document.

The Company will be required to file reports and other information with the
Commission pursuant to the Exchange Act. The Company intends to furnish to its
stockholders 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.

69
<PAGE>

This Page Intentionally Left Blank

<PAGE>
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
<S> <C>
CAPSTAR HOTEL COMPANY

Independent Auditors' Report......................................................... F-4

Balance Sheet and Notes to Balance Sheet as of June 30, 1996......................... F-5

EQUISTAR HOTEL INVESTORS, L.P. AND CAPSTAR MANAGEMENT COMPANY, L.P.

Independent Auditors' Report......................................................... F-6

Combined Balance Sheets as of June 30, 1996 and December 31, 1995.................... F-7

Combined Statements of Operations for the six months ended June 30, 1996 and for the
period from January 12, 1995 (date of inception) to December 31, 1995................ F-8

Combined Statements of Partners' Capital for the six months ended June 30, 1996 and
for the period from January 12, 1995 (date of inception) to December 31, 1995...... F-9

Combined Statements of Cash Flows for the six months ended June 30, 1996 and for the
period from January 12, 1995 (date of inception) to December 31, 1995................ F-10

Notes to the Combined Financial Statements........................................... F-11

CAPSTAR MANAGEMENT COMPANY, L.P.

Independent Auditors' Report......................................................... F-18

Balance Sheet as of December 31, 1994................................................ F-19

Statements of Operations and Changes in Management Operations' Equity for the years
ended December 31, 1994 and 1993..................................................... F-20

Statements of Cash Flows for the years ended December 31, 1994 and 1993.............. F-21

Notes to Financial Statements........................................................ F-22

ORANGE COUNTY AIRPORT HILTON

Independent Auditors' Report......................................................... F-24

Statements of Operations for the period from January 1, 1996 to February 22, 1996
(date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended
December 31, 1995, 1994 and 1993................................................... F-25

Statements of Cash Flows for the period from January 1, 1996 to February 22, 1996
(date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended
December 31, 1995, 1994 and 1993................................................... F-26

Notes to Financial Statements........................................................ F-27

COLORADO SPRINGS SHERATON HOTEL

Independent Auditors' Report......................................................... F-29

Statements of Operations for the period from January 1, 1995 to June 30, 1995 (date
of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31,
1994 and 1993...................................................................... F-30

Statements of Cash Flows for the period from January 1, 1995 to June 30, 1995 (date
of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31,
1994 and 1993...................................................................... F-31

Notes to Financial Statements........................................................ F-32

GEORGETOWN LATHAM HOTEL

Independent Auditors' Report......................................................... F-33

Statements of Operations for the period from January 1, 1996 to March 8, 1996 (date
of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31,
1995, 1994 and 1993................................................................ F-34
</TABLE>

F-1
<PAGE>
<TABLE>
<S> <C>
Statements of Cash Flows for the period from January 1, 1996 to March 8, 1996 (date
of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31,
1995, 1994 and 1993................................................................ F-35

Notes to Financial Statements........................................................ F-36

WESTIN ATLANTA AIRPORT

Independent Auditors' Report......................................................... F-38

Statements of Operations for the period from January 1, 1995 to November 15, 1995
(date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended
December 31, 1994 and 1993......................................................... F-39

Statements of Cash Flows for the period from January 1, 1995 to November 15, 1995
(date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended
December 31, 1994 and 1993........................................................... F-40

Notes to Financial Statements........................................................ F-41

SOMERSET MARRIOTT HOTEL

Independent Auditors' Report......................................................... F-43

Statements of Operations for the fiscal years ended September 30, 1995, 1994 and
1993................................................................................. F-44

Statements of Cash Flows for the fiscal years ended September 30, 1995, 1994 and
1993................................................................................. F-45

Notes to Financial Statements........................................................ F-46

CHARLOTTE SHERATON AIRPORT PLAZA

Independent Auditors' Report......................................................... F-48

Statements of Operations for the period from January 1, 1996 to February 2, 1996
(date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended
December 31, 1995, 1994 and 1993................................................... F-49

Statements of Cash Flows for the period from January 1, 1996 to February 2, 1996
(date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended
December 31, 1995, 1994 and 1993................................................... F-50

Notes to Financial Statements........................................................ F-51

CLEVELAND HOLIDAY INN AND AFFILIATE

Independent Auditors' Report......................................................... F-53

Combined Statements of Income for the period from January 1, 1996 to February 16,
1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended
December 31, 1995, 1994 and 1993................................................... F-54

Combined Statements of Cash Flows for the period from January 1, 1996 to February 16,
1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the years ended
December 31, 1995, 1994 and 1993..................................................... F-55

Notes to Combined Financial Statements............................................... F-56

ARLINGTON HILTON HOTEL

Independent Auditors' Report......................................................... F-58

Statements of Operations for the period from January 1, 1996 to April 17, 1996 and
the years ended December 31, 1995, 1994 and 1993................................... F-59

Statements of Cash Flows for the period from January 1, 1996 to April 17, 1996 and
the years ended December 31, 1995, 1994 and 1993................................... F-60

Notes to Financial Statements........................................................ F-61
</TABLE>

F-2
<PAGE>
<TABLE>
<S> <C>
SALT LAKE AIRPORT HILTON

Independent Auditors' Report......................................................... F-63

Statements of Operations for the period from January 1, 1995 to March 3, 1995 (date
of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31,
1994 and 1993...................................................................... F-64

Statements of Cash Flows for the period from January 1, 1995 to March 3, 1995 (date
of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31,
1994 and 1993...................................................................... F-65

Notes to Financial Statements........................................................ F-66

BALLSTON HOTEL LIMITED PARTNERSHIP (HILTON HOTEL, ARLINGTON, VA)

Independent Auditors' Report......................................................... F-68

Balance Sheets as of June 30, 1996 and December 31, 1995 and 1994.................... F-69

Statements of Operations for the six months ended June 30, 1996 and the years ended
December 31, 1995, 1994 and 1993..................................................... F-70

Statements of Partners' Deficit for the six months ended June 30, 1996 and the years
ended December 31, 1995, 1994 and 1993............................................. F-71

Statements of Cash Flows for the six months ended June 30, 1996 and the years ended
December 31, 1995, 1994 and 1993..................................................... F-72

Notes to Financial Statements........................................................ F-73

BELLEVUE HILTON HOTEL

Independent Auditors' Report......................................................... F-78

Statements of Operations for the period from January 1, 1995 to August 4, 1995 (date
of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31,
1994 and 1993...................................................................... F-79

Statements of Cash Flows for the period from January 1, 1995 to August 4, 1995 (date
of acquisition by EquiStar Hotel Investors, L.P.) and the years ended December 31,
1994 and 1993...................................................................... F-80

Notes to Financial Statements........................................................ F-81

ADDITIONAL HOTELS

Independent Auditors' Report......................................................... F-83

Combined Balance Sheets as of June 30, 1996, December 31, 1995 and 1994.............. F-84

Combined Statements of Operations for the six months ended June 30, 1996 and the
years ended December 31, 1995, 1994 and 1993....................................... F-85

Combined Statements of Owners' Capital for the six months ended June 30, 1996 and the
years ended December 31, 1995, 1994 and 1993......................................... F-86

Combined Statements of Cash Flows for the six months ended June 30, 1996 and the
years ended December 31, 1995, 1994 and 1993....................................... F-87

Notes to Combined Financial Statements............................................... F-88
</TABLE>

F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors
CapStar Hotel Company:

We have audited the accompanying balance sheet of CapStar Hotel Company (the
"Company") as of June 30, 1996. This balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on the balance
sheet 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 balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.

In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of CapStar Hotel Company as of June
30, 1996 in conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

Washington, D.C.
July 26, 1996

F-4
<PAGE>
CAPSTAR HOTEL COMPANY

BALANCE SHEET
JUNE 30, 1996

<TABLE>
<S> <C>
Asset--cash........................................................................... $ 1
---
---
Stockholder's Equity:
Preferred Stock ($.01 par value, 25,000,000 shares authorized, no shares issued or
outstanding).......................................................................... --
---
Common stock ($.01 par value, 49,000,000 shares authorized, 100 shares issued and
outstanding).......................................................................... $ 1
$ 1
---
---
</TABLE>

NOTES TO BALANCE SHEET

(1) ORGANIZATION

CapStar Hotel Company (the "Company") was incorporated under Delaware
General Corporation Law on May 29, 1996. The authorized capital stock of the
Company consists of 49,000,000 shares of Common Stock having a par value of $.01
per share and 25,000,000 shares of Preferred Stock having a par value of $.01
per share. Each holder of Common Stock shall be entitled to one vote for each
share held. No Preferred Stock is issued or outstanding at June 30, 1996.

(2) FORMATION OF THE COMPANY

EquiStar Hotel Investors, L.P. (EquiStar) and CapStar Management Company,
L.P. (CapStar Management) were formed on January 12, 1995. The entities are
under common ownership. The principal activity of EquiStar is to acquire and own
upscale full-service hotels in the United States. At June 30, 1996, EquiStar
owned 11 hotels. CapStar Management operates 48 hotels throughout the United
States on behalf of third-party and affiliate owners.

Pursuant to certain agreements, the Company expects the partners of CapStar
Management and EquiStar to contribute their partnership interests in these
entities to the Company in exchange for shares of Common Stock. The Company also
expects to (i) contribute certain limited partnership interests in CapStar
Management to CapStar L.P. Corporation, a wholly-owned subsidiary, and (ii)
contribute all of the assets of EquiStar to CapStar Management. CapStar
Management will assume all of the liabilities of EquiStar and function as the
Company's operating partnership. As a result of these transactions, the Company
and CapStar L.P. Corporation will own (directly or indirectly) all of the assets
currently owned by CapStar Management and EquiStar.

The Company and a stockholder intend to offer 6,750,000 and 2,500,000 shares
of Common Stock, respectively, in an initial public offering.

F-5
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Partners
EquiStar Hotel Investors, L.P. and CapStar Management Company, L.P.:

We have audited the accompanying combined balance sheets of EquiStar Hotel
Investors, L.P. and subsidiaries and CapStar Management Company, L.P.
(collectively, the "Partnerships") as of June 30, 1996 and December 31, 1995 and
the related combined statements of operations, partners' capital, and cash flows
for the six months ended June 30, 1996 and for the period from January 12, 1995
(date of inception) to December 31, 1995, and the supplementary schedule. These
combined financial statements and schedule are the responsibility of the
Partnerships' management. Our responsibility is to express an opinion on these
combined financial statements and schedule 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 and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement and schedule presentation. We believe that our audits
provide 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 EquiStar
Hotel Investors, L.P. and subsidiaries and CapStar Management Company, L.P. as
of June 30, 1996 and December 31, 1995, and the results of their combined
operations and their combined cash flows for the six months ended June 30, 1996
and for the period from January 12, 1995 (date of inception) to December 31,
1995, in conformity with generally accepted accounting principles, and the
supplementary schedule, in our opinion, presents fairly, in all material
respects, the information set forth therein.

KPMG Peat Marwick LLP

Washington, D.C.
July 18, 1996

F-6
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P. AND
CAPSTAR MANAGEMENT COMPANY, L.P.

COMBINED BALANCE SHEETS

JUNE 30, 1996 AND DECEMBER 31, 1995

<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents....................................... $ 4,907,234 6,831,983
Accounts receivable, net of allowance for doubtful accounts of
$131,000 in 1996 and $91,000 in 1995............................ 6,947,529 2,748,909
Deposits, including restricted deposits of $2,023,307 in 1995... 3,863,123 3,515,332
Prepaid expenses and other...................................... 837,045 265,260
Inventory....................................................... 618,573 173,514
------------ -----------
Total current assets............................................ 17,173,504 13,534,998
Property and equipment:
Land.......................................................... 37,142,485 12,767,661
Buildings and improvements.................................... 127,244,333 84,545,420
Furniture, fixtures and equipment............................. 24,594,853 11,353,507
Construction-in-progress...................................... 6,321,996 2,216,174
------------ -----------
195,303,667 110,882,762
Accumulated depreciation...................................... (4,979,831) (1,756,412)
------------ -----------
Total property and equipment, net............................... 190,323,836 109,126,350
Deferred costs, net of accumulated amortization of $967,112 in
1996 and $271,496 in 1995..................................... 5,445,308 2,637,754
Restricted cash................................................. 18,793,399 7,351,128
------------ -----------
$231,736,047 132,650,230
------------ -----------
------------ -----------
LIABILITIES, MINORITY INTEREST AND PARTNERS' CAPITAL
Accounts payable................................................ $ 4,436,619 2,329,034
Accrued expenses and other liabilities.......................... 10,409,654 4,320,320
Due to CapStar Equity Associates, G.P........................... 329,362 305,077
Long-term debt, current portion................................. 3,220,336 2,668,121
------------ -----------
Total current liabilities....................................... 18,395,971 9,622,552
Long-term debt.................................................. 164,891,922 73,574,038
------------ -----------
Total liabilities............................................... 183,287,893 83,196,590
Minority interest............................................... 576,314 815,918
Partners' capital--General Partners............................. 2,467,442 2,431,589
Partners' capital--Limited Partners............................. 45,404,398 46,206,133
------------ -----------
$231,736,047 132,650,230
------------ -----------
------------ -----------
</TABLE>

See accompanying notes to combined financial statements.

F-7
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P. AND
CAPSTAR MANAGEMENT COMPANY, L.P.

COMBINED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 12
PERIOD FROM (DATE OF
SIX MONTHS JANUARY 12 INCEPTION)
ENDED TO TO
JUNE 30, JUNE 30, DECEMBER 31,
----------- ----------- ------------
1996 1995 1995
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Revenue from hotel operations:
Rooms........................................ $28,120,664 1,928,837 14,456,387
Food and beverage............................ 12,988,951 559,632 5,900,238
Other operating departments.................. 2,422,446 193,595 1,122,361
Lease revenue................................ 637,548 -- 447,934
Hotel management and other fees................ 2,086,931 2,128,493 4,436,428
----------- ----------- ------------
Total revenue.................................. 46,256,540 4,810,557 26,363,348
----------- ----------- ------------
Hotel operating expenses by department:
Rooms........................................ 7,364,570 528,120 4,190,299
Food and beverage............................ 10,302,012 425,087 4,923,790
Other operating departments.................. 1,089,381 79,866 512,791
Undistributed operating expenses:
Administrative and general................... 9,457,210 2,463,242 8,078,304
Property operating costs..................... 5,380,675 426,417 2,623,626
Property taxes, insurance and other.......... 2,116,498 84,967 1,310,517
Depreciation and amortization................ 3,919,035 302,802 2,097,512
----------- ----------- ------------
Total operating expenses....................... 39,629,381 4,310,501 23,736,839
----------- ----------- ------------
Net operating income........................... 6,627,159 500,056 2,626,509
Interest expense............................... 7,374,163 346,523 2,673,365
Interest income................................ (83,905) (12,109) (260,017)
----------- ----------- ------------
Income (loss) before minority interest and
extraordinary item............................. (663,099) 165,642 213,161
Minority interest in subsidiary................ (68,771) -- (17,415)
----------- ----------- ------------
Income (loss) before extraordinary item........ (594,328) 165,642 230,576
Extraordinary item--loss on early
extinguishment of debt....................... -- -- (887,631)
----------- ----------- ------------
Net income (loss).............................. $ (594,328) 165,642 (657,055)
----------- ----------- ------------
----------- ----------- ------------
Net income (loss) attributable to General
Partners....................................... $ 38,098 21,533 (87,254)
----------- ----------- ------------
----------- ----------- ------------
Net income (loss) attributable to Limited
Partners....................................... $ (632,426) 144,109 (569,801)
----------- ----------- ------------
----------- ----------- ------------
</TABLE>

See accompanying notes to combined financial statements.

F-8
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P. AND
CAPSTAR MANAGEMENT COMPANY, L.P.

COMBINED STATEMENTS OF PARTNERS' CAPITAL

FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND

FOR THE PERIOD FROM JANUARY 12, 1995

(DATE OF INCEPTION) TO DECEMBER 31, 1995

<TABLE>
<CAPTION>
GENERAL LIMITED
TOTAL PARTNERS PARTNERS
----------- ---------- ----------
<S> <C> <C> <C>
Initial capital contributions on January 12, 1995..... $ 1,773,304 88,765 1,684,539
Capital contributions................................. 48,624,696 2,431,235 46,193,461
Capital distributions................................. (115,723) (1,157) (114,566)
Net loss for the period from inception to December 31,
1995.................................................. (657,055) (87,254) (569,801)
----------- ---------- ----------
49,625,222 2,431,589 47,193,633
Less--notes receivable from management for capital
contributions......................................... (987,500) -- (987,500)
----------- ---------- ----------
Partners' capital at December 31, 1995................ 48,637,722 2,431,589 46,206,133
----------- ---------- ----------
----------- ---------- ----------
Capital distributions................................. (171,554) (2,245) (169,309)
Net loss for the six months ended June 30, 1996....... (594,328) 38,098 (632,426)
----------- ---------- ----------
----------- ---------- ----------
Partners' capital at June 30, 1996.................... $47,871,840 2,467,442 45,404,398
----------- ---------- ----------
----------- ---------- ----------
</TABLE>

See accompanying notes to combined financial statements.

F-9
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P. AND
CAPSTAR MANAGEMENT COMPANY, L.P.
COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
SIX MONTHS JANUARY 12 JANUARY 12 TO
ENDED JUNE 30, TO JUNE 30, DECEMBER 31,
-------------- -------------- -------------
1996 1995 1995
-------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $ (594,328) 165,642 (657,055)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization............... 3,919,035 302,802 2,097,512
Loss on early extinguishment of debt........ -- -- 617,730
Minority interest in consolidated
subsidiary........................................ (68,771) -- (17,415)
Changes in working capital:
Accounts receivable, net.................. (4,198,620) (1,219,488) (2,748,909)
Deposits.................................. (2,371,098) (874,117) (1,492,025)
Prepaid expenses and other................ (571,785) (93,124) (223,260)
Inventory................................. (445,059) (28,176) (173,514)
Accounts payable.......................... 2,107,585 502,959 2,329,034
Accrued expenses and other liabilities.... 6,089,334 1,333,929 4,320,320
Due to CapStar Equity Associates, G.P..... 24,285 -- 305,077
-------------- -------------- -------------
Net cash provided by operating activities......... 3,890,578 90,427 4,357,495
-------------- -------------- -------------
Cash flows from investing activities:
Purchases of property and equipment............. (84,115,843) (40,023,370) (109,221,935)
Purchase of minority interest................... (66,666) -- --
Additions to restricted cash for capital
improvements and
other, net.................................... (11,442,271) (6,084,208) (7,351,128)
-------------- --------------
Net cash used by investing activities............. (95,624,780) (46,107,578) (116,573,063)
-------------- -------------- -------------
Cash flows from financing activities:
Proceeds from long-term debt.................... 91,307,685 25,875,000 98,057,709
Payments on long-term debt...................... (58,056) (23,285) (23,095,559)
Principal repayments on capital leases.......... (95,661) (15,377) (37,888)
Release of (additions to) restricted deposits
for hedge agreement........................... 2,023,307 -- (2,023,307)
Deferred costs.................................. (3,092,101) (1,567,382) (3,000,181)
Capital contributions........................... -- 23,631,539 50,250,000
Loans to management............................. -- -- (987,500)
Capital distributions........................... (171,554) -- (115,723)
Distributions to minority interest.............. (104,167) -- --
-------------- -------------- -------------
Net cash provided by financing activities......... 89,809,453 47,900,495 119,047,551
-------------- -------------- -------------
Net increase (decrease) in cash and cash
equivalents....................................... (1,924,749) 1,883,344 6,831,983
Cash and cash equivalents at beginning of
period............................................ 6,831,983 -- --
-------------- -------------- -------------
Cash and cash equivalents at end of period........ $ 4,907,234 1,883,344 6,831,983
-------------- -------------- -------------
-------------- -------------- -------------
Supplemental disclosure of cash flow information:
Interest paid................................... $ 5,694,077 261,213 2,383,299
Capitalized interest costs...................... 209,682 -- 67,000
Capital lease additions......................... 305,062 253,952 721,494
Deferred financing fees not yet paid............ 411,069 -- 596,403
Prepaid expenses contributed by limited
partner........................................... -- 42,000 42,000
Furniture and equipment contributed by limited
partner........................................... -- 106,000 106,000
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>

See accompanying notes to combined financial statements.

F-10
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P.
AND CAPSTAR MANAGEMENT COMPANY, L.P.

NOTES TO THE COMBINED FINANCIAL STATEMENTS

JUNE 30, 1996 AND DECEMBER 31, 1995

(1) ORGANIZATION

EquiStar Hotel Investors, L.P. ("EquiStar") was formed on January 12, 1995.
The principal activity of EquiStar is to acquire and own upscale, full-service
hotels throughout the continental United States. As of June 30, 1996, EquiStar
had acquired and owned the following hotels:

<TABLE>
<CAPTION>
ACQUISITION TOTAL
DATE NAME ROOMS COST
----------- ---- ----- ----
<S> <C> <C> <C>
March 3, 1995.............. Salt Lake Airport Hilton, UT 287 $14,600,000
June 30, 1995.............. Radisson Hotel, Schaumburg, IL 202 9,000,000
June 30, 1995.............. Sheraton Hotel, Colorado Springs, CO 502 17,600,000
August 4, 1995............. Hilton Hotel, Bellevue, WA 180 12,500,000
October 3, 1995............ Marriott Hotel, Somerset, NJ 434 25,800,000
November 15, 1995.......... Westin Atlanta Airport, Atlanta, GA 496 21,200,000
February 2, 1996........... Sheraton Airport Plaza, Charlotte, NC 226 18,500,000
February 16, 1996.......... Holiday Inn, Cleveland, OH 237 9,300,000
February 22, 1996.......... Orange County Airport Hilton, Irvine, CA 290 19,400,000
March 8, 1996.............. The Latham Hotel, Washington, DC 143 12,500,000
April 17, 1996............. Hilton Hotel, Arlington, TX 289 18,350,000
</TABLE>

Separate wholly-owned limited liability companies ("LLCs") were established
to directly own the above hotels. However, for the Westin Atlanta Airport, LLCs
were established to purchase and hold EquiStar's 1% general partner interest and
the 85.2% limited partner interest in the partnership that owns the hotel. Due
to the significance of these LLCs' partnership interests, the partnership's
operations are consolidated.

CapStar Management Company, L.P. ("CapStar Management") operates 48 hotels
throughout the continental United States on behalf of third-party and affiliate
owners. The partnership was formed on January 12, 1995.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Combination

The accounts of EquiStar and CapStar Management (collectively, the
"Partnerships") have been combined in these financial statements as the
Partnerships are under common ownership. All material intercompany transactions
and balances have been eliminated in combination.

The combined financial statements for the six months ended June 30, 1995 are
unaudited; however, in the opinion of management all adjustments for the fair
presentation of the combined financial statements for this period have been
included.

Cash and Cash Equivalents

The Partnerships consider all highly liquid investments with an original
maturity of three months or less to be cash equivalents.

Deposits

Deposits represent refundable amounts escrowed during the negotiation of
potential hotel acquisitions, certain amounts held for future hotel renovations
and the amounts held in escrow related to a hedge agreement (see note 4).

F-11
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P.
AND CAPSTAR MANAGEMENT COMPANY, L.P.

NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Inventory

Inventories, which consist primarily of hotel food and beverage stock, are
recorded at the lower of cost or market using the first-in, first-out ("FIFO")
valuation method.

Deferred Costs

Organizational costs incurred in the formation of the Partnerships are
amortized over five years using the straight-line method. Costs associated with
the acquisition of debt are amortized over the lives of the related debt
instruments using a method that approximates the interest method.

Property and Equipment

Buildings and building improvements are depreciated over 40 years.
Furniture, fixtures and equipment purchases are stated at cost and depreciated
over estimated useful lives of five to seven years or, for capital leases, the
related lease terms. Furniture and equipment contributed is stated at its fair
value at the time it was contributed. All property and equipment balances are
depreciated using the straight-line method.

Management plans to hold all hotel assets long-term. Management evaluates
potential permanent impairment of the net carrying value of its hotel assets on
a quarterly basis. For each hotel asset, the expected undiscounted future cash
flows for the asset are compared to its net carrying value. If the net carrying
value of the hotel exceeds the undiscounted cash flows, management estimates the
fair value of the assets based on recent appraisals, if available, or by
discounting expected future cash flows using prevailing market discount rates.
If the net carrying value of the hotel exceeds its fair value, the excess is
charged to operations. No impairment losses were recorded for the six months
ended June 30, 1996 and 1995 (unaudited) or in 1995.

Restricted Cash

EquiStar is required to maintain certain levels of restricted cash in order
to comply with the terms of its debt agreements. Restricted cash reserved
primarily for future hotel capital improvements was $18,793,399 and $7,351,128
at June 30, 1996 and December 31, 1995, respectively.

Minority Interest

Minority interest represents the limited partnership interests in the
partnership which owns the Westin Atlanta Airport which are not owned by
EquiStar.

Revenues

Revenue is earned primarily through the operations and management of the
hotel properties and is recognized when earned. Until February 29, 1996, the
Westin Atlanta Airport was leased to a third-party operator and revenue related
to this hotel was recorded as lease revenue. On February 29, 1996, EquiStar
assumed the operations of the hotel upon termination of the lease.

Income Taxes

The combined financial statements contain no provision for federal income
taxes since both entities are partnerships and, therefore, all federal income
tax liabilities are passed through to the individual partners in accordance with
the Partnership Agreements and Internal Revenue Code.

F-12
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P.
AND CAPSTAR MANAGEMENT COMPANY, L.P.

NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Partners' Capital Contributions, Distributions and Profit and Loss Allocations

The individual partnership agreements of the Partnerships specify the
required capital contributions of the partners and the procedures for the
allocation of profit and loss and for distributions to partners. Generally,
these items are allocated in proportion to the respective ownership percentages
of the partners.

Use of Estimates

Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these combined financial statements in conformity with
generally accepted accounting principles. Actual results could differ from those
estimates.

(3) NOTES RECEIVABLE FROM MANAGEMENT

Pursuant to the terms of an agreement dated January 4, 1995, certain members
of management borrowed $987,500 from CapStar Management to fund capital
contributions to EquiStar. The notes are secured by the borrowers' interest in
EquiStar and are personally guaranteed by the individual note holders. During
1995, these notes earned interest at the prime rate. For the six months ended
June 30, 1996 and thereafter, these notes will earn interest at prime (as of
January 1996) plus 1.5%. Outstanding principal balances are to be repaid within
five years of the individual loan dates but may be repaid earlier through
certain CapStar Management or EquiStar distributions as defined in the related
agreements. Interest is due semi-annually on June 30 and December 31.

(4) HEDGE AGREEMENT

In August 1995, EquiStar entered into an agreement with Salomon Brothers
Holding Company Inc. ("Salomon") to hedge against the impact that interest rate
fluctuations may have on EquiStar's various floating rate debt instruments.
Gains and losses resulting from this agreement are not recorded in the financial
statements until realized.

The hedge agreement is a two-year forward swap that is effective June 30,
1997 and that matures on June 30, 2007. The agreement requires EquiStar to pay a
fixed rate of 7.095% and receive a floating interest rate based on the
three-month London Interbank Offered Rate ("LIBOR"), on a notional amount of
$25,000,000. The agreement required EquiStar to make an initial collateral
deposit of $1,000,000 and provides for required additions or reductions to the
collateral escrow account by EquiStar and Salomon in $500,000 increments based
on changes in the market value of this agreement.

At December 31, 1995, EquiStar had made required deposits totaling
$1,000,000 to the collateral escrow account which are recorded as restricted
deposits. The unrealized loss on this agreement at December 31, 1995 was
$1,546,000.

On May 6, 1996, EquiStar sold its interest in the swap agreement. The gain
on sale of $536,000 has been deferred for financial statement purposes.

(5) LONG-TERM DEBT

Salomon Long-term Debt--Prior to December 21, 1995, EquiStar had a loan
facility with Salomon to fund the acquisition of hotels. At December 21, 1995,
$22,690,000 was outstanding on this

F-13
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P.
AND CAPSTAR MANAGEMENT COMPANY, L.P.

NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)

(5) LONG-TERM DEBT--(CONTINUED)
loan facility. Interest-only payments were required under this loan facility at
a floating rate based on LIBOR. This debt was refinanced with Lehman Brothers
Holding, Inc. ("Lehman Holdings").

Lehman Long-term Debt--On December 21, 1995, EquiStar entered into a
$202,500,000 Master Mortgage Loan Facility Agreement (the "Master Agreement")
with Lehman Holdings to facilitate the repayment of the existing $22,690,000 in
debt and hotel acquisitions. Under the Master Agreement, 50% of total
acquisition capital, not to exceed $125,000,000, may be funded through a senior
loan facility. An additional 27.5% of acquisition capital, not to exceed
$75,000,000, may be borrowed through a mezzanine loan facility. Certain fees
incurred by EquiStar related to these borrowings may also be financed through
the Master Agreement, up to a maximum of $2,500,000. Separate loans are obtained
under the Master Agreement for each hotel acquired. The loans are
cross-collateralized and cross-defaulted and are secured by first and second
liens on EquiStar's real and personal property.

Loans obtained under the senior loan facility bear interest at variable
rates that are based on one-month LIBOR. For the six months ended June 30, 1996
and for the year ended December 31, 1995, interest rates on the loans under the
senior facility were between 9.625% and 10%. Loans obtained under the mezzanine
loan facility bear interest at a fixed rate of 16%. Interest payments of 10% are
required with the remaining 6% accruing to principal. All loans require
interest-only payments monthly. All of the loans mature January 1, 1999. At June
30, 1996 and December 31, 1995, total borrowings under the Master Agreement were
$151,815,394 and $59,975,900, of which $101,753,393 and $55,840,900 were made
from the senior loan facility and $50,062,001 and $4,135,000 were made from the
mezzanine loan facility, respectively.

Under the Master Agreement, EquiStar is required to pay financing fees upon
the repayment of each loan. These deferred financing fees payable, which are
included in long-term debt, totaled $1,007,472 and $596,403 at June 30, 1996 and
December 31, 1995, respectively.

Wells Fargo Long-term Debt--On March 2, 1995, EquiStar borrowed $9,960,000
from Wells Fargo Bank, National Association ("Wells Fargo") to finance the
purchase of the Salt Lake Airport Hilton (all other hotel loans are under the
Master Agreement). The loan matures on March 1, 1999 and provides for a one-year
extension at the option of the borrower. Interest, which is payable monthly, is
recorded at the one-month LIBOR plus 4.25%, as adjusted for certain provisions
in the loan agreement. The debt is secured by certain real and personal property
of the hotel. At June 30, 1996 and December 31, 1995, the outstanding balance on
this note was $9,832,088 and $9,890,144, respectively.

Wells Fargo Line of Credit--EquiStar has an unsecured $5,000,000 revolving
credit facility with Wells Fargo to support operations as needed. Amounts
outstanding on this line of credit were $2,500,000 and $4,181,809 at June 30,
1996 and December 31, 1995, respectively. Interest accrues at either LIBOR plus
2.25% or the Prime rate plus 1%, depending on the nature of the advance. Prime
rate based interest payments are due quarterly while LIBOR based interest is
payable over various periods not to exceed six months. Borrowings expected to be
repaid within one year are classified as current liabilities. The full amount
outstanding is expected to be repaid upon the termination of the credit
facility.

Notes Payable--During 1995, in order to fund the loans to management (see
note 3), CapStar Management borrowed $950,000 from Acadia Partners, L.P.
("Acadia Partners"), an affiliate of the Partnerships. In January 1996, CapStar
Management borrowed an additional $150,000 from Acadia Partners under this note
agreement to prepay a consulting fee. The note bears fixed interest at the prime
rate (as of January 1996) plus 1.5% and is secured by interests in and liens on
certain of CapStar

F-14
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P.
AND CAPSTAR MANAGEMENT COMPANY, L.P.

NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)

(5) LONG-TERM DEBT--(CONTINUED)
Management's real and personal property. Principal payments are scheduled for
August 31, 1996 and upon maturity on August 31, 1997. Interest is payable
semi-annually beginning February 29, 1996.

In March 1996, EquiStar entered into an unsecured note agreement for
$1,000,000 with LCP Hotel Ventures, L.P., an affiliate of the Partnerships and
the seller of the Georgetown Latham Hotel, to finance the purchase of that hotel
(see note 6). The note requires interest only payments quarterly, and bears
interest at a rate of 10%. All principal and accrued interest is due in full on
January 1, 1999.

Capital Leases--The Partnerships have entered into several capital leases
for hotel and office equipment that expire between 1997 and 2000. The total
capital lease obligations at June 30, 1996 and December 31, 1995, were $857,304
and $647,903, respectively, and are included in long-term debt.

Interest costs on long-term debt for the Partnerships were $7,583,845 and
$346,523 (unaudited) for the six months ended June 30, 1996 and 1995,
respectively, and $2,740,365 for 1995.

Aggregate maturities of the above obligations are as follows:

<TABLE>
<CAPTION>
PERIOD
- ------
<S> <C>
From July 1 to December 31
1996...................................................... $ 3,045,107
Year ending December 31
1997...................................................... 1,062,222
1998...................................................... 1,297,655
1999...................................................... 162,533,716
2000 and thereafter....................................... 173,558
-------------
$ 168,112,258
-------------
-------------
</TABLE>

Management has determined that the outstanding balance of the Partnerships'
long-term debt approximates fair value by discounting the future cash flows
under the debt arrangements using rates currently available for debt with
similar terms and maturities.

(6) RELATED-PARTY TRANSACTIONS

CapStar Management manages hotels that are owned in part by affiliates or
officers of CapStar Management. Revenue associated with the management of these
hotels was $494,191 and $539,509 (unaudited) for the six months ended June 30,
1996 and 1995, respectively, and $1,104,582 in 1995. At June 30, 1996 and
December 31, 1995, the amount due from these properties was $128,820 and
$237,029, respectively. Management believes these contracts are at prevailing
market rates.

Upon formation of CapStar Management, certain receivables of CapStar Equity
Associates, G.P. ("CEA"), a limited partner, were assigned to CapStar
Management. Amounts collected under these receivables are to be paid to CEA when
CapStar Management achieves a minimum level of liquidity as defined in the
Contribution Agreement. Amounts collected under this agreement, which are
recorded as due to CapStar Equity Associates, G.P., amounted to $329,362 at June
30, 1996 and $305,077 at December 31, 1995. Management believes that the balance
will be repaid to CEA within one year.

On March 8, 1996, EquiStar acquired the Georgetown Latham Hotel for a
purchase price of $12,000,000 from LCP Hotel Ventures, L.P. ("LCP"). At the time
of the acquisition, the general partner of LCP, Latham Hotels, Inc., was
wholly-owned by certain members of the Partnerships'

F-15
<PAGE>
EQUISTAR HOTEL INVESTORS, L.P.
AND CAPSTAR MANAGEMENT COMPANY, L.P.

NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)

(6) RELATED-PARTY TRANSACTIONS--(CONTINUED)
management. Directly or indirectly, these members of management owned a 9.7%
beneficial interest in LCP and received $806,000 of the net proceeds of the
purchase price paid to LCP. Management believes that the purchase price was
determined through arm's-length negotiations between EquiStar and
representatives of the holders of the majority of the beneficial interests in
the LCP.

On November 15, 1995, EquiStar acquired its 1% general partner interest in
the Westin Atlanta Airport from LHP, a corporation in which an individual who,
at the time, was a principal of the Partnerships, owned an equity interest. LHP
was paid a fee of $893,000 in connection with EquiStar's acquisition of the
general and limited partner interests and is entitled to an additional $161,000
upon the ultimate disposition of the partnership that owns the Westin Atlanta
Airport. Another affiliate of the former principal, LCP Group, L.P., is entitled
to an annual fee of $30,000 to provide certain administrative services related
to the outside limited partners. Management believes that these fees were
negotiated at arm's-length between the former principal and the other principals
of EquiStar.

(7) COMMITMENTS AND CONTINGENCIES

CapStar Management has entered into two operating leases for office space
which expire in October 1998. Lease payments will be approximately $250,000
annually through expiration.

EquiStar is involved in various litigation through the normal course of
business which management believes will not have a material adverse effect on
the combined financial statements.

On June 14, 1996, EquiStar entered into a binding contract to purchase the
Renaissance Hotel, Arlington, Virginia for $19,300,000. EquiStar intends to
operate the hotel under a franchise agreement with Hilton Hotels Corporation to
be entered into in August 1996. The hotel is a full-service hotel with 209
rooms.

On June 20, 1996 EquiStar entered into a binding contract to purchase five
upscale, full service hotels which contain 1,121 rooms, for a purchase price of
$68,400,000.

(8) PRO FORMA INFORMATION (UNAUDITED)

The following unaudited pro forma summary presents information as if hotel
acquisitions made from inception of the Partnerships through June 30, 1996, had
been made at inception of the Partnerships. The pro forma information is
provided for informational purposes only. It is based on historical information
and does not necessarily reflect the actual results that would have occurred nor
is it necessarily indicative of future results of operations of the
Partnerships.

PRO FORMA INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS ENDED JANUARY 12, 1995 TO
JUNE 30, 1996 DECEMBER 31, 1995
------------------ -------------------
<S> <C> <C>
Total revenue............................ $ 55,933,151 106,558,750
------------------ -------------------
Net loss before extraordinary item....... $ (2,184,158) (4,914,034)
------------------ -------------------
Net loss................................. $ (2,184,158) (5,801,665)
------------------ -------------------
</TABLE>

F-16
<PAGE>
SCHEDULE III

EQUISTAR HOTEL INVESTORS, L.P. AND
CAPSTAR MANAGEMENT COMPANY, L.P.

SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION

JUNE 30, 1996
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
COSTS SUBSEQUENT TO CARRIED AT CLOSE OF
PERIOD
INITIAL COST TO COMPANY ACQUISITION -------------------------
------------------------- -------------------- (1)
BUILDING AND BUILDING AND (1) BUILDING AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS
- -------------------------- ------------ ---------- ------------ ----- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Hotel Assets:
Salt Lake Airport Hilton,
UT...................... $ 9,832,088 770,000 12,827,670 580 758,467 770,580 13,586,137
Radisson Hotel,
Schaumburg, IL.......... 8,368,664 1,080,000 5,131,399 13,378 954,936 1,093,378 6,086,335
Sheraton Hotel, Colorado
Springs, CO............. 16,413,685 1,071,394 14,591,596 678 841,753 1,072,072 15,433,349
Hilton Hotel, Bellevue,
WA...................... 10,865,360 5,210,695 6,766,323 4,590 459,749 5,215,285 7,226,072
Marriott Hotel, Somerset,
NJ...................... 22,559,130 1,977,509 23,001,126 854 46,160 1,978,363 23,047,286
Westin Atlanta Airport,
Atlanta, GA............. 23,677,187 2,650,000 15,926,116 -- 344,727 2,650,000 16,270,843
Sheraton Hotel,
Charlotte, NC........... 15,795,668 4,700,000 11,056,927 -- 13,406 4,700,000 11,070,333
Holiday Inn, Cleveland,
OH...................... 9,878,786 1,330,000 6,353,249 -- 58,581 1,330,000 6,411,830
Orange County Airport
Hilton, Irvine, CA....... 16,762,455 9,990,000 7,993,137 6,635 48,820 9,996,635 8,041,957
The Latham Hotel,
Washington, DC.......... 11,518,688 6,500,000 5,319,708 -- 17,648 6,500,000 5,337,356
Hilton Hotel, Arlington,
TX...................... 16,975,771 1,836,172 14,689,379 -- 43,456 1,836,172 14,732,835
------------ ---------- ------------ ----- ------------ ---------- ------------
162,647,482 37,115,770 123,656,630 26,715 3,587,703 37,142,485 127,244,333
------------ ---------- ------------ ----- ------------ ---------- ------------
------------ ---------- ------------ ----- ------------ ---------- ------------

ACCUMULATED YEAR OF DATE
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED LIFE
- -------------------------- ----------- ------------ -------- ----
<S> <C> <C> <C> <C>
Hotel Assets:
Salt Lake Airport Hilton,
UT........................ 434,128 1980 03/03/95 40
Radisson Hotel,
Schaumburg, IL............ 131,374 1974 06/30/95 40
Sheraton Hotel, Colorado
Springs, CO.............. 369,875 1979 06/30/95 40
Hilton Hotel, Bellevue,
WA........................ 156,668 1979 08/04/95 40
Marriott Hotel, Somerset,
NJ........................ 431,983 1978 10/03/95 40
Westin Atlanta Airport,
Atlanta, GA............... 269,432 1982 11/15/95 40
Sheraton Hotel,
Charlotte, NC............. 115,875 1985 02/02/96 40
Holiday Inn, Cleveland,
OH........................ 60,081 1985 02/16/96 40
Orange County Airport
Hilton, Irvine, CA....... 70,925 1976 02/22/96 40
The Latham Hotel,
Washington, DC............ 108,459 1978 03/08/96 40
Hilton Hotel, Arlington,
TX........................ 22,712 1983 04/17/96 40
-----------
2,171,512
-----------
-----------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(1) As of June 30, 1996, hotel property and equipment have a cost
of $194,718,048 for federal income tax purposes. Land 37,142,485 --
Hotel furniture and equipment....
24,009,234 2,735,224
Construction in progress......... 6,321,996 --
------------ -----------
Total hotel property and
equipment........................ $194,718,048 $4,906,736
------------ -----------

<CAPTION>
(1) As of June 30, 1996,

A reconciliation of the Partnerships' investment in hotel property and
equipment and related accumulated depreciation is as follows:

<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Hotel property and equipment:
Balance at beginning of period...................................................... $110,454,164 --
Additions during period:
Acquisitions...................................................................... 70,561,215 104,238,519
Improvements and construction-in-progress......................................... 13,702,669 6,215,645
------------ -----------
Balance at end of period............................................................. 194,718,048 110,454,164
------------ -----------
Accumulated depreciation:
Balance at beginning of period...................................................... 1,742,573 --
Additions--depreciation expense..................................................... 3,164,163 1,742,573
------------ -----------
4,906,736 1,742,573
------------ -----------
Net hotel property and equipment at end of period.................................... $189,811,312 108,711,591
------------ -----------
------------ -----------
</TABLE>

F-17
<PAGE>
INDEPENDENT AUDITOR'S REPORT

The Partners
CapStar Management Company, L.P.:

We have audited the accompanying balance sheet of CapStar Management
Company, L.P. ("CapStar Management") as of December 31, 1994, and the related
statements of operations and changes in management operations' equity and cash
flows for the years ended December 31, 1994 and 1993. These financial statements
are the responsibility of the management of CapStar Management. Our
responsibility is to express an opinion on these 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 our audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CapStar Management Company,
L.P. as of December 31, 1994, and the results of its operations and its cash
flows for the years ended December 31, 1994 and 1993 in conformity with
generally accepted accounting principles.

KPMG Peat Marwick LLP

Washington, D.C.
May 7, 1996

F-18
<PAGE>
CAPSTAR MANAGEMENT

BALANCE SHEET

DECEMBER 31, 1994

<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash......................................................................... $ 157,151
Accounts receivable.......................................................... 946,717
Prepaid expenses............................................................. 22,157
----------
Total current assets........................................................... 1,126,025
Furniture and equipment, net of accumulated depreciation of $69,804............ 105,772
----------
$1,231,797
----------
----------
LIABILITIES AND MANAGEMENT OPERATIONS' EQUITY
Accounts payable and accrued expenses.......................................... $ 823,637
Due to affiliates.............................................................. 203,140
Management operations' equity.................................................. 205,020
----------
$1,231,797
----------
----------
</TABLE>

See accompanying notes to financial statements.

F-19
<PAGE>
CAPSTAR MANAGEMENT

STATEMENTS OF OPERATIONS AND CHANGES IN MANAGEMENT OPERATIONS' EQUITY

YEARS ENDED DECEMBER 31, 1994 AND 1993

<TABLE>
<CAPTION>
1994 1993
---------- ---------
<S> <C> <C>
Revenue:
Management fees................................................... $3,823,166 3,918,576
Accounting fees and other income.................................. 594,756 315,566
---------- ---------
Total revenue....................................................... 4,417,922 4,234,142
---------- ---------
Expenses:
Salaries, wages and benefits...................................... 2,311,569 1,988,282
Other overhead, general and administrative........................ 2,196,251 2,076,385
Depreciation...................................................... 22,639 14,349
---------- ---------
Total expenses...................................................... 4,530,459 4,079,016
---------- ---------
Net income (loss)................................................... (112,537) 155,126
Management operations' equity (deficit), beginning of year.......... 317,557 (81,820)
Capital contributions............................................... -- 244,251
---------- ---------
Management operations' equity, end of year.......................... $ 205,020 317,557
---------- ---------
---------- ---------
</TABLE>

See accompanying notes to financial statements.

F-20
<PAGE>
CAPSTAR MANAGEMENT

STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1994 AND 1993

<TABLE>
<CAPTION>
1994 1993
--------- --------
<S> <C> <C>
Net income (loss)..................................................... $(112,537) 155,126
Adjustments to reconcile net income (loss) to net cash provided (used)
by operating activities:
Depreciation...................................................... 22,639 14,349
Changes in working capital:
Accounts receivable............................................. 249,284 (738,337)
Prepaid expenses................................................ 20,339 (4,463)
Accounts payable................................................ (114,628) 361,377
Accrued expenses................................................ 1,213 110,624
--------- --------
Cash provided (used) by operating activities.......................... 66,310 (101,324)
--------- --------
Cash flows from investing activities--purchases of furniture and
equipment............................................................. (41,257) (24,475)
--------- --------
Cash flows from financing activities--capital contributions........... -- 244,251
--------- --------
Net increase in cash.................................................. 25,053 118,452
Cash at beginning of year............................................. 132,098 13,646
--------- --------
Cash at end of year................................................... $ 157,151 132,098
--------- --------
--------- --------
</TABLE>

See accompanying notes to financial statements.

F-21
<PAGE>
CAPSTAR MANAGEMENT

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1994

(1) ORGANIZATION

For the period from January 1, 1993 through December 31, 1994, CapStar
Hotels, Inc. and subsidiaries ("CHI") provided hotel management services to
hotels throughout the continental United States on behalf of third-party and
affiliate owners. At December 31, 1994, CHI had contracts to manage 41 hotels.

On January 4, 1995, CHI assigned the hotel management contracts and certain
assets and liabilities related to its hotel management operations to CapStar
Equity Associates, G.P. ("CEA"). On January 12, 1995, CEA, in turn, assigned the
same to CapStar Management Company, L.P.

For purposes of these financial statements, the hotel management operations
accounts are presented as if they were a separate and distinct legal entity
(CapStar Management).

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These financial statements have been prepared on the accrual basis of
accounting and in accordance with generally accepted accounting principles.

Revenues and Accounts Receivable

CapStar Management receives fees for the performance of management,
accounting and other services in accordance with the agreements entered into
with individual hotels. All revenues are recognized as the related services are
performed.

Generally, management fees are equal to 2% to 4% of the gross monthly
revenue of each hotel. Additional incentive management fees are earned when a
hotel's operating performance exceeds levels specified in the management
contract.

The collectibility of accounts receivable is evaluated periodically during
the year. CapStar Management uses the direct write-off method to record bad debt
expense for amounts deemed uncollectible.

Furniture and Equipment

Furniture and equipment purchases are stated at cost. These assets are
depreciated using the straight-line method over an estimated useful life of
seven years.

Use of Estimates

Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these financial statements. Actual results could differ
from those estimates.

Income Taxes

No provision has been made for income taxes in the financial statements, as
any taxable income or loss of CapStar Management is included in the income tax
returns of CHI for the years ended December 31, 1994 and 1993.

F-22
<PAGE>
CAPSTAR MANAGEMENT

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(3) RELATED-PARTY TRANSACTIONS

Certain of the hotels managed are owned by affiliates of CHI. Revenue earned
by CapStar Management from these hotels was approximately $2,830,177 in 1994 and
$2,812,653 in 1993. Accounts receivable associated with hotels owned by
affiliates was $481,561 at December 31, 1994.

Due to affiliates primarily represents amounts collected by CapStar
Management on behalf of the hotels it manages which have not yet been disbursed
to the hotels.

F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Partners
EquiStar Hotel Investors, L.P.:

We have audited the accompanying statements of operations and cash flows of
the Orange County Airport Hilton (the "Hotel") for the period from January 1,
1996 to February 22, 1996 (date of acquisition by EquiStar Hotel Investors,
L.P.) and the years ended December 31, 1995, 1994 and 1993. 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.

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 financial statements referred to above present fairly,
in all material respects, the results of the Orange County Airport Hilton's
operations and its cash flows for the period from January 1, 1996 to February
22, 1996 and the years ended December 31, 1995, 1994 and 1993 in conformity with
generally accepted accounting principles.

KPMG Peat Marwick LLP

Washington, D.C.
April 20, 1996

F-24
<PAGE>
ORANGE COUNTY AIRPORT HILTON

STATEMENTS OF OPERATIONS

FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 22, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1996 1995 1994 1993
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Rooms................................. $ 854,685 4,564,294 3,479,926 3,137,865
Food and beverage..................... 409,200 2,554,156 2,188,612 2,204,286
Other operating departments........... 48,828 314,723 239,755 183,980
---------- ----------- ----------- -----------
1,312,713 7,433,173 5,908,293 5,526,131
---------- ----------- ----------- -----------
Operating costs and expenses:
Rooms................................. 254,389 1,302,612 1,009,792 875,825
Food and beverage..................... 346,563 1,882,782 1,617,235 1,543,846
Other operating departments........... 23,005 147,896 116,224 84,197
Undistributed operating expenses:
Administrative and general............ 222,566 1,050,388 1,022,104 869,499
Sales and marketing................... 126,979 692,052 452,070 449,615
Management fees....................... 35,000 210,000 197,500 150,000
Property operating costs.............. 96,410 763,258 704,873 691,160
Property taxes, insurance and other... 57,301 342,177 386,464 467,055
Depreciation and amortization......... 112,129 832,958 798,442 854,566
Interest expense...................... 608,294 3,510,997 2,688,580 2,193,590
---------- ----------- ----------- -----------
Total expenses.......................... 1,882,636 10,735,120 8,993,284 8,179,353
---------- ----------- ----------- -----------
Net loss................................ $ (569,923) (3,301,947) (3,084,991) (2,653,222)
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>

See accompanying notes to financial statements.

F-25
<PAGE>
ORANGE COUNTY AIRPORT HILTON

STATEMENTS OF CASH FLOWS

FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 22, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.)
AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1996 1995 1994 1993
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................. $(569,923) (3,301,947) (3,084,991) (2,653,222)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization......... 112,129 832,958 798,442 854,566
Decrease (increase) in accounts
receivable.......................... (56,580) (198,792) (27,765) 203,192
Decrease (increase) in other assets... 67,637 (42,736) 26,502 38,421
Increase (decrease) in accounts
payable and accrued expenses........ 296,914 540,514 11,866 (12,467)
Increase in accrued interest.......... 358,294 3,010,996 2,568,580 2,167,618
--------- ---------- ---------- ----------
Total adjustments......................... 778,394 4,142,940 3,377,625 3,251,330
--------- ---------- ---------- ----------
Net cash provided by operating activities... 208,471 840,993 292,634 598,108
--------- ---------- ---------- ----------
Cash flows used by investing activities--
additions to hotel.......................... -- (76,435) (54,925) (17,811)
--------- ---------- ---------- ----------
Cash flows from financing activities:
Repayments of note payable................ -- (30,099) (55,000) --
Capital distributions..................... (43,445) (896,802) (274,594) (397,073)
Increase (decrease) in bank overdrafts.... (165,026) 162,343 91,885 (183,224)
--------- ---------- ---------- ----------
Net cash used by financing activities....... (208,471) (764,558) (237,709) (580,297)
--------- ---------- ---------- ----------
Net increase in cash........................ -- -- -- --
Cash at beginning of period................. -- -- -- --
--------- ---------- ---------- ----------
Cash at end of period....................... $ -- -- -- --
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Supplemental disclosure of cash flow
information:
Cash paid for interest.................... $ 250,000 500,000 120,000 25,972
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
</TABLE>

See accompanying notes to financial statements.

F-26
<PAGE>
ORANGE COUNTY AIRPORT HILTON

NOTES TO FINANCIAL STATEMENTS

FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 22, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND THE
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

(1) ORGANIZATION

The Orange County Airport Hilton (the "Hotel") is located near the Orange
County Airport in Irvine, California, approximately 45 miles from Los Angeles.
The Hotel opened in 1976 and was operated under a franchise agreement with
Radisson Hotels International, Inc. during the periods under audit. Since April
1, 1996, the Hotel has been operating as a Hilton. The Hotel has 290 rooms, an
outdoor pool and jacuzzi, fitness center and same day valet service. The dining
facilities include Mimi's Grill and The Promenade Lounge. The Hotel has
approximately 30,000 square feet of meeting space.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accounts of the Hotel were included in the financial records of GMY
Investment Company ("GMY"), a limited partnership which owned the Hotel until it
was sold to EquiStar on February 22, 1996 for $19,200,000. The accompanying
statements of operations and cash flows include the accounts of the Hotel only,
as if it were a separate legal entity, and have been prepared using the accrual
basis of accounting.

Depreciation

Depreciation is computed on the cost of hotel property and equipment using
the Modified Accelerated Cost Recovery method over 39 and 31.5 years for the
building and building improvements and over 5 to 7 years for furniture, fixtures
and equipment.

Bad Debt Expense

Bad debt expense is accounted for using the allowance method. Management
reviews the aging of accounts receivable and other current information on
debtors to establish an allowance for doubtful accounts. Write-offs occur when
management deems a receivable uncollectible.

Revenue

Revenue is earned primarily through the operations of the Hotel and
recognized when earned.

Income Taxes

The financial statements contain no provision for federal income taxes since
the Hotel was owned by a partnership and, therefore, all federal income tax
liabilities were passed through to the individual partners in accordance with
the partnership agreement and the Internal Revenue Code.

Use of Estimates

Management has made a number of estimates and assumptions to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.

F-27
<PAGE>
ORANGE COUNTY AIRPORT HILTON

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(3) INTEREST EXPENSE

GMY entered into a promissory note with an original balance of $19,000,000
in June 1989. Interest accrued at 10% for the first year, and then adjusted to
the Bank of America National Trust and Savings Association prime rate as
announced from time to time. On December 1, 1991, GMY stopped making scheduled
interest and principal payments and the note was in default. From the default
date, interest was computed using the prime rate plus four percentage points on
the outstanding balance plus any accrued interest.

(4) RELATED-PARTY TRANSACTIONS

The Hotel incurred management fees of $35,000, $210,000, $197,500 and
$150,000 for the period from January 1, 1996 to February 22, 1996 and the years
ended December 31, 1995, 1994 and 1993, respectively. The management fees were
paid to an affiliate of the Hotel.

F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Partners
EquiStar Hotel Investors, L.P.:

We have audited the accompanying statements of operations and cash flows of
the Colorado Springs Sheraton Hotel (the "Hotel") for the period from January 1,
1995 to June 30, 1995 (date of acquisition by EquiStar Hotel Investors, L.P.)
and the years ended December 31, 1994 and 1993. 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.

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 financial statements referred to above present fairly,
in all material respects, the results of the Colorado Springs Sheraton Hotel's
operations and its cash flows for the period from January 1, 1995 to June 30,
1995, and the years ended December 31, 1994 and 1993, in conformity with
generally accepted accounting principles.

KPMG Peat Marwick LLP

Washington, D.C.
April 26, 1996

F-29
<PAGE>
COLORADO SPRINGS SHERATON HOTEL

STATEMENTS OF OPERATIONS

FOR THE PERIOD FROM JANUARY 1, 1995 TO JUNE 30, 1995
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1994 AND 1993

<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ---------
<S> <C> <C> <C>
Revenue:
Rooms................................................. $3,058,060 7,381,231 6,306,143
Food and beverage..................................... 1,450,753 3,476,833 2,930,970
Other operating departments........................... 217,547 534,042 491,097
---------- ---------- ---------
4,726,360 11,392,106 9,728,210
---------- ---------- ---------
Operating costs and expenses:
Rooms................................................. 950,418 1,956,592 1,720,992
Food and beverage..................................... 1,325,154 2,751,933 2,383,324
Other operating departments........................... 140,610 305,426 260,327
Undistributed operating expenses:
Administrative and general............................ 612,704 1,606,117 1,163,407
Sales and marketing................................... 483,000 889,803 853,153
Property operating costs.............................. 560,029 1,220,401 1,150,870
Management fees....................................... 137,852 284,803 291,736
Property taxes, insurance and other................... 290,750 498,989 549,725
Depreciation and amortization......................... 545,685 1,123,249 1,076,652
---------- ---------- ---------
5,046,202 10,637,313 9,450,186
---------- ---------- ---------
Net income (loss)....................................... $ (319,842) 754,793 278,024
---------- ---------- ---------
---------- ---------- ---------
</TABLE>

See accompanying notes to financial statements.

F-30
<PAGE>
COLORADO SPRINGS SHERATON HOTEL

STATEMENTS OF CASH FLOWS

FOR THE PERIOD FROM JANUARY 1, 1995 TO JUNE 30, 1995
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1994 AND 1993

<TABLE>
<CAPTION>
1995 1994 1993
--------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $(319,842) 754,793 278,024
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization...................... 545,685 1,123,249 1,076,652
Decrease (increase) in accounts receivable......... (222,962) 216,504 (252,683)
Decrease (increase) in inventory and other
assets........................................... 132,255 (136,067) 21,999
Increase (decrease) in accounts payable and accrued
expenses......................................... (361,807) (60,970) 161,062
--------- ---------- ---------
Net cash provided (used) by operating activities......... (226,671) 1,897,509 1,285,054
--------- ---------- ---------
Cash flows used by investing activities--purchases of
furniture, fixtures and equipment........................ (18,014) (113,743) (324,601)
--------- ---------- ---------
Cash flows from financing activities:
Capital distributions.................................. -- (2,153,816) (777,181)
Capital contributions.................................. 425,146 -- --
Increase (decrease) in bank overdrafts................. (180,461) 196,509 (9,731)
--------- ---------- ---------
Net cash flows provided (used) by financing activities... 244,685 (1,957,307) (786,912)
--------- ---------- ---------
Net increase in cash..................................... -- (173,541) 173,541
Cash at beginning of year................................ -- 173,541 --
--------- ---------- ---------
Cash at end of year...................................... $ -- -- 173,541
--------- ---------- ---------
--------- ---------- ---------
</TABLE>

See accompanying notes to financial statements.

F-31
<PAGE>
COLORADO SPRINGS SHERATON HOTEL

NOTES TO FINANCIAL STATEMENTS

FOR THE PERIOD FROM JANUARY 1, 1995 TO JUNE 30, 1995
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1994 AND 1993

(1) ORGANIZATION

The Colorado Springs Sheraton Hotel (the "Hotel") is a 502 room full-service
hotel located in Colorado Springs, Colorado. The Hotel is near Colorado Springs
Airport and is about an hour from Denver. The Hotel has a restaurant, a snack
bar/coffee shop, a lounge/ lobby bar, an exercise facility and an indoor/outdoor
swimming pool. The Hotel is currently undergoing major renovations (budgeted at
$2.7 million).

For the period ended June 30, 1995 and for the years ended December 31, 1994
and 1993, the Hotel was owned by CIGNA.

The Hotel was sold on June 30, 1995 to EquiStar for a purchase price of
$17,250,000.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accounts of the Hotel were included in the financial records of CIGNA.
The accompanying statements of operations and cash flows include the accounts of
the Hotel only, as if it were a separate legal entity, and have been prepared
using the accrual basis of accounting.

Depreciation

Depreciation is computed on the cost of the Hotel property and equipment
using the straight-line method over 40 years for the building, over 15 years for
building improvements and over five years for furniture, fixtures and equipment.

Bad Debt Expense

Revenue

Revenue is earned primarily through the operations of the Hotel and is
recognized when earned.

Income Taxes

The financial statements contain no provision for federal income taxes since
the Hotel does not pay any taxes directly. All taxes are the responsibility of
the parent company, CIGNA.

Use of Estimates

F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Partners
EquiStar Hotel Investors, L.P.:

We have audited the accompanying statements of operations and cash flows of
the Georgetown Latham Hotel (the "Hotel") for the period from January 1, 1996 to
March 8, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the
years ended December 31, 1995, 1994 and 1993. 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.

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 financial statements referred to above present fairly,
in all material respects, the results of the Georgetown Latham Hotel's
operations and its cash flows for the period from January 1, 1996 to March 8,
1996 and the years ended December 31, 1995, 1994 and 1993 in conformity with
generally accepted accounting principles.

KPMG Peat Marwick LLP

Washington, D.C.
April 12, 1996

F-33
<PAGE>
GEORGETOWN LATHAM HOTEL

STATEMENTS OF OPERATIONS

FOR THE PERIOD FROM JANUARY 1, 1996 TO MARCH 8, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1996 1995 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Rooms.................................... $ 612,857 3,790,580 3,764,567 3,784,884
Food and beverage........................ 628,269 3,699,257 3,448,669 3,192,731
Other operating departments.............. 81,116 360,958 419,968 374,672
---------- ---------- ---------- ----------
1,322,242 7,850,795 7,633,204 7,352,287
---------- ---------- ---------- ----------
Operating costs and expenses:
Rooms.................................... 187,244 1,081,472 1,069,864 1,177,839
Food and beverage........................ 553,396 3,268,979 3,095,593 3,032,272
Other operating departments.............. 50,228 313,870 272,476 185,028
Undistributed operating expenses:
Administrative and general............... 110,613 996,666 795,642 663,466
Sales and marketing...................... 94,903 511,975 478,520 606,068
Management fees.......................... 39,581 235,523 248,270 288,779
Property operating costs................. 105,258 649,576 672,065 585,158
Property taxes, insurance and other...... 65,278 328,299 244,123 328,451
Depreciation and amortization............ 81,782 674,537 637,614 574,751
Interest expense......................... 87,771 476,901 5,265 --
---------- ---------- ---------- ----------
1,376,054 8,537,798 7,519,432 7,441,812
---------- ---------- ---------- ----------
Net income (loss).......................... $ (53,812) (687,003) 113,772 (89,525)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>

See accompanying notes to financial statements.

F-34
<PAGE>
GEORGETOWN LATHAM HOTEL

STATEMENTS OF CASH FLOWS

FOR THE PERIOD FROM JANUARY 1, 1996 TO MARCH 8, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1996 1995 1994 1993
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................ $(53,812) (687,003) 113,772 (89,525)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization............ 81,782 674,537 637,614 574,751
Decrease (increase) in accounts
receivable............................. (26,055) 43,384 83,943 (305,105)
Decrease (increase) in other assets...... (29,166) 121,568 (311,111) (184,175)
Increase (decrease) in accounts payable
and accrued expenses................... 165,028 42,727 (384,682) 450,341
Increase in interest payable............. -- 33,880 5,265 --
-------- ---------- ---------- --------
Net cash provided by operating activities...... 137,777 229,093 144,801 446,287
-------- ---------- ---------- --------
Cash flows from investing activities:
Purchase of furniture, fixtures and
equipment.................................. (18,907) (262,176) -- (276,520)
Proceeds from sale of furniture, fixtures and
equipment.................................. -- -- 91,933 --
-------- ---------- ---------- --------
Net cash provided (used) by investing
activities................................... (18,907) (262,176) 91,933 (276,520)
-------- ---------- ---------- --------
Cash flows from financing activities:
Principal repayments on capital leases....... (3,770) (21,857) -- --
Proceeds from note payable................... -- -- 4,500,000 --
Principal payments on note payable........... (6,849) (35,573) -- --
Advances to affiliate........................ -- -- (3,825,000) --
Repayments of advances to affiliate.......... -- 3,825,000 -- --
Capital distributions........................ -- (4,206,759) (593,312) (134,115)
-------- ---------- ---------- --------
Net cash provided (used) by financing
activities................................... (10,619) (439,189) 81,688 (134,115)
-------- ---------- ---------- --------
Net increase (decrease) in cash................ 108,251 (472,272) 318,422 35,652
Cash at beginning of year...................... 32,193 504,465 186,043 150,391
-------- ---------- ---------- --------
Cash at end of year............................ $140,444 32,193 504,465 186,043
-------- ---------- ---------- --------
-------- ---------- ---------- --------
Supplemental disclosure of cash flow
information:
Cash paid for interest....................... $118,085 443,021 -- --
Additions to capital lease obligations....... -- -- 71,004 --
-------- ---------- ---------- --------
-------- ---------- ---------- --------
</TABLE>

See accompanying notes to financial statements.

F-35
<PAGE>
GEORGETOWN LATHAM HOTEL

NOTES TO FINANCIAL STATEMENTS

FOR THE PERIOD FROM JANUARY 1, 1996 TO MARCH 8, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

(1) ORGANIZATION

The Georgetown Latham Hotel (the "Hotel") is located on 3000 M Street in
Washington, D.C. It is close to the Smithsonian, embassies, monuments, the
Kennedy Center and the downtown business district, and caters mainly to tourists
and business travelers. The Hotel has 143 rooms; fine dining in the CITRONELLE
restaurant; meeting and banquet facilities; an outdoor pool; business center;
limousine rental service; and valet parking.

Until 1993, the Hotel was owned by Muben/LCP Hotel Partners, L.P.
("Muben/LCP"), a limited partnership which owned 9 hotels. On October 1, 1993,
LCP Hotel Ventures, L.P., a partner in Muben/LCP ("LCP Ventures"), conveyed its
10% interest in Muben/LCP for 100% ownership of the Hotel.

The Hotel was sold on March 8, 1996 to EquiStar for a purchase price of
$12,000,000.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accounts of the Hotel were included in the financial records of
Muben/LCP and then LCP Ventures, as described above, until the Hotel was sold to
EquiStar. The accompanying statements of operations and cash flows include the
accounts of the Hotel only, as if it were a separate legal entity, and have been
prepared using the accrual basis of accounting.

Depreciation

Depreciation is computed on the cost of the Hotel property and equipment
using the straight-line method over 31.5 years for the building and building
improvements and over five years for furniture, fixtures and equipment.

Bad Debt Expense

Revenue

Revenue is earned primarily through the operations of the Hotel and
recognized when earned.

Income Taxes

The financial statements contain no provision for federal income taxes since
the Hotel was owned by a partnership and, therefore, all federal income tax
liabilities are passed through to the individual partners in accordance with the
partnership agreement and the Internal Revenue Code.

F-36
<PAGE>
GEORGETOWN LATHAM HOTEL

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Use of Estimates

(3) INTEREST EXPENSE

On December 23, 1994, the Hotel obtained financing from CPC Advisors No. 3,
L.L.C. The original note balance was $4,500,000 and had a fixed interest rate of
10.53%. Principal and interest payments were due monthly. The note was scheduled
to mature on December 27, 1999.

(4) RELATED-PARTY TRANSACTIONS

The Hotel was managed by an affiliate of LCP Ventures. For the period from
January 1, 1993 through September 30, 1993 the Hotel incurred management fees of
4% of gross revenue, as defined in the management agreement. For the remainder
of 1993 through March 8, 1996 the Hotel incurred base management fees of 3% and
an incentive management fee equal to 5% of the amount by which the net operating
income exceeds the amount of preferred return, as defined in the management
agreement. Management fees incurred during 1996, 1995, 1994 and 1993 were
$39,581, $235,523, $248,270 and $288,779, respectively. No incentive management
fees were earned.

F-37
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Partners
EquiStar Hotel Investors, L.P.:

We have audited the accompanying statements of operations and cash flows of
the Westin Atlanta Airport (the "Hotel") for the period from January 1, 1995 to
November 15, 1995 (date of acquisition by EquiStar Hotel Investors, L.P.) and
the years ended December 31, 1994 and 1993. 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.

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 financial statements referred to above present fairly,
in all material respects, the results of the Westin Atlanta Airport's operations
and its cash flows for the period from January 1, 1995 to November 15, 1995 and
the years ended December 31, 1994 and 1993 in conformity with generally accepted
accounting principles.

KPMG Peat Marwick LLP

Washington, D.C.
April 5, 1996

F-38
<PAGE>
WESTIN ATLANTA AIRPORT

STATEMENTS OF OPERATIONS

FOR THE PERIOD FROM JANUARY 1, 1995 TO NOVEMBER 15, 1995
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1994 AND 1993

<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Rooms................................................ $9,069,888 8,640,768 7,839,244
Food and beverage.................................... 4,054,054 4,342,750 3,828,053
Other operating departments.......................... 689,834 637,278 571,756
---------- ---------- ----------
13,813,776 13,620,796 12,239,053
---------- ---------- ----------
Operating costs and expenses:
Rooms................................................ 2,199,381 2,106,483 1,899,024
Food and beverage.................................... 3,220,403 3,392,581 3,096,841
Other operating departments.......................... 363,698 377,110 398,384
Undistributed operating expenses:
Administrative and general........................... 1,175,803 1,142,701 1,178,117
Sales and marketing.................................. 1,049,508 1,064,740 1,004,350
Management fees...................................... 498,791 500,769 263,775
Property operating costs............................. 1,029,636 1,193,688 1,157,683
Property taxes, insurance and other.................. 1,286,750 1,232,672 1,100,168
Depreciation and amortization........................ 981,547 1,254,302 1,439,270
Interest expense..................................... 2,290,924 2,618,358 2,641,131
---------- ---------- ----------
14,096,441 14,883,404 14,178,743
---------- ---------- ----------
Net loss............................................... $ (282,665) (1,262,608) (1,939,690)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

See accompanying notes to financial statements.

F-39
<PAGE>
WESTIN ATLANTA AIRPORT

STATEMENTS OF CASH FLOWS

FOR THE PERIOD FROM JANUARY 1, 1995 TO NOVEMBER 15, 1995
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1994 AND 1993

<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $ (282,665) (1,262,608) (1,939,690)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization................. 981,547 1,254,302 1,439,270
Decrease (increase) in accounts receivable.... (464,896) (474,273) 216,891
Decrease (increase) in other assets........... 33,045 (50,994) 22,875
Decrease in inventory......................... 8,531 16,061 13,530
Increase in accounts payable and accrued
expenses.................................... 267,755 83,237 96,551
Decrease in interest payable.................. (108,653) (1,319) (1,193)
Increase (decrease) in other liabilities...... 173,892 (13,781) 237,001
Increase in intercompany payable.............. 458,419 897,156 1,041,316
---------- ---------- ----------
Net cash provided by operating activities........... 1,066,975 447,781 1,126,551
---------- ---------- ----------
Cash flows from investing activities:
Purchase of furniture, fixtures and equipment..... (117,392) (43,179) --
Proceeds from sale of furniture, fixtures and
equipment........................................... -- -- 16,240
---------- ---------- ----------
Net cash provided (used) by investing activities.... (117,392) (43,179) 16,240
---------- ---------- ----------
Cash flows from financing activities--decrease in
notes payable..................................... (159,594) (158,265) (143,264)
---------- ---------- ----------
Net increase in cash and cash equivalents........... 789,989 246,337 999,527
Cash and cash equivalents at beginning of period.... 1,967,782 1,721,445 721,918
---------- ---------- ----------
Cash and cash equivalents at end of period.......... $2,757,771 1,967,782 1,721,445
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of cash flow information:
Cash paid for interest............................ $2,399,577 2,619,677 2,642,324
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

See accompanying notes to financial statements.

F-40
<PAGE>
WESTIN ATLANTA AIRPORT

NOTES TO FINANCIAL STATEMENTS

FOR THE PERIOD FROM JANUARY 1, 1995 TO NOVEMBER 15, 1995
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.)
AND THE YEARS ENDED DECEMBER 31, 1994 AND 1993

(1) ORGANIZATION

The Westin Atlanta Airport (the "Hotel") is located near Atlanta Hartsfield
International Airport. For the periods presented, the Hotel was operated as a
Renaissance hotel. The Hotel has 496 rooms and suites, a health club, whirlpool,
sundeck, indoor and outdoor swimming pool and sauna. The dining and
entertainment facilities include the Le Cafe Restaurant, Atrium Lounge and
Studebaker's. The Hotel's business is generated from its proximity to the
Atlanta Hartsfield International Airport and the Georgia International
Convention Center.

On November 15, 1995, EquiStar purchased a 1% general partnership interest
and an 84.6% limited partnership interest in Lepercq Atlanta Renaissance
Partners, L.P. ("Atlanta Partners"), the owner of the Hotel.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Through November 15, 1995, Atlanta Partners leased the Hotel operations to a
third party. The accompanying statements of operations and cash flows include
the accounts of the Hotel and the accounts of Atlanta Partners. Atlanta
Partners' operations related primarily to the Hotel. All intercompany
transactions between the Hotel and Atlanta Partners have been eliminated.

Depreciation

Depreciation is computed on the building using the straight-line method over
a useful life of 31.5 years. Building improvements are depreciated using the
straight-line method over seven to 31.5 years while furniture, fixtures and
equipment are depreciated straight-line over three to ten years. Costs for
supplies, maintenance and repairs are charged to expense as incurred.

Bad Debt Expense

Revenue

Revenue is earned primarily through the operations of the Hotel and
recognized when earned.

Income Taxes

The financial statements contain no provision for federal income taxes since
Atlanta Partners is a partnership and, therefore, all federal income tax
liabilities are passed through to the individual partners in accordance with the
partnership agreement and the Internal Revenue Code.

F-41
<PAGE>
WESTIN ATLANTA AIRPORT

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Use of Estimates

(3) MORTGAGE NOTE PAYABLE

Through November 15, 1995, the Hotel was encumbered by a nonrecourse
mortgage loan from the Travelers Insurance Company in the amount of $24,725,000.
The loan was secured by a mortgage on the Hotel and an assignment of the lease.
The mortgage loan had an interest rate of 10% per annum and required monthly
payments of principal and interest of $216,980 through July 1, 1999.

F-42
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Partners
EquiStar Hotel Investors, L.P.:

We have audited the accompanying statements of operations and cash flows of
the Somerset Marriott Hotel (the "Hotel") for the fiscal years ended September
30, 1995, 1994 and 1993. These financial statements are the responsibility of
the Hotel's owners. Our responsibility is to express an opinion on these
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 financial statements referred to above present fairly,
in all material respects, the results of the Somerset Marriott Hotel's
operations and its cash flows for the fiscal years ended September 30, 1995,
1994 and 1993, in conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

Washington, D.C.
April 26, 1996

F-43
<PAGE>
SOMERSET MARRIOTT HOTEL

STATEMENTS OF OPERATIONS

FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Rooms............................................... $10,280,997 9,104,957 9,138,730
Food and beverage................................... 5,249,474 4,816,344 5,100,830
Other operating departments......................... 802,637 682,877 668,821
----------- ---------- ----------
16,333,108 14,604,178 14,908,381
----------- ---------- ----------
Operating costs and expenses:
Rooms............................................... 2,766,075 2,552,776 2,425,536
Food and beverage................................... 4,241,806 4,041,375 4,136,987
Other operating departments......................... 239,993 292,510 332,098
Undistributed operating expenses:
Administrative and general.......................... 1,622,395 1,647,152 1,723,724
Sales and marketing................................. 1,075,845 852,599 1,034,166
Management fees..................................... 710,174 640,793 648,515
Property operating costs............................ 1,498,497 1,586,722 1,794,374
Property taxes, insurance and other................. 637,759 566,615 753,345
Depreciation and amortization....................... 1,519,441 1,531,226 1,541,746
Interest expense.................................... 1,753,095 1,828,501 1,857,388
Impairment of long lived assets..................... -- -- 2,007,000
----------- ---------- ----------
16,065,080 15,540,269 18,254,879
----------- ---------- ----------
Net income (loss)..................................... $ 268,028 (936,091) (3,346,498)
----------- ---------- ----------
----------- ---------- ----------
</TABLE>

See accompanying notes to financial statements.

F-44
<PAGE>
SOMERSET MARRIOTT HOTEL

STATEMENTS OF CASH FLOWS

FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ 268,028 (936,091) (3,346,498)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................... 1,519,441 1,531,226 1,541,746
Decrease (increase) in accounts receivable....... 8,484 413,140 (510,947)
Decrease (increase) in intercompany receivable... (47,684) 3,565,876 7,118,692
Decrease (increase) in other assets.............. 36,364 252,389 (182,467)
Impairment of long lived assets.................. -- -- 2,007,000
Decrease in accounts payable..................... (62,243) (4,073,542) (4,498,773)
Increase in interest payable..................... 2,023 4,226 2,000
----------- ---------- ----------
Net cash provided by operating activities.............. 1,724,413 757,224 2,130,753
----------- ---------- ----------
Cash flows from investing activities--acquisition of
furniture, fixtures and equipment...................... (2,092,043) (1,528,971) (309,311)
----------- ---------- ----------
Cash flows from financing activities:
Proceeds from notes payable.......................... -- 242,628 --
Principal payments on notes payable.................. (170,249) -- (92,260)
Principal repayments on capital leases............... (45,693) -- --
----------- ---------- ----------
Net cash provided (used) by financing activities....... (215,942) 242,628 (92,260)
----------- ---------- ----------
Net increase (decrease) in cash........................ (583,572) (529,119) 1,729,182
Cash at beginning of period............................ 1,187,792 1,716,911 (12,271)
----------- ---------- ----------
Cash at end of period.................................. $ 604,220 1,187,792 1,716,911
----------- ---------- ----------
----------- ---------- ----------
Supplemental disclosure of cash flow information:
Cash paid for interest............................... $ 1,751,072 1,824,275 1,855,388
Additions to capital lease obligations............... -- 363,872 --
----------- ---------- ----------
----------- ---------- ----------
</TABLE>

See accompanying notes to financial statements.

F-45
<PAGE>
SOMERSET MARRIOTT HOTEL

NOTES TO FINANCIAL STATEMENTS

FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993

(1) ORGANIZATION

The Somerset Marriott Hotel (the "Hotel") is centrally located in Somerset,
New Jersey, about 25 miles from the Newark Airport. The Hotel has 434 rooms,
fine dining in Allie's restaurant, meeting and banquet facilities, an
indoor/outdoor pool, business center, exercise room and volleyball courts.

The Hotel was owned by MRI Business Properties Fund, Ltd., II ("MRI") until
it was sold on October 3, 1995 to EquiStar for a purchase price of $24,950,000.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accounts of the Hotel were included in the financial records of MRI. The
accompanying statements of operations and cash flows include the accounts of the
Hotel only, as if it were a separate legal entity, and have been prepared using
the accrual basis of accounting.

Depreciation

Depreciation is computed on the cost of hotel property and equipment using
the straight-line method over 23 to 39 years for the building and building
improvements and over five to seven years for furniture, fixtures and equipment.

Bad Debt Expense

Bad debt expense is accounted for using the allowance method. Management
reviews the aging of accounts receivables and other current information on
debtors to establish an allowance for doubtful accounts. Write-offs occur when
management deems a receivable uncollectible.

Revenue

Revenue is earned primarily through the operations of the Hotel and
recognized when earned.

Income Taxes

Use of Estimates

(3) INTEREST EXPENSE

Private investors provided financing for the Hotel and improvements through
two separate loans made on September 26, 1985 and August 26, 1988. Both notes
had a fixed interest rate of 8.25%. Principal and interest payments were due
monthly. Marriott provided the Hotel with a renovation loan

F-46
<PAGE>
SOMERSET MARRIOTT HOTEL

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(3) INTEREST EXPENSE--(CONTINUED)
on October 24, 1990 for $650,000 bearing interest at 8.00% with interest
payments due monthly. All notes were repaid when the Hotel was purchased by
EquiStar on October 5, 1995.

(4) PROVISIONS FOR IMPAIRMENT OF VALUE

Due to the deterioration of the economic market in Somerset, New Jersey and
projected future operational cash flows, recovery of the carrying value of the
Hotel was not likely and a provision for impairment of value of $2,007,000 was
recognized in 1993.

F-47
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Partners
EquiStar Hotel Investors, L.P.:

We have audited the accompanying statements of operations and cash flows of
the Charlotte Sheraton Airport Plaza (the "Hotel") for the period from January
1, 1996 to February 2, 1996 (date of acquisition by EquiStar Hotel Investors,
L.P.) and the years ended December 31, 1995, 1994 and 1993. 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.

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 financial statements referred to above present fairly,
in all material respects, the results of the Charlotte Sheraton Airport Plaza's
operations and its cash flows for the period from January 1, 1996 to February 2,
1996 and the years ended December 31, 1995, 1994 and 1993 in conformity with
generally accepted accounting principles.

KPMG Peat Marwick LLP

Washington, D.C.
March 29, 1996

F-48
<PAGE>
CHARLOTTE SHERATON AIRPORT PLAZA

STATEMENTS OF OPERATIONS

FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 2, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.)
AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1996 1995 1994 1993
-------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Revenue:
Rooms........................................ $404,646 4,353,741 4,279,608 3,764,540
Food and beverage............................ 330,471 3,136,701 2,698,709 2,625,091
Other operating departments.................. 21,096 609,342 861,007 779,557
-------- --------- ---------- ---------
756,213 8,099,784 7,839,324 7,169,188
-------- --------- ---------- ---------
Operating costs and expenses:
Rooms........................................ 111,163 1,067,053 1,151,114 976,178
Food and beverage............................ 258,901 2,101,504 1,906,329 1,854,924
Other operating departments.................. 13,740 114,588 82,500 80,354
Undistributed operating expenses:
Administrative and general................... 73,487 375,920 263,728 254,309
Sales and marketing.......................... 90,546 922,890 927,186 863,274
Management fees.............................. 22,497 269,689 391,966 358,459
Property operating costs..................... 67,286 618,771 556,634 519,500
Property taxes, insurance and other.......... 41,126 425,563 404,523 356,690
Depreciation and amortization................ 49,600 595,522 603,543 587,150
Interest expense............................. -- 689,563 3,378,933 1,466,088
-------- --------- ---------- ---------
728,346 7,181,063 9,666,456 7,316,926
-------- --------- ---------- ---------
Net income (loss).............................. $ 27,867 918,721 (1,827,132) (147,738)
-------- --------- ---------- ---------
-------- --------- ---------- ---------
</TABLE>

See accompanying notes to financial statements.

F-49
<PAGE>
CHARLOTTE SHERATON AIRPORT PLAZA

STATEMENTS OF CASH FLOWS

FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 2, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.)
AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1996 1995 1994 1993
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................... $ 27,867 918,721 (1,827,132) (147,738)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating
activities:
Depreciation and amortization........... 49,600 595,522 603,543 587,150
Decrease (increase) in accounts
receivable.................................... 70,128 (86,461) (45,518) (44,970)
Increase in intercompany receivable..... (450,000) (1,444,939) (1,937,634) (263,645)
Decrease (increase) in other assets..... 50,127 87,415 (5,447) 40,469
Increase (decrease) in accounts payable
and accrued expenses.......................... (80,687) 165,657 193,488 75,714
Increase in interest payable............ -- 689,563 3,378,346 92,000
-------- ---------- ---------- ---------
Net cash provided (used) by operating
activities.................................... (332,965) 925,478 359,646 338,980
-------- ---------- ---------- ---------
Cash flows from investing
activities--purchases of furniture, fixtures
and equipment................................. (57,124) (257,302) (346,957) (133,901)
-------- ---------- ---------- ---------
Cash flows from financing
activities--principal payments on note
payable....................................... -- -- -- (203,839)
-------- ---------- ---------- ---------
Net increase (decrease) in cash............... (390,089) 668,176 12,689 1,240
Cash at beginning of period................... 712,894 44,718 32,029 30,789
-------- ---------- ---------- ---------
Cash at end of period......................... 322,805 712,894 44,718 32,029
-------- ---------- ---------- ---------
-------- ---------- ---------- ---------
Supplemental disclosure of cash flow
information:
Cash paid for interest...................... $ -- -- 587 1,374,088
-------- ---------- ---------- ---------
-------- ---------- ---------- ---------
</TABLE>

See accompanying notes to financial statements.

F-50
<PAGE>
CHARLOTTE SHERATON AIRPORT PLAZA

NOTES TO FINANCIAL STATEMENTS

FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 2, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.)
AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

(1) ORGANIZATION

The Charlotte Sheraton Airport Plaza (the "Hotel") is a 226 room,
full-service hotel located near the Charlotte Douglas International Airport. The
Hotel was constructed in 1985.

The Hotel was owned by Krisch Realty Associates, L.P. ("Krisch Realty")
during 1993, 1994 and through March 7, 1995, when it was conveyed to the lender.

The Hotel was sold on February 2, 1996 to EquiStar for a purchase price of
$18,000,000.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accounts of the Hotel were included in the financial records of Krisch
Realty, which owned the Hotel until it was conveyed to the lender. The
accompanying statements of operations and cash flows include the accounts of the
Hotel only, as if it were a separate legal entity, and have been prepared on the
accrual basis of accounting.

Depreciation

Depreciation is computed on the cost of hotel property and equipment using
the straight-line method over 45 years for the building, 10 years for most
building improvements, and five to eight years for furniture, fixtures and
equipment.

Bad Debt Expense

Revenue

Revenue is earned primarily through the operations of the hotel and
recognized when earned.

Income Taxes

The financial statements contain no provision for federal income taxes since
the Hotel was owned by a partnership and, therefore, all federal income tax
liabilities are passed through to the individual partners in accordance with the
Partnership Agreement and the Internal Revenue Code.

Use of Estimates

F-51
<PAGE>
CHARLOTTE SHERATON AIRPORT PLAZA

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(3) INTEREST EXPENSE

For the period from January 1, 1995 to February 2, 1995, and during 1994 and
1993, financing for the Hotel was provided through a two-tier loan. The first
tier loan, which had an original principal balance of $12,523,925, had an
interest rate of prime plus 1%. Principal and interest payments on the first
tier loan were due monthly. The second tier loan, which had an original
principal balance of $7,444,062, required interest payments based on the Hotel's
cash flow.

During January 1994, the owner ceased making payments on the loan and the
loan went into default. From that point, the first and second tiers of the loan
accrued interest at the default rate of 16% until March 7, 1995, when the Hotel
was conveyed to the lender.

(4) OTHER RELATED-PARTY TRANSACTIONS

Krisch Hotels, Inc. ("Krisch"), an affiliate of the Hotel's owner, managed
the Hotel until March 7, 1995, and charged the Hotel base management fees of 3%
of gross revenues. The Hotel management agreement also provided for incentive
management fees to be paid to Krisch of 10% of net operating income, as defined
in the agreement. After March 7, 1995, the Hotel incurred only base management
fees of 3% of gross revenues. For the period from January 1, 1996 to February 2,
1996, and for 1995, 1994 and 1993, base and incentive management fees incurred
by the Hotel totaled $22,497, $269,689, $391,966 and $358,459, respectively.

F-52
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Partners
EquiStar Hotel Investors, L.P.:

We have audited the accompanying combined statements of income and cash
flows of the Cleveland Holiday Inn and Affiliate for the period from January 1,
1996 to February 16, 1996 (date of Acquisition by EquiStar Hotel, Investors,
L.P.) and the years ended December 31, 1995, 1994 and 1993. 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.

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 provide a reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Cleveland
Holiday Inn and Affiliate's operations and their cash flows for the period from
January 1, 1996 to February 16, 1996 and the years ended December 31, 1995, 1994
and 1993, in conformity with generally accepted accounting principles.

Bober, Markey & Company

Akron, Ohio
April 30, 1996

F-53
<PAGE>
CLEVELAND HOLIDAY INN AND AFFILIATE

COMBINED STATEMENTS OF INCOME

FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 16, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1996 1995 1994 1993
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue
Rooms..................................... $474,517 $4,209,885 $3,940,430 $3,588,454
Food and beverage......................... 274,472 2,559,215 2,435,422 2,280,071
Other operating departments............... 40,419 246,911 209,456 205,464
-------- ---------- ---------- ----------
789,408 7,016,011 6,585,308 6,073,989

Cost of sales
Rooms..................................... 158,211 1,122,963 1,064,500 949,018
Food and beverage......................... 237,095 2,055,813 1,964,550 1,803,837
Other operating departments............... 44,467 59,012 57,080 59,001
-------- ---------- ---------- ----------
439,773 3,237,788 3,086,130 2,811,856
-------- ---------- ---------- ----------

Operating income............................ 349,635 3,778,223 3,499,178 3,262,133

Other expenses
Selling, general and administrative
expenses.................................... 281,426 2,142,371 2,001,877 1,860,957
Interest.................................. 51,005 347,276 364,500 380,044
Depreciation and amortization............. 39,621 321,859 247,377 272,176
Management fees--related entity 47,060 421,554 382,604 353,763
-------- ---------- ---------- ----------
419,112 3,233,060 2,996,358 2,866,940
-------- ---------- ---------- ----------

Net income (loss)........................... $(69,477) $ 545,163 $ 502,820 $ 395,193
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
</TABLE>

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

F-54
<PAGE>
CLEVELAND HOLIDAY INN AND AFFILIATE

COMBINED STATEMENTS OF CASH FLOWS

FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 16, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.)
AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1996 1995 1994 1993
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss)............................. $ (69,477) $ 545,163 $ 502,820 $ 395,193
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating
activities
Depreciation and amortization............. 39,621 321,859 247,377 272,176
Gain (loss) on equipment disposal......... (235) 35,961 33,202 6,248
Decrease (increase) in accounts
receivable.............................. 30,835 (39,803) (34,335) (4,105)
Decrease (increase) in accounts
receivable-- affiliates................. -- 1,542 (1,222) (53,624)
Decrease (increase) in other assets....... 5,868 (4,087) (4,499) 4,038
Increase (decrease) in accounts payable
and accrued expenses.................... (49,238) 161,865 33,007 (130,830)
Increase (decrease) in advances from
related entities........................ -- 266,500 (9,350) (2,211)
--------- ---------- --------- ---------
Net cash provided (used) by operating
activities...................................... (42,626) 1,289,000 767,000 486,885

Cash flows from investing activities
Cash payments for the purchase of property,
plant and equipment............................. (2,836) (680,006) (273,411) (76,419)
Cash proceeds on sale of property, plant and
equipment....................................... 4,242 1,100 4,530 2,965
Payment of franchise fee...................... -- (71,100) -- --
--------- ---------- --------- ---------
Net cash provided (used) by investing
activities...................................... 1,406 (750,006) (268,881) (73,454)

Cash flows from financing activities
Principal payments on long-term debt.......... (37,788) (473,718) (217,981) (199,257)
Issuance of note payable-related party........ -- 75,000 -- --
Capital distributions......................... (24,000) (144,000) (243,000) (204,000)
(Decrease) increase in escrowed funds......... -- 8,652 (2,871) 642
--------- ---------- --------- ---------
Net cash used by financing activities........... (61,788) (534,066) (463,852) (402,615)
--------- ---------- --------- ---------
Net increase (decrease) in cash................. (103,008) 4,928 34,267 10,816
Cash at beginning of year....................... 336,806 331,878 297,611 286,795
--------- ---------- --------- ---------
Cash at end of year............................. $ 233,798 $ 336,806 $ 331,878 $ 297,611
--------- ---------- --------- ---------
--------- ---------- --------- ---------

Supplemental disclosure of cash flow information
Interest paid................................. $ 45,610 $ 348,276 $ 361,786 $ 379,664
Income taxes paid............................. $ 239 $ 2,385 $ 1,850 $ 3,168
--------- ---------- --------- ---------
--------- ---------- --------- ---------
</TABLE>

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

F-55
<PAGE>
CLEVELAND HOLIDAY INN AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

FOR THE PERIOD FROM JANUARY 1, 1996 TO FEBRUARY 16, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

(1) ORGANIZATION

The Company is engaged in the operation of a hotel in Middleburg Heights,
Ohio, which is located in close proximity to the Cleveland Hopkins International
Airport. The hotel was opened in June, 1978. The hotel has 242 rooms, a cocktail
lounge, restaurant, sauna, pool and approximately 13,800 square feet of meeting
space.

Bagley Road Properties (a division of Rockside Properties) is a Partnership
which held the assets of the Cleveland Holiday Inn until substantially all of
the Company's assets were sold to EquiStar Hotel Investors, L.P. (EquiStar) for
a purchase price of $9,183,249 on February 16, 1996.

The hotel and restaurant operations are reflected within Bagley Road
Operating Corporation, an S-corporation.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying combined financial statements include the accounts of
Bagley Road Operating Corporation and Bagley Road Properties (a division of
Rockside Properties), as they are under common control and collectively
represent the Cleveland Holiday Inn. For purposes of these financial statements,
the entities are collectively referred to as the "Cleveland Holiday Inn and
Affiliate" and/or the "Company".

Significant intercompany transactions and balances have been eliminated in
the combined financial statements.

Depreciation

Depreciation is computed for financial reporting purposes using the cost of
the property and equipment using the straight line method over 19 to 40 years
for the building and building improvements and over 5 to 10 years for the
furniture, fixtures and equipment.

Bad Debt Expense

Management reviews accounts receivable on a regular basis for any
potentially uncollectible accounts. The uncollectible accounts are directly
written off, as deemed necessary.

Revenue Recognition

Revenue is earned primarily through the operations of the hotel and is
recognized when earned.

Income Taxes

The financial statements contain no provision for federal income taxes since
the Company's property is maintained in a partnership which is not subject to
federal income taxes. Instead, its earnings and losses are passed though to the
individual partners in accordance with the partnership agreement and the
Internal Revenue Code. In addition, the Company's operations are maintained in
an S-corporation and therefore, the income is also taxed at the shareholder
level.

F-56
<PAGE>
CLEVELAND HOLIDAY INN AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Use of Estimates

(3) INTEREST EXPENSE

On July 22, 1976, the Company obtained financing from a real estate
investment corporation. The mortgage has a fixed interest rate of 10.25%, with
principal and interest payments due monthly. The principal balance was
$2,641,541, $2,679,329, $2,893,047, and $3,086,028 as of February 16, 1996 and
December 31, 1995, 1994 and 1993, respectively. The loan requires additional
interest payments equal to 1% of the year's gross room revenue. The note is
scheduled to mature October, 2003.

On May 18, 1995, the Company obtained financing of $75,000 from a related
party. Interest is being accrued at the applicable federal rates (5.65% at
December 31, 1995).

On various dates, the Company obtained financing from a bank. The principal,
was $50,000, $50,000, $75,000 and $85,000, as of February 16, 1996, and December
31, 1995, 1994 and 1993, respectively, is due on demand and the interest is
payable monthly at prime plus 1% (9.5% at December 31, 1995).

All of the financing notes above were paid off subsequent to the date of
sale of the hotel to EquiStar Hotel Investors, L.P.

(4) RELATED-PARTY TRANSACTIONS

The hotel and restaurant operations are managed by a related entity. The
Management Agreement provides for payment of a management fee of approximately
six percent of room rentals, restaurant and bar receipts. Management fees
totaled $47,060, $421,554, $382,604, and $353,763 for the period from January 1,
1996 to February 16, 1996 and for the years 1995, 1994 and 1993, respectively.

F-57
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Partners
EquiStar Hotel Investors, L.P.:

We have audited the accompanying statements of operations and cash flows of
the Arlington Hilton Hotel (the "Hotel") for the period from January 1, 1996 to
April 17, 1996 (date of acquisition by EquiStar Hotel Investors, L.P.) and the
years ended December 31, 1995, 1994 and 1993. 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.

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 financial statements referred to above present fairly,
in all material respects, the results of the Arlington Hilton Hotel's operations
and its cash flows for the period from January 1, 1996 to April 17, 1996 and the
years ended December 31, 1995, 1994 and 1993, in conformity with generally
accepted accounting principles.

KPMG Peat Marwick LLP

Washington, D.C.
July 18, 1996

F-58
<PAGE>
ARLINGTON HILTON HOTEL

STATEMENTS OF OPERATIONS

FOR THE PERIOD FROM JANUARY 1, 1996 TO APRIL 17, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1996 1995 1994 1993
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Rooms....................................... $1,907,168 6,309,256 5,875,281 5,453,149
Food and beverage........................... 824,816 2,846,102 2,755,550 2,708,330
Other operating departments................. 195,137 639,420 505,739 553,640
---------- --------- --------- ---------
2,927,121 9,794,778 9,136,570 8,715,119
---------- --------- --------- ---------
Operating costs and expenses:
Rooms....................................... 420,844 1,526,054 1,361,027 1,342,080
Food and beverage........................... 654,451 2,225,510 2,072,864 2,137,821
Other operating departments................. 115,854 351,577 301,793 276,276
Undistributed operating expenses:
Administrative and general.................. 250,896 1,044,680 1,347,488 1,252,493
Sales and marketing......................... 195,671 646,496 510,261 501,991
Management fees............................. 87,814 313,579 90,998 86,165
Property operating costs.................... 296,643 1,004,445 871,365 1,006,770
Property taxes, insurance and other......... 160,884 645,504 479,755 475,144
Depreciation and amortization............... 242,528 823,414 794,256 794,600
Interest expense............................ -- 257,494 927,325 337,114
---------- --------- --------- ---------
2,425,585 8,838,753 8,757,132 8,210,454
---------- --------- --------- ---------
Net income.................................... $ 501,536 956,025 379,438 504,665
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>

See accompanying notes to financial statements.

F-59
<PAGE>
ARLINGTON HILTON HOTEL

STATEMENTS OF CASH FLOWS

FOR THE PERIOD FROM JANUARY 1, 1996 TO APRIL 17, 1996
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.)
AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1996 1995 1994 1993
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................ $ 501,536 956,025 379,438 504,665
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization......... 242,528 823,414 794,256 794,600
Interest added to loan payable to
General Partner..................... -- -- 18,777 13,482
Decrease (increase) in accounts
receivable.......................... (107,923) 41,059 (9,969) 47,634
Decrease (increase) in inventory and
other assets........................ (90,676) 110,942 (17,697) 6,803
Decrease (increase) in restricted
funds............................... -- 215,868 477,431 (44,462)
Increase (decrease) in accounts
payable and accrued expenses........ 120,770 (1,027,915) 284,120 231,758
---------- ---------- --------- ----------
Total adjustments......................... 164,699 163,368 1,546,918 1,049,815
---------- ---------- --------- ----------
Net cash provided by operating activities... 666,235 1,119,393 1,926,356 1,554,480
---------- ---------- --------- ----------
Cash flows used by investing activities--
purchase of furniture and equipment......... (15,499) (660,359) (232,583) (178,368)
---------- ---------- --------- ----------
Cash flows from financing activities:
Principal payments on capital lease
obligations............................. (13,442) (41,262) (36,415) (27,314)
Repayments of note payable................ -- -- (357,390) (1,532,401)
Capital distribution...................... -- (1,232,055) -- --
---------- ---------- --------- ----------
Net cash used by financing activities....... (13,442) (1,273,317) (393,805) (1,559,715)
---------- ---------- --------- ----------
Net increase (decrease) in cash and cash
equivalents................................. 637,294 (814,283) 1,299,968 (183,603)
Cash and cash equivalents at beginning of
period...................................... 946,895 1,761,178 461,210 644,813
---------- ---------- --------- ----------
Cash and cash equivalents at end of
period...................................... $1,584,189 946,895 1,761,178 461,210
---------- ---------- --------- ----------
---------- ---------- --------- ----------
Supplemental disclosure of cash flow
information:
Cash paid for interest.................... $ 2,570 13,612 18,459 337,114
Additions to property and equipment
through capital leases...................... -- -- -- 101,765
Conversion of notes payable to equity..... -- 19,338,404 -- --
---------- ---------- --------- ----------
---------- ---------- --------- ----------
</TABLE>

See accompanying notes to financial statements.

F-60
<PAGE>
ARLINGTON HILTON HOTEL

NOTES TO FINANCIAL STATEMENTS

FOR THE PERIOD FROM JANUARY 1, 1996 TO APRIL 17, 1996 (DATE OF ACQUISITION BY
EQUISTAR HOTEL INVESTORS, L.P.) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND
1993

(1) ORGANIZATION

The Arlington Hilton Hotel (the "Hotel") is located near the Dallas/Fort
Worth Airport, adjacent to Six Flags over Texas theme park. The Hotel opened in
1984. The Hotel has 310 rooms, one restaurant, one nightclub/bar, meeting
facilities for up to 400, a business center, an indoor/outdoor pool and a
fitness center.

Until March 7, 1995, the Hotel was owned by Hotel Associates of Arlington
Limited Partnership ("Hotel Associates"). On March 7, 1995, the Hotel was
conveyed through bankruptcy to the holders of the note, Arlington Hotel
Investors, LTD ("Arlington Investors").

The Hotel was sold on April 17, 1996 to EquiStar for a purchase price of
$18,200,000.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accounts of the Hotel were included in the financial records of its
various owners until the Hotel was sold to EquiStar. The accompanying statements
of operations and cash flows include the accounts of the Hotel only, as if it
were a separate legal entity, and have been prepared using the accrual basis of
accounting.

Bad Debt Expense

Revenue

Revenue is earned primarily through the operations of the Hotel and
recognized when earned.

Income Taxes

Use of Estimates

Depreciation

Depreciation is computed on the cost of the hotel property and equipment
using the straight-line method over 25 years for building and building
improvements, and five years for furniture and equipment.

F-61
<PAGE>
ARLINGTON HILTON HOTEL

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(3) RELATED-PARTY TRANSACTIONS

Prior to March 7, 1995 (the date the lenders took possession of the Hotel),
the Hotel was managed by Capitol Hotel Group, Inc. ("CHG"), an affiliate of the
owners, for a 1% management fee based on gross revenues. For the period from
March 7, 1995 through April 17, 1996 (date of acquisition by EquiStar), the
Hotel was managed by DePalma Hotel Corporation, an affiliate of the lenders, for
a 3% management fee based on gross revenues.

Upon foreclosure on the property, the loan and all related accrued interest
payable to the general partner of Hotel Associates was converted to equity in
the statement of partners' capital.

F-62
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Partners
EquiStar Hotel Investors, L.P.:

We have audited the accompanying statements of operations and cash flows of
the Salt Lake Airport Hilton (the "Hotel") for the period from January 1, 1995
to March 3, 1995 (date of acquisition by EquiStar Hotel Investors, L.P.) and the
years ended December 31, 1994 and 1993. 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.

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 financial statements referred to above present fairly,
in all material respects, the results of the Salt Lake Airport Hilton's
operations and its cash flows for the period from January 1, 1995 to March 3,
1995 and the years ended December 31, 1994 and 1993, in conformity with
generally accepted accounting principles.

KPMG Peat Marwick LLP

Washington, D.C.
April 19, 1996

F-63
<PAGE>
SALT LAKE AIRPORT HILTON

STATEMENTS OF OPERATIONS

FOR THE PERIOD FROM JANUARY 1, 1995 TO MARCH 3, 1995
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1994 AND 1993

<TABLE>
<CAPTION>
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Revenue:
Rooms.................................................. $ 890,777 4,992,835 4,371,476
Food and beverage...................................... 299,340 1,922,403 1,652,443
Other operating departments............................ 56,364 261,667 259,080
---------- --------- ---------
1,246,481 7,176,905 6,282,999
---------- --------- ---------
Operating costs and expenses:
Rooms.................................................. 287,299 1,932,546 1,359,691
Food and beverage...................................... 274,434 1,346,960 1,366,367
Other operating departments............................ 43,230 224,564 152,836
Undistributed operating expenses:
Administrative and general............................. 153,391 991,058 801,238
Sales and marketing.................................... 76,761 350,199 330,216
Property operating costs............................... 108,327 745,650 915,665
Property taxes, insurance and other.................... 30,112 324,944 325,044
Depreciation and amortization.......................... 104,996 630,200 528,089
Interest Expense....................................... 176,766 1,597,597 1,226,162
---------- --------- ---------
1,255,316 8,143,718 7,005,308
---------- --------- ---------
Net loss................................................. $ (8,835) (966,813) (722,309)
---------- --------- ---------
---------- --------- ---------
</TABLE>

See accompanying notes to financial statements.

F-64
<PAGE>
SALT LAKE AIRPORT HILTON

STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1995 TO MARCH 3, 1995
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1994 AND 1993

<TABLE>
<CAPTION>
1995 1994 1993
-------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $ (8,835) (966,813) (722,309)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization........................ 104,996 630,200 528,089
Decrease (increase) in accounts receivable........... 57,808 (176,471) 204,118
Decrease (increase) in inventory and other assets.... 5,100 233,040 (144,857)
Increase (decrease) in accounts payable and accrued
expenses................................................... 144,597 84,908 (36,031)
Increase in interest payable......................... -- 510,270 40,010
-------- --------- ---------
Net cash provided (used) by operating activities........... 303,666 315,134 (130,980)
-------- --------- ---------
Cash flows from investing activities--purchases of
furniture, fixtures and equipment........................ (5,530) (914,264) (117,908)
-------- --------- ---------
Cash flows from financing activities:
Repayments of notes payable.............................. (4,316) (764,498) (394,450)
Proceeds from mortgage loans and notes payable........... -- 1,182,000 541,344
Capital contributions.................................... -- 225,463 --
Increase (decrease) in bank overdrafts................... (68,085) (43,835) 101,994
-------- --------- ---------
Net cash flows provided (used) by financing activities..... (72,401) 599,130 248,888
-------- --------- ---------
Net increase in cash....................................... 225,735 -- --
Cash at beginning of period................................ -- -- --
-------- --------- ---------
Cash at end of period...................................... $225,735 -- --
-------- --------- ---------
-------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid for interest................................... $176,766 1,087,327 1,186,152
-------- --------- ---------
-------- --------- ---------
</TABLE>

See accompanying notes to financial statements.

F-65
<PAGE>
SALT LAKE AIRPORT HILTON

NOTES TO FINANCIAL STATEMENTS

FOR THE PERIOD FROM JANUARY 1, 1995 TO MARCH 3, 1995
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.)
AND THE YEARS ENDED DECEMBER 31, 1994 AND 1993

(1) ORGANIZATION

The Salt Lake Airport Hilton (the "Hotel") is a full service hotel located
near the Salt Lake City International Airport. The hotel has 287 rooms,
complimentary shuttle service to and from the airport, indoor and outdoor pools,
a fitness room, outdoor putting green and an outdoor sports court. The Hotel was
constructed in two phases. The first phase was constructed in 1980 and consists
of public areas including a conference center, recreational amenities and guest
rooms on a three level portion of the structure known as the low-rise. In 1984,
99 rooms were added with the construction of the high-rise section of the Hotel.

For the period from January 1, 1995 through March 3, 1995 and for the years
ended December 31, 1994 and 1993, the Hotel was owned by Airport Hilton
Ventures, L.P., a limited partnership ("Airport Ventures"). The Hotel was sold
on March 3, 1995 to EquiStar for a purchase price of $14,350,000.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accounts of the Hotel were included in the financial records of Airport
Ventures. The accompanying statements of operations and cash flows include the
accounts of the Hotel only, as if it were a separate legal entity, and have been
prepared using the accrual basis of accounting.

Depreciation

Bad Debt Expense

Revenue

Revenue is earned primarily through the operations of the Hotel and is
recognized when earned.

Income Taxes

F-66
<PAGE>
SALT LAKE AIRPORT HILTON
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Use of Estimates

(3) INTEREST EXPENSE

The Hotel had mortgage loans payable to two lenders of approximately
$5,400,000 and $4,200,000 through March 3, 1995. The loans required
interest-only payments monthly and had fixed interest rates of 9% and 10%,
respectively.

The Hotel also had notes payable outstanding with various third parties and
affiliates. Total amounts outstanding on these notes payable ranged from
approximately $2,958,000 to approximately $3,486,000 from January 1, 1993 to
March 3, 1995. During the same period, interest rates on these notes ranged from
7% to 10%. Included in notes payable from January 1, 1993 to March 3, 1995 was a
note payable to the Boyer Company, an affiliate of the Hotel. During this
period, the amount outstanding on this note ranged from approximately $470,000
to approximately $1,652,000 and the interest rate ranged from 7% to 8.25%.

F-67
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Partners
EquiStar Hotel Investors, L.P.:

We have audited the accompanying balance sheets of Ballston Hotel Limited
Partnership (the "Partnership") as of June 30, 1996 and December 31, 1995 and
1994, and the related statements of operations, partners' deficit, and cash
flows for the six months ended June 30, 1996 and for the years ended December
31, 1995, 1994 and 1993. 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of Ballston Hotel Limited
Partnership as of June 30, 1996 and December 31, 1995 and 1994, and the results
of its operations and its cash flows for the six months ended June 30, 1996 and
for the years ended December 31, 1995, 1994 and 1993, in conformity with
generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in note 4 to the
financial statements, the Partnership's note payable to a financial institution
is in default and may be called at any time. This raises substantial doubt about
the Partnership's ability to continue as a going concern. Management's plans in
regard to this matter are also described in note 4. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.

KPMG Peat Marwick LLP

Washington, D.C.
July 11, 1996

F-68
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995 AND 1994

<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............................. $ 271,215 501,433 98,904
Certificate of deposit................................ -- 101,833 250,000
Hotel inventory, at cost.............................. 37,481 51,635 52,794
Accounts receivable:
Trade............................................... 293,251 174,833 369,961
Affiliates (note 6)................................. -- -- 757,624
----------- ---------- ----------
Total accounts receivable, net........................ 293,251 174,833 1,127,585
----------- ---------- ----------
Hotel property (notes 4 and 7):
Land................................................ 2,073,323 2,073,323 2,073,323
Building, net of accumulated depreciation of
$2,192,347 in 1996, $2,029,714 in 1995 and
$1,704,449 in 1994.............................. 10,818,285 10,980,918 11,306,183
Furniture, fixtures and equipment, net of
accumulated depreciation of $1,163,947 in 1996,
$1,060,156 in 1995 and $854,609 in 1994........... 1,889,117 1,983,728 1,742,714
Initial hotel supplies, net of accumulated
amortization of $197,924 in 1996, $183,187 in 1995
and $153,713 in 1994.............................. 244,189 258,926 288,400
Conversion costs, net of accumulated amortization of
$107,181 in 1996, $98,491 in 1995 and $81,111 in
1994.............................................. 153,533 162,223 179,603
----------- ---------- ----------
Total hotel property.................................. 15,178,447 15,459,118 15,590,223
Investment in partnership (note 5).................... 2,189,989 2,259,061 2,332,760
Other Assets.......................................... 77,609 131,409 144,842
----------- ---------- ----------
$18,047,992 18,679,322 19,597,108
----------- ---------- ----------
----------- ---------- ----------
LIABILITIES AND PARTNERS' DEFICIT
Accounts payable and accrued expenses:
Affiliates (note 6)................................. $ 2,283,784 2,163,011 1,855,114
Trade............................................... 473,641 338,665 340,846
----------- ---------- ----------
Total accounts payable and accrued expenses........... 2,757,425 2,501,676 2,195,960
Notes payable (notes 4 and 6):
Financial institution............................... 17,079,121 17,079,121 17,201,202
Affiliates.......................................... 1,468,891 2,437,377 3,340,277
----------- ---------- ----------
Total notes payable................................... 18,548,012 19,516,498 20,541,479
----------- ---------- ----------
Total liabilities..................................... 21,305,437 22,018,174 22,737,439
Partners' deficit (note 3)............................ (3,257,445) (3,338,852) (3,140,331)
----------- ---------- ----------
Commitments (notes 4 and 7)...........................
$18,047,992 18,679,322 19,597,108
----------- ---------- ----------
----------- ---------- ----------
</TABLE>

See accompanying notes to financial statements.

F-69
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP

STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1996 1995 1994 1993
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Hotel operating revenue:
Room rental................................. $3,173,738 5,820,170 5,408,935 5,116,700
Food and beverage sales..................... 950,778 2,000,110 2,045,750 1,792,965
Telephone and other......................... 128,037 303,194 260,190 269,030
---------- --------- --------- ---------
Total hotel operating revenue................. 4,252,553 8,123,474 7,714,875 7,178,695
---------- --------- --------- ---------
Hotel operating expenses:
Department expenses......................... 1,538,843 3,140,757 3,100,077 2,810,690
Energy and engineering...................... 351,538 602,512 574,578 518,924
Sales and marketing......................... 327,356 659,284 604,457 629,567
General and administrative (note 6)......... 458,119 981,849 927,024 907,215
Management fee (note 7)..................... 127,547 243,704 231,446 215,359
Other....................................... 99,892 138,551 84,534 66,640
---------- --------- --------- ---------
Total hotel operating expenses................ 2,903,295 5,766,657 5,522,116 5,148,395
---------- --------- --------- ---------
Income from hotel operations.................. 1,349,258 2,356,817 2,192,759 2,030,300
---------- --------- --------- ---------
Fixed charges:
Financial costs (note 6).................... 739,867 1,571,261 1,438,463 1,327,641
Depreciation and amortization............... 290,467 611,645 700,566 723,020
Property insurance and taxes................ 146,248 266,115 249,394 251,608
Parking costs............................... 42,733 99,093 103,057 106,833
---------- --------- --------- ---------
Total fixed charges........................... 1,219,315 2,548,114 2,491,480 2,409,102
---------- --------- --------- ---------
Other income (expense):
Interest income............................. 8,153 40,169 15,010 12,228
Equity in income of partnership (note 5).... 15,355 36,510 41,105 31,309
Other....................................... (72,044) (83,903) (6,908) (80)
---------- --------- --------- ---------
Total other income (expense), net............. (48,536) (7,224) 49,207 43,457
---------- --------- --------- ---------
Net income (loss)............................. $ 81,407 (198,521) (249,514) (335,345)
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>

See accompanying notes to financial statements.

F-70
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP

STATEMENTS OF PARTNERS' DEFICIT

FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
GENERAL LIMITED
TOTAL PARTNER PARTNERS
----------- ------- ----------
<S> <C> <C> <C>
Balance at December 31, 1992............................. $(2,555,472) (46,288) (2,509,184)
Net loss............................................... (335,345) (3,353) (331,992)
----------- ------- ----------
Balance at December 31, 1993............................. $(2,890,817) (49,641) (2,841,176)
Net loss............................................... (249,514) (2,495) (247,019)
----------- ------- ----------
Balance at December 31, 1994............................. $(3,140,331) (52,136) (3,088,195)
Net loss............................................... (198,521) (1,985) (196,536)
----------- ------- ----------
Balance at December 31, 1995............................. $(3,338,852) (54,121) (3,284,731)
Net income............................................. 81,407 8,141 73,266
----------- ------- ----------
Balance at June 30, 1996................................. $(3,257,445) (45,980) (3,211,465)
----------- ------- ----------
----------- ------- ----------
</TABLE>

See accompanying notes to financial statements.

F-71
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1996 1995 1994 1993
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................ $ 81,407 (198,521) (249,514) (335,345)
Adjustments to reconcile net income (loss) to
cash provided (used) by operating
activities:
Depreciation and amortization............ 290,467 611,645 700,566 723,020
Increase (decrease) in provision for
doubtful accounts...................... 397 (8,072) 11,323 (1,375)
Decrease in certificates of deposit...... 101,833 148,167 -- --
Equity in income of partnership.......... (15,355) (36,510) (41,105) (31,309)
Decrease (increase) in accounts
receivable............................. (118,815) 960,824 (789,828) (87,582)
Decrease (increase) in hotel inventory... 14,154 1,159 (930) (9,997)
Decrease (increase) in other assets...... 53,800 (20,258) (58,614) 42,031
Increase in accounts payable and accrued
expenses............................... 255,749 305,716 375,580 320,816
--------- ---------- --------- ---------
Total adjustments............................ 582,230 1,962,671 196,992 955,604
--------- ---------- --------- ---------
Net cash provided (used) by operating
activities..................................... 663,637 1,764,150 (52,522) 620,259
--------- ---------- --------- ---------
Cash flows from investing activities:
Additions to hotel property.................. (9,796) (446,849) (133,901) (195,323)
Distributions from investee partnership...... 84,427 110,209 120,694 204,761
--------- ---------- --------- ---------
Net cash provided (used) by investing
activities..................................... 74,631 (336,640) (13,207) 9,438
--------- ---------- --------- ---------
Cash flows from financing activities:
Principal payments on notes payable.......... (968,486) (1,024,981) (110,072) (818,644)
Borrowings on notes payable.................. -- -- -- 20,000
--------- ---------- --------- ---------
Net cash used by financing activities.......... (968,486) (1,024,981) (110,072) (798,644)
--------- ---------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.................................... (230,218) 402,529 (175,801) (168,947)
Cash and cash equivalents at beginning of
period......................................... 501,433 98,904 274,705 443,652
--------- ---------- --------- ---------
Cash and cash equivalents at end of period..... $ 271,215 501,433 98,904 274,705
--------- ---------- --------- ---------
--------- ---------- --------- ---------
Supplemental disclosure of cash flow
information:
Cash paid for interest....................... $ 619,094 1,263,364 1,135,123 1,120,853
--------- ---------- --------- ---------
--------- ---------- --------- ---------
</TABLE>

See accompanying notes to financial statements.

F-72
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 1996 AND DECEMBER 31, 1995 AND 1994

(1) ORGANIZATION

Ballston Hotel Limited Partnership (the "Partnership") was formed on January
1, 1988 pursuant to the Commonwealth of Virginia Uniform Limited Partnership
Act. The principal business activity of the Partnership is the development and
operation of a hotel complex as part of the mixed-use Ballston Metro Center
project (the "Project") located in Arlington, Virginia. Ballston Condo Limited
Partnership ("BCLP") and Ballston Office Limited Partnership ("BOLP"),
affiliates of the Partnership, constructed the condominium and office building
components of the Project, respectively.

The hotel opened on October 5, 1989 and operated as the Arlington
Renaissance Hotel at Ballston Metro Center (the "Hotel"). Management intends to
operate the hotel under a franchise agreement with Hilton Hotels Corporation to
be entered into in August 1996.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting Records and Income Taxes

The Partnership maintains its accounting records on the accrual basis for
both financial statement and federal income tax reporting purposes. Federal and
state income taxes accrue to the individual partners; accordingly, no federal
and state income taxes have been provided in the accompanying financial
statements.

Building and Land

Contributed land is recorded at the fair value at the date of contribution
as agreed to by the partners. Purchased land and building costs are recorded at
cost. The building is depreciated over 40 years using the straight-line method.

Hotel Furniture, Fixtures and Equipment

Hotel furniture, fixtures and equipment are recorded at cost and are
depreciated over their estimated useful lives using the straight-line method.

Initial Hotel Supplies

Initial hotel supplies required for the Hotel's operations, such as linens,
china, silverware and other expendable supplies, are recorded at cost and are
being amortized over 15 years using the straight-line method. Additional
purchases of linens, china, silverware and other expendable supplies are
expensed when purchased.

Conversion Costs

Conversion costs were incurred to convert the Ramada Hotel into a
Renaissance Hotel. These costs are recorded at cost and are being amortized over
15 years using the straight-line method.

Investment in Partnership

Investment in partnership is accounted for under the equity method.
Accordingly, the investment is stated at cost and adjusted for the Partnership's
share of earnings or loss and distributions of the investee partnership.

F-73
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Cash Equivalents

For financial statement purposes, the Partnership considers investments with
an original maturity date of three months or less to be cash equivalents.

Use of Estimates

Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosures of contingent assets and
liabilities to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from these
estimates.

(3) PARTNERS' DEFICIT AND ALLOCATION OF PROFITS AND LOSSES

All profits and losses are allocated in proportion to each partner's
respective percentage interest in the Partnership as follows:

<TABLE>
<S> <C>
General partner..................................................... 1.0%
Limited partners.................................................... 99.0
-----
100.0%
-----
-----
</TABLE>

(4) NOTES PAYABLE

Notes payable at June 30, 1996 and December 31, 1995 and 1994 consist of the
following:

<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Financial institution--prime rate plus 1% or a
LIBOR/CD rate option note, secured by a first deed
of trust on land and improvements of hotel complex
and the shared improvements of the condominium
constructed by BCLP and an assignment of existing
and future revenue derived from the collateral;
interest only payable monthly, principal payable
annually, based on 30-year amortization, with
remaining principal and interest due October 5,
1995................................................ $17,079,121 17,079,121 17,201,202
Limited partner--prime rate plus 2% unsecured
note................................................ 1,468,891 2,437,377 3,340,277
----------- ----------- -----------
$18,548,012 19,516,498 20,541,479
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

Ballston Hotel, Inc., the general partner, and IDI, L.C. (formerly IDI
Associates), IDI Financial Associates and Ballston Realty, Inc., affiliates of
the Partnership, jointly and severally guarantee the financial institution note
payable.

The note payable to the financial institution, which matured on October 5,
1995, is in default. The Partnership has been unable thus far to refinance the
note but continues to make the regular monthly interest payments.

Given the status of the note payable with the financial institution and the
nature of the terms of the note payable to the limited partner, management is
unable to determine the fair value of the notes payable.

F-74
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(5) INVESTMENT IN PARTNERSHIP

Financial Statement Summary

The following is a summary of the assets, liabilities and equity of the
unconsolidated partnership, Ballston Parking Associates ("BPA") as of June 30,
1996 and December 31, 1995 and 1994, and the results of its operations for the
six months ended June 30, 1996 and the years ended December 31, 1995, 1994 and
1993. The unconsolidated partnership was formed primarily to operate the hotel
and office building parking garage of the Project. The Partnership's interest in
the unconsolidated partnership was 35.02%, 35.48% and 35.60% as of June 30, 1996
and December 31, 1995 and 1994, respectively. The percentage of the Partnership
interest in BPA will decrease in accordance with BPA's partnership agreement
based upon the number of parking space easements sold.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS

<S> <C> <C> <C>
1996 1995 1994
---------- --------- ---------

<CAPTION>
<S> <C> <C> <C>
ASSETS
Cash................................................... $ 1,267 4,263 3,055
Accounts receivable.................................... 29,250 31,200 27,080
Garage property, net of accumulated depreciation....... 4,125,801 4,224,801 4,359,801
Other assets........................................... 4,521 4,521 4,203
---------- --------- ---------
$4,160,839 4,264,785 4,394,139
---------- --------- ---------
---------- --------- ---------
LIABILITIES AND EQUITY
Total accounts payable and accrued liabilities......... $ -- 6,121 7,000
Equity:
The Partnership...................................... 1,443,210 1,501,136 1,552,543
Other partners....................................... 2,717,629 2,757,528 2,834,596
---------- --------- ---------
$4,160,839 4,264,785 4,394,139
---------- --------- ---------
---------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS

<S> <C> <C> <C> <C>
1996 1995 1994 1993
-------- ------- ------- -------

<CAPTION>
<S> <C> <C> <C> <C>
Parking revenue...................................... $288,562 538,898 520,479 538,047
Loss on sales of parking spaces...................... (9,080) (7,000) (3,329) (20,149)
-------- ------- ------- -------
Total income......................................... 279,482 531,898 517,150 517,898
Operating expenses................................... 187,642 353,490 333,542 333,149
-------- ------- ------- -------
Net income........................................... $ 91,840 178,408 183,608 184,749
-------- ------- ------- -------
-------- ------- ------- -------
Equity in net income:
The Partnership.................................... $ 26,501 58,802 63,397 53,601
Other partners..................................... 65,339 119,606 120,211 131,148
-------- ------- ------- -------
$ 91,840 178,408 183,608 184,749
-------- ------- ------- -------
-------- ------- ------- -------
</TABLE>

Note to Condensed Financial Statements

Contributed property is recorded at fair value at the date of contribution
as agreed to by the partners.

F-75
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(5) INVESTMENT IN PARTNERSHIP--(CONTINUED)
Reconciliation of Investment in Partnership and Equity in Income

The following is a reconciliation of the Partnership's investment in
partnership as of June 30, 1996 and December 31, 1995 and 1994 and equity in
income for the six months ended June 30, 1996 and the years ended December 31,
1995, 1994 and 1993, as indicated above, to the amounts reported in the
accompanying financial statements.
<TABLE>
<CAPTION>
INVESTMENT IN PARTNERSHIP EQUITY IN INCOME
---------------------------------- -------------------------------------
1996 1995 1994 1996 1995 1994 1993
---------- --------- --------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance per condensed financial
statements.......................... $1,443,210 1,501,136 1,552,543 26,501 58,802 63,397 53,601
Adjustment for costs incurred in
excess of agreed-upon basis in
property............................ 746,779 757,925 780,217 (11,146) (22,292) (22,292) (22,292)
---------- --------- --------- ------- ------- ------- -------
$2,189,989 2,259,061 2,332,760 15,355 36,510 41,105 31,309
---------- --------- --------- ------- ------- ------- -------
---------- --------- --------- ------- ------- ------- -------
</TABLE>

(6) RELATED-PARTY TRANSACTIONS

Interest expense of approximately $121,000 in 1996, $308,000 in 1995,
$303,000 in 1994 and $294,000 in 1993 was incurred on note payable to BCA, L.P.,
the limited partner, and are included in financial costs in the accompanying
financial statements. Accrued interest payable of $2,283,784, $2,163,011 and
$1,855,114 as of June 30, 1996 and December 31, 1995 and 1994, respectively, is
recorded as accounts payable to affiliates in the accompanying financial
statements.

The Partnership entered into an agreement with IDI Management, Inc., an
affiliate of the Partnership, to perform administrative services for the Hotel
effective January 1, 1991. The administrative fee is based on 0.5% of the gross
revenues of the Partnership except for any distributions from BPA related to
parking. The Partnership incurred administrative fees of $21,257 in 1996,
$41,952 in 1995, $39,771 in 1994 and $37,103 in 1993. These fees are included in
general and administrative expenses in the accompanying financial statements.

The Partnership has advanced funds to affiliates. Advances outstanding were
$757,624 at December 31, 1994.

(7) COMMITMENTS

Hotel Management Agreement

The Partnership has entered into a 20-year agreement with Renaissance Hotel
Operating Company ("Renaissance") for the management of the Hotel. The
Partnership has committed to pay the following management fees:

(1) base management fee equal to 3% of the Hotel's gross revenue, as
defined in the agreement, payable monthly;

(2) reservation and advertising fees equal to 4.5% of the Hotel's gross
room revenue, as defined in the agreement, payable monthly; and

(3) incentive management fee equal to 10% of the Hotel's gross operating
profit, as defined in the agreement, earned and payable annually if certain
cash flow requirements are met.

F-76
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(7) COMMITMENTS--(CONTINUED)
Base management fees of $127,547 in 1996, $243,704 in 1995, $231,446 in 1994
and $215,359 in 1993 and reservation and advertising fees of $142,818 in 1996,
$261,908 in 1995, $243,402 in 1994 and $230,252 in 1993 were incurred by the
Partnership. No incentive management fees were incurred since none of the cash
flow requirements were met.

F-77
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Partners
EquiStar Hotel Investors, L.P.:

We have audited the accompanying statements of operations and cash flows of
the Bellevue Hilton Hotel (the "Hotel") for the period from January 1, 1995 to
August 4, 1995 (date of acquisition by EquiStar Hotel Investors, L.P.) and the
years ended December 31, 1994 and 1993. 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.

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 financial statements referred to above present fairly,
in all material respects, the results of the Bellevue Hilton Hotel's operations
and its cash flows for the period from January 1, 1995 to August 4, 1995, and
the years ended December 31, 1994 and 1993 in conformity with generally accepted
accounting principles.

KPMG Peat Marwick LLP

Washington, D.C.
April 5, 1996

F-78
<PAGE>
BELLEVUE HILTON HOTEL

STATEMENTS OF OPERATIONS

FOR THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 4, 1995
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1994 AND 1993

<TABLE>
<CAPTION>
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Revenue:
Rooms.................................................. $2,410,592 3,669,316 3,217,466
Food and beverage...................................... 1,038,893 1,761,230 1,575,901
Other operating departments............................ 173,258 316,254 280,040
---------- --------- ---------
3,622,743 5,746,800 5,073,407
---------- --------- ---------
Operating costs and expenses:
Rooms.................................................. 647,515 1,072,831 1,016,798
Food and beverage...................................... 904,803 1,523,578 1,404,418
Other operating departments............................ 117,590 191,894 153,628
Undistributed operating expenses:
Administrative and general............................. 397,972 703,739 584,237
Sales and marketing.................................... 192,476 292,142 222,708
Management fees........................................ -- 113,948 100,989
Property operating costs............................... 280,436 493,633 458,288
Property taxes, insurance and other.................... 130,437 230,020 218,177
Depreciation and amortization.......................... 284,191 486,813 466,957
Interest expense....................................... 171,493 305,496 402,676
---------- --------- ---------
3,126,913 5,414,094 5,028,876
---------- --------- ---------
Income before extraordinary item......................... 495,830 332,706 44,531
Extraordinary item--loss on early extinguishment of
debt..................................................... -- 59,242 --
---------- --------- ---------
Net income............................................... $ 495,830 273,464 44,531
---------- --------- ---------
---------- --------- ---------
</TABLE>

See accompanying notes to financial statements.

F-79
<PAGE>
BELLEVUE HILTON HOTEL

STATEMENTS OF CASH FLOWS

FOR THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 4, 1995
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.) AND
THE YEARS ENDED DECEMBER 31, 1994 AND 1993

<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 495,830 273,464 44,531
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization..................... 284,191 486,813 466,957
Increase in accounts receivable................... (90,295) (40,935) (61,931)
Decrease (increase) in other assets............... 49,326 11,792 (7,731)
Increase (decrease) in due from affiliates........ 952,205 (514,384) 8,041
Increase in accounts payable and accrued
expenses................................................ 55,205 2,604 360,821
---------- ---------- ----------
Total adjustments..................................... 1,250,632 (54,110) 766,157
---------- ---------- ----------
Net cash provided by operating activities............... 1,746,462 219,354 810,688
---------- ---------- ----------
Cash flows from investing activities:
Additions to hotel.................................... (50,165) (199,320) (2,771,413)
Purchases of furniture and fixtures................... 3,909 (129) 162
---------- ---------- ----------
Net cash used in investing activities................... (46,256) (199,449) (2,771,251)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from note payable--affiliates................ -- 3,885,000 --
Repayments of note payable............................ -- (3,901,274) (178,298)
Capital distributions................................. (1,642,623) -- --
Capital contributions................................. -- -- 2,155,312
---------- ---------- ----------
Net cash provided (used) by financing activities........ (1,642,623) (16,274) 1,977,014
---------- ---------- ----------
Net increase in cash and cash equivalents............... 57,583 3,631 16,451
Cash and cash equivalents at beginning of period........ 88,411 84,780 68,329
---------- ---------- ----------
Cash and cash equivalents at end of period.............. $ 145,994 88,411 84,780
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of cash flow information:
Cash paid for interest................................ $ 171,493 297,592 398,369
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

See accompanying notes to financial statements.

F-80
<PAGE>
BELLEVUE HILTON HOTEL

NOTES TO FINANCIAL STATEMENTS

FOR THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 4, 1995
(DATE OF ACQUISITION BY EQUISTAR HOTEL INVESTORS, L.P.)
AND THE YEARS ENDED DECEMBER 31, 1994 AND 1993

(1) ORGANIZATION

The Bellevue Hilton Hotel (the "Hotel") is located approximately ten miles
east of downtown Seattle, across Lake Washington. The Hotel opened in March
1980. The Hotel has 180 rooms and complimentary privileges at Bally's Pacific
West health club, as well as an indoor pool, jacuzzi and sauna, business center
and same day valet service. The dining facilities include Sam's Restaurant,
Sam's Lounge and Azteca Restaurant. The Hotel has over 7,746 square feet of
meeting space. The Hotel's business is generated mainly from the local corporate
market. The corporate headquarters of a number of notable high-tech companies
are located in Bellevue or nearby, including Microsoft, Nintendo, AT&T Wireless
Systems, Aldus and Microrim.

The Hotel was sold on August 4, 1995 to EquiStar for a purchase price of
$12,300,000.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accounts of the Hotel were included in the financial records of
Chrisbell Hospitality Company, a limited partnership which owned the Hotel until
it was sold to EquiStar. The accompanying statements of operations and cash
flows include the accounts of the Hotel only, as if it were a separate legal
entity, and have been prepared using the accrual basis of accounting.

Depreciation

Depreciation is computed on the cost of hotel property and equipment using
the straight-line method over 35 years for the building, over 20 years for most
building improvements and over four to five years for furniture, fixtures and
equipment.

Bad Debt Expense

Revenue

Revenue is earned primarily through the operations of the Hotel and
recognized when earned.

Income Taxes

Use of Estimates

F-81
<PAGE>
BELLEVUE HILTON HOTEL

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(3) INTEREST EXPENSE

Prudential Realty Group ("Prudential") provided permanent financing for the
Hotel in March of 1980. The original note balance was $5,300,000 and had a fixed
interest rate of 10%. Principal and interest payments were due monthly.

On February 15, 1994 the remaining balance on the Prudential note was paid
off using $3,929,037 of the proceeds from a $66,000,000 note between Washington
Square, Inc. (an affiliate) and Connecticut General Life Insurance Co.
Interest-only payments were required monthly. The note had an interest rate of
7.60%. The Hotel paid interest to Washington Square, Inc. related to the portion
of the proceeds used to pay off the Prudential note.

The Hotel incurred a prepayment penalty on the pay-off of the Prudential
note in 1994 of $59,242, which is recorded as an extraordinary item in the
accompanying statement of operations.

(4) RELATED-PARTY TRANSACTIONS

During 1994 and 1993, the owner charged the Hotel management fees of 2% of
gross revenue. Management fees incurred during 1994 and 1993 were $110,598 and
$100,989, respectively. No management fees were charged by the owner in 1995.

(5) COMMITMENTS

For the period from January 1, 1995 through August 4, 1995 and during 1994
and 1993, certain space in the Hotel was leased to the Azteca Restaurant. Azteca
made monthly lease payments of $11,625 to the Hotel in accordance with the
lease, which has an expiration date of March 31, 2005. Azteca also paid a
portion of the Hotel real estate taxes and common area expenses.

F-82
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Partners
EquiStar Hotel Investors, L.P.:

We have audited the accompanying combined balance sheets of the Additional
Hotels (the "Hotels") as of June 30, 1996, December 31, 1995 and 1994 and
related combined statements of operations, owners' capital and cash flows for
the six months ended June 30, 1996 and the years ended December 31, 1995, 1994
and 1993. These combined financial statements are the responsibility of the
Hotels' 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.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Additional Hotels as of June 30, 1996, December 31, 1995 and 1994, and the
results of their combined operations and their combined cash flows for the six
months ended June 30, 1996 and the years ended December 31, 1995, 1994 and 1993,
in conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

Washington, D.C.
July 18, 1996

F-83
<PAGE>
ADDITIONAL HOTELS

COMBINED BALANCE SHEETS
JUNE 30, 1996, DECEMBER 31, 1995 AND 1994

<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.......................... $ 2,249,541 2,100,027 1,795,991
Accounts receivable................................ 1,182,989 1,009,479 1,347,062
Inventory and other assets......................... 773,152 1,004,098 1,100,562
------------ ----------- -----------
Total current assets............................... 4,205,682 4,113,604 4,243,615
------------ ----------- -----------
Property and equipment:
Land............................................. 14,454,496 14,454,496 14,454,496
Building......................................... 48,821,317 48,816,467 48,792,386
Furniture, fixtures and equipment................ 20,074,640 19,968,593 18,993,252
------------ ----------- -----------
83,350,453 83,239,556 82,240,134
Less--accumulated depreciation................... (34,286,904) (32,623,613) (29,307,378)
------------ ----------- -----------
Total net property and equipment................... 49,063,549 50,615,943 52,932,756
------------ ----------- -----------
Total assets....................................... $ 53,269,231 54,729,547 57,176,371
------------ ----------- -----------
------------ ----------- -----------
LIABILITIES AND OWNERS' CAPITAL
Accounts payable and accrued expenses.............. $ 2,842,132 2,778,452 3,022,008
Advance deposits................................... 117,902 41,927 45,436
------------ ----------- -----------
Total liabilities.................................. 2,960,034 2,820,379 3,067,444
Owners' capital.................................... 50,309,197 51,909,168 54,108,927
------------ ----------- -----------
Total liabilities and owners' capital.............. $ 53,269,231 54,729,547 57,176,371
------------ ----------- -----------
------------ ----------- -----------
</TABLE>

See accompanying notes to combined financial statements.

F-84
<PAGE>
ADDITIONAL HOTELS

COMBINED STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1996 1995 1994 1993
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Rooms................................... $11,898,784 21,925,991 21,147,009 21,059,634
Food and beverage....................... 5,580,911 10,442,474 10,513,519 10,699,483
Other operating departments............. 831,891 1,613,934 1,591,255 1,689,678
----------- ---------- ---------- ----------
18,311,586 33,982,399 33,251,783 33,448,795
----------- ---------- ---------- ----------
Operating costs and expenses:
Rooms................................... 2,947,864 5,751,406 5,673,951 5,840,918
Food and beverage....................... 4,654,082 9,198,740 9,407,042 9,737,488
Other operating departments............. 444,994 904,143 933,992 985,047
Undistributed operating expenses:
Administrative and general.............. 1,686,225 3,342,110 3,314,554 3,431,329
Sales and marketing..................... 1,214,885 2,320,060 2,343,494 2,436,334
Management fees......................... 404,220 1,065,175 1,051,710 1,260,199
Property operating costs................ 2,317,051 4,407,863 4,353,126 4,067,892
Property taxes, insurance and other..... 673,014 1,390,174 1,519,555 2,574,155
Depreciation and amortization........... 1,663,291 3,316,235 4,451,660 4,656,873
----------- ---------- ---------- ----------
16,005,626 31,695,906 33,049,084 34,990,235
----------- ---------- ---------- ----------
Net income (loss)......................... $ 2,305,960 2,286,493 202,699 (1,541,440)
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
</TABLE>

See accompanying notes to combined financial statements.

F-85
<PAGE>
ADDITIONAL HOTELS

COMBINED STATEMENTS OF OWNERS' CAPITAL

FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1992.................................................. $57,345,663
Distributions............................................................... (658,109)
Net loss.................................................................... (1,541,440)
-----------
Balance at December 31, 1993.................................................. $55,146,114
Contributions............................................................... 1,485,114
Distributions............................................................... (2,725,000)
Net income.................................................................. 202,699
-----------
Balance at December 31, 1994.................................................. $54,108,927
Contributions............................................................... 215,327
Distributions............................................................... (4,701,579)
Net income.................................................................. 2,286,493
-----------
Balance at December 31, 1995.................................................. $51,909,168
Contributions............................................................... 88,650
Distributions............................................................... (3,994,581)
Net income.................................................................. 2,305,960
-----------
Balance at June 30, 1996...................................................... $50,309,197
-----------
-----------
</TABLE>

See accompanying notes to combined financial statements.

F-86
<PAGE>
ADDITIONAL HOTELS

COMBINED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1996 1995 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................... $2,305,960 2,286,493 202,699 (1,541,440)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization......... 1,663,291 3,316,235 4,451,660 4,656,873
Decrease (increase) in accounts
receivable.......................... (173,510) 337,583 (77,086) 119,328
Decrease (increase) in inventory and
other assets........................ 230,946 96,464 22,741 (18,439)
Decrease (increase) in notes
receivable.......................... -- -- 100,000 (100,000)
Increase (decrease) in accounts
payable and accrued expenses........ 63,680 (243,556) (312,119) (661,001)
Increase (decrease) in advance
deposits............................ 75,975 (3,509) (10,866) (115,904)
---------- ---------- ---------- ----------
Total adjustments......................... 1,860,382 3,503,217 4,174,330 3,880,857
---------- ---------- ---------- ----------
Net cash provided by operating activities... 4,166,342 5,789,710 4,377,029 2,339,417
---------- ---------- ---------- ----------
Cash flows from investing activities--
purchases of furniture and equipment........ (110,897) (999,422) (2,285,579) (1,737,036)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Capital contributions..................... 88,650 215,327 1,485,114 --
Capital distributions..................... (3,994,581) (4,701,579) (2,725,000) (658,109)
---------- ---------- ---------- ----------
Net cash used by financing activities....... (3,905,931) (4,486,252) (1,239,886) (658,109)
---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents................................. 149,514 304,036 851,564 (55,728)
Cash and cash equivalents at beginning of
period...................................... 2,100,027 1,795,991 944,427 1,000,155
---------- ---------- ---------- ----------
Cash and cash equivalents at end of
period...................................... $2,249,541 2,100,027 1,795,991 944,427
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>

See accompanying notes to combined financial statements.

F-87
<PAGE>
ADDITIONAL HOTELS

NOTES TO COMBINED FINANCIAL STATEMENTS

JUNE 30, 1996, DECEMBER 31, 1995 AND 1994

(1) ORGANIZATION

The Additional Hotels (the "Hotels") consists of five hotels which are part
of MBL Life Assurance Corporation. Two of the hotels are in California
(Sacramento Hilton and Santa Barbara Inn); one is in Louisiana (Lafayette
Hilton), one is in Colorado (Holiday Inn) and the other is in Washington, D.C.
(Embassy Row).

EquiStar has entered into a binding contract to purchase the Hotels for
approximately $68,400,000.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accounts of the Hotels are included in the financial records of MBL Life
Assurance Corporation. The accompanying combined financial statements include
the accounts of the Hotels only, as if they were a separate legal entity, and
have been prepared using the accrual basis of accounting.

Cash and Cash Equivalents

The Hotels consider all highly liquid instruments with an original maturity
date of three months or less to be cash equivalents.

Inventories

Inventories, consisting primarily of china, tableware, linens and food and
beverage items, are stated at cost, using the first-in, first-out ("FIFO")
method of inventory valuation.

Property and Equipment

Property and equipment are reflected in the balance sheets at their fair
value at the time of contribution. Depreciation is computed on the buildings and
building improvements using the straight-line method over their useful lives of
18 to 39 years. Furniture, fixtures and equipment are depreciated using the
straight-line method over five years.

Bad Debt Expense

Revenue

Revenue is earned primarily through the operations of the hotel and
recognized when earned.

Income Taxes

The combined financial statements contain no provision for federal income
taxes since the Hotels do not pay any taxes directly. All taxes are the
responsibility of the parent company MBL Life Assurance Corporation.

F-88
<PAGE>
ADDITIONAL HOTELS

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Use of Estimates

Management has made a number of estimates and assumptions to prepare these
combined financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.

(3) RELATED-PARTY TRANSACTIONS

All of the hotels except for Embassy Row are managed by CapStar Management.
The Hotels managed by CapStar Management paid base management fees based on
gross revenue plus incentive management fees if the Hotels' operating results
exceeded levels specified in the management contract. The four hotels incurred
management fees of $366,456 in 1996, $926,737 in 1995, $929,013 in 1994 and
$1,008,719 in 1993.

F-89
<PAGE>
======================================= ======================================
- --------------------------------------- --------------------------------------

NO DEALER, SALESPERSON OR ANY OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE 9,250,000 SHARES
CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY [CAPSTAR LOGO]
OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER
OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY,
TO ANY PERSON IN ANY JURISDICTION WHERE
SUCH AN OFFER OR SOLICITATION WOULD BE COMMON STOCK
UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
-------------------

TABLE OF CONTENTS

PAGE
----
Prospectus Summary.............. 3
Risk Factors.................... 11
The Formation Transactions...... 17
Use of Proceeds................. 18
Dividend Policy................. 18
Dilution........................ 19 ----------------------
Capitalization.................. 20 PROSPECTUS
Selected Financial and
Other Data..................... 21 AUGUST 20, 1996
Unaudited Pro Forma Financial ----------------------
Statements.................... 23
Management's Discussion
and Analysis of Financial
Condition and Results of
Operations.................... 30
The Company..................... 34
Business and Properties......... 35
Management...................... 52
Principal Stockholders
and Selling Stockholder....... 59
Certain Relationships and
Related Transactions.......... 60
Shares Available for
Future Sale................... 61
Description of Capital
Stock......................... 62
Underwriting.................... 65
Legal Matters................... 69
Experts......................... 69
Additional Information.......... 69

-------------------
LEHMAN BROTHERS

UNTIL SEPTEMBER 14, 1996 (25
CALENDAR DAYS AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING GOLDMAN, SACHS & CO.
TRANSACTIONS IN THE COMMON STOCK
WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE MERRILL LYNCH & CO.
REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION
OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND SMITH BARNEY INC.
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.

- --------------------------------------- --------------------------------------
======================================= ======================================

<PAGE>
[Alternate International Prospectus Cover]
PROSPECTUS
9,250,000 SHARES

[CAPSTAR LOGO]

COMMON STOCK
-------------------

CapStar Hotel Company ("CapStar" or the "Company") is a hotel investment and
management company which acquires, owns, renovates, repositions and manages
hotels throughout the United States. CapStar owns 12 upscale, full-service
hotels (the "Owned Hotels") which contain 3,516 rooms. The Company has entered
into a contract to acquire five additional hotels (the "Additional Hotels")
which contain 1,121 rooms. Including the Owned Hotels, the Company manages 49
hotels (the "Hotels") with 8,849 rooms. The Company's business strategy is to
identify and acquire hotel properties with the potential for cash flow growth
and to renovate, reposition and operate each hotel according to a business plan
specifically tailored to the characteristics of the hotel and its market.

Of the 9,250,000 shares of common stock, par value $.01 per share (the
"Common Stock") offered hereby, 1,850,000 shares are initially being offered
outside the United States and Canada (the "International Offering") by the
International Managers (as defined herein) and 7,400,000 shares are being
offered in the United States and Canada (the "U.S. Offering") by the U.S.
Underwriters (as defined herein). See "Underwriting." Of the shares of Common
Stock offered, 6,750,000 are being sold by the Company and 2,500,000 are being
sold by the Selling Stockholder (as defined herein). See "Principal Stockholders
and Selling Stockholder." Prior to the Offering (as defined herein), there has
been no public market for the Common Stock. See "Underwriting" for a discussion
of the factors considered in determining the initial public offering price.

The Common Stock has been approved for listing on the New York Stock
Exchange ("NYSE") under the symbol "CHO," subject to official notice of
issuance.

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>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2) SELLING STOCKHOLDER
<S> <C> <C> <C> <C>
Per Share....... $18 $1.17 $16.83 $16.83
Total(3)........ $166,500,000 $10,822,500 $113,602,500 $42,075,000
</TABLE>

(1) The Company and the Selling Stockholder have agreed to indemnify the several
U.S. Underwriters and International Managers against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $2,569,500.
(3) The Company has granted the International Managers and the U.S. Underwriters
a 30-day option to purchase up to 1,387,500 additional shares on the same
terms and conditions as set forth above solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, and Proceeds to Company will be
$191,475,000, $12,445,875 and $136,954,120, respectively. See
"Underwriting."
-------------------

The shares of Common Stock offered by this Prospectus are offered by the
Managers subject to prior sale, to withdrawal, cancellation or modification of
the offer without notice, to delivery to and acceptance by the Underwriters and
to certain further conditions. It is expected that delivery of the shares will
be made at the offices of Lehman Brothers Inc., in New York, New York on or
about August 23, 1996.
-------------------
LEHMAN BROTHERS
GOLDMAN SACHS INTERNATIONAL
MERRILL LYNCH INTERNATIONAL LIMITED
SMITH BARNEY INC.
-------------------
August 20, 1996.
<PAGE>
[Alternate Cov - International Pros.]

======================================= ======================================
- --------------------------------------- --------------------------------------

NO DEALER, SALESPERSON OR ANY OTHER
PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS 9,250,000 SHARES
OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED [CAPSTAR LOGO]
BY THE COMPANY OR ANY OF THE
INTERNATIONAL MANAGERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OF ANY
SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES OR AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, TO ANY
PERSON IN ANY JURISDICTION WHERE SUCH AN
OFFER OR SOLICITATION WOULD BE UNLAWFUL. COMMON STOCK
NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
-------------------

TABLE OF CONTENTS

PAGE
----
Prospectus Summary............... 3
Risk Factors..................... 11
The Formation Transactions....... 17
Use of Proceeds.................. 18 ----------------------
Dividend Policy.................. 18 PROSPECTUS
Dilution......................... 19
Capitalization................... 20
Selected Financial and AUGUST 20, 1996
Other Data..................... 21 ----------------------
Unaudited Pro Forma Financial
Statements..................... 23
Management's Discussion
and Analysis of Financial
Condition and Results
of Operations.................. 30
The Company...................... 34
Business and Properties.......... 35
Management....................... 52
Principal Stockholders
and Selling Stockholder........ 59
Certain Relationships and
Related Transactions........... 60
Shares Available for
Future Sale.................... 61
Description of Capital
Stock.......................... 62
Underwriting..................... 65
Legal Matters.................... 69
Experts.......................... 69
Additional Information........... 69

-------------------
LEHMAN BROTHERS
UNTIL SEPTEMBER 14, 1996 (25
CALENDAR DAYS AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING
TRANSACTIONS IN THE COMMON STOCK GOLDMAN SACHS INTERNATIONAL
WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS MERRILL LYNCH INTERNATIONAL LIMITED
IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH SMITH BARNEY INC.
RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

- --------------------------------------- --------------------------------------
======================================= ======================================