CAPSTAR HOTEL CO, 424B1, 1997-03-13

CAPSTAR HOTEL CO
424B1, 1997-03-13
HOTELS & MOTELS

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<PAGE>
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-22073
PROSPECTUS
5,000,000 SHARES

[LOGO]
COMMON STOCK
------------------

CapStar Hotel Company ("CapStar" or the "Company") is a hotel management and
investment company which acquires, renovates, repositions and manages hotels
throughout the United States. CapStar owns and manages 22 upscale, full-service
hotels (the "Owned Hotels") which contain 5,981 rooms and manages an additional
31 hotels owned by third parties which contain 5,488 rooms (the "Managed
Hotels"). CapStar's portfolio of Owned Hotels and Managed Hotels includes 53
hotels which contain 11,469 rooms (the "Hotels"). The Company has entered into
contracts to acquire a portfolio of six hotels which contain 1,358 rooms (the
"Highgate Portfolio") and two additional hotels containing 367 rooms (the
"Additional Acquisitions"). 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.
All of the 5,000,000 shares of common stock, par value $.01 per share (the
"Common Stock") offered hereby, are being offered by the Company. The Common
Stock is listed on the New York Stock Exchange ("NYSE"), under the symbol "CHO."
On March 12, 1997, the last reported sale price of the Common Stock was $24 3/4.
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>
<S> <C> <C> <C>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share.......................... $24.75 $1.18 $23.57
Total(3)........................... $123,750,000 $5,878,125 $117,871,875
</TABLE>

(1) The Company has agreed to indemnify the several Underwriters 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 $1,114,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
750,000 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 $142,312,500, $6,759,844 and
$135,552,656. See "Underwriting."
-------------------

The shares of Common Stock offered by this Prospectus are offered by the
several Underwriters, 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 March 18, 1997.
-------------------
LEHMAN BROTHERS
BT SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
SMITH BARNEY INC.
-------------------
March 12, 1997.
<PAGE>
[PHOTOGRAPHS/MAPS AND CAPTIONS]

Certain persons participating in this offering may engage in transactions that
stabilize, maintain, or otherwise affect the price of the Common Stock. Such
transactions may include the purchase of shares of Common Stock prior to the
pricing of the offering for the purpose of maintaining the price of the Common
Stock, the purchase of shares of Common Stock following the pricing of the
offering to cover a syndicate short position in the Common Stock or for the
purpose of maintaining the price of the Common Stock, and the imposition of
penalty bids. For a description of these activities, see "Underwriting."

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 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 (INCLUDING THE COMPANY'S
SUBSIDIARY OPERATING PARTNERSHIPS, THROUGH WHICH THE COMPANY OPERATES ALL OF ITS
BUSINESSES). THE OFFERING BY THE COMPANY OF 5,000,000 SHARES OF COMMON STOCK 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 AND HAS
NOT PROVIDED ANY FORM OF CONSULTATION, ADVICE OR COUNSEL REGARDING ANY ASPECT OF
THE OFFERING.

THE COMPANY

CapStar is a hotel management and investment company which acquires,
renovates, repositions and manages hotels throughout the United States. CapStar
owns and manages 22 upscale, full-service hotels (the "Owned Hotels") which
contain 5,981 rooms and manages an additional 31 hotels owned by third parties
which contain 5,488 rooms (the "Managed Hotels"). CapStar's portfolio of Owned
Hotels and Managed Hotels includes 53 hotels which contain 11,469 rooms (the
"Hotels"). The Company's business strategy is to 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. The Owned Hotels are located in markets which have
recently experienced strong economic growth, including Albuquerque, Atlanta,
Charlotte, Chicago, Cleveland, Denver, Houston, Los Angeles, Salt Lake City,
Seattle and Washington, D.C. The Owned Hotels include hotels operated under
nationally recognized brand names such as Hilton-Registered Trademark-,
Sheraton-Registered Trademark-, Westin-Registered Trademark-,
Marriott-Registered Trademark-, Doubletree-Registered Trademark- and Embassy
Suites-Registered Trademark-. For the year ended December 31, 1996, on a pro
forma basis, the operating performance of the Owned Hotels (excluding the ten
hotels purchased since September 30, 1996) improved significantly, as
demonstrated by the following table:

<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED DECEMBER
31,
---------------------- PERCENTAGE
1995 1996 INCREASE
---------- ---------- -------------
<S> <C> <C> <C>
Revenues (in thousands)............................... $ 109,798 $ 118,329 7.8%
Gross Operating Profit (in thousands)................. $ 30,947 $ 37,909 22.5%
Average Occupancy..................................... 72.4% 72.9% 0.7%
Average Daily Rate ("ADR")............................ $ 75.25 $ 83.82 11.4%
Revenue Per Available Room ("RevPAR")................. $ 54.44 $ 61.11 12.3%
</TABLE>

Additionally, the performance of the Owned Hotels compares favorably with that
of the industry in general. For the year ended December 31, 1996, RevPAR for the
Owned Hotels (excluding the ten hotels purchased since September 30, 1996)
increased 12.3%, while RevPAR for all upscale hotels, as reported by Smith
Travel Research, increased 5.4%. For the year ended December 31, 1996, RevPAR at
all of the Owned Hotels (including the ten hotels purchased since September 30,
1996) increased 10.1%.

The Company completed its initial public offering (the "IPO") in August
1996. Since the IPO, the Company has significantly expanded its portfolio by
completing the purchase of ten upscale, full-service hotels containing 2,465
rooms for an aggregate total acquisition cost, including estimated closing
costs, planned renovations and initial working capital ("Total Acquisition
Cost"), of $181.6 million. The Company has also entered into a contract with
Highgate Hotels, Inc. and certain affiliated entities ("Highgate Hotels") to
acquire a portfolio of six upscale, full-service hotels containing 1,358 rooms
(the "Highgate Portfolio") for a Total Acquisition Cost of approximately $105.2
million. See "Recent Developments--The

3
<PAGE>
Highgate Portfolio." The Company has also entered into contracts to acquire two
additional hotels containing 367 rooms for a Total Acquisition Cost of $26.7
million (the "Additional Acquisitions"). In addition to the acquisition of these
hotels, since the IPO the Company has invested in a joint venture which owns the
456-room Holiday Inn Riverfront in St. Louis, Missouri and has entered into
three new long-term management agreements.

During the year ended December 31, 1996, the Company spent a total of $21.6
million on renovations at the Owned Hotels and intends to spend an additional
$21.7 million completing the renovation programs (including approximately $8.4
million to renovate and reposition the Highgate Portfolio and the Additional
Acquisitions). See "Special Note Regarding Forward-Looking Statements."

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 20 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 5.5% of the Common Stock upon completion of the
Offering. See "Principal Stockholders."

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.

4
<PAGE>
RECENT DEVELOPMENTS

In August 1996, the Company completed its IPO at a price of $18 per share,
generating net proceeds of approximately $110 million to the Company. Since
completing the IPO, the Company has continued to execute the hotel acquisition
and operating strategies that it had pursued prior to the IPO which has resulted
in significant growth in the Company's hotel portfolio. The Company's
acquisition, financing, and management activities since the IPO are discussed
below.

POST-IPO ACQUISITIONS

At the time of the IPO, the Company owned 12 upscale, full-service hotels,
containing 3,516 rooms. Since the IPO, the Company has acquired ten additional
upscale, full-service hotels containing 2,465 rooms. These newly acquired hotels
are operated under nationally recognized brand names such as Hilton, Doubletree,
Embassy Suites and Holiday Inn-Registered Trademark-. The Company expects to
improve the operating performance of these newly acquired hotels by implementing
the detailed management plans that have been created for each property as part
of its operation strategy. The Company believes that all of its post-IPO
acquisitions represent attractive investment opportunities because (i) they are
located in major metropolitan or growing secondary markets and are well-located
within these markets (ii) they were acquired at an average cost of approximately
$74,000 per room, which represents more than a 30% discount to replacement cost
and (iii) they have attractive current returns and potential for significant
revenue and cash flow growth through implementation of the Company's operating
strategy.

THE HIGHGATE PORTFOLIO

The Company has entered into a contract with Highgate Hotels to acquire the
Highgate Portfolio, a group of six upscale, full-service hotels containing 1,358
rooms for a Total Acquisition Cost of approximately $105.2 million. The
acquisition will be financed with $75.2 million in cash and $30.0 million of
units in the Company's subsidiary operating partnerships ("OP Units"). See
"Recent Developments--The Highgate Portfolio." The Highgate Portfolio hotels are
operated under nationally recognized brand names including Sheraton, Doubletree,
Radisson-Registered Trademark-, Ramada-Registered Trademark- and Holiday Inn,
and are located in Dallas, Indianapolis, Calgary and Vancouver. The Highgate
Portfolio enhances the Company's geographic diversity by expanding its portfolio
into Canada and, in connection with the acquisition of the Highgate Portfolio,
the Company has entered into agreements to manage two additional hotels owned by
principals of Highgate Hotels: the 414-room Pontchartrain-Crowne Plaza in
Detroit, Michigan and the 393-room Four Points Hotel in suburban Atlanta. The
Company believes that the acquisition of the Highgate Portfolio and the
establishment of a strategic alliance with Highgate Hotels (one of the
principals of which the Company has agreed to nominate to a new seat on its
board of directors) will provide significant benefits to its on-going
acquisition and corporate development activities. A portion of the net proceeds
from the Offering will be used by the Company to consummate the acquisition of
the Highgate Portfolio. The Company expects to complete the acquisition of the
Highgate Portfolio in April 1997. There can be no assurance, however, that the
closing will occur. See "Risk Factors--Risks Associated with Expansion" and
"Special Note Regarding Forward-Looking Statements."

THE ADDITIONAL ACQUISITIONS

The Company has also entered into contracts to acquire the Additional
Acquisitions: the 213-room Four Points Hotel in Cherry Hill, New Jersey for a
Total Acquisition Cost of $8.2 million and the 154-room Great Valley Sheraton in
Frazer, Pennsylvania for a Total Acquisition Cost of $18.5 million.

MANAGEMENT AGREEMENTS/JOINT VENTURES

5
<PAGE>
with the joint venture, the Company has signed a long-term agreement to manage
the 456-room property. Since August 1996 the Company has entered into
significant new long-term management agreements with three other hotel owners.
The Company expects to form additional joint ventures and strategic alliances
with institutional and private hotel owners to invest in future acquisitions and
sale and leaseback transactions, and to secure additional fee management
arrangements. See "Special Note Regarding Forward-Looking Statements."

FINANCING ACTIVITIES

In September 1996, the Company entered into a $225 million revolving credit
facility (the "Credit Facility") led by Bankers Trust Company ("Bankers Trust"),
as agent, to fund post-IPO acquisitions, to repay outstanding indebtedness and
for general corporate purposes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."

In December 1996, the Company modified the terms of the Credit Facility to
increase the Company's permitted nonrecourse indebtedness from $25 million to
$50 million and to permit it to incur up to $100 million of subordinated
indebtedness. In December 1996, the Company borrowed $50 million of subordinated
indebtedness (the "Subordinated Debt") to provide additional funding for
acquisitions and for general corporate purposes.

6
<PAGE>
THE PROPERTIES

The following table sets forth certain information for each of the Owned
Hotels, the Highgate Portfolio and the Additional Acquisitions for the year
ended December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
------------------------
<S> <C> <C> <C> <C>
GUEST AVERAGE
HOTEL LOCATION ROOMS ADR OCCUPANCY
- ---------------------------------------------------------- ------------------------- ----------- --------- -------------

<CAPTION>
<S> <C> <C> <C> <C>
OWNED HOTELS
Orange County Airport Hilton.............................. Irvine, CA 290 $ 78.48 66.0%
Hilton Hotel.............................................. Sacramento, CA 326 75.89 71.7
Santa Barbara Inn......................................... Santa Barbara, CA 71 129.86 85.1
Hilton Hotel.............................................. San Pedro, CA 226 67.23 62.3
Holiday Inn............................................... Colorado Springs, CO 201 60.57 72.6
Sheraton Hotel............................................ Colorado Springs, CO 502 65.95 70.1
Embassy Suites Denver..................................... Englewood, CO 236 102.57 74.1
Embassy Row Hilton........................................ Washington, DC 195 111.24 60.8
The Latham Hotel.......................................... Washington, DC 143 108.17 72.0
Westin Atlanta Airport.................................... Atlanta, GA 496 79.44 79.3
Radisson Hotel............................................ Schaumburg, IL 202 75.54 66.1
Hilton Hotel & Towers..................................... Lafayette, LA 328 70.05 74.1
Marriott Hotel............................................ Somerset, NJ 434 104.36 72.4
Doubletree Hotel.......................................... Albuquerque, NM 294 77.12 66.6
Sheraton Airport Plaza.................................... Charlotte, NC 226 83.97 70.8
Holiday Inn............................................... Cleveland, OH 237 70.11 73.1
Hilton Hotel.............................................. Arlington, TX 310 81.03 73.3
Southwest Hilton.......................................... Houston, TX 293 72.17 53.9
Westchase Hilton.......................................... Houston, TX 295 89.87 77.9
Salt Lake Airport Hilton.................................. Salt Lake City, UT 287 79.18 75.5
Hilton Hotel.............................................. Arlington, VA 209 109.21 74.5
Hilton Hotel.............................................. Bellevue, WA 180 91.70 80.8
----- --------- ---
Subtotal/Weighted Average--Owned Hotels 5,981 $ 83.02 71.3%

HIGHGATE PORTFOLIO
Doubletree Guest Suites................................... Indianapolis, IN 137 $ 79.53 73.5%
Holiday Inn Select........................................ Dallas, TX 348 59.04 61.7
Radisson Hotel............................................ Dallas, TX 305 60.69 74.6
Holiday Inn Calgary Airport............................... Calgary, Alberta 170 53.09 59.3
Sheraton Hotel............................................ Guildford, B.C. 280 69.17 75.2
Ramada Vancouver Centre................................... Vancouver, B.C. 118 70.40 79.4
----- --------- ---
Subtotal/Weighted Average--Highgate Portfolio 1,358 $ 64.35 69.8%

ADDITIONAL ACQUISITIONS
Four Points Hotel......................................... Cherry Hill, NJ 213 $ 73.40 61.8%
Great Valley Sheraton..................................... Frazer, PA 154 88.80 72.0
----- --------- ---
Subtotal/Weighted Average--Additional Acquisitions 367 $ 80.43 66.1%
----- --------- ---
Total/Weighted Average 7,706 $ 79.64 70.8%
----- --------- ---
----- --------- ---
</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.

7
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered by the
Company........................... 5,000,000 shares

Common Stock to be Outstanding after
the Offering...................... 17,754,321 shares(1)(2)

Use of Proceeds..................... The net proceeds of the Offering will be used to fund
the acquisition of the Highgate Portfolio and the
Additional Acquisitions, to retire outstanding
balances under the Credit Facility and for general
corporate purposes.

NYSE Symbol......................... "CHO"
</TABLE>

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

(1) Does not include up to 750,000 shares of Common Stock subject to an
over-allotment option granted to the Underwriters. See "Underwriting."

(2) Does not include 1,201,680 shares of Common Stock issuable upon the
conversion of 809,523 Common OP Units (as defined herein) and 392,157
Preferred OP Units (as defined herein). See "Recent Developments--The
Highgate Portfolio." Also does not include 1,740,000 shares of Common Stock
reserved for issuance under the Equity Incentive Plan (as defined herein)
under which the Company has currently granted 745,254 options to purchase
shares of Common Stock. See "Management--Compensation of Directors,"
"--Stock Option Grants" and "--Compensation Plans."

8
<PAGE>
Summary Financial and Other Information

Prior to the IPO, the business of the Company was conducted through EquiStar
Hotel Investors, L.P. ("EquiStar") and CapStar Management Company, L.P.
("CapStar Management"). 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 December 31,
1996, the Company acquired 19 hotels on various dates. Thus, the historical
financial statements for the years ended December 31, 1996 and 1995 reflect
differing numbers of hotels owned throughout the periods. The unaudited pro
forma financial statements for the year ended December 31, 1996 assume 30 hotels
owned.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, PRO
---------------------------------------------------------- FORMA
1992 1993 1994 1995 1996 1996(A)
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)

<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Revenues:
Rooms............................. $ 0 $ 0 $ 0 $ 14,456 $ 68,498 $ 158,293
Food, beverage and other.......... 0 0 0 7,471 36,949 81,543
Management services and other
revenues........................ 3,479 4,234 4,418 4,436 4,345 3,169
---------- ---------- ---------- ---------- ---------- ----------
Total revenues................ 3,479 4,234 4,418 26,363 109,792 243,005
---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Departmental expenses:
Rooms............................. 0 0 0 4,190 17,509 39,732
Food, beverage and other.......... 0 0 0 5,437 27,102 60,496
Undistributed operating expenses:
Selling, general and
administrative.................. 2,836 4,065 4,508 8,078 20,448 43,450
Property operating costs.......... 0 0 0 3,934 17,151 39,769
Depreciation and amortization..... 12 14 23 2,098 8,248 18,809
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses...... 2,848 4,079 4,531 23,737 90,458 202,256
---------- ---------- ---------- ---------- ---------- ----------
Operating income/(loss)............. 631 155 (113) 2,626 19,334 40,749
Interest expense, net............... 0 0 0 2,413 12,346 16,601
Minority interest................... 0 0 0 17 39 (1,674)
Provision for income taxes(B)....... 0 0 0 0 2,674 8,991
Income/(loss) before extraordinary
item.............................. 631 155 (113) 230 4,353 13,483
Extraordinary item(C)............... 0 0 0 (887) (1,956) 0
---------- ---------- ---------- ---------- ---------- ----------
Net income/(loss)............... 631 155 (113) (657) 2,397 13,483
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Earnings per share before
extraordinary item(D)............. $ -- $ -- $ -- $ -- $ 0.31 $ 0.76
Number of shares of common stock and
common stock equivalents
outstanding....................... -- -- -- -- 12,754,321 18,563,844

OTHER FINANCIAL DATA:
EBITDA(E)........................... $ 643 $ 169 $ (90) $ 4,741 $ 27,621 $ 57,895
Net cash provided by (used in)
operating activities.............. 87 (101) 66 4,357 13,373 32,822
Net cash used in investing
activities........................ (65) (24) (41) (116,573) (225,251) (373,286)
Net cash provided by (used in)
financing activities.............. (219) 244 0 119,048 226,830 359,722

BALANCE SHEET DATA:
Property and equipment, gross....... $ 110 $ 134 $ 176 $ 110,883 $ 343,092 $ 521,163
Total assets........................ 586 1,458 1,232 132,650 379,161 543,255
Long term obligations............... 0 0 0 73,574 200,361 216,494
</TABLE>

9
<PAGE>
SUMMARY FINANCIAL AND OTHER INFORMATION

<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, PRO
---------------------------------------------------------- FORMA
1992 1993 1994 1995 1996 1996(A)
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Owned Hotels:
Number of hotels.................. -- -- -- 6 19 30
Number of guest rooms............. -- -- -- 2,101 5,166 7,706
Total revenues (in thousands)..... -- -- -- $ 21,927 $ 105,447 $ 239,836
Average occupancy................. -- -- -- 72.3% 71.6% 70.8%
ADR(F)............................ -- -- -- $ 71.58 $ 82.84 $ 79.64
RevPAR(G)......................... -- -- -- $ 51.75 $ 59.31 $ 56.39
All Hotels(H):
Number of hotels(I)............... 34 34 39 46 47 --
Number of guest rooms(I).......... 5,918 5,971 5,847 7,895 9,785 --
Total revenues (in thousands)..... $ 109,837 $ 123,124 $ 128,151 $ 170,888 $ 193,092 --
</TABLE>

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

(A) The pro forma Operating Results, Other Financial Data and Operating Data for
the year ended December 31, 1996 have been prepared as if the Offering and
the acquisition of the Owned Hotels, the Highgate Portfolio and the
Additional Acquisitions had been consummated at the beginning of 1996, and
the pro forma Balance Sheet Data as of December 31, 1996 has been prepared
as if the Offering and the acquisition of the Owned Hotels, the Highgate
Portfolio and the Additional Acquisitions had been consummated on such date.

(B) No provision for federal income taxes is included in the historical data
other than for 1996 because CapStar Management and EquiStar were
partnerships and all federal income tax liabilities were passed through to
the individual partners.

(C) During 1995 and 1996, certain loan facilities were refinanced and the
write-offs of deferred costs associated with the prior facilities were
recorded as extraordinary losses.

(D) Earnings per share before extraordinary item for the historical year ended
December 31, 1996 is based on earnings for the period from the IPO on August
20, 1996 through December 31, 1996.

(E) 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, income taxes,
depreciation and amortization, which is generally equivalent to EBITDA, and
EBITDA is unaffected by the debt and equity structure of the property owner.
EBITDA 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.

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

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

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

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

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 two of the
Owned Hotels, the Highgate Portfolio hotels and the Additional Acquisitions 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 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 binding
contracts to acquire the Highgate Portfolio and the Additional Acquisitions 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 and could have a
material adverse effect on the company's results of operations.

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 22 hotels and has entered into contracts to
acquire the Highgate Portfolio and the Additional Acquisitions. 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

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, 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

12
<PAGE>
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,
the Highgate Portfolio and the Additional Acquisitions, 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.

The Credit Facility and the Subordinated Debt 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.

The Company's outstanding indebtedness under the Credit Facility and the
Subordinated Debt bears 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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations --Liquidity and Capital Resources."

CONTROLLING STOCKHOLDERS

Acadia Partners, L.P., a private investment partnership, and related
entities ("Acadia Partners"), and certain members of management will
beneficially own an aggregate of 19.7% of the issued and outstanding shares of
Common Stock upon completion of the Offering. See "Principal Stockholders." So
long as Acadia Partners and such members of management beneficially own a
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 "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 expiring in December 1999, which
contain certain non-compete clauses. See "Management--Employment Agreements."

13
<PAGE>
POTENTIAL FOR CONFLICTS OF INTEREST

Mr. Whetsell and Mr. McCaslin and entities owned by them own, directly or
indirectly, (i) a leasehold interest, expiring on December 31, 2001, in two 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 four 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 1996, the Company received approximately
$824,070 in management fees from the eight hotels in which Messrs. Whetsell and
McCaslin own an equity interest, including approximately $554,896 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 31 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 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 1996, the
Company's pro forma revenue from Management Agreements was $3.2 million
constituting 1.3% of the Company's total pro forma revenue for such period. No
single Management Agreement (or group of Management Agreements for hotels under
common ownership or control) currently accounts for more than 0.5% of the total
revenue of the Company 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

14
<PAGE>
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 approximately the last 24 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.

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.

SHARES AVAILABLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock (including shares issuable upon
the exercise of stock options or the conversion of OP Units), or the perception
that such sales could occur, could adversely affect prevailing market prices for
the Common Stock. See "Management--Stock Option Grants" and

15
<PAGE>
"The Operating Partnerships." Upon consummation of the Offering, the Company
will have outstanding 17,754,321 shares of Common Stock (assuming no exercise of
the over-allotment option). 3,504,321 of these shares are "restricted
securities" 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 such restricted securities which were issued in connection with
the formation transactions that occurred immediately prior to the closing of the
IPO (the "Formation Transactions"). See "Description of Capital
Stock--Registration Rights." In connection with the Offering, the Company has
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 Brothers Inc. ("Lehman"). Certain entities
controlled by members of management (who beneficially own an aggregate of
980,010 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 180 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>
USE OF PROCEEDS

The net proceeds to the Company from the Offering are estimated to be
approximately $116.8 million (approximately $134.4 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 net proceeds are expected to be used as follows: (i) $70.8 million to
fund the cash portion of the acquisition of the Highgate Portfolio; (ii) $21.8
million to fund the acquisition of the Additional Acquisitions; and (iii) the
remainder will be available to retire outstanding balances under the Credit
Facility and for general corporate purposes.

PRICE RANGE OF COMMON STOCK

The Common Stock has been listed on the NYSE since August 20, 1996 under the
symbol "CHO." The following table sets forth for the periods indicated the high
and low closing sale prices for the Common Stock on the NYSE.

<TABLE>
<CAPTION>
PRICE
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
1997:
First Quarter (through March 12, 1997)................................... $ 24 3/4 $ 19 3/8
1996:
Fourth Quarter (ended December 31, 1996)................................. 19 5/8 16 7/8
Third Quarter (ended September 30, 1996)................................. 18 3/8 16 1/2
</TABLE>

The last reported sale price of the Common Stock on the NYSE on March 12,
1997 was $24 3/4. As of March 12, 1997, there were approximately 49 holders of
record of the Common Stock.

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 and Subordinated Debt 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.

17
<PAGE>
CAPITALIZATION

The following table sets forth the actual capitalization of the Company as
of December 31, 1996 and as adjusted to give effect to the acquisition of three
Owned Hotels since December 31, 1996, the Highgate Portfolio and the Additional
Acquisitions, and the Offering. The information below should be read in
conjunction with the consolidated financial statements and notes thereto and the
pro forma financial statements and notes thereto contained elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-----------------------
<S> <C> <C>
HISTORICAL AS ADJUSTED
---------- -----------

<CAPTION>
(IN THOUSANDS)
<S> <C> <C>

DEBT:

Total long-term debt..................................................................... $ 200,361 $ 216,494
Minority interest........................................................................ 606 30,642

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 and 17,754,321
shares, respectively, issued and outstanding).......................................... 128 178
Additional paid-in capital............................................................... 158,533 275,241
Retained earnings........................................................................ 2,054 2,054
---------- -----------
Total stockholders' equity......................................................... 160,715 277,473
---------- -----------
Total capitalization............................................................... $ 361,682 $ 524,609
---------- -----------
---------- -----------
</TABLE>

18
<PAGE>
SELECTED FINANCIAL AND OTHER DATA

The following table sets forth selected historical and pro forma financial
information for the Company. The Balance Sheet Data of the Company as of
December 31, 1996, 1995, and 1994, and the Operating Results and Other Financial
Data for the years ended December 31, 1996, 1995, 1994, and 1993, have been
derived from the audited financial statements which are included elsewhere in
this Prospectus. The other comparable data as of, and for the years ended,
December 31, 1993 and 1992 have been derived from financial statements that are
not required to be included in this Prospectus. The following information should
be read in conjunction with the historical consolidated 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 pro forma operating data and other data for the year ended December 31,
1996 has been prepared as if the Offering and the acquisition of the Owned
Hotels, the Highgate Portfolio and the Additional Acquisitions had been
consummated at the beginning of 1996, and the pro forma balance sheet data as of
December 31, 1996 has been prepared as if the Offering and the acquisition of
the Owned Hotels, the Highgate Portfolio and the Additional Acquisitions 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 year ended December
31, 1996, nor does it purport to represent the Company's future financial
position and results of operations.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ ------------

<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Revenues:
Rooms................................................ $ 0 $ 0 $ 0 $ 14,456 $ 68,498
Food, beverage and other............................. 0 0 0 7,471 36,949
Management services and other revenues............... 3,479 4,234 4,418 4,436 4,345
------------ ------------ ------------ ------------ ------------
Total revenues................................... 3,479 4,234 4,418 26,363 109,792
------------ ------------ ------------ ------------ ------------
Operating expenses:
Departmental expenses:
Rooms................................................ 0 0 0 4,190 17,509
Food, beverage and other............................. 0 0 0 5,437 27,102
Undistributed operating expenses:
Selling, general and administrative.................. 2,836 4,065 4,508 8,078 20,448
Property operating costs............................. 0 0 0 3,934 17,151
Depreciation and amortization........................ 12 14 23 2,098 8,248
------------ ------------ ------------ ------------ ------------
Total operating expenses......................... 2,848 4,079 4,531 23,737 90,458
------------ ------------ ------------ ------------ ------------
Operating income/(loss)................................ 631 155 (113) 2,626 19,334
Interest expense, net.................................. 0 0 0 2,413 12,346
Minority interest...................................... 0 0 0 17 39
Provision for income taxes(B).......................... 0 0 0 0 2,674
Income/(loss) before extraordinary item................ 631 155 (113) 230 4,353
Extraordinary item(C).................................. 0 0 0 (887) (1,956)
------------ ------------ ------------ ------------ ------------
Net income/(loss)................................ 631 155 (113) (657) 2,397
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Earnings per share before extraordinary item(D)........ $ -- $ -- $ -- $ -- $ 0.31
Number of shares of common stock and common stock
equivalents outstanding.............................. -- -- -- -- 12,754,321

OTHER FINANCIAL DATA:
EBITDA(E).............................................. $ 643 $ 169 $ (90) $ 4,741 $ 27,621
Net cash provided by (used in) operating activities.... 87 (101) 66 4,357 13,373
Net cash used in investing activities.................. (65) (24) (41) (116,573) (225,251)
Net cash provided by (used in) financing activities.... (219) 244 0 119,048 226,830

BALANCE SHEET DATA:
Property and equipment, gross.......................... $ 110 $ 134 $ 176 $ 110,883 343,092
Total assets........................................... 586 1,458 1,232 132,650 379,161
Long term obligations.................................. 0 0 0 73,574 200,361

<CAPTION>
PRO FORMA

<S> <C>
1996(A)
------------

<S> <C>
OPERATING RESULTS:
Revenues:
Rooms................................................ $ 158,293
Food, beverage and other............................. 81,543
Management services and other revenues............... 3,169
------------
Total revenues................................... 243,005
------------
Operating expenses:
Departmental expenses:
Rooms................................................ 39,732
Food, beverage and other............................. 60,496
Undistributed operating expenses:
Selling, general and administrative.................. 43,450
Property operating costs............................. 39,769
Depreciation and amortization........................ 18,809
------------
Total operating expenses......................... 202,256
------------
Operating income/(loss)................................ 40,749
Interest expense, net.................................. 16,601
Minority interest...................................... (1,674)
Provision for income taxes(B).......................... 8,991
Income/(loss) before extraordinary item................ 13,483
Extraordinary item(C).................................. 0
------------
Net income/(loss)................................ 13,483
------------
------------
Earnings per share before extraordinary item(D)........ $ 0.76
Number of shares of common stock and common stock
equivalents outstanding.............................. 18,563,844
OTHER FINANCIAL DATA:
EBITDA(E).............................................. $ 57,895
Net cash provided by (used in) operating activities.... 32,822
Net cash used in investing activities.................. (373,286)
Net cash provided by (used in) financing activities.... 359,722
BALANCE SHEET DATA:
Property and equipment, gross.......................... 521,163
Total assets........................................... 543,255
Long term obligations.................................. 216,494
</TABLE>

19
<PAGE>
SELECTED FINANCIAL AND OTHER DATA

<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, PRO FORMA
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996 1996(A)
--------- --------- --------- --------- --------- -----------
OPERATING DATA:
Owned Hotels:
Number of hotels........................................ -- -- -- 6 19 30
Number of guest rooms................................... -- -- -- 2,101 5,166 7,706
Total revenues (in thousands)........................... -- -- -- $ 21,927 $ 105,447 $ 239,836
Average occupancy....................................... -- -- -- 72.3% 71.6% 70.8%
ADR(F).................................................. -- -- -- $ 71.58 $ 82.84 $ 79.64
RevPAR(G)............................................... -- -- -- $ 51.75 $ 59.31 $ 56.39
All Hotels(H):
Number of hotels(I)..................................... 34 34 39 46 47 --
Number of guest rooms(I)................................ 5,918 5,971 5,847 7,895 9,785 --
Total revenues (in thousands)........................... $ 109,837 $ 123,124 $ 128,151 $ 170,888 $ 193,092 --
</TABLE>

- ------------------------------
(A) The pro forma Operating Results, Other Financial Data and Operating Data for
the year ended December 31, 1996 have been prepared as if the Offering and
the acquisition of the Owned Hotels, the Highgate Portfolio and the
Additional Acquisitions had been consummated at the beginning of 1996, and
the pro forma Balance Sheet Data as of December 31, 1996 has been prepared
as if the Offering and the acquisition of the Owned Hotels, the Highgate
Portfolio and the Additional Acquisitions had been consummated on such date.

(C) During 1995 and 1996, certain loan facilities were refinanced and the
write-offs of deferred costs associated with the prior facilities were
recorded as extraordinary losses.

(D) Earnings per share before extraordinary item for the historical year ended
December 31, 1996 is based on earnings for the period from the IPO on August
20, 1996 through December 31, 1996.

(E) 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 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.

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

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

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

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

20
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS

The unaudited Pro Forma Balance Sheet of the Company as of December 31, 1996
is presented assuming: (i) the Offering and the application of the net proceeds
had been completed on December 31, 1996; and (ii) the Owned Hotels, the Highgate
Portfolio and the Additional Acquisitions were owned on December 31, 1996.

The unaudited Pro Forma Statement of Operations of the Company for the year
ended December 31, 1996 presents the results of operations of the Company
assuming: (i) all of the Owned Hotels, the Highgate Portfolio and the Additional
Acquisitions had been acquired at the beginning of 1996; and (ii) the Offering
was completed as of the beginning of 1996.

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, the Highgate Portfolio and the Additional
Acquisitions were, in fact, acquired on such date and if the Offering occurred
on such date. 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 consolidated financial
statements and related notes thereto of the Company, which are included
elsewhere in this Prospectus.

21
<PAGE>
CAPSTAR HOTEL COMPANY
PRO FORMA BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
PRO FORMA
AFTER
OFFERING, HIGHGATE OFFERING AND
PORTFOLIO AND ACQUISITION
OWNED ADDITIONAL OF HIGHGATE
HOTELS ACQUISITIONS PRO PORTFOLIO AND
PRO FORMA FORMA ADDITIONAL
HISTORICAL(A) ADJUSTMENTS(B) ADJUSTMENTS(C) ACQUISITIONS
------------- --------------- ------------------ -------------
<S> <C> <C> <C> <C>
ASSETS
Cash.......................................... $ 21,784 $ (6,189) $ (7,223) $ 8,372
Property and equipment, net
Land........................................ 58,127 4,834 12,250 75,211
Building and improvements................... 244,367 45,088 98,000 387,455
Furniture, fixtures and equipment........... 28,066 5,649 12,250 45,965
Construction-in-progress.................... 3,891 -- -- 3,891
------------- ------- -------- -------------
Total property and equipment, net............. 334,451 55,571 122,500 512,522

Other assets.................................. 22,926 (1,515) 950 22,361
------------- ------- -------- -------------
Total assets.................................. $ 379,161 $ 47,867 $ 116,227 $ 543,255
------------- ------- -------- -------------
------------- ------- -------- -------------
LIABILITIES, MINORITY INTEREST AND EQUITY
Other liabilities............................. $ 17,479 $ 367 $ 800 $ 18,646
Long-term debt................................ 200,361 47,500 (31,367)(D) 216,494
------------- ------- -------- -------------
Total liabilities............................. 217,840 47,867 (30,567) 235,140
Minority interest............................. 606 -- 30,036(E) 30,642
Equity........................................ 160,715 -- 116,758(D) 277,473
------------- ------- -------- -------------
Total liabilities, minority interest and
equity...................................... $ 379,161 $ 47,867 $ 116,227 $ 543,255
------------- ------- -------- -------------
------------- ------- -------- -------------
</TABLE>

<TABLE>
<C> <S>
(A) Reflects the historical consolidated balance sheet of the Company as of December 31, 1996.
(B) Reflects the Company's cost basis and financing for three Owned Hotels acquired subsequent to December 31,
1996.
(C) Reflects the estimated cost basis and financing for the Highgate Portfolio and the Additional Acquisitions.
The estimated acquisition cost of the Highgate Portfolio is $100,844 plus $4,350 for renovations. The
estimated acquisition cost of the Additional Acquisitions is $22,606 plus $4,094 in renovations and other
costs.
(D) A reconciliation of gross proceeds from the Offering to net proceeds is as follows:
</TABLE>

<TABLE>
<S> <C> <C>
Gross proceeds at $24.75 per share..................................................... $ 123,750
Underwriting, advisory and other transaction expenses.................................. (6,992)
---------
Net cash proceeds from Offering........................................................ $ 116,758
---------
A schedule of sources and uses of funds related to the Offering are as follows:
SOURCES
Net cash proceeds from Offering........................................................ $ 116,758
Cash on hand........................................................................... 7,223
---------
Total sources.......................................................................... $ 123,981
---------
USES
Repayment of outstanding amounts on certain existing debt facilities................... $ (31,367)
Purchase of Highgate Portfolio and Additional Acquisitions............................. (92,614)
---------
Total uses............................................................................. $(123,981)
---------
</TABLE>

<TABLE>
<S> <S>
The Pro forma balance sheet assumes that the proceeds from the Credit Facility are drawn on December 31,
1996.
(E) Represents 809,523 Common OP Units convertible into an equal number of shares of Common Stock and 392,157
Preferred OP Units convertible into an equal number of shares of Common Stock.
</TABLE>

22
<PAGE>
CAPSTAR HOTEL COMPANY
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
PRO FORMA
OFFERING, AFTER OFFERING
HIGHGATE AND
PORTFOLIO AND ACQUISITION OF
ADDITIONAL HIGHGATE
OWNED HOTELS ACQUISITIONS PORTFOLIO
PRO FORMA PRO FORMA AND ADDITIONAL
HISTORICAL(A) ADJUSTMENTS(B) ADJUSTMENTS(C) ACQUISITIONS
------------ --------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues:
Rooms.................................................... $ 68,498 $ 60,370 $ 29,425 $ 158,293
Food and beverage........................................ 30,968 22,889 13,207 67,064
Other revenue............................................ 5,981 3,853 4,645 14,479
Hotel management, accounting and other................... 4,345 (1,040) (136) 3,169
------------ ------- ------- -----------------
Total Revenue.......................................... 109,792 86,072 47,141 243,005
------------ ------- ------- -----------------
Hotel operating expenses by department:
Rooms.................................................... 17,509 14,954 7,269 39,732
Food and beverage........................................ 24,589 18,518 10,322 53,429
Other operating departments.............................. 2,513 2,124 2,430 7,067
Undistributed operating expenses:
Selling, general and administrative...................... 20,448 15,424 7,578 43,450
Property operating costs................................. 12,586 10,270 4,478 27,334
Property taxes, insurance and other...................... 4,565 4,055 3,815 12,435
Depreciation and amortization............................ 8,248 6,361 4,200 18,809
------------ ------- ------- -----------------
Total operating expenses............................... 90,458 71,706 40,092 202,256
------------ ------- ------- -----------------
Interest expense, net...................................... 12,346 6,594 (2,339) 16,601
------------ ------- ------- -----------------
Total expenses............................................. 102,804 78,300 37,753 218,857
------------ ------- ------- -----------------
Income before minority interest and
income taxes............................................. 6,988 7,772 9,388 24,148
Minority interest.......................................... 39 (38) (1,675) (1,674)
------------ ------- ------- -----------------
Income before income taxes................................. 7,027 7,734 7,713 22,474
Income tax provision....................................... 2,674 3,231 3,086 8,991
------------ ------- ------- -----------------
Net income............................................. $ 4,353 $ 4,503 $ 4,627 $ 13,483
------------ ------- ------- -----------------
------------ ------- ------- -----------------
Pro forma earnings per share(D)............................ $ 0.76
Pro forma weighted average shares outstanding.............. 18,563,844
</TABLE>

<TABLE>
<S> <C> <C>
(A) Reflects historical consolidated statement of operations of the Company for the year ended December 31, 1996.

Reflects the pre-acquisition operations of the Owned Hotels to provide a full year of hotel operations for
(B) the unaudited Pro Forma Statement of Operations. For each Owned Hotel, the 1996 pre-acquisition operations
were obtained from the hotel's pre-acquisition financial statements. 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, (ii) eliminate the related lease revenue earned
by the Company during this period (on February 29, 1996, the lease was terminated and the Company assumed
management of hotel operations), (iii) eliminate management fee charges for the Owned Hotels for services
that were provided by the Company, (iv) reflect federal and state income taxes (assuming a 40% combined
effective rate), (v) reflect 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), (vi) reflect 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 and (vii) reflect pro forma depreciation and interest expense as if the hotels had
been acquired as of the beginning of the period presented as follows:

Elimination of depreciation on hotels for pre-acquisition period................................ $ (3,298)
Depreciation on hotels for pre-acquisition period based on the Company's cost basis............. 8,529
Amortization of deferred financing costs related to the Credit Facility......................... 1,130
-----------
Net depreciation and amortization adjustment.................................................... $ 6,361
-----------
-----------
Elimination of interest from pre-acquisition operations......................................... $ (5,003)
Interest on hotels for pre-acquisition period based on the terms of the Credit Facility......... 11,597
-----------
Net interest adjustment......................................................................... $ 6,594
-----------
-----------
</TABLE>

<TABLE>
<S> <C> <C>
(C) Reflects the historical operations of the Highgate Portfolio and the Additional Acquisitions adjusted for (i)
depreciation on the new cost basis, (ii) reduction of interest on debt to be paid with proceeds from the
Offering, (iii) minority interest and (iv) income taxes. Also reflects the elimination of management fees
earned by the Company for managing one of the Additional Acquisitions in 1996 ($136). Historical operations
of the Highgate Portfolio were obtained from the hotels' audited combined financial statements included
elsewhere in this Prospectus.

(D) In computing earnings per share, net income has been adjusted for certain minority interests.
</TABLE>

23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

CERTAIN STATEMENTS CONTAINED HEREIN AND ELSEWHERE IN THIS PROSPECTUS WHICH
ARE NOT HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES REFERENCED ELSEWHERE IN THIS PROSPECTUS. SEE "RISK FACTORS" AND
"SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS."

GENERAL

Prior to the IPO, 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 December 31, 1996, the Company
acquired 19 hotels. Thus, the historical financial statements for the year ended
December 31, 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.

RESULTS OF OPERATIONS
PRO FORMA RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED
WITH THE
HISTORICAL RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996

On a pro forma basis, after giving effect to the Offering, the acquisition
of the Owned Hotels, the Highgate Portfolio and the Additional Acquisitions, pro
forma total revenues increased to $243.0 million for 1996 from $109.8 million
for the same historical period. The increase resulted from the recognition of
revenue for the Owned Hotels, the Highgate Portfolio and the Additional
Acquisitions 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 certain Owned Hotels prior to
their acquisition. The pro forma revenues for the period prior to acquiring each
Owned Hotel, the Highgate Portfolio and the Additional Acquisitions reflect the
actual revenues of the previous owners.

Pro forma expenses reflect the acquisition of the Owned Hotels, the Highgate
Portfolio and the Additional Acquisitions, and the Offering. Total pro forma
operating expenses increased to $202.3 million for 1996 from $90.5 million for
the same historical period. Departmental, selling, general, administrative and
other operating expenses of the hotels 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 acquisition of the Owned Hotels, the Highgate Portfolio and
the Additional Acquisitions had taken place at the beginning of the period.

Pro forma EBITDA improved to $57.9 million for 1996 from $27.6 million for
the same historical period. Pro forma EBITDA as a percentage of revenue
decreased to 23.8% for 1996 from 25.2% 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,

24
<PAGE>
income taxes, depreciation and amortization, which is generally equivalent to
EBITDA, and EBITDA is unaffected by the debt and equity structure of the
property owner. EBITDA 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.

YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995

Total revenues increased to $109.8 million in 1996 from $26.4 million in
1995. The Company purchased its first hotel in March 1995 and owned five hotels
as of the end of 1995. During 1996, the Company purchased an additional 14
hotels. The growth in revenues between 1995 and 1996 reflects this significant
growth in the number of hotels owned.

Operating costs and expenses increased to $90.5 million in 1996 from $23.7
million in 1995. Departmental expenses, property operating costs, selling,
general and administrative costs and depreciation and amortization increased in
1996 over 1995. All of these increases reflect the growth in the number of owned
hotels from five to nineteen. The costs related to management of the Managed
Hotels remained stable between the periods.

Operating income increased to $19.3 million in 1996 from $2.6 million in
1995. The increase from 1995 is due to the operating income generated by
additional hotels and to increased efficiencies in the management of the Managed
Hotels.

Net interest expense of $12.3 million for 1996 increased from $2.4 million
in 1995 due to the additional debt incurred related to the hotels acquired in
1996.

The extraordinary loss of $2.0 million in 1996 reflects the write-off of
deferred financing fees of $3.3 million, net of a deferred tax benefit of $1.3
million. The financing fees written-off were unamortized fees associated with a
credit facility which was refinanced prior to maturity. The Company also
incurred an extraordinary loss on extinguishment of debt during 1995 from the
write-off of deferred financing fees in connection with a refinancing
transaction.

Net income increased to $2.4 million for 1996 from a net loss of $0.7
million for 1995. The primary reason for the increase is due to increased
operating income generated by hotels acquired during 1996 and improvements in
operating income from hotels acquired in 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.

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 in 1995 from a loss of $0.1
million in 1994. The increase from 1994 is due to the operating income of 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.

25
<PAGE>
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 loss was the early extinguishment of debt.

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 and joint
venture investments are financed through a combination of internally generated
cash, external borrowings and the issuance of OP Units and/or Common Stock.

At December 31, 1996, the Company had $21.8 million in cash and cash
equivalents, an increase of $15.0 million from the balance of $6.8 million on
December 31, 1995. During the year ended December 31, 1996, the Company invested
$21.6 million in capital improvements in connection with renovations of the
Owned Hotels. The Company expects to spend an additional $13.3 million to
complete the renovation of the Owned Hotels. Renovations for the Highgate
Portfolio and the Additional Acquisitions will commence after consummation of
their acquisitions and are projected to total $8.4 million. Capital for
renovation work has been and will be provided by a combination of internally
generated cash and external borrowings. 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.

On September 24, 1996, the Company entered into the Credit Facility which
provides for a maximum borrowing capacity of $225 million bearing interest at a
rate of LIBOR plus 2% per annum. Borrowings under this Credit Facility have been
used by the Company to repay previously existing indebtedness, to acquire and
renovate upscale, full service hotels and for general corporate purposes. The
Company's ability to borrow under the Credit Facility is subject, among other
things, to a borrowing base test calculated with 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. As of December 31, 1996
approximately $177 million was available for borrowing under the Credit
Facility, of which $149 million had been borrowed. The Credit Facility permits
the Company to incur an additional $50 million of subordinated indebtedness as
of December 31, 1996.

The term of the Credit Facility is three years, subject to two one-year
extensions upon the satisfaction of certain conditions. Under the Credit
Facility, the Company is entitled to borrow additional advances or reborrow
during the extension period. The Company was 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
under the Credit Facility.

The Credit Facility is a direct obligation of CapStar Management and is
fully and unconditionally guaranteed by the Company and certain subsidiaries of
CapStar Management, including the subsidiaries which own the hotel properties.
The Credit Facility is secured by substantially all the real and personal
property of CapStar Management and its subsidiaries.

The Credit Facility contains 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

26
<PAGE>
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 and the
Subordinated Debt 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. In February 1997, in accordance with
certain of these covenants, the Company entered into interest rate protection
agreements.

On December 13, 1996, the Company modified the terms of the Credit Facility
to increase the Company's permitted nonrecourse indebtedness from $25 million to
$50 million and to permit it to incur up to $100 million of subordinated
indebtedness. In December 1996, the Company borrowed the Subordinated Debt. The
Subordinated Debt was used to finance the acquisition of the five hotels
purchased from MBL Life Assurance Corporation and for general corporate
purposes. The Subordinated Debt bears interest at a rate of LIBOR plus 4% per
annum. The term of the Subordinated Debt is three years, subject to two one year
extensions upon satisfaction of certain covenants. The Company was required to
pay customary fees in connection with the structuring of this debt. The
Subordinated Debt is a direct obligation of CapStar Management and its
subsidiaries which own the hotel properties. The Subordinated Debt contains
covenants similar to those contained in the Credit Facility.

Management believes that the Company will have access to sufficient capital
resources to fund its operating and administrative expenses, to continue to
service its debt obligations and to acquire additional hotel properties.

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.

27
<PAGE>
THE COMPANY

CapStar is a hotel management and investment company which acquires,
renovates, repositions and manages hotels throughout the United States. CapStar
owns and manages 22 upscale, full-service Owned Hotels which contain 5,981 rooms
and manages an additional 31 Managed Hotels owned by third parties which contain
5,488 rooms. CapStar's portfolio of Owned Hotels and Managed Hotels includes 53
hotels which contain 11,469 rooms. The Company's business strategy is to 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. The Owned Hotels
are located in markets which have recently experienced strong economic growth,
including Albuquerque, Atlanta, Charlotte, Chicago, Cleveland, Denver, Houston,
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, Doubletree and Embassy Suites. For the year ended
December 31, 1996, on a pro forma basis, the operating performance of the Owned
Hotels (excluding the ten hotels purchased since September 30, 1996) improved
significantly, as demonstrated by the following table:
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED DECEMBER
31,
----------------------
<S> <C> <C> <C>
PERCENTAGE
1995 1996 INCREASE
---------- ---------- -------------

<CAPTION>
<S> <C> <C> <C>
Revenues (in thousands).............................. $ 109,798 $ 118,329 7.8%
Gross Operating Profit (in thousands)................ $ 30,947 $ 37,909 22.5%
Average Occupancy.................................... 72.4% 72.9% 0.7%
ADR.................................................. $ 75.25 $ 83.82 11.4%
RevPAR............................................... $ 54.44 $ 61.11 12.3%
</TABLE>

The Company completed its IPO in August 1996. Since the IPO, the Company has
significantly expanded its portfolio by completing the purchase of ten upscale,
full-service hotels containing 2,465 rooms for an aggregate Total Acquisition
Cost of $181.6 million. The Company has also entered into a contract with
Highgate Hotels to acquire a portfolio of six upscale, full-service hotels
containing 1,358 rooms for a Total Acquisition Cost of approximately $105.2
million. See "Recent Developments--The Highgate Portfolio." The Company has also
entered into contracts to acquire the Additional Acquisitions containing 367
rooms for a Total Acquisition Cost of $26.7 million. In addition to the
acquisition of these hotels, the Company has entered into a joint venture to
acquire the 456-room Holiday Inn Riverfront in St. Louis, Missouri and has
entered into three new long-term management agreements.

During the year ended December 31, 1996, the Company spent a total of $21.6
million on renovations at the Owned Hotels and intends to spend an additional
$21.7 million completing its renovation programs (including $8.4 million to
renovate and reposition the Highgate Portfolio and the Additional Acquisitions).
See "Special Note Regarding Forward--Looking Statements."

28
<PAGE>
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
5.5% of the Common Stock upon completion of the Offering. See "Principal
Stockholders."

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.

RECENT DEVELOPMENTS

POST-IPO ACQUISITIONS

At the time of the IPO, the Company owned 12 upscale, full-service hotels,
containing 3,516 rooms. Since the IPO, the Company has acquired ten additional
upscale, full-service Owned Hotels containing 2,465 rooms. These newly acquired
hotels are operated under nationally recognized brand names such as Hilton,
Doubletree, Embassy Suites and Holiday Inn. The Company expects to improve the
operating performance of these newly acquired hotels by implementing the
detailed management plans that have been created for each property as part of
its operating strategy. The Company believes that all of its post-IPO
acquisitions represent attractive investment opportunities because (i) they are
located in major metropolitan or growing secondary markets and are well-located
within these markets (ii) they were acquired at an average cost of approximately
$74,000 per room, which represents a more than a 30% discount to replacement
cost and (iii) they have attractive current returns and potential for
significant revenue and cash flow growth through implementation of the Company's
operating strategy.

THE HIGHGATE PORTFOLIO

29
<PAGE>
are convertible at the sellers' election into an equal number of shares of
Common Stock (or, at the Company's option, cash in an amount equal to the market
price of such shares) and (ii) 392,157 preferred OP Units ("Preferred OP
Units"), with a 6.5% cumulative annual preferred return and a liquidating
preference of $25.50 per OP Unit. The Preferred OP Units are convertible on or
after August 23, 1997 at the sellers' election into an equal number of shares of
Common Stock (or, at the Company's option, cash in an amount equal to the market
price of such shares) and redeemable after three years at the Company's election
for an amount equal to $25.50 per Preferred OP Unit (or, at the Company's
option, shares of Common Stock bearing a market price equal to such amount).

The Highgate Portfolio hotels are operated under nationally recognized brand
names including Sheraton, Doubletree, Radisson, Ramada and Holiday Inn, and are
located in Dallas, Indianapolis, Calgary and Vancouver. The Highgate Portfolio
enhances the Company's geographic diversity by expanding its portfolio into
Canada. In connection with the acquisition of the Highgate Portfolio, the
Company has entered into agreements to manage two additional hotels owned by
Highgate Hotels: the 414-room Pontchartrain-Crowne Plaza in Detroit, Michigan
and the 393-room Four Points Hotel in Suburban Atlanta. The Company believes
that the acquisition of the Highgate Portfolio and the establishment of a
strategic alliance with Highgate Hotels (one of the principals of which the
Company has agreed to nominate to a new seat on its board of directors) will
provide significant benefits to its on-going acquisition and corporate
development activities. A portion of the net proceeds from the Offering will be
used to consummate the acquisition of the Highgate Portfolio. The Company
expects to complete the acquisition of the Highgate Portfolio by April 1997.
There can be no assurance, however, that the closing will occur. See "Risk
Factors--Risks Associated with Expansion" and "Special Note Regarding Forward-
Looking Statements."

THE ADDITIONAL ACQUISITIONS

The Company has also entered into contracts to acquire the two Additional
Acquisitions: the 213-room Four Points Hotel in Cherry Hill, New Jersey for a
Total Acquisition Cost of $8.2 million and the 154-room Great Valley Sheraton in
Frazer, Pennsylvania for a Total Acquisition Cost of $18.5 million.

MANAGEMENT AGREEMENTS/JOINT VENTURES

In January 1997, the Company invested in a joint venture with Hallmark
Investment Corp. which owns the Holiday Inn Riverfront, located in downtown St.
Louis at the base of the Gateway Arch. In connection with the joint venture, the
Company has signed a long-term agreement to manage the 456-room property. Since
August 1996 the Company has entered into significant new long-term management
agreements with three other hotel owners. The Company expects to form joint
ventures and strategic alliances with institutional and private hotel owners to
invest in future acquisitions and sale and leaseback transactions, and to secure
additional fee management arrangements. See "Special Note Regarding
Forward-Looking Statements."

FINANCING ACTIVITIES

In September 1996, the Company entered into the $225 million Credit Facility
led by Bankers Trust, as agent, to fund post-IPO acquisitions, to repay
outstanding indebtedness and for general corporate purposes. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

In December 1996, the Company modified the terms of the Credit Facility to
increase the Company's permitted nonrecourse indebtedness from $25 million to
$50 million and to permit it to incur up to $100 million of subordinated
indebtedness. In December 1996, the Company borrowed the Subordinated Debt to
provide additional funding for acquisitions and for general corporate purposes.
See "Management's

30
<PAGE>
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

BUSINESS AND PROPERTIES

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

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 partners or
through equity contributions, sale and leasebacks 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 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 26 states across the nation and the District of
Columbia, with eight Hotels located in California, four in Colorado, three in
Georgia, three in Maryland, three in Texas, three in Virginia, three in
Washington, D.C., two in Arizona, two in Louisiana, two in Missouri, two in New
Jersey, two in New York, two in Pennsylvania and one Hotel each in 14 additional
states.

31
<PAGE>
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 revenue and cash flow. The
Company's ability to improve operations is demonstrated by the fact that RevPAR
at the Owned Hotels (excluding the ten hotels purchased since September 30,
1996) increased 12.3% from the year ended December 31, 1995 to the year ended
December 31, 1996, as compared to an increase of only 5.4% for the upscale,
full-service hotel segment as reported by Smith Travel Research over the
comparable period. For the year ended December 31, 1996, RevPAR at all of the
Owned Hotels (including the ten hotels purchased since September 30, 1996)
increased 10.1%

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 has 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 OP Units or Common Stock as an alternative to cash. 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

32
<PAGE>
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 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 toll-free 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 year ended
December 31, 1996, the Company spent a total of $21.6 million on renovations at
the Owned Hotels and currently intends to spend an additional $21.7 million
completing the renovation programs (including approximately $8.4 million to
renovate and reposition the Highgate Portfolio and the Additional Acquisitions).
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.

33
<PAGE>
The following chart summarizes certain information with respect to the
national franchise affiliations of the Hotels, the Highgate Portfolio and the
Additional Acquisitions:

<TABLE>
<CAPTION>
OWNED HOTELS, HIGHGATE PORTFOLIO
AND ADDITIONAL ACQUISITIONS MANAGED HOTELS
----------------------------------------- ---------------------------------------
NUMBER OF NUMBER OF
GUEST NUMBER OF % OF GUEST NUMBER OF % OF
FRANCHISE ROOMS HOTELS ROOMS ROOMS HOTELS ROOMS
- ------------------------------------------ ----------- --------------- ----------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Hilton.................................... 2,939 11 38.1% -- -- --%
Sheraton.................................. 1,162 4 15.0 -- -- --
Holiday Inn............................... 608 3 7.9 883 4 16.1
Radisson.................................. 507 2 6.6 126 1 2.3
Westin.................................... 496 1 6.4 -- -- --
Marriott.................................. 434 1 5.6 288 1 5.3
Holiday Select-Registered Trademark-...... 348 1 4.5 -- -- --
Doubletree................................ 294 1 3.8 208 1 3.8
Embassy Suites............................ 236 1 3.1 -- -- --
Independent............................... 214 2 2.8 830 6 15.1
Four Points-Registered Trademark-......... 213 1 2.8 589 2 10.7
Doubletree Guest
Suites-Registered Trademark-............. 137 1 1.8 -- -- --
Ramada.................................... 118 1 1.5 457 3 8.3
Best Western-Registered Trademark-........ -- -- -- 562 3 10.3
Crowne Plaza-Registered Trademark-........ -- -- -- 414 1 7.5
Days Inn-Registered Trademark-............ -- -- -- 277 2 5.1
Comfort Suites-Registered Trademark-...... -- -- -- 244 2 4.5
Clarion-Registered Trademark-............. -- -- -- 194 1 3.5
Quality Suites-Registered Trademark-...... -- -- -- 177 1 3.2
Residence Inn-Registered Trademark-....... -- -- -- 104 1 1.9
Quality Inn-Registered Trademark-......... -- -- -- 100 1 1.8
Holiday Inn
Express-Registered Trademark-............ -- -- -- 35 1 0.6
-- --
----- ----------- ----- ---------
7,706 30 100.0% 5,488 31 100.0%
-- --
-- --
----- ----------- ----- ---------
----- ----------- ----- ---------
</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-Registered Trademark-,
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-Registered Trademark- and
"TCBY"-Registered Trademark- 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.

34
<PAGE>
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-Registered Trademark-
and cc:Mail-Registered Trademark- 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 Hotel's daily occupancy,
ADR, and revenue from rooms, food and 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.

THE PROPERTIES

The Owned Hotels, the Highgate Portfolio and the Additional Acquisitions
feature, or after the Company's renovation programs have 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 travelers as well as banquets and receptions from the local
community.

35
<PAGE>
The following table sets forth certain information with respect to the Owned
Hotels, the Highgate Portfolio and the Additional Acquisitions for the year
ended December 31, 1996:
<TABLE>
<CAPTION>
PLANNED OR
COMPLETED
NUMBER OF RENOVATION
GUEST YEAR MONTH EXPENDITURE(1)
HOTEL LOCATION ROOMS BUILT ACQUIRED (000'S)
- ----------------------------------- -------------------------- ------------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C>
OWNED HOTELS
Orange County Airport Hilton....... Irvine, CA 290 1976 2/96 $ 2,006
Hilton Hotel....................... Sacramento, CA 326 1983 12/96 750
Santa Barbara Inn.................. Santa Barbara, CA 71 1959 12/96 450
Hilton Hotel....................... San Pedro, CA 226 1989 1/97 1,500
Holiday Inn........................ Colorado Springs, CO 201 1974 12/96 200
Sheraton Hotel..................... Colorado Springs, CO 502 1974 6/95 3,393
Embassy Suites Denver.............. Englewood, CO 236 1986 12/96 500
Embassy Row Hilton................. Washington, DC 195 1969 12/96 2,033
The Latham Hotel................... Washington, DC 143 1981 3/96 802
Westin Atlanta Airport(3).......... Atlanta, GA 496 1982 11/95 7,100
Radisson Hotel..................... Schaumburg, IL 202 1979 6/95 1,652
Hilton Hotel & Towers.............. Lafayette, LA 328 1981 12/96 249
Marriott Hotel..................... Somerset, NJ 434 1978 10/95 3,311
Doubletree Hotel................... Albuquerque, NM 294 1974 1/97 1,500
Sheraton Airport Plaza............. Charlotte, NC 226 1985 2/96 1,529
Holiday Inn........................ Cleveland, OH 237 1978 2/96 2,900
Hilton Hotel....................... Arlington, TX 310 1983 4/96 2,700
Southwest Hilton................... Houston, TX 293 1979 10/96 1,072
Westchase Hilton................... Houston, TX 295 1980 1/97 415
Salt Lake Airport Hilton........... Salt Lake City, UT 287 1980 3/95 1,823
Hilton Hotel....................... Arlington, VA 209 1990 8/96 1,500
Hilton Hotel....................... Bellevue, WA 180 1979 8/95 1,063
----- -------
Subtotal/Weighted Average--Owned Hotels 5,981 $ 38,448

HIGHGATE PORTFOLIO
Doubletree Guest Suites............ Indianapolis, IN 137 1987 4/97 $ 1,000
Holiday Inn Select................. Dallas, TX 348 1974 4/97 300
Radisson Hotel..................... Dallas, TX 305 1972 4/97 1,500
Holiday Inn Calgary Airport........ Calgary, Alberta 170 1981 4/97 350
Sheraton Hotel..................... Guildford, B.C. 280 1992 4/97 700
Ramada Vancouver Centre............ Vancouver, B.C. 118 1968 4/97 500
----- -------
Subtotal/Weighted Average--Highgate Portfolio 1,358 $ 4,350

ADDITIONAL ACQUISITIONS
Four Points Hotel.................. Cherry Hill, NJ 213 1991 3/97 $ 850
Great Valley Sheraton.............. Frazer, PA 154 1971 5/97 3,244
----- -------
Subtotal/Weighted Average--Additional Acquisitions 367 $ 4,094

Total/Weighted Average 7,706 $ 46,892
----- -------
----- -------

<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-------------------------------------
AVERAGE
HOTEL OCCUPANCY ADR REVPAR(2)
- ----------------------------------- ------------- --------- -----------
<S> <C> <C> <C>
OWNED HOTELS
Orange County Airport Hilton....... 66.0% $ 78.48 $ 51.80
Hilton Hotel....................... 71.7 75.89 54.41
Santa Barbara Inn.................. 85.1 129.86 110.51
Hilton Hotel....................... 62.3 67.23 41.88
Holiday Inn........................ 72.6 60.57 43.97
Sheraton Hotel..................... 70.1 65.95 46.23
Embassy Suites Denver.............. 74.1 102.57 76.00
Embassy Row Hilton................. 60.8 111.24 67.63
The Latham Hotel................... 72.0 108.17 77.88
Westin Atlanta Airport(3).......... 79.3 79.44 63.00
Radisson Hotel..................... 66.1 75.54 49.93
Hilton Hotel & Towers.............. 74.1 70.05 51.91
Marriott Hotel..................... 72.4 104.36 75.56
Doubletree Hotel................... 66.6 77.12 51.36
Sheraton Airport Plaza............. 70.8 83.97 59.45
Holiday Inn........................ 73.1 70.11 51.25
Hilton Hotel....................... 73.3 81.03 59.39
Southwest Hilton................... 53.9 72.17 38.90
Westchase Hilton................... 77.9 89.87 70.01
Salt Lake Airport Hilton........... 75.5 79.18 59.78
Hilton Hotel....................... 74.5 109.21 81.36
Hilton Hotel....................... 80.8 91.70 74.09
--- --------- -----------
Subtotal/Weighted Average--Owne 71.3% $ 83.02 $ 59.19
HIGHGATE PORTFOLIO
Doubletree Guest Suites............ 73.5% $ 79.53 $ 58.45
Holiday Inn Select................. 61.7 59.04 36.43
Radisson Hotel..................... 74.6 60.69 45.27
Holiday Inn Calgary Airport........ 59.3 53.09 31.48
Sheraton Hotel..................... 75.2 69.17 52.02
Ramada Vancouver Centre............ 79.4 70.40 55.90
--- --------- -----------
Subtotal/Weighted Average--High 69.8% $ 64.35 $ 44.92
ADDITIONAL ACQUISITIONS
Four Points Hotel.................. 61.8% $ 73.40 $ 45.36
Great Valley Sheraton.............. 72.0 88.80 63.94
--- --------- -----------
Subtotal/Weighted Average--Addi 66.1% $ 80.43 $ 53.16
Total/Weighted Average 70.8% $ 79.64 $ 56.39
--- --------- -----------
--- --------- -----------
</TABLE>

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

(1) Represents the total planned or completed capital expenditures at each
hotel. For the year ended December 31, 1996, $21.6 million had been spent
and an additional $21.7 million was planned.

(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.

36
<PAGE>
POST-IPO ACQUISITIONS

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.

SANTA BARBARA INN, SANTA BARBARA, CA. Built in 1959, the 71-room hotel is
located on the Pacific Coast Highway directly across from the Pacific Ocean and
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.

HILTON HOTEL, SAN PEDRO, CA. Built in 1989, the 226-room hotel is located
in Los Angeles County between Long Beach and Palos Verdes, approximately 12
miles south of Los Angeles International Airport. The hotel's facilities and
amenities feature over 14,000 square feet of banquet and meeting space, a
swimming pool, a spa, two tennis courts and a grill restaurant. San Pedro is
located within five miles of the Port of Long Beach and within two miles of the
Port of Los Angeles, which together handle nearly two-thirds of the Western
United States' cargo. Los Angeles County is currently experiencing increased
economic growth as it emerges from the recession of the early- and mid-1990s.
Upon acquisition in February 1997, the hotel was reflagged as a Hilton.

HOLIDAY INN, COLORADO SPRINGS, CO. Built in 1974 and renovated in 1990, the
201-room hotel is located on Interstate 25, approximately five miles north of
downtown Colorado Springs and approximately eight miles north of another 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 a rapidly expanding, young
population.

EMBASSY SUITES DENVER, DENVER, CO. Built in 1986, the 236-room hotel is
located in South Denver within a concentration of office and industrial parks
known as the Denver Tech Center. The hotel's facilities and amenities feature
over 5,000 square feet of banquet and meeting space, an indoor pool, an upgraded
fitness center, a business center, valet services, a gift shop and a restaurant.
Denver has experienced significant development and growth during the 1990s as
the economic and cultural center of the rapidly expanding Mountain region.

THE EMBASSY ROW HILTON, WASHINGTON, D.C. Built in 1969 and renovated in
1994, 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. Upon acquisition in December 1996, the
hotel was reflagged as a Hilton.

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.

37
<PAGE>
DOUBLETREE HOTEL, ALBUQUERQUE, NM. Built in 1975, the 294-room hotel is
located in downtown Albuquerque, adjacent to the Convention Center and the
subterranean Galleria Shopping Center. The hotel's facilities and amenities
feature over 10,000 square feet of meeting and banquet space, an outdoor heated
pool, an exercise room, a gift shop, an airline desk, two restaurants, two
lobbies and a garden foyer. The region has experienced consistent growth
throughout the 1990s, in part because of the increased presence of high
technology businesses in Albuquerque. The Company plans to spend $1.5 million on
renovations at the hotel.

SOUTHWEST HILTON, HOUSTON, TX. Built in 1981, the 293-room hotel is located
in the Southwest area of Houston on the Southwest Freeway, one of the city's
busiest roads. The hotel's facilities and amenities feature over 15,000 square
feet of banquet and meeting space, an outdoor pool, a fitness center, a business
center, valet services a gift shop and a restaurant. Houston is the nation's
fourth largest metro area with a population over 3.8 million and the region is a
national leader in economic growth and job growth. The Company plans to spend
$1.1 million on renovations at the hotel.

WESTCHASE HILTON, HOUSTON, TX. Built in 1981, the 295-room hotel is located
within blocks of the freeway to the Houston International Airport and convenient
to the commercial and retail concentration known as the Galleria area. The
hotel's facilities and amenities feature over 13,000 square feet of banquet and
meeting space, a landscaped outdoor pool with a deck and hot tub, a fitness
center, a beauty salon, a gift shop and a restaurant. Houston is the nation's
fourth largest metro area with a population over 3.8 million and the region is a
national leader in economic growth and job growth.

THE HIGHGATE PORTFOLIO

DOUBLETREE GUEST SUITES, INDIANAPOLIS, IN. Built in 1987, the 137-room
hotel is located on busy North Meridian Street on the north side of the suburb
of Carmel. The hotel is located within a commercial concentration of insurance
companies and national companies such as Lucent Technologies, Thompson Consumer
Electronics, GTE, Eli Lilly and Hewlett Packard. The hotel's facilities and
amenities feature over 1,000 square feet of banquet and meeting space, an
indoor/outdoor pool, a fitness center, a whirlpool, a gift shop and a
restaurant.

HOLIDAY INN SELECT, DALLAS, TX. Built in 1974 and renovated in 1988 and
1995, the 348-room hotel is located at the intersection of Interstate 35 and
Mockingbird Lane, within easy access to the market areas of Las Colinas,
Stemmons Corridor/Market Center, Love Field and Central Business
District/Convention Center. The hotel's facilities and amenities feature over
13,560 square feet of banquet and meeting space, an outdoor pool and sundeck, a
health club, a business center, a gift shop and a restaurant.

RADISSON HOTEL, DALLAS, TX. Built in 1972, the 305-room hotel is located on
West Mockingbird Lane, within easy access to Interstate 35 and the market areas
of Love Field, Stemmons Corridor/Market Center, Parkland/Medical Center and the
Central Business District/Convention Center. The hotel's facilities and
amenities feature over 16,000 square feet of banquet and meeting space, and
outdoor pool, a health club, two racquetball courts, a jogging track, sand
volleyball courts, a whirlpool, a sauna, a gift shop and two restaurants.

HOLIDAY INN CALGARY AIRPORT, CALGARY, ALBERTA. Built in 1981, the 170-room
hotel is located between Calgary's International Airport and central business
district, near such tourist attractions as the Calgary Zoo and Prehistoric Park,
Devonian Garden, the Saddledome (home of the NHL Calgary Flames), Stampede Park,
Canada Olympic Park, the Olympic Hall of fame, Heritage Park, Eau Clair Market
and the IMAX theatre. The hotel's facilities and amenities feature over 2,040
square feet of banquet and meeting space, an indoor pool, two saunas, guest
privileges at a nearby health club and a restaurant.

SHERATON HOTEL, GUILDFORD, B.C. Built in 1992, the 280-room hotel is
located in the Guildford Area of the City of Surrey, the geographic center of
the Greater Vancouver region. The hotel's facilities and amenities feature over
18,000 square feet of banquet and meeting space, an outdoor pool, an exercise

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<PAGE>
room, a sauna, a gift shop and a restaurant. Surrey has experienced significant
expansion in recent years and is a leader in economic growth and job growth
within the Province of British Columbia.

RAMADA VANCOUVER CENTRE, VANCOUVER, B.C. Built in 1968 and renovated in
1989 and 1994, the 118-room hotel is located on West Broadway, one block from
the Vancouver Hospital & Health Science Centre and minutes from downtown
Vancouver. Nearby tourist attractions include the Queen Elizabeth Theatre and
the Ford Centre for the Performing Arts, Vancouver International Airport, Canada
Place/ Convention Centre, B.C. Place, General Motors Place, Granville Island
Market, the University of British Columbia, Chinatown and Japantown.

THE ADDITIONAL ACQUISITIONS

FOUR POINTS HOTEL, CHERRY HILL, NEW JERSEY. Built in 1971, the 213-room
hotel is located on Route 70 East, off I-295, nine miles from the Philadelphia
Convention Center and near several major corporate office parks in the Cherry
Hill/Mount Laurel area. The hotel's facilities and amenities feature 16,288
square feet of banquet and meeting space, a large outdoor courtyard with a pool,
exercise room, two tennis courts, a gift shop, a Morgan's restaurant and a lobby
bar.

GREAT VALLEY SHERATON, FRAZER, PENNSYLVANIA. Built in 1991, the 154-room
hotel is located at the intersection of Route 202 and Lancaster Pike in historic
Chester County, Pennsylvania. The hotel's facilities and amenities feature 7,852
square feet of meeting and banquet space, an indoor pool, the White Horse Tavern
and Chesterfield's Piano Lounge. The "202 Corridor" has experienced significant
growth in recent years.

THE MANAGED HOTELS

The Company operates 31 Managed Hotels owned by third parties containing
5,488 rooms. Of the Managed Hotels, 23 are full-service properties, seven are
limited-service properties and one is an extended stay property. Of the Managed
Hotels, 25 are operated under nationally-recognized brand names and six are
independent properties. The brand names of the Managed Hotels include Sheraton,
Clarion, Holiday Inn and Best Western. 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 1996, the
Company's pro forma revenue from Management Agreements was $3.2 million
constituting 1.3% of the Company's total pro forma revenue for such period. No
single Management Agreement (or group of Management Agreements for hotels under
common ownership or control) currently accounts for more than 0.5% of the total
revenue of the Company 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.

39
<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, brand
affiliation, price, range of services and guest amenities offered and quality of
customer service and overall product.

EMPLOYEES

As of December 31, 1996, the Company employed approximately 6,200 persons,
of whom approximately 5,200 were compensated on an hourly basis. Approximately
65 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.

DOUBLETREE-Registered Trademark-, EMBASSY SUITES-Registered Trademark-,
HILTON-Registered Trademark- HOLIDAY INN-Registered Trademark-,
MARRIOTT-Registered Trademark-, RADISSON-Registered Trademark-,
SHERATON-Registered Trademark- AND WESTIN-Registered Trademark- ARE REGISTERED
TRADEMARKS OF THIRD PARTIES, NONE OF WHICH SHALL BE DEEMED AN ISSUER OR
UNDERWRITER OF THE SHARES OF COMMON STOCK OFFERED HEREBY NOR HAVE ANY OF SUCH
FRANCHISORS ENDORSED OR APPROVED THE OFFERING. SUCH FRANCHISORS 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 ANY SUCH
FRANCHISE LICENSE FOR CERTAIN OF THE COMPANY'S HOTELS IS NOT INTENDED AS, AND
SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY
ANY OF SUCH FRANCHISORS (OR ANY OF THEIR 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

40
<PAGE>
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."

THE OPERATING PARTNERSHIPS

THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE
PROVISIONS OF CAPSTAR MANAGEMENT'S LIMITED PARTNERSHIP AGREEMENT, A COPY OF
WHICH HAS BEEN FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS
PROSPECTUS IS A PART.

Substantially all of the Company's assets are currently held indirectly by
and operated through CapStar Management, the Company's subsidiary operating
partnership. The Company is the sole general partner of CapStar Management, and
the Company and CapStar LP Corporation, a wholly-owned subsidiary of the Company
("CapStar LP"), are the sole limited partners of CapStar Management. The
partnership agreement of CapStar Management gives the general partner full
control over the business and affairs of CapStar Management. The general partner
is also given the right, in connection with the contribution of property to
CapStar Management or otherwise, to issue additional partnership interests in
CapStar Management in one or more classes or series, with such designations,
preferences and participating or other special rights and powers (including
rights and powers senior to those of the existing partners) as the general
partner may determine.

In connection with its state tax planning, the Company expects to modify its
current corporate structure to create a second subsidiary operating partnership
("CapStar Management II"). A new wholly-owned subsidiary of the Company will be
the general partner of CapStar Management II and CapStar LP will be the sole
limited partner of CapStar Management II. The partnership agreement of CapStar
Management II will be substantially indentical to that of CapStar Management.
Following the formation of CapStar Management II, certain assets will be
transfered from CapStar Management to CapStar Management II and substantially
all of the Company's assets will be held indirectly by and operated through the
two operating partnerships.

In connection with the acquisition of the Highgate Portfolio, the Company
has agreed to issue limited partnership interests in the operating partnerships
to Highgate Hotels. The partnership agreements of CapStar Management and CapStar
Management II will provide for two classes of partnership interests, Common OP
Units and Preferred OP Units, and the partners of each of CapStar Management and
CapStar Management II will own the following aggregate numbers of such OP Units:
(i) the Company and CapStar LP Corporation--a number of Common OP Units equal to
the number of issued and outstanding shares of Common Stock (including those
issued in the Offering); and (ii) Highgate Hotels--809,523 Common OP Units and
392,157 Preferred OP Units. The Preferred OP Units will pay a 6.5% cumulative
annual preferred return, compounded quarterly to the extent not paid on a
current basis, and will be entitled to a liquidation preference of $25.50 per
Preferred OP Unit. All net income and capital proceeds earned by CapStar
Management and CapStar Management II, after payment of the annual preferred
return and, if applicable, the liquidation preference, will be shared by the
holders of the Common OP Units in proportion to the number of Common OP Units in
the relevant operating partnership owned by each such holder.

Each OP Unit held by Highgate Hotels will be convertible by the holder on or
after August 23, 1997 for one share of Common Stock of the Company (or, at the
Company's option, for cash in an amount equal to the market value of a share of
Common Stock). In addition, the Preferred OP Units will be redeemable by CapStar
Management at a price of $25.50 per Preferred OP Unit (or, at the Company's
option, for a number of shares of Common Stock having a value equal to such
redemption price) at any time after the third anniversary of the acquisition of
the Highgate Portfolio.

41
<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.................................... 46 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..................................... 41 Executive Vice President, Finance and Development
John Emery.......................................... 32 Treasurer and Secretary
Michael T. George................................... 38 Senior Vice President, Operations
D. Scott Livchak.................................... 42 Senior Vice President, Operations
Robert Gauthier..................................... 43 Senior Vice President, Operations
Daniel L. Doctoroff................................. 38 Director
Bradford E. Bernstein............................... 30 Director
William S. Janes.................................... 43 Director
Joseph McCarthy..................................... 64 Director
Edward L. Cohen..................................... 51 Director
Edwin T. Burton, III................................ 54 Director
Edward P. Dowd...................................... 54 Director
Mahmood Khimji...................................... 36 Proposed 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

42
<PAGE>
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.

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 1990 to 1995, Mr. George served as Vice President of Operations and
ultimately as Chief Operating Officer for Devon Hotels Ltd. in Montreal. From
1989 to 1990, Mr. George served as a General Manager and Vice President for
Radisson Hotels International, Inc. Prior to that, from 1986 to 1989, Mr. George
served in various capacities with Radisson Hotels, Hilton Hotels and Sheraton
Hotels.

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, 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., Payroll Transfers, Inc. and Caliber Collision
Centers, 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.

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<PAGE>
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 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.

MAHMOOD KHIMJI has served as Senior Vice President of Highgate Hotels, Inc.,
an owner and operator of hotel and commercial properties throughout North
America, since 1988. Prior to that, from 1986 to 1988, Mr. Khimji was an
associate at the law firm of Paul, Weiss, Rifkind, Wharton & Garrison. Mr.
Khimji serves as a Director of the Texas Hotel/Motel Association.

EXECUTIVE COMPENSATION

The following table sets forth all compensation paid by the Company during
1996 with respect to the Chief Executive Officer and the four most highly
compensated executive officers (the "Named Executive Officers").

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -------------
------------------------------------ SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- ----------------------------------------- ---------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Paul W. Whetsell......................... $ 215,081 $ -- $ 2,312 150,000 --
President, Chief Executive Officer
and Chairman of the Board
David E. McCaslin........................ 179,748 30,000 2,312 87,500 --
Chief Operating Officer and Director
John E. Plunket.......................... 185,691 10,000 -- 73,129 --
Executive Vice President, Finance and
Development
William M. Karnes........................ 154,549 30,000 -- 50,000 --
Senior Executive Vice President
and Chief Financial Officer
Michael T. George........................ 132,000 13,000 20,500 18,282 --
Senior Vice President, Operations
</TABLE>

44
<PAGE>
STOCK OPTION GRANTS

The following table sets forth certain information with respect to the
options granted to the Named Executive Officers during 1996.

OPTION GRANTS IN FISCAL YEAR 1996

<TABLE>
<CAPTION>
POTENTIAL
VALUE AT ASSUMED
ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN OR EXPIRATION --------------------------
NAME GRANTED(1) 1996 FISCAL YEAR BASE PRICE DATE 5% 10%
- ----------------------- ----------- ----------------- ------------- ------------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Paul W. Whetsell....... 150,000 20.1% $ 18 August 20, 2006 $ 1,698,015 $ 4,303,105
David E. McCaslin...... 87,500 11.7 18 August 20, 2006 990,509 2,510,144
John E. Plunket........ 73,129 9.8 18 August 20, 2006 827,828 2,097,878
William M. Karnes...... 50,000 6.7 18 August 20, 2006 566,005 1,434,368
Michael T. George...... 18,282 2.5 18 August 20, 2006 206,954 524,462
</TABLE>

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

(1) All of these options vest in equal installments over three years except
10,000 of the options granted to Mr. Plunket which vested immediately upon
their grant.

(2) In accordance with rules of the Securities and Exchange Commission, these
amounts are the hypothetical gains or "option spreads" that would exist for
the respective options based on assumed rates of annual compound stock price
appreciation of 5% and 10% from the date the options were granted over the
full option term.

COMPENSATION OF DIRECTORS

Directors who are not employees of the Company ("Independent Directors") are
paid an annual fee of $12,000. In addition, each Independent Director is 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 do not receive any fees for their
service on the Board or a committee thereof. The Company reimburses directors
for their out-of-pocket expenses in connection with their service on the Board.
In connection with the IPO, each Independent Director was granted options to
purchase 5,000 shares of Common Stock at the IPO price of $18 per share. 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 in equal installments over a period of
three years from the date of grant. Any Independent Director who ceases to be a
director will forfeit the right to receive any options not previously vested or
granted.

COMMITTEES

The Board currently has an Audit Committee, a Compensation Committee and an
Investment Committee. The Audit Committee consists of three Independent
Directors. The Audit Committee makes recommendations concerning the engagement
of independent public accountants, reviews with the independent public
accountants the plans and results of the audit engagement, approves professional
services provided by the independent public accountants, review the independence
of the independent public accountants, considers the range of audit and
non-audit fees and reviews the adequacy of the Company's internal accounting
controls. The Compensation Committee consists of three Independent Directors and
determines compensation of the Company's executive officers and administers the
Company's Equity Incentive Plan (as defined below). The Investment Committee
consists of the Chairman of the Board and

45
<PAGE>
three Independent Directors, and reviews and approves investments proposed to be
made by the Company.

COMPENSATION PLANS

MANAGEMENT BONUS PLAN. The Company has established a management bonus plan
(the "Management Bonus Plan") under which certain officers and employees of the
Company, including the Named Executive Officers, are eligible to receive cash
bonuses based upon the achievement of predetermined corporate and individual
goals. Bonuses awarded under the Management Bonus Plan may not exceed 66% of the
officer or employee's annual base salary. The Management Bonus Plan is
administered by the Compensation Committee.

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.

Common Stock purchased under the Stock Purchase Plan is held in custodial
accounts until sold or distributed at the participant's request. The custodian
may charge a fee for the execution of any such sale or for the delivery of share
certificates. The participant may not elect to purchase stock under the Stock
Purchase Plan for three months after a withdrawal or sale of Common Stock under
the Stock Purchase Plan. Shares purchased under the Stock Purchase Plan may not
be sold for six months after their purchase. Any cash dividends paid on Common
Stock held in a participant's account will be reinvested in additional Common
Stock (at 100% of fair market value). Non-cash distributions on Common Stock
held in a participant's account will be distributed to the participant.

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.

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<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.

In connection with the IPO, the Company granted certain executive officers
and other members of management options to purchase up to 745,254 shares of
Common Stock at the IPO price of $18 per share. Certain of these options were
exercisable immediately upon their grant, while the remaining options 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 of the Company. The Compensation

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<PAGE>
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
his contract for an additional year at the end of its initial term (which ends
December 31, 1999) or any

48
<PAGE>
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.

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<PAGE>
PRINCIPAL STOCKHOLDERS

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 5,000,000 shares of Common Stock by the Company in the Offering by (i) all
persons known by the Company to own beneficially more than 5% of the Common
Stock, (ii) each director who is a stockholder, (iii) each of the Named
Executive Officers, and (iv) all directors and executive officers as a group.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OFFERING OWNED AFTER OFFERING
-------------------------- --------------------------
NAME & ADDRESS OF BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE
- ----------------------------------------------------------------- --------- --------------- --------- ---------------
<S> <C> <C> <C> <C>
Acadia Partners, L.P.(1)....................................... 1,426,102 11.2% 1,426,102 8.0%
RCM Capital Management, L.L.C.(2).............................. 1,424,500 11.2 1,424,500 8.0
LaSalle Advisors Limited Partnership and ABKB/LaSalle
Securities Limited Partnership (3)........................... 1,154,700 9.1 1,154,700 6.5
Franklin Resources, Inc.(4).................................... 987,500 7.7 987,500 5.6
Paul W. Whetsell(5)............................................ 970,503 7.6 970,503 5.5
David E. McCaslin(6)........................................... 472,236 3.7 472,236 2.7
John E. Plunket(6)............................................. 462,729 3.6 462,729 2.6
William M. Karnes(7)........................................... 0 -- 0 --
John Emery(7).................................................. 0 -- 0 --
Michael T. George(7)........................................... 0 -- 0 --
D. Scott Livchak(7)............................................ 0 -- 0 --
Robert Gauthier(7)............................................. 0 -- 0 --
Daniel L. Doctoroff(7)......................................... 0 -- 0 --
Bradford E. Bernstein(7)....................................... 0 -- 0 --
William S. Janes(7)............................................ 0 -- 0 --
Joseph McCarthy(7)............................................. 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 7.6% 980,010 5.5%
</TABLE>

- --------------------------
(1) The business address of Acadia Partners, L.P. is 201 Main Street, Suite
3100, Fort Worth, TX 76102. Includes 1,373,034 shares owned by Acadia
Partners, L.P. and 53,068 shares owned by Cherwell Investors, Inc.
("Cherwell"), a wholly owned subsidiary of Acadia Partners. 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 chart, above. The number of
shares set forth as being owned by Acadia Partners, L.P. in the Principal
Stockholders 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. ("Oak Hill Partners"), which is the investment advisor
to Acadia Partners, L.P., is the general partner of each of OHP and OHP II.

(2) The business address of RCM Capital Management, L.L.C. ("RCM Capital") is
Four Embarcadero Center, Suite 2900, San Francisco, CA 94111. The Managing
Agent of RCM Capital is RCM Limited L.P. ("RCM Limited"). The General
Partner of RCM Limited is RCM General Corporation ("RCM General"). As such,
RCM Limited and RCM General may be deemed to beneficially own such shares
within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934,
as amended ("Rule 13d-3"). In addition, RCM Capital is a wholly-owned
subsidiary of Dresdner Bank AG ("Dresdner"). As such, Dresdner Bank also may
be deemed to beneficially own the shares held by RCM Limited.

(3) The business address of La Salle Advisors Limited Partnership and
ABKB/LaSalle Securities Limited Partnership (collectively, the "LaSalle
Partnerships") is 11 South LaSalle Street, Chicago, IL 60603. The LaSalle
Partnerships are registered investment advisors and may be deemed to
beneficially own such shares within the meaning of Rule 13d-3. William K.
Morrill, Jr. and Keith R. Pauley are employees of the LaSalle Partnerships
and, in such capacity, also may be deemed to beneficially own such shares
within the meaning of Rule 13d-3.

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(4) The business address of Franklin Resources, Inc. ("FRI") is 777 Mariners
Island Blvd., San Mateo, CA 94404. Such shares are owned by one or more open
or closed-ended investment companies or other managed accounts which are
advised by direct or indirect advisory subsidiares of FRI. Such advisory
subsidiaries may be deemed to beneficially own such shares within the
meaning of Rule 13d-3. Charles B. Johnson and Rupert H. Johnson, Jr. each
own in excess of 10% of FRI and, as such, also may be deemed to own such
shares held, directly or indirectly, by FRI within the meaning of Rule
13d-3.

(5) Includes shares held by entities over which Mr. Whetsell has beneficial
ownership within the meaning of Rule 13d-3.

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

(7) 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.

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 Hotel 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 ("Atlanta Partners") that owns the
Westin Atlanta Airport. 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 two
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 four 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 1996, the Company received approximately $824,070 in
management fees from those Managed Hotels in which Messrs. Whetsell and McCaslin
own an equity interest, including approximately $554,896 in management fees from
the Affiliated Owners. Under the terms of their employment agreements, Messrs.
Whetsell and McCaslin are prohibited from hereafter

51
<PAGE>
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 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 were repaid in September 1996.

SUBORDINATED DEBT

One member of the syndicate of lenders of the $50 million Subordinated Debt
is Oak Hill Securities Fund, L.P. ("Oak Hill Securities"). The investment
advisor to Oak Hill Securities is Oak Hill Advisors, Inc., one of the principal
stockholders of which is Daniel L. Doctoroff, a director of the Company. Mr.
Doctoroff is also a principal stockholder of Oak Hill Partners which is the
investment advisor to Acadia Partners, a principal stockholder of the Company.
The Company has borrowed an aggregate of $25 million from Oak Hill Securities.
See "Principal Stockholders."

SHARES AVAILABLE FOR FUTURE SALE

Upon consummation of the Offering (assuming the over-allotment option is not
exercised), the Company will have 17,754,321 shares of Common Stock outstanding.
14,250,000 of these shares, 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. See "Description of Capital
Stock--Registration Rights."

In general, under Rule 144, if one year has 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 two 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 Company has 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
980,010 shares of Common

52
<PAGE>
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. There can be no
assurance that Lehman will not grant any such consent.

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. The Board granted 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 filed 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 generally will be available for sale in the open
market. See "Management--Stock Option Grants."

In connection with the acquisition of the Highgate Portfolio, the Company
will issue to the sellers 809,523 Common OP Units and 392,157 Preferred OP
Units. Within certain limitations, such OP Units are convertible at the sellers'
election into an equal number of shares of Common Stock (or, at the Company's
election, cash in an amount equal to the market price of such shares). See
"Recent Developments--The Highgate Portfolio." Following the closing of the sale
of the Highgate Portfolio, one of the sellers may enter into transactions, with
an affiliate of Lehman acting as counter-party, to hedge the value of the OP
Units received by such seller. In order to offset its exposure to such hedging
transactions, such affiliate of Lehman may engage in other market transactions,
including short sales of 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
the conversion of OP Units, or the perception that such sales, exercises or
conversions could occur, will have on the market price prevailing from time to
time. Sales of substantial amounts of such Common Stock in the public market
could have an adverse effect on the market price of the Common Stock. See "Risk
Factors--Shares Available for Future Sale."

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 12,754,321 shares
of Common Stock and no shares of Preferred Stock are outstanding. Upon
completion of the Offering, 17,754,321 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

53
<PAGE>
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.

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

The Company has entered into registration rights agreements with (i) persons
receiving shares of Common Stock in connection with the Formation Transactions
and (ii) the principals of Highgate Hotels receiving OP Units which, under
certain circumstances, may be converted into Common Stock (the "Registration
Rights Agreements"), pursuant to which the Company has agreed (with certain
limitations) to register for sale any shares of Common Stock that are held by
the parties thereto (collectively, the "Registrable Securities"). The
Registration Rights Agreements provide 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

54
<PAGE>
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. Certain management-controlled entities that received 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 date of the IPO,
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.

The Registration Rights Agreements also provide that, with certain limited
exceptions, in the event the Company proposes to file a registration statement
with respect to an offering of any class of equity securities 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 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.

55
<PAGE>
UNDERWRITING

The Underwriters of the Offering of Common Stock (the "Underwriters"), for
whom Lehman, BT Securities Corporation, Goldman, Sachs & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Montgomery Securities 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 "Underwriting Agreement"), to purchase from the
Company, and the Company has agreed to sell to the Underwriters, the aggregate
number of shares of Common Stock set forth opposite their respective names
below.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Lehman Brothers Inc.............................................................. 833,500
BT Securities Corporation........................................................ 833,300
Goldman, Sachs & Co.............................................................. 833,300
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................................... 833,300
Montgomery Securities............................................................ 833,300
Smith Barney Inc................................................................. 833,300
----------
Total............................................................................ 5,000,000
----------
----------
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
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 Underwriters pursuant to the Underwriting
Agreement, all the shares of Common Stock agreed to be purchased by the
Underwriters pursuant to the Underwriting Agreement, must be so purchased.

The Company has been advised that the Underwriters 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 Underwriters) at such public offering price less a selling
concession not to exceed $1.18 per share. The selected dealers may reallow a
concession not to exceed $.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 Underwriters.

The Company has agreed to indemnify the Underwriters 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 has granted to the Underwriters an option to purchase up to an
additional 750,000 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 option
may be exercised at any time within 30 days after the date of the Underwriting
Agreement. To the extent the Underwriters exercise such option, each of the
Underwriters will be committed, subject to certain conditions, to purchase a
number of the additional shares of Common Stock proportionate to such
Underwriter's initial commitment as indicated in the preceding table.

In connection with the Offering, the Company has 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 180 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."

56
<PAGE>
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.

Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters to
bid for and purchase shares of Common Stock. As an exception to these rules, the
Representatives are permitted to engage in certain transactions that stabilize
the price of the Common Stock. Such transactions may consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.

If the Underwriters create a short position in the Common Stock in
connection with the offering, (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), the Representatives
may reduce the short position by purchasing Common Stock in the open market. The
Representatives may elect to reduce any short position by exercising all or part
of the over-allotment option described herein.

The Representatives also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of the Offering.

In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the offering.

Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.

In connection with the formation of EquiStar, CapStar Management made loans
to certain directors and executive officers of the Company. Lehman has extended
loans to these directors and executive officers to repay CapStar Management all
amounts previously outstanding under the loans. The loans from Lehman, which
currently total approximately $1.1 million, are 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.

In September 1996, the Company entered into the $225 million Credit Facility
led by Bankers Trust, an affiliate of BT Securities Corporation, one of the
Representatives. The Credit Facility bears interest at a rate of LIBOR plus 2%
per annum. The Company expects that it may use as much as approximately $31.4
million of the proceeds of the Offering to retire a portion of the approximately
$191.1 million currently outstanding under the Credit Facility. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." In addition, an
affiliate of Bankers Trust owns approximately 337,500 shares of Common Stock.

Because an affiliate of BT Securities Corporation may receive more than 10%
of the net proceeds of the Offering in repayment of outstanding balances under
the Credit Facility, the Offering is being conducted in accordance with Rule
2710(c)(8) of the Conduct Rules of the National Association of Securities
Dealers, Inc.

57
<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.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements under the headings "Prospectus Summary," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," "The
Company," "Recent Developments," "Business and Properties" and elsewhere in this
Prospectus constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performances or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, the following: the ability of the Company to successfully
implement its acquisition strategy and operating strategy; the Company's ability
to manage rapid expansion; changes in economic cycles; competition from other
hospitality companies; and changes in the laws and government regulations
applicable to the Company.

58
<PAGE>
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.

59
<PAGE>
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
CAPSTAR HOTEL COMPANY
Independent Auditors' Report......................................................... F-3
Consolidated Balance Sheets as of December 31, 1996 and 1995......................... F-4
Consolidated Statements of Operations for the years ended December 31, 1996 and
1995............................................................................... F-5
Consolidated Statements of Stockholders' Equity and Partners' Capital for the years
ended December 31, 1996 and 1995................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and
1995............................................................................... F-7
Notes to the Consolidated Financial Statements....................................... F-8

CAPSTAR MANAGEMENT
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

HIGHGATE PORTFOLIO
Independent Auditors' Report......................................................... F-24
Combined Balance Sheet as of December 31, 1996....................................... F-25
Combined Statement of Operations for the year ended December 31, 1996................ F-26
Combined Statement of Owners' Deficit for the year ended December 31, 1996........... F-27
Combined Statement of Cash Flows for the year ended December 31, 1996................ F-28
Notes to Combined Financial Statements............................................... F-29

ORANGE COUNTY AIRPORT HILTON
Independent Auditors' Report......................................................... F-32
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-33
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-34
Notes to Financial Statements........................................................ F-35

GEORGETOWN LATHAM HOTEL
Independent Auditors' Report......................................................... F-37
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-38
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-39
Notes to Financial Statements........................................................ F-40

CHARLOTTE SHERATON AIRPORT PLAZA
Independent Auditors' Report......................................................... F-42
Statements of Operations for the period from January 1, 1996 to February 2, 1996
(date of the acquisition by EquiStar Hotel Investors, L.P.) and the years ended
December 31, 1995, 1994 and 1993................................................... F-43
</TABLE>

F-1
<PAGE>
<TABLE>
<S> <C>
Statement 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-44
Notes to Financial Statements........................................................ F-45

ARLINGTON HILTON HOTEL
Independent Auditors' Report......................................................... F-47
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-48
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-49
Notes to Financial Statements........................................................ F-50

BALLSTON HOTEL LIMITED PARTNERSHIP (HILTON HOTEL, ARLINGTON, VA)
Independent Auditors' Report......................................................... F-52
Balance Sheets as of June 30, 1996 and December 31, 1995 and 1994.................... F-53
Statements of Operations for the six months ended June 30, 1996 and the years ended
December 31, 1995, 1994 and 1993................................................... F-54
Statements of Partners' Deficit for the six months ended June 30, 1996 and the years
ended December 31, 1995, 1994 and 1993............................................. F-55
Statements of Cash Flows for the six months ended June 30, 1996 and the years ended
December 31, 1995, 1994 and 1993................................................... F-56
Notes to Financial Statements........................................................ F-57

MUBEN HOTELS
Independent Auditors' Report......................................................... F-62
Combined Balance Sheets as of September 30, 1996, December 31, 1995 and 1994......... F-63
Combined Statements of Operations for the nine months ended September 30, 1996 and
the years ended December 31, 1995 and 1994......................................... F-64
Combined Statements of Owners' Capital for the nine months ended September 30, 1996
and the years ended December 31, 1995 and 1994..................................... F-65
Combined Statements of Cash Flows for the nine months ended September 30, 1996 and
the years ended December 31, 1995 and 1994......................................... F-66
Notes to Combined Financial Statements............................................... F-67
</TABLE>

F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors
CapStar Hotel Company:

We have audited the accompanying consolidated balance sheets of CapStar
Hotel Company and subsidiaries (formerly EquiStar Hotel Investors, L.P. and
CapStar Management Company, L.P., the "Company") as of December 31, 1996 and
1995 and the related consolidated statements of operations, stockholders' equity
and partners' capital, and cash flows for the years then ended, and the
supplementary schedule. These consolidated financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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 financial statements referred to above present fairly,
in all material respects, the financial position of CapStar Hotel Company and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years ended December 31, 1996 and 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.
February 14, 1997

F-3
<PAGE>
CAPSTAR HOTEL COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................................................. $ 21,784 6,832
Accounts receivable, net of allowance for doubtful accounts of $189 in 1996 and $91 in
1995.................................................................................... 8,109 2,749
Deposits, including restricted deposits of $2,023 in 1995................................. 3,167 3,515
Prepaid expenses and other................................................................ 1,454 265
Inventory................................................................................. 1,321 174
---------- ----------
Total current assets...................................................................... 35,835 13,535
Property and equipment:
Land.................................................................................... 58,127 12,768
Buildings............................................................................... 248,376 84,545
Furniture, fixtures and equipment....................................................... 32,698 11,354
Construction-in-progress................................................................ 3,891 2,216
---------- ----------
343,092 110,883
Accumulated depreciation................................................................ (8,641) (1,757)
---------- ----------
Total property and equipment, net......................................................... 334,451 109,126
Deferred costs, net of accumulated amortization of $802 in 1996 and $271 in 1995.......... 8,225 2,638
Investments in partnerships............................................................... 650 --
Restricted cash........................................................................... -- 7,351
---------- ----------
$ 379,161 132,650
---------- ----------
---------- ----------
LIABILITIES, MINORITY INTEREST, STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
Accounts payable.......................................................................... $ 4,125 2,329
Accrued expenses and other liabilities.................................................... 10,737 4,626
Income tax payable........................................................................ 1,436 --
Long-term debt, current portion........................................................... 498 2,668
---------- ----------
Total current liabilities................................................................. 16,796 9,623
Deferred tax liability.................................................................... 1,181 --
Long-term debt............................................................................ 199,863 73,574
---------- ----------
Total liabilities......................................................................... 217,840 83,197
Minority interest......................................................................... 606 815
Partners' capital......................................................................... -- 48,638
Common stock (49,000,000 shares authorized, at $.01 par value, 12,754,321 issued and
outstanding at December 31, 1996)....................................................... 128 --
Paid in capital........................................................................... 158,533 --
Retained earnings......................................................................... 2,054 --
---------- ----------
$ 379,161 132,650
---------- ----------
---------- ----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>
CAPSTAR HOTEL COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Revenue from hotel operations:
Rooms.................................................................................... $ 68,498 14,456
Food and beverage........................................................................ 30,968 5,900
Other operating departments.............................................................. 5,981 1,571
Hotel management and other fees............................................................ 4,345 4,436
---------- ---------
Total revenue.............................................................................. 109,792 26,363
---------- ---------
Hotel operating expenses by department:
Rooms.................................................................................... 17,509 4,190
Food and beverage........................................................................ 24,589 4,924
Other operating departments.............................................................. 2,513 513
Undistributed operating expenses:
Administrative and general............................................................... 20,448 8,078
Property operating costs................................................................. 12,586 2,624
Property taxes, insurance and other...................................................... 4,565 1,310
Depreciation and amortization............................................................ 8,248 2,097
---------- ---------
Total operating expenses................................................................... 90,458 23,736
---------- ---------
Net operating income....................................................................... 19,334 2,627
Interest expense........................................................................... 12,784 2,673
Interest income............................................................................ (438) (259)
---------- ---------
Income before minority interest, income taxes, and extraordinary loss...................... 6,988 213
Minority interest.......................................................................... 39 18
---------- ---------
Income before income taxes and extraordinary loss.......................................... 7,027 231
Income taxes............................................................................... 2,674 --
---------- ---------
Income before extraordinary loss........................................................... 4,353 231
Extraordinary loss on early extinguishment of debt, net of tax benefit of $1,304 for
1996..................................................................................... (1,956) (888)
---------- ---------
Net income (loss).......................................................................... $ 2,397 (657)
---------- ---------
---------- ---------
Earnings per share:
Primary
Income before extraordinary loss....................................................... $ 0.31 --
Extraordinary loss..................................................................... (0.15) --
---------- ---------
Net income............................................................................. 0.16 --
---------- ---------
---------- ---------
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>
CAPSTAR HOTEL COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN RETAINED GENERAL LIMITED
SHARES AMOUNT CAPITAL EARNINGS PARTNERS PARTNERS TOTAL
------------ ----------- ---------- ----------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
COMMON STOCK
$.01 PAR VALUE
Initial capital contributions
on January 12, 1995.......... -- $ -- -- -- 89 1,684 $ 1,773
Capital contributions.......... -- -- -- -- 2,431 46,194 48,625
Capital distributions.......... -- -- -- -- (1) (115) (116)
Net loss for the year ended
December 31, 1995............ -- -- -- -- (87) (570) (657)
------------ ----- ---------- ----------- --------- ---------- ----------
-- -- -- -- 2,432 47,193 49,625
Less--notes receivable from
management for capital
contributions................ -- -- -- -- -- (987) (987)
------------ ----- ---------- ----------- --------- ---------- ----------
Partners' capital at December
31, 1995..................... -- -- -- -- 2,432 46,206 $ 48,638
------------ ----- ---------- ----------- --------- ---------- ----------
Capital distributions.......... -- -- -- -- (2) (170) (172)
Repayment of notes receivable
from management.............. -- -- -- -- -- 987 987
Net income for period from
January 1, 1996 through
August 19, 1996.............. -- -- -- -- 45 298 343
------------ ----- ---------- ----------- --------- ---------- ----------
Partners' capital at August 19,
1996......................... -- -- -- -- 2,475 47,321 49,796
Shares sold on August 20,
1996......................... 6,750,000 68 110,044 -- -- -- 110,112
Shares issued for partners'
capital on August 20, 1996... 6,004,321 60 49,736 -- (2,475) (47,321) --
Deferred tax liability assumed
from partners on August 20,
1996......................... -- -- (1,247) -- -- -- (1,247)
Net income for period from
August 20, 1996 through
December 31, 1996............ -- -- -- 2,054 -- -- 2,054
------------ ----- ---------- ----------- --------- ---------- ----------
Stockholders' equity at
December 31, 1996............ 12,754,321 $ 128 158,533 2,054 -- -- $ 160,715
------------ ----- ---------- ----------- --------- ---------- ----------
------------ ----- ---------- ----------- --------- ---------- ----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>
CAPSTAR HOTEL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................................................... $ 2,397 (657)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization......................................................... 8,248 2,097
Loss on early extinguishment of debt.................................................. 3,260 618
Minority interest in consolidated subsidiary.......................................... (39) (18)
Changes in working capital:
Accounts receivable, net............................................................ (5,360) (2,749)
Deposits, prepaid expenses and other, and inventory................................. (4,011) (1,889)
Accounts payable.................................................................... 1,797 2,329
Accrued expenses and other liabilities.............................................. 5,711 4,626
Income taxes payable................................................................ 1,436 --
Deferred tax liability.............................................................. (66) --
---------- ----------
Net cash provided by operating activities................................................. 13,373 4,357
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment..................................................... (231,885) (109,223)
Purchases of investments in partnerships................................................ (650) --
Purchases of minority interest.......................................................... (67) --
Release of (additions to) restricted cash for capital improvements and other, net....... 7,351 (7,351)
---------- ----------
Net cash used by investing activities..................................................... (225,251) (116,574)
---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt............................................................ 372,778 98,058
Payments on long-term debt, line of credit, and capital leases.......................... (248,387) (23,133)
Release of (additions to) restricted deposits for hedge agreement....................... 2,559 (2,023)
Deferred costs.......................................................................... (10,943) (3,000)
Capital contributions................................................................... -- 50,250
Repayments from (loans to) management................................................... 987 (987)
Net proceeds from issuance of common stock.............................................. 110,112 --
Capital distributions................................................................... (172) (116)
Distributions to minority interests..................................................... (104) --
---------- ----------
Net cash provided by financing activities................................................. 226,830 119,049
---------- ----------
Net increase in cash and cash equivalents................................................. 14,952 6,832
Cash and cash equivalents at beginning of year............................................ 6,832 --
---------- ----------
Cash and cash equivalents at end of year.................................................. $ 21,784 6,832
---------- ----------
---------- ----------
Supplemental disclosure of cash flow information:
Interest paid........................................................................... $ 12,105 2,383
Income taxes paid....................................................................... 807 --
Capitalized interest costs.............................................................. 461 67
Capital lease additions................................................................. 324 721
Deferred financing fees not yet paid.................................................... -- 596
Prepaid expenses and property contributed by limited partner............................ -- 148
---------- ----------
---------- ----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-7
<PAGE>
CAPSTAR HOTEL COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

1. ORGANIZATION

The corporate structure of CapStar Hotel Company and its subsidiaries
(collectively, the "Company") was formed pursuant to a Formation Agreement,
dated June 20, 1996 (the "Formation Agreement"). As a result of the transactions
discussed in Note 3, the consolidated financial statements of the Company as of
December 31, 1996 and 1995, include the historical results of the Company's
predecessor entities, EquiStar Hotel Investors, L.P. and subsidiaries
(collectively, "EquiStar") and CapStar Management Company, L.P. ("CapStar
Management").

The principal activity of the Company is to acquire, renovate, reposition
and manage upscale, full-service hotels. At December 31, 1996, the Company owned
nineteen hotels and managed 27 other hotels on the behalf of third party and
affiliate owners. At December 31, 1996, the owned hotels consisted of:

<TABLE>
<CAPTION>
ACQUISITION DATE NAME ROOMS
- --------------------------------- ------------------------------------------------- -----------
<S> <C> <C>
March 3, 1995.................... Salt Lake Airport Hilton, UT 287
June 30, 1995.................... Radisson Hotel, Schaumburg, IL 202
June 30, 1995.................... Sheraton Hotel, Colorado Springs, CO 502
August 4, 1995................... Hilton Hotel, Bellevue, WA 180
October 3, 1995.................. Marriott Hotel, Somerset, NJ 434
November 15, 1995................ Westin Atlanta Airport, GA 496
February 2, 1996................. Sheraton Airport Plaza, Charlotte, NC 226
February 16, 1996................ Holiday Inn, Cleveland, OH 237
February 22, 1996................ Orange County Airport Hilton, Irvine, CA 290
March 8, 1996.................... The Latham Hotel, Washington, DC 143
April 17, 1996................... Hilton Hotel, Arlington, TX 310
August 23, 1996.................. Hilton Hotel, Arlington, VA 209
October 31, 1996................. Southwest Hilton, Houston, TX 293
December 12, 1996................ Embassy Suites, Denver, CO 236
December 17, 1996................ Hilton Hotel, Sacramento, CA 326
December 17, 1996................ Santa Barbara Inn, CA 71
December 17, 1996................ Holiday Inn, Colorado Springs, CO 201
December 17, 1996................ Embassy Row Hilton, Washington, DC 195
December 17, 1996................ Hilton Hotel & Towers, Lafayette, LA 328
</TABLE>

Separate wholly-owned limited liability companies ("LLCs") or limited
partnerships were established to directly own the above hotels. However, for the
Westin Atlanta Airport, LLCs were established to purchase and hold the Company's
general and limited partner interest in the partnership that owns the hotel (the
"Atlanta Partnership"). At December 31, 1996 and 1995, the Company had a 1%
general partner interest and an 85.2% and 84.6% limited partner interest in the
Atlanta Partnership, respectively.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION--All material intercompany transactions and
balances have been eliminated in the consolidation of the Company for 1996. The
accounts of EquiStar and CapStar Management have been combined in the 1995
financial statements as the Partnerships were under common ownership. All
material intercompany transactions and balances are eliminated in the
combination for 1995.

F-8
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.

DEPOSITS--Deposits primarily represent refundable amounts escrowed during
the negotiation of potential hotel acquisitions. Additionally, certain amounts
held for future hotel renovations and the amount held in escrow related to a
hedge agreement (see Note 5) were recorded as deposits at December 31, 1995.

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.

PROPERTY AND EQUIPMENT--Buildings and building improvements are stated at
cost and 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 during 1996 or 1995.

DEFERRED COSTS--Organizational costs incurred in the formation of the
Company and its predecessor entities 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.

INVESTMENTS IN PARTNERSHIPS--Based on ownership percentages and a lack of
significant influence, the Company records its interests in partnerships under
the cost method of accounting for investments.

RESTRICTED CASH--Prior to the September 30, 1996 debt refinancing (see Note
6), the Company was required to maintain certain levels of restricted cash to
comply with the terms of its debt agreements. Restricted cash reserved primarily
for future hotel capital improvements was $7,351 at December 31, 1995.

INCOME TAXES--Prior to the Formation Transactions (see Note 3), no provision
for income taxes was made since the Company's predecessor entities were
partnerships, and, therefore, all income, losses, and credits for tax purposes
were passed through to the individual partners. Concurrent with the Formation
Transactions, the Company implemented Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Deferred income taxes reflect
the tax consequences on future years of differences between the tax basis of
assets and liabilities and their financial reporting amounts.

MINORITY INTEREST--Minority interest represents the limited partner
interests in the Atlanta Partnership which are not owned by the Company.

REVENUES--Revenue is earned primarily through the operations and management
of the hotel properties and is recognized when earned. During the period from
its acquisition until February 29, 1996, the Westin Atlanta Airport hotel was
leased to a third-party operator. Related lease revenue is recorded as other
operating departments revenue. On February 29, 1996, the Company assumed the
operations of the hotel upon termination of the lease.

USE OF ESTIMATES--Management has made a number of estimates and assumptions
related to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these

F-9
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.

3. FORMATION TRANSACTIONS AND INITIAL PUBLIC OFFERING

The following transactions (the "Formation Transactions") occurred prior to
or on August 20, 1996, the date of the Company's initial public offering (the
"IPO"):

- a limited partner of CapStar Management contributed its partnership
interest in CapStar Management to the Company in exchange for shares of
Common Stock;

- the Company contributed 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
contributed their respective partnership interest in CapStar Management
and EquiStar to the Company in exchange for shares of Common Stock;

- the Company contributed all the assets of EquiStar to CapStar Management
and CapStar Management assumed all of the liabilities of EquiStar; and

- the Agreement of Limited Partnership of CapStar Management was amended and
restated to reflect the fact that CapStar Management has succeeded the
business of EquiStar and the Company became the general partner of CapStar
Management.

In connection with the Formation Transactions, the Company issued 6,004,321
shares of Common Stock to the partners of EquiStar and CapStar Management.

On August 20, 1996, the Company completed its IPO of 9,250,000 shares of
common stock at a price of $18 per share. The Company sold 6,750,000 of the
initial shares which, after underwriting discounts, commissions and other IPO
expenses, produced net proceeds to the Company of $110,112. The remaining
2,500,000 shares were sold by Acadia Partners, L.P. and certain related entities
("Acadia Partners"), which received 100% of the net proceeds from the sale of
their shares. The Company used the proceeds of the IPO to repay a portion of the
Company's outstanding indebtedness.

4. NOTES RECEIVABLE FROM MANAGEMENT

Pursuant to the terms of an agreement dated January 4, 1995, certain members
of management borrowed $987 from CapStar Management to fund capital
contributions to EquiStar. The notes were secured by the borrowers' interests in
EquiStar and were personally guaranteed by the individual note holders. These
notes earned interest at the prime rate throughout 1995 and at prime plus 1.5%
during 1996 until their repayment on September 13, 1996.

5. HEDGE AGREEMENT

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

The hedge agreement was a two-year forward swap that was effective June 30,
1997 and was to mature on June 30, 2007. The agreement required the Company to
pay a fixed rate of 7.1% and receive a floating interest rate based on the
three-month London Interbank Offered Rate ("LIBOR"), on a notional amount of
$25,000. The agreement required the Company to make an initial collateral
deposit of $1,000 and

F-10
<PAGE>
5. HEDGE AGREEMENT (CONTINUED)
provided for required additions or reductions to the collateral escrow account
by the Company and Salomon in $500 increments based on changes in the market
value of this agreement.

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

On May 6, 1996, the Company sold its interest in the swap agreement and
received a cash payment of $536. This gain on sale has been deferred for
financial statement purposes.

6. LONG-TERM DEBT

BANKERS TRUST DEBT--On September 30, 1996, the Company entered into a
$225,000 Senior Secured Revolving Credit Facility (the "Credit Facility") with a
group of lenders led by Bankers Trust Company ("Bankers Trust"). The Credit
Facility provides for acquisition loans, working and renovation capital, and
letters of credit. The initial proceeds from the Credit Facility were used to
refinance virtually all existing indebtedness and to fund hotel renovations. The
Credit Facility has an initial term of three years, which can be extended at the
Company's option using two additional one-year periods upon the satisfaction of
certain conditions. The Credit Facility is collateralized by substantially all
of the Company's assets. At December 31, 1996, no letters of credit were
outstanding.

Interest on the Credit Facility is payable monthly at the Company's election
of the Base Rate (lenders' prime rate) plus 1.0% or Eurodollar Option (LIBOR for
periods of one, two, three or six months) plus 2.0%. The interest rate for the
Credit Facility was 7.6% at December 31, 1996.

A commitment fee, which is calculated using an annual rate of 0.25% times
the average unutilized balance on the Credit Facility, is due quarterly. Letter
of credit fees of 2.0% per annum times the average outstanding balances on
letters of credit, if any, are also payable quarterly. The Company incurred $108
in commitment fees, which are recorded as interest expense, and no letter of
credit fees during 1996.

On December 13, 1996, the Company also entered into a $50,000 unsecured
senior subordinated credit facility (the "Subordinated Debt") with Bankers Trust
as agent and arranger. The net proceeds from the Subordinated Debt borrowing
were used to acquire certain of the hotels and for general corporate purposes.
In connection with the closing of the Subordinated Debt, the Credit Facility was
amended to, among other things, permit the Company to incur up to $100,000 of
subordinated indebtedness.

The Subordinated Debt is due on December 31, 1999, and may be extended at
the Company's option for two additional one-year periods upon the satisfaction
of certain conditions. Interest on the Subordinated Debt is payable monthly and
is calculated at the Company's election of the one, two, three, or six month
LIBOR plus 4.0%. At December 31, 1996, the interest rate for the Subordinated
Debt was 9.6%.

Both the Credit Facility and Subordinated Debt agreements contain certain
covenants, including maintenance of certain financial ratios, restrictions on
payments of dividends, certain reporting requirements and other customary
restrictions. The Company's ability to borrow under the Credit Facility is also
subject to a borrowing base test calculated with 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 value of such
hotel properties and certain other factors. As of December 31, 1996,
approximately $177,000 was available for borrowing under the Credit Facility, of
which $149,000 has been borrowed. Under the Credit Facility, the Company is
permitted to incur an additional $50,000 of subordinated indebtedness as of
December 31, 1996.

LEHMAN DEBT--On December 21, 1995, the Company entered into a $202,500
Master Mortgage Loan Facility Agreement (the "Master Agreement") with Lehman
Brothers Holding, Inc. ("Lehman") to facilitate the repayment of the existing
$22,690 in debt (see "Salomon Debt" below) and to fund hotel

F-11
<PAGE>
6. LONG-TERM DEBT (CONTINUED)
acquisitions. Under the Master Agreement, 50% of total acquisition capital, not
to exceed $125,000, could be funded through a senior loan facility. An
additional 27.5% of acquisition capital, not to exceed $75,000, could be
borrowed through a mezzanine loan facility. Certain fees incurred by the Company
related to these borrowings could also be financed through the Master Agreement,
up to a maximum of $2,500. Separate loans were obtained under the Master
Agreement for each hotel acquired. The loans were cross-collateralized and
cross-defaulted and were secured by first and second liens on the Company's real
and personal property.

Loans obtained under the senior loan facility bore interest at variable
rates that were based on the one-month LIBOR. For the nine months ended
September 30, 1996 (the date of refinancing) and the year ended December 31,
1995, interest rates on the loans under the senior facility were between 9.6%
and 10%, respectively. Loans obtained under the mezzanine loan facility bore
interest at a fixed rate of 16.0%, with monthly interest payments of 10% with
the remaining 6% accruing to principal.

Under the Master Agreement, the Company was required to pay financing fees
upon the repayment of each loan. These deferred financing fees payable, which
were included in long-term debt, totaled $596 at December 31, 1995.

At December 31, 1995, total borrowings under the Master Agreement were
$59,976, of which $55,841 were made from the senior loan facility and $4,135
were made from the mezzanine loan facility. On August 21, 1996, the majority of
the outstanding Lehman debt was repaid with a portion of the Company's IPO
proceeds. All remaining Lehman indebtedness was repaid with proceeds from the
Credit Facility on September 30, 1996.

SALOMON DEBT--During 1995, the Company entered into a loan facility with
Salomon to fund hotel acquisitions. Interest-only payments were required under
this loan facility at a floating rate based on LIBOR. On December 21, 1995, the
$22,690 outstanding balance was repaid with proceeds from the Lehman debt
facility.

WELLS FARGO DEBT--On March 2, 1995, the Company borrowed $9,960 from Wells
Fargo Bank, National Association ("Wells Fargo") to finance the purchase of the
Salt Lake Airport Hilton. Interest, which was payable monthly, was based on the
one-month LIBOR plus 4.25%, as adjusted for certain provisions in the loan
agreement. At December 31, 1995, the outstanding balance on this amortizing note
was $9,890. The note was repaid in 1996.

The Company also entered into an unsecured $5,000 revolving credit facility
with Wells Fargo that was used for general corporate purposes. Interest accrued
at either LIBOR plus 2.25% or the Prime Rate plus 1%, depending on the nature of
the advance. At December 31, 1995, there was $4,181 outstanding under this line.
The outstanding balance was repaid in 1996.

NOTES PAYABLE--In September 1996, the Company entered into a note agreement
to finance a three-year insurance policy. Principal and interest payments are
due monthly. The outstanding balance on the note, which bears interest at 6.0%,
was $665 at December 31, 1996.

During 1995, in order to fund certain loans to management (see Note 4), the
Company borrowed $950 from Acadia Partners. In January 1996, the Company
borrowed an additional $150 under this note agreement. The note, which bore
fixed interest at the Prime Rate plus 1.5%, was repaid on September 13, 1996.

To help finance the March 1996 purchase of The Latham Hotel, the Company
entered into an unsecured $1,000 note agreement with LCP Hotel Ventures, L.P.
("LCP"), the seller of the hotel and an affiliated entity of the Company (see
Note 10). The note, which bore interest at a rate of 10%, was repaid on August
23, 1996.

F-12
<PAGE>
6. LONG-TERM DEBT (CONTINUED)
CAPITAL LEASES--The Company has entered into several capital leases for
hotel and office equipment that expire between 1997 and 2001. The total capital
lease obligations at December 31, 1996 and 1995, were $696 and $648,
respectively, and are included in long-term debt.

At December 31, 1996, long-term debt outstanding under the above facilities
and agreements consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
<S> <C> <C>
1996 1995
---------- -------------
Senior Secured Revolving Credit Facility........................... $ 149,000 --
Senior Subordinated Credit Facility................................ 50,000 --
Mortgage Debt...................................................... -- 74,048
Notes Payable...................................................... 665 950
Capital Leases..................................................... 696 648
Other.............................................................. -- 596
---------- -------------
200,361 76,242
Less Current Portion............................................... (498) (2,668)
---------- -------------
$ 199,863 73,574
---------- -------------
---------- -------------
</TABLE>

Aggregate maturities of the above obligations are as follows:

<TABLE>
<S> <C>
1997.......................................................... $ 498
1998.......................................................... 483
1999.......................................................... 199,285
2000.......................................................... 84
2001.......................................................... 11
Thereafter.................................................... --
-----------
$ 200,361
-----------
-----------
</TABLE>

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

7. INCOME TAXES

Income taxes of the Company are based on pretax income since the Formation
Transactions and the associated change in the Company's tax status to a C
Corporation on August 20, 1996. Pretax income of the Company from August 20
through December 31, 1996 is $3,424. The Company's effective income tax rate is
40%.

Income taxes were allocated as follows for the year ended December 31, 1996:

<TABLE>
<CAPTION>
Income before income taxes and extraordinary loss................... $ 2,674
<S> <C>
Extraordinary loss.................................................. (1,304)
---------
$ 1,370
---------
---------
</TABLE>

F-13
<PAGE>
7. INCOME TAXES (CONTINUED)
Income tax expense attributable to income before income taxes and
extraordinary loss consists of the following for the year ended December 31,
1996:

<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
----------- ------------- ---------
<S> <C> <C> <C>
U.S. federal..................................................... $ 2,118 (51) 2,067
State and local.................................................. 622 (15) 607
--
----------- ---------
$ 2,740 (66) 2,674
--
--
----------- ---------
----------- ---------
</TABLE>

The "expected" tax expense, based on the U.S. federal statutory rate of 34%,
differs from the actual tax expense, calculated at the effective rate of 40%,
due to state and local taxes, net of federal tax benefit.

Upon formation of the Company, the Company assumed certain deferred tax
assets and liabilities from its predecessor entities. The tax effects of
temporary differences that give rise to deferred tax assets and liabilites of
August 20, 1996, and December 31, 1996, are presented below:

<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 20,
1996 1996
------------ -----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts, recorded for financial statement
purposes only.................................................... $ 75 41
Accrued vacation, recorded for financial statement purposes only... 252 199
Other.............................................................. 7 27
------------ -----------
Total gross deferred tax assets.................................... 334 267
Deferred tax liability--Difference in accumulated depreciation and
amortization for tax purposes and financial statement purposes... (1,515) (1,514)
------------ -----------
Net deferred tax liability......................................... $ (1,181) (1,247)
------------ -----------
------------ -----------
</TABLE>

There is no valuation allowance for deferred tax assets as of August 20,
1996 or as of December 31, 1996, as management believes that it is more likely
than not that these deferred tax assets will be fully realized.

8. EXTRAORDINARY LOSS

On September 30, 1996, the Company recognized an extraordinary loss from the
write-off of deferred financing fees in connection with the refinancing of the
Lehman debt. The recorded loss of $1,956 net of a tax benefit of $1,304 reflects
the write-off of the unamortized balance of deferred financing fees at the time
of the refinancing.

On December 21, 1995, an extraordinary loss was recorded to write-off the
unamortized deferred financing fees related to the Salomon debt. There is no tax
effect on the recorded loss of $888 because the Company's predecessor entities
were not subject to income tax.

9. EARNINGS PER SHARE

The earnings per share have been calculated using actual income before
extraordinary loss, extraordinary loss, and net income amounts for the period
from the IPO on August 20, 1996 through December 31, 1996. Earnings per share is
not presented for periods prior to the IPO because the Company's predecessor
entities were partnerships and were not subject to the provisions of Accounting
Principles Board Opinion No. 15. The weighted average number of common shares
used in the calculations is 12,754,321.

F-14
<PAGE>
10. RELATED-PARTY TRANSACTIONS

The Company manages hotels that are owned in part by affiliates or officers
of the Company. Revenue associated with the management of these hotels was $824
and $1,104 during 1996 and 1995, respectively. At December 31, 1996 and 1995,
the amount due from these properties was $304 and $237, 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 this agreement, which are recorded as a
current liability, amounted to $305,077 at December 31, 1995. During 1996, all
amounts collected under these receivables were repaid to CEA.

On March 8, 1996, the Company acquired The Latham Hotel for a purchase price
of $12,000 from LCP (see Note 6). At the time of the acquisition, the general
partner of LCP, Latham Hotels, Inc., was wholly-owned by certain members of the
Company's management. Directly or indirectly, these members of management owned
a 9.7% beneficial interest in LCP and received $806 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 the Company and
representatives of the holders of the majority of the beneficial interests in
LCP.

On November 15, 1995, the Company acquired its 1% general partner interest
in the Atlanta Partnership from LHP, a corporation in which an individual who,
at the time, was a principal of the Company's predecessor entities, owned an
equity interest. LHP was paid a fee of $893 in connection with the Company's
acquisition of the general and limited partner interests and is entitled to an
additional $161 upon the ultimate disposition of the Atlanta Partnership.
Another affiliate of the former principal, LCP Group, L.P., is entitled to an
annual fee of $30 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.

11. EMPLOYEE BENEFIT PLANS

On August 20, 1996, the Company adopted an equity incentive plan (the
"Equity Incentive Plan"). Pursuant to the terms of its Equity Incentive Plan,
the Company is authorized to issue and award 1,740,000 shares of common stock as
options to purchase shares, stock appreciation rights, or restricted shares.
Awards may be granted to directors, officers or other key employees of the
Company or an affiliate.

On August 20, 1996, in connection with the IPO, the Company granted certain
executive officers and other members of management 745,254 options to purchase
shares of the Company's common stock at the initial public offering price of $18
per share. Of such options, 54,254 were exercisable immediately upon their
grant, although no options were exercised during 1996. The remaining options
will become exercisable in three annual installments. All shares granted lapse
ten years from the date of grant.

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, the Company applies Accounting Principles Board
Opinion No. 25 in accounting for the Equity Incentive Plan and therefore no
compensation cost has been recognized for the Equity Incentive Plan. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model, with the following weighted average
assumptions used for the grants in 1996: risk free interest rate of 5.96%; no
expected dividend yields; expected lives of 3.11 years; expected volatility of
25%. The Company's 1996 pro forma net income and earnings per share as if the
fair value method had been applied, were $2,111 and $0.14, respectively. The
effects of applying SFAS No. 123 for disclosing compensation costs may not be
representative of the effects on reported net income and earnings per share for
future years.

During 1996, the Company adopted a 401(k) plan. All employees are eligible
to participate in the 401(k) plan after one year of service. The cost of
administering the plan was not significant during 1996.

F-15
<PAGE>
12. COMMITMENTS AND CONTINGENCIES

The Company has entered into three operating leases for office space which
expire in October 1998. Lease payments will approximate $265 annually through
expiration. The Company leases the ground under the Embassy Row Hilton. Annual
lease payments are $73.

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

13. PRO FORMA INFORMATION (UNAUDITED)

The following unaudited pro forma summary presents information as if all
hotels owned at December 31, 1996 had been acquired on January 1, 1995 and does
not reflect the repayment of outstanding debt with the proceeds from the IPO.
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 Company.

PRO FORMA INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Total revenue......................................................... $ 172,653 160,961
---------- ----------
---------- ----------
Net income (loss) before extraordinary loss........................... $ 1,958 (10,861)
---------- ----------
---------- ----------
Net income (loss)..................................................... $ 2 (11,749)
---------- ----------
---------- ----------
</TABLE>

14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following is a summary of the Company's quarterly results of operations:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH FIRST SECOND
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
--------- ----------- ----------- ----------- ----------- -----------
Total revenue................................ $ 18,033 28,223 30,872 32,664 1,782 3,029
Total operating expenses..................... 15,887 23,742 24,018 26,811 1,605 2,705
Net operating income......................... 2,146 4,481 6,854 5,853 177 324
Income (loss) before extraordinary loss...... (642) 48 2,575 2,372 95 71
Net income (loss)............................ (642) 48 619 2,372 95 71
Earnings (loss) per share.................... $ -- -- (0.03) 0.19 -- --
--------- ----------- ----------- ----------- ----- -----
--------- ----------- ----------- ----------- ----- -----

<S> <C> <C>
THIRD FOURTH
QUARTER QUARTER
----------- -----------
Total revenue................................ 9,400 12,152
Total operating expenses..................... 7,799 11,627
Net operating income......................... 1,601 525
Income (loss) before extraordinary loss...... 805 (740)
Net income (loss)............................ 805 (1,628)
Earnings (loss) per share.................... -- --
----- -----------
----- -----------
</TABLE>

15. SUBSEQUENT EVENTS

On January 28, 1997, the Company acquired long-term leasehold rights to the
226-room San Pedro Hilton at Cabrillo Marina in San Pedro, California, from U.S.
Bancorp for a purchase price of $7,000. Additionally, the 295 room Westchase
Hilton in Houston, Texas, was purchased from Redstone Group on January 31, 1997
for $28,500. In a separate transaction, the Company also purchased the 294 room
Doubletree Hotel in Albuquerque, New Mexico, on January 31, 1997 from Merv
Griffin Hotels for $19,000. All of these hotel acquisitions were funded through
the Credit Facility, assumption of debt and existing working capital.

In February 1997, the Company entered into a contract to acquire the
Highgate Portfolio, a group of six upscale, full-service hotels containing 1,358
rooms for a purchase price of $95,000.

In February 1997, the Company also entered into contracts to purchase the
213-room Four Points Hotel Sheraton in Cherry Hill, New Jersey, for $6,900 and
the 154-room Great Valley Sheraton in Frazer, Pennsylvania, for $14,355.

F-16
<PAGE>
CAPSTAR HOTEL COMPANY
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
GROSS
AMOUNT AT
WHICH CAR-
COSTS SUBSEQUENT TO RIED AT
CLOSE OF
INITIAL COST TO COMPANY ACQUISITION PERIOD
--------------------------- ------------------------- -----------
BUILDING AND BUILDING AND
DESCRIPTION ENCUMBRANCES(1) LAND IMPROVEMENTS LAND IMPROVEMENTS LAND(2)
- -------------------------------------- ----------------- ----------- -------------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Hotel Assets:
Salt Lake Airport Hilton, UT......... -- 770 12,828 1 797 771
Radisson Hotel, Schaumburg, IL....... -- 1,080 5,131 26 1,090 1,106
Sheraton Hotel, Colorado Springs,
CO.................................. -- 1,071 14,592 1 1,953 1,072
Hilton Hotel, Bellevue, WA........... -- 5,211 6,766 4 478 5,215
Marriott Hotel, Somerset, NJ......... -- 1,978 23,001 9 1,643 1,987
Westin Atlanta Airport, Atlanta,
GA.................................. 23,609 2,650 15,926 (300) 6,461 2,350
Sheraton Hotel, Charlotte, NC........ -- 4,700 11,057 -- 2,179 4,700
Holiday Inn, Cleveland, OH........... -- 1,330 6,353 2 1,545 1,332
Orange County Airport Hilton, Irvine,
CA.................................. -- 9,990 7,993 14 575 10,004
The Latham Hotel, Washington, DC..... 12,000 6,500 5,320 -- 480 6,500
Hilton Hotel, Arlington, TX.......... -- 1,836 14,689 354 1,218 2,190
Hilton Hotel, Arlington, VA.......... 16,210 4,000 15,069 -- 147 4,000
Southwest Hilton, Houston, TX........ -- 2,300 15,665 -- (75) 2,300
Embassy Suites, Englewood, CO........ -- 2,500 20,700 -- 27 2,500
Holiday Inn, Colorado Springs, CO.... -- 1,600 4,232 -- 6 1,600
Embassy Row Hilton, Washington DC.... -- 2,200 13,247 -- 17 2,200
Hilton Hotel, Sacramento, CA......... -- 4,000 16,013 -- 22 4,000
Santa Barbara Inn, Santa Barbara, CA -- 2,600 5,141 -- 9 2,600
Hilton Hotel & Towers, Lafayette,
LA.................................. -- 1,700 16,062 -- 19 1,700
----------------- ----------- -------------- --------- -------------- -----------
51,819 58,016 229,785 111 18,591 58,127
----------------- ----------- -------------- --------- -------------- -----------
----------------- ----------- -------------- --------- -------------- -----------
(1) Listed above are encumbrances incurred by the Company or its subsidiaries under loan facilities which
require the collateralization of certain Hotel Assets. At December 31, 1996, the Company also had other
borrowings that are secured by the general assets of the Company instead of specific Hotel Assets and that
are not included in this schedule.
(2) As of December 31, 1996, hotel property and equipment have a cost of
$342,366 for federal income tax purposes.

<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Buildings and improvements............
Land
Hotel furniture and equipment.........
Construction in progress..............
Total hotel property and equipment....
Office furniture and equipment........
Total property and equipment..........

BUILDING AND ACCUMULATED YEAR OF DATE
DESCRIPTION IMPROVEMENTS(2) DEPRECIATION CONSTRUCTION ACQUIRED LIFE
- -------------------------------------- ----------------- ------------- --------------- ----------- ---
<S> <C> <C> <C> <C> <C>
Hotel Assets:
Salt Lake Airport Hilton, UT......... 13,625 591 1980 03/03/95 40
Radisson Hotel, Schaumburg, IL....... 6,221 195 1974 06/30/95 40
Sheraton Hotel, Colorado Springs,
CO.................................. 16,545 562 1979 06/30/95 40
Hilton Hotel, Bellevue, WA........... 7,244 233 1979 08/04/95 40
Marriott Hotel, Somerset, NJ......... 24,644 701 1978 10/03/95 40
Westin Atlanta Airport, Atlanta,
GA.................................. 22,387 545 1982 11/15/95 40
Sheraton Hotel, Charlotte, NC........ 13,236 277 1985 02/02/96 40
Holiday Inn, Cleveland, OH........... 7,898 154 1975 02/16/96 40
Orange County Airport Hilton, Irvine,
CA.................................. 8,568 176 1976 02/22/96 40
The Latham Hotel, Washington, DC..... 5,800 114 1978 03/08/96 40
Hilton Hotel, Arlington, TX.......... 15,907 231 1983 04/17/96 40
Hilton Hotel, Arlington, VA.......... 15,216 141 1990 8/23/96 40
Southwest Hilton, Houston, TX........ 15,590 68 1979 10/31/96 40
Embassy Suites, Englewood, CO........ 20,727 21 1986 12/12/96 40
Holiday Inn, Colorado Springs, CO.... 4,238 -- 1974 12/17/96 40
Embassy Row Hilton, Washington DC.... 13,264 -- 1969 12/17/96 40
Hilton Hotel, Sacramento, CA......... 16,035 -- 1983 12/17/96 40
Santa Barbara Inn, Santa Barbara, CA 5,150 -- 1959 12/17/96 40
Hilton Hotel & Towers, Lafayette,
LA.................................. 16,081 -- 1981 12/17/96 40
----------------- -------------
248,376 4,009
----------------- -------------
----------------- -------------

(1) Listed above are encumbrances inc
require the collateralization of
borrowings that are secured by th
are not included in this schedule
(2) As of December 31, 1996, hotel pr
$342,366 for federal income tax pu
ACCUMULATED
COST DEPRECIATION
----------------- -------------
<S> <C> <C> <C> <C> <C>
$ 248,376 4,009
58,127 --
31,972 4,423
3,891 --
----------------- -------------

342,366 8,432
726 209
----------------- -------------
$ 343,092 8,641
----------------- -------------
----------------- -------------
</TABLE>

A reconciliation of the Partnerships' investment in hotel property and
equipment and related accumulated depreciation is as follows:
<TABLE>
<CAPTION>
1996
--------------
<S> <C>
Hotel property and equipment:
Balance at beginning of period............................................................................... $ 110,455
Additions during period:
Acquisitions............................................................................................... 204,740
Improvements and construction-in-progress.................................................................. 27,171
--------------
Balance at end of period..................................................................................... 342,366
--------------
Accumulated depreciation:
Balance at beginning of period............................................................................... 1,743
Additons--depreciation expense............................................................................... 6,689
--------------
8,432
--------------
Net hotel property and equipment at end of period.............................................................. $ 333,934
--------------
--------------

<CAPTION>
1995

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

<S> <C>
Hotel property and equipment:
Balance at beginning of period............................................................................... --

Additions during period:
Acquisitions............................................................................................... 104,239

Improvements and construction-in-progress.................................................................. 6,216

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

Balance at end of period..................................................................................... 110,455

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

Accumulated depreciation:
Balance at beginning of period............................................................................... --

Additons--depreciation expense............................................................................... 1,743

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

1,743

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

Net hotel property and equipment at end of period.............................................................. 108,712

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

</TABLE>

F-17
<PAGE>
INDEPENDENT AUDITORS' 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>
<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 Board of Directors
Capstar Hotel Company:

We have audited the accompanying combined balance sheet of the Highgate
Portfolio (the "Hotels") as of December 31, 1996 and the related combined
statements of operations, owners' deficit and cash flows for the year then
ended. 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 audit.

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

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Highgate Portfolio as of December 31, 1996 and the results of their combined
operations and their combined cash flows for the year ended December 31, 1996,
in conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

Washington, D.C.
February 7, 1997

F-24
<PAGE>
HIGHGATE PORTFOLIO
COMBINED BALANCE SHEET
DECEMBER 31, 1996

<TABLE>
<CAPTION>
1996
--------------
<S> <C>
ASSETS

Cash and cash equivalents......................................................................... $ 3,093,582
Escrow accounts................................................................................... 265,695
Accounts receivable............................................................................... 1,911,939
Inventory and other assets........................................................................ 547,449
--------------
Total current assets.............................................................................. 5,818,665
--------------

Property and equipment:
Land............................................................................................ 4,852,052
Building........................................................................................ 32,550,978
Furniture, fixtures and equipment............................................................... 16,817,888
--------------
54,220,918
Less--accumulated depreciation.................................................................. (16,638,646)
--------------
Total property and equipment, net................................................................. 37,582,272
Deferred assets, net of accumulated amortization of $983,486...................................... 1,042,224
Advances to related parties....................................................................... 7,297,283
--------------
Total assets...................................................................................... $ 51,740,444
--------------
--------------

LIABILITIES AND OWNERS' DEFICIT

Accounts payable and accrued expenses............................................................. $ 5,231,355
Capital lease obligations, current portion........................................................ 202,980
Notes payable, current portion.................................................................... 1,122,000
--------------
Total current liabilities......................................................................... 6,556,335
--------------

Capital lease obligations, long-term.............................................................. 226,977
Advances from related parties..................................................................... 11,902,144
Notes payable, long-term.......................................................................... 45,074,801
--------------
Total liabilities................................................................................. 63,760,257
Owners' deficit................................................................................... (12,019,813)
--------------
Total liabilities and owners' deficit............................................................. $ 51,740,444
--------------
--------------
</TABLE>

See accompanying notes to combined financial statements.

F-25
<PAGE>
HIGHGATE PORTFOLIO
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
1996
-------------
<S> <C>
Revenue:
Rooms............................................................................................ $ 22,285,306
Food and beverage................................................................................ 8,194,218
Other operating departments...................................................................... 3,940,775
-------------
34,420,299
-------------
Operating expenses:
Rooms............................................................................................ 5,498,855
Food and beverage................................................................................ 6,672,434
Other operating departments...................................................................... 2,189,072
Undistributed operating expenses:
Administrative and general....................................................................... 2,678,993
Sales and marketing.............................................................................. 2,857,750
Management fees.................................................................................. 1,157,682
Property operating costs......................................................................... 2,870,437
Property taxes, insurance and other.............................................................. 1,973,571
Depreciation and amortization.................................................................... 2,719,401
Interest expense................................................................................. 5,951,317
Foreign currency exchange adjustment............................................................. 1,297
-------------
34,570,809
-------------
Net loss before income taxes..................................................................... (150,510)
Income tax expense............................................................................... 215,700
-------------
Net loss......................................................................................... $ (366,210)
-------------
-------------
</TABLE>

See accompanying notes to combined financial statements.

F-26
<PAGE>
HIGHGATE PORTFOLIO
COMBINED STATEMENT OF OWNERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<S> <C>
Balance, December 31, 1995..................................................... $(11,660,873)
Foreign currency translation adjustment........................................ 7,270
Net loss....................................................................... (366,210)
-----------
Balance, December 31, 1996..................................................... $(12,019,813)
-----------
-----------
</TABLE>

See accompanying notes to combined financial statements.

F-27
<PAGE>
HIGHGATE PORTFOLIO
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
1996
-------------
<S> <C>
Cash flows from operating activities:
Net loss......................................................................................... $ (366,210)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization.................................................................. 2,719,401
Foreign currency translation adjustment........................................................ (7,270)
Increase in escrow accounts.................................................................... (78,953)
Increase in accounts receivable................................................................ (338,313)
Decrease in inventory and other assets......................................................... 79,815
Increase in accounts payable and accrued expenses.............................................. 1,444,744
-------------
Net cash provided by operating activities.......................................................... 3,453,214
-------------
Cash flows from investing activities:
Deferred asset additions......................................................................... (50,000)
Purchases of building improvements............................................................... (998,350)
Net repayments of advances to related parties.................................................... 1,193,230
Purchases of furniture and equipment............................................................. (1,408,204)
-------------
Net cash used by investing activities.............................................................. (1,263,324)
-------------
Cash flows from financing activities:
Repayments of notes payable...................................................................... (409,360)
Advances from related parties.................................................................... 15,352
Repayments of capital lease obligations.......................................................... (137,729)
-------------
Net cash used by financing activities.............................................................. (531,737)
-------------
Net increase in cash and cash equivalents.......................................................... 1,658,153
Cash and cash equivalents at beginning of period................................................... 1,435,429
-------------
Cash and cash equivalents at end of period......................................................... $ 3,093,582
-------------
-------------
Supplemental disclosure of cash flow information:
Interest paid...................................................................................... $ 5,011,517
Additions to capital lease obligations............................................................. 377,081
-------------
-------------
</TABLE>

See accompanying notes to combined financial statements.

F-28
<PAGE>
HIGHGATE PORTFOLIO
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996

(1) ORGANIZATION

The Highgate Portfolio (the "Hotels") consists of six hotels which are owned
by partnerships or corporations affiliated with Highgate Hotels, Inc. ("Highgate
Hotels"). Two of the Hotels are located in Dallas (Radisson and Holiday Inn
Select), one hotel is located in Indianapolis (Doubletree), one hotel is located
in Calgary (Holiday Inn), and two hotels are located in Vancouver (Ramada and
Sheraton).

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accounts of the Hotels are included in the financial records of the
respective partnership or corporation that owns each hotel. 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.

ESCROW ACCOUNTS

Escrow Accounts represent amounts paid into a property tax escrow account.

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 stated at cost. Depreciation is computed on the
buildings and building improvements using the straight-line method over their
useful lives of 15 to 40 years. Furniture, fixtures and equipment are
depreciated using the straight-line method over five years.

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 debts
to establish an allowance for doubtful accounts. Write offs occur when
management deems a receivable uncollectible.

DEFERRED EXPENSES

Deferred expenses consist, primarily, of deferred financing costs which are
amortized on a basis which approximates the interest method, over the term of
the respective loan.

REVENUE

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

INCOME TAXES

Four of the Hotels are owned by partnerships, and therefore, any income
taxes are reported by the individual partners. The two remaining hotels are
owned by entities incorporated in Canada (the Canadian Corporations). For the
purposes of these financial statements, the Hotels have calculated the tax
provision for the Canadian Corporations using an effective tax rate of 44%. The
Canadian Corporations' deferred tax assets and liabilities are insignificant to
these financial statements and are therefore not presented.

F-29
<PAGE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TRANSLATION OF FOREIGN CURRENCIES

Assets and liabilities of three hotels, located in Canada, are translated at
the rate of exchange at the balance sheet date; revenue and expenses are
translated at the average rates of exchange prevailing during the year. The
related translation adjustments to assets and liabilities are recorded in the
Combined Statement of Owners' Deficit. Foreign currency translation gains and
losses are recorded in the Combined Statements of Operations.

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

Five of the Hotels are managed by Hospitality Group, Inc. a related party of
Highgate Hotels. The property management agreements provide for management fees
of 3% of Gross Revenues, as defined in the management agreement. In addition,
the management agreements provide for an incentive fee of 2% of Gross Revenues,
as defined in the management agreement, provided that certain net operating
income thresholds are met. The five hotels incurred management fees of
$1,047,730 in 1996.

The Hotels have made advances to various related parties. The total amounts
outstanding on the advances to related parties were $7,297,283 at December 31,
1996. The advances are unsecured, bear no interest and have no terms of
repayment.

The Hotels have received advances from various related parties. The total
amounts outstanding on the advances from related parties were $11,902,144 at
December 31, 1996. The advances are unsecured, bear no interest and have no
terms of repayment. Management does not expect to be required to repay advances
during 1997.

(4) NOTES PAYABLE

Notes Payable consisted of the following on December 31, 1996:

<TABLE>
<S> <C>
RADISSON--DALLAS

Note payable to the Equitable Life Assurance of the United States (Equitable),
collateralized by a deed of trust on the Hotel. Interest payable monthly at
10% with the balance due November 30, 2000................................... $7,407,205

Note payable to Equitable, with no interest due, collateralized by a deed of
trust on the hotel. Balance due November 30, 2000............................ 1,140,020

HOLIDAY INN SELECT--DALLAS

Note payable to Allied Capital Commercial Corporation and Business Mortgage
Investors, Inc., collateralized by a deed of trust on substantially all
assets of the current owner. Principal payments of $25,000 are due monthly
with interest at prime plus 5.25% (13.5% at December 31, 1996). Balance is
due September 30, 1999....................................................... 7,500,000

Note payable to BancOne Capital Partners III Limited Partnership,
collateralized by a pledge and assignment of partnership interests and a
stock pledge in affiliates of Highgate Hotels. Interest is payable monthly at
13%, with Participation Payments, as defined, due 30 days after the end of
each calendar year. Balance is due September 30, 1999........................ 2,500,000

HOLIDAY INN--CALGARY

Note Payable to Hongkong Bank of Canada with interest payable monthly at
5.36%........................................................................ 3,064,575
</TABLE>

F-30
<PAGE>
(4) NOTES PAYABLE (CONTINUED)
<TABLE>
<S> <C>
DOUBLETREE--INDIANAPOLIS

Note payable to Lincoln National Life Insurance, collateralized by a deed of
trust on the hotel. Principal payments of $39,935 are due monthly with
interest at 10.50%. Balance is due on January 1, 2005........................ 3,874,866

Note payable to BancOne Capital Partners III Limited Partnership,
collateralized by a pledge and assignment of partnership interests and a
stock pledge in affiliates of Highgate Hotels. Interest is payable monthly at
12%. The balance is due November 30, 2004.................................... 2,430,000

SHERATON HOTEL--VANCOUVER (SURREY)

Note payable to Lehman Brothers Holdings, Inc., collateralized by a deed of
trust on the hotel. Interest is payable monthly at LIBOR plus 13%. The
balance is due September 1, 2000............................................. 11,500,000

RAMADA HOTEL--VANCOUVER

Note payable to Canadian Imperial Bank of Commerce (CIBC), secured by a first
fixed charge against the hotel. Interest is payable monthly at the CIBC prime
rate plus 1.5%. Principal is due monthly, in accordance with the note, with
the balance due February 28, 2000............................................ 6,780,135
----------

Total...................................................................... $46,196,801
----------
----------
</TABLE>

Aggregate maturities of the above notes payable are as follows:

<TABLE>
<CAPTION>
For the year ended
- ---------------------------------------------------------------
<S> <C>
1997........................................................... $1,122,000
1998........................................................... 1,144,047
1999........................................................... 10,267,515
2000........................................................... 26,210,678
2001........................................................... 479,220
Thereafter..................................................... 6,973,341
----------
Total...................................................... $46,196,801
----------
----------
</TABLE>

(5) CAPITAL LEASE OBLIGATIONS

The Hotels lease certain equipment under various capital leases. The leases
require monthly payments totaling $16,915 including interest ranging between
10.5% to 15.5% per annum, with the final lease maturing in February 2000.
Furniture and equipment includes approximately $430,000 for leases that have
been capitalized.

(6) MANAGEMENT AGREEMENT

Property management for the Doubletree hotel is provided by Double Tree
Partners. The management agreement provides for payment of a management fee of
3% of Total Sales, as defined in the management agreement. In addition, the
management agreement provides for an incentive management fee equal to 15% of
the amount, if any, by which the Net Operating Income, as defined in the
management agreement, for any fiscal year exceeds $420,000. Total management
fees under this agreement were $109,952 for 1996. See note 3 for management
agreements related to the other five hotels.

F-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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

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

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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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
------------------------------------ ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1996 1995 1994 1993
------------ ---------- ---------- --------- --------- --------- ---------

<CAPTION>
<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

F-60
<PAGE>
BALLSTON HOTEL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(7) COMMITMENTS--(CONTINUED)
(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.

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-61
<PAGE>
INDEPENDENT AUDITORS' REPORT

Board of Directors
CapStar Hotel Company:

We have audited the accompanying combined balance sheets of the Muben Hotels
(the "Hotels") as of September 30, 1996, December 31, 1995 and 1994 and related
combined statements of operations, owners' capital and cash flows for the nine
months ended September 30, 1996 and the years ended December 31, 1995 and 1994.
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 Muben
Hotels as of September 30, 1996, December 31, 1995 and 1994, and the results of
their combined operations and their combined cash flows for the nine months
ended September 30, 1996 and the years ended December 31, 1995 and 1994, in
conformity with generally accepted accounting principles.

KPMG Peat Marwick, LLP

Washington, D.C.
January 10, 1997

F-62
<PAGE>
MUBEN HOTELS
COMBINED BALANCE SHEETS
SEPTEMBER 30, 1996, DECEMBER 31, 1995 AND 1994

<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents........................................ $ 2,540,021 2,100,027 1,795,991
Accounts receivable.............................................. 1,520,016 1,009,479 1,347,062
Inventory and other assets....................................... 1,000,652 1,004,098 1,100,562
-------------- -------------- --------------
Total current assets............................................. 5,060,689 4,113,604 4,243,615
-------------- -------------- --------------
Property and equipment:
Land........................................................... 14,454,496 14,454,496 14,454,496
Building....................................................... 49,190,163 48,816,467 48,792,386
Furniture, fixtures and equipment.............................. 19,744,427 19,968,593 18,993,252
-------------- -------------- --------------
83,389,086 83,239,556 82,240,134
Less -- accumulated depreciation................................. (35,118,050) (32,623,613) (29,307,378)
-------------- -------------- --------------
Total net property and equipment................................. 48,271,036 50,615,943 52,932,756
-------------- -------------- --------------
Total assets..................................................... $ 53,331,725 54,729,547 57,176,371
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND OWNERS' CAPITAL
Accounts payable and accrued expenses............................ $ 3,622,343 2,778,452 3,022,008
Advance deposits................................................. 114,175 41,927 45,436
Intercompany income taxes payable (note 4)....................... 2,485,345 995,677 81,080
-------------- -------------- --------------
Total liabilities................................................ 6,221,863 3,816,056 3,148,524
Owners' capital.................................................. 47,109,862 50,913,491 54,027,847
-------------- -------------- --------------
Total liabilities and owners' capital............................ $ 53,331,725 54,729,547 57,176,371
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>

See accompanying notes to combined financial statements.

F-63
<PAGE>
MUBEN HOTELS
COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND THE YEARS ENDED DECEMBER 31,
1995 AND 1994

<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Revenue:
Rooms...................................................... $ 18,337,641 21,925,991 21,147,009
Food and beverage.......................................... 8,117,806 10,442,474 10,513,519
Other operating departments................................ 1,265,677 1,613,934 1,591,255
------------- ------------- -------------
27,721,124 33,982,399 33,251,783
------------- ------------- -------------
Operating costs and expenses:
Rooms.................................................... 4,513,632 5,751,406 5,673,951
Food and beverage........................................ 6,874,250 9,198,740 9,407,042
Other operating departments.............................. 669,595 904,143 933,992
Undistributed operating expenses:
Administrative and general................................. 2,505,580 3,342,110 3,314,554
Sales and marketing........................................ 1,811,948 2,320,060 2,343,494
Management fees (note 3)................................... 628,182 1,065,175 1,051,710
Property operating costs................................... 3,505,572 4,407,863 4,353,126
Property taxes, insurance and other........................ 993,759 1,390,174 1,519,555
Depreciation and amortization.............................. 2,494,437 3,316,235 4,451,660
------------- ------------- -------------
23,996,955 31,695,906 33,049,084
------------- ------------- -------------
Net income before income taxes............................. 3,724,169 2,286,493 202,699
Income taxes (note 4)...................................... 1,489,668 914,597 81,080
------------- ------------- -------------
Net income................................................. $ 2,234,501 1,371,896 121,619
------------- ------------- -------------
</TABLE>

See accompanying notes to combined financial statements.

F-64
<PAGE>
MUBEN HOTELS
COMBINED STATEMENTS OF OWNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995 AND 1994

<TABLE>
<S> <C>
Balance at December 31, 1993................................................... $55,146,114
Contributions................................................................ 1,485,114
Distributions................................................................ (2,725,000)
Net income................................................................... 121,619
----------
Balance at December 31, 1994................................................... 54,027,847
Contributions................................................................ 215,327
Distributions................................................................ (4,701,579)
Net income................................................................... 1,371,896
----------
Balance at December 31, 1995................................................... 50,913,491
Contributions................................................................ 173,601
Distributions................................................................ (6,211,731)
Net income................................................................... 2,234,501
----------
Balance at September 30, 1996.................................................. $47,109,862
----------
----------
</TABLE>

See accompanying notes to combined financial statements.

F-65
<PAGE>
MUBEN HOTELS
COMBINED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995 AND 1994

<TABLE>
<CAPTION>
1996 1995 1994
------------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 2,234,501 1,371,896 121,619
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.................................... 2,494,437 3,316,235 4,451,660
Decrease (increase) in accounts receivable....................... (510,537) 337,583 (77,086)
Decrease in inventory and other assets........................... 3,446 96,464 22,741
Decrease in notes receivable..................................... -- -- 100,000
Increase (decrease) in accounts payable and accrued expenses..... 843,891 (243,556) (312,119)
Increase (decrease) in advance deposits.......................... 72,248 (3,509) (10,866)
Increase in intercompany income taxes payable.................... 1,489,668 914,597 81,080
------------- ----------- -----------
Total Adjustments.................................................... 4,393,153 4,417,814 4,255,410
------------- ----------- -----------
Net cash provided by operating activities.............................. 6,627,654 5,789,710 4,377,029
------------- ----------- -----------
Cash flows from investing activities--purchases of furniture and
equipment............................................................ (149,530) (999,422) (2,285,579)
------------- ----------- -----------
Cash flows from financing activities:
Capital contributions................................................ 173,601 215,327 1,485,114
Capital distributions................................................ (6,211,731) (4,701,579) (2,725,000)
------------- ----------- -----------
Net cash used by financing activities.................................. (6,038,130) (4,486,252) (1,239,886)
------------- ----------- -----------
Net increase in cash and cash equivalents.............................. 439,994 304,036 851,564
Cash and cash equivalents at beginning of period....................... 2,100,027 1,795,991 944,427
------------- ----------- -----------
Cash and cash equivalents at end of period............................. $ 2,540,021 2,100,027 1,795,991
------------- ----------- -----------
------------- ----------- -----------
</TABLE>

See accompanying notes to combined financial statements.

F-66
<PAGE>
MUBEN HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30,1996, DECEMBER 31,1995 AND 1994

(1) ORGANIZATION

The combined financial statements consist of five hotels which are part of
MBL Life Assurance Corporation. This portfolio of hotels is known as the Muben
Hotels (the "Hotels"). 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).

CapStar Hotel Company purchased the Hotels for approximately $68,400,000 on
December 17, 1996.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accounts of the Hotels are included in the financial records of the 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 accounts of the Hotels are included in the financial records of the MBL
Life Assurance Corporation and therefore the Hotels were not subject to income
taxes on a separate basis. For purposes of these financial statements, the
Hotels have calculated their tax provision on the separate return basis to
approximate tax expense as if they were a separate legal entity.

F-67
<PAGE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
USE OF ESTIMATES

(3) RELATED-PARTY TRANSACTIONS

All of the Hotels, except for Embassy Row, are managed by CapStar Hotel
Company. The hotels managed by CapStar Hotel Company paid base management fees
based on gross revenue plus incentive management fees if the hotels' operating
results exceeded levels specified in the management contract. These four hotels
incurred management fees of $563,455 in 1996; $926,737 in 1995; $929,013 in
1994; and $1,008,719 in 1993.

CapStar Hotel Company began managing Embassy Row on September 25, 1996.

(4) INCOME TAXES

The Hotels' income tax expense is comprised of the following:

<TABLE>
<CAPTION>
1996 1995 1994
------------ --------- ---------
<S> <C> <C> <C>
Federal........................................................................ $ 1,151,118 706,741 62,653
State and local................................................................ 338,550 207,856 18,427
------------ --------- ---------
$ 1,489,668 914,597 81,080
------------ --------- ---------
------------ --------- ---------
</TABLE>

The "expected" tax expense, based on the U.S. federal statutory rate of 34%
for each of the periods above, differs from the actual tax expense, calculated
at an effective rate of 40%, due to state and local taxes, net of federal tax
benefit.

The Hotels' deferred tax assets and liabilities are insignificant to these
financial statements and are therefore not presented.

F-68
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

No dealer, salesperson or any other person has been authorized to give any
information or to make any representations 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 by the Company 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 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

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 11
Use of Proceeds................................. 17
Price Range of Common Stock..................... 17
Dividend Policy................................. 17
Capitalization.................................. 18
Selected Financial and Other Data............... 19
Unaudited Pro Forma Financial Statements........ 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 24
The Company..................................... 28
Recent Developments............................. 29
Business and Properties......................... 31
The Operating Partnership....................... 41
Management...................................... 42
Principal Stockholders.......................... 50
Certain Relationships and Related
Transactions.................................. 51
Shares Available for Future Sale................ 52
Description of Capital Stock.................... 53
Underwriting.................................... 56
Legal Matters................................... 58
Experts......................................... 58
Special Note Regarding Forward-Looking
Statements.................................... 58
Additional Information.......................... 59
Index to Financial Statements................... F-1
</TABLE>

5,000,000 Shares

[LOGO]

Common Stock

--------------------
PROSPECTUS
March 12, 1997
----------------------

LEHMAN BROTHERS
BT SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
SMITH BARNEY INC.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

GRAPHICS APPENDIX
INSIDE FRONT COVER PAGE 1

Map depicting location of the Company's Hotels.

The Company logo.

Photo of the Westchase Hilton, Houston, Texas.

INSIDE FRONT COVER PAGE 2

Under the heading "Growth", the following text appears: "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."

Under the heading "Operating Strategy," the following text appears: "The
Company seeks to achieve its principal operating 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. CapStar believes that skilled
management of hotel operations is the most critical element in maximizing
revenue and cash flow in full-service hotels."

Photos of the Sheraton Hotel Lobby, Colorado Springs, Colorado, the Marriott
Hotel, Somerset, New Jersey, Hilton Los Angeles Worldport, Los Angeles,
California, and Citronelle Restaurant, The Latham Hotel, Washington, D.C.

INSERT FRONT COVER PAGE 3

Under the heading "Acquisition Strategy," the following text appears:
"CapStar seeks to increase shareholder value by continuing to acquire upscale,
full-service hotels below replacement cost in selected markets throughout the
United States and Canada and implementing its operating strategy to improve
hotel operations and increase cash flow."

Photos of the Hilton Hotel, Arlington, Texas, The Westin Hotel, Atlanta
Airport, Atlanta, Georgia, The Sheraton Airport Plaza, Charlotte, North
Carolina, and The Westin Hotel (interior), Atlanta Airport, Atlanta, Georgia.

INSIDE BACK COVER PAGE 1

Photos of the Radisson Hotel, Dallas, Texas (to be acquired), Orange County
Airport Hilton, Irvine, California, The Sheraton Hotel, Vancouver, British
Columbia (to be acquired), The Doubletree Hotel, Albuquerque, New Mexico.

INSIDE BACK COVER PAGE 2

Before and after photos of the Salt Lake Airport Hilton, Salt Lake City,
Utah, and the Hilton Hotel, Bellevue, Washington.

INSIDE BACK COVER PAGE 3

Photos of Hilton Hotel, Arlington, Virginia, Embassy Suites, Denver,
Colorado, Southwest Hilton, Houston, Texas, Radisson Hotel, Schaumburg,
Illinois, Hilton Hotel, Lafayette, Louisiana.