MERISTAR HOTELS & RESORTS INC, S-1, 1998-04-10

MERISTAR HOTELS & RESORTS INC
S-1, 1998-04-10

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 10, 1998

REGISTRATION NO. 333-

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

---------------
MERISTAR HOTELS & RESORTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 7011 51-0379982
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.)

MERISTAR HOTELS & RESORTS, INC.
1010 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20007
(202) 965-4455
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

---------------
PAUL W. WHETSELL
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MERISTAR HOTELS & RESORTS, INC.
1010 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20007
(202) 965-4455
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

---------------
COPIES TO:
RICHARD S. BORISOFF, ESQ.
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019-6064
(212) 373-3000

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

---------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]

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

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

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

---------------
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED (1) PER UNIT (1) PRICE(1) FEE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share........ 8,400,000 $2.58 $21,672,000 $6,394
- --------------------------------------------------------------------------------
Subscription Rights(2). (2) -- -- --
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
(2) Evidencing the rights to subscribe for the shares of Common Stock
described above.

---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 10, 1998

PROSPECTUS

. SHARES

MERISTAR HOTELS & RESORTS, INC.

SHARES OF COMMON STOCK AND RIGHTS TO ACQUIRE
UP TO . OF SUCH SHARES

----------

MeriStar Hotels & Resorts, Inc. ("MeriStar Hotels" or the "Company") is
distributing to holders of record of (a) the common stock, par value $0.01 per
share (the "REIT Common Stock"), of MeriStar Hospitality Corporation, a
Maryland corporation operating as a real estate investment trust (the "REIT"),
and (b) the units of limited partnership (the "REIT OP Units") of MeriStar
Hospitality Operating Partnership, L.P., a Delaware limited partnership (the
"REIT Operating Partnership"), other than REIT OP Units held by the REIT or any
of its subsidiaries, as of the effective time of the Merger defined below (the
"Record Date"), non-transferable rights (the "Rights") to subscribe for and
purchase shares of the common stock, par value $0.01 per share (the "Common
Stock"), of MeriStar Hotels, at a subscription price (the "Subscription Price")
equal to 95% of the average of the daily high and low prices of the Common
Stock on the New York Stock Exchange Inc. ("NYSE") or any other principal
trading market on which the Common Stock is then traded (the "Principal
Market"), for the period (the "Measurement Period") of five consecutive trading
days (a "Trading Day") on the Principal Market immediately following the third
Trading Day after the date the Common Stock opens for trading on the Principal
Market.

The Company will be spun off (the "Spin-Off") by CapStar Hotel Company, a
Delaware corporation ("CapStar"), and certain of its affiliates, as further
described below, to become the lessee, manager and operator of various hotel
assets, including those currently (i) owned, leased and managed by CapStar and
its affiliates. CapStar intends to transfer or cause to be transferred certain
assets and liabilities constituting the hotel management and leasing business
currently operated by CapStar and its subsidiaries to MeriStar Hotels, a wholly
owned subsidiary of CapStar. CapStar then intends to distribute, on a share-
for-share basis, to its stockholders of record as of the effective time of the
Merger (the "Spin-Off Record Date") all of the outstanding capital stock of
MeriStar Hotels in the Spin-Off. The Spin-Off will provide the stockholders of
CapStar as of the Spin-Off Record Date with the opportunity to participate in
the benefits of both the real estate operations of the REIT, and the leasing
and management operations of MeriStar Hotels.

Pursuant to an Agreement and Plan of Merger, dated as of March 15, 1998 (the
"Merger Agreement"), among American General Hospitality Corporation, a Maryland
corporation operating as a real estate investment trust ("AGH"), American
General Hospitality Operating Partnership, L.P., a Delaware limited partnership
("AGH Operating Partnership"), CapStar, CapStar Management Company, L.P., a
Delaware limited partnership, ("CapStar Management"), and CapStar Management
Company II, L.P., a Delaware limited partnership ("CapStar Management II"),
CapStar after spinning-off MeriStar Hotels will merge with and into AGH (the
"Merger"), with the result that (a) AGH will be the surviving corporation
operating under the name MeriStar Hospitality Corporation and (b) each
outstanding share of common stock, par value $0.01 per share, of CapStar
("CapStar Common Stock") will be converted into 1.0 share of REIT Common Stock,
and each outstanding share of common stock, par value $0.01 per share, of AGH
("AGH Common Stock") will be converted into 0.8475 shares of REIT Common Stock.

Immediately following the Spin-Off and the effective date of the Merger, the
Company will acquire 100% of the limited partnership interests in the third-
party lessee of most of the hotels owned by AGH and substantially all of the
assets and certain liabilities of the third-party manager of most of the hotels
owned by AGH, pursuant to an Acquisition Agreement, dated as of March 15, 1998
(the "Lessee-Manager Acquisition Agreement"). See "The Merger and the Spin-
Off--The Lessee-Manager Acquisition Agreement."

Each holder of record of REIT Common Stock and/or REIT OP Units on the Record
Date (a "Rightholder") will receive one-sixth of a Right for each share of REIT
Common Stock and/or each REIT OP Unit so held. Each whole Right will entitle
the Rightholder (but not a subsequent transferee of the REIT Common Stock
and/or REIT OP Units held by such Rightholder on the Record Date) to purchase
one share of Common Stock at the Subscription Price (the "Subscription
Privilege"). The Company will publicly announce the Subscription Price promptly
following determination thereof. Although fractional Rights will be issued to
Rightholders, the Company reserves the right, in its sole discretion, to pay
cash in lieu of fractional shares of Common Stock that would otherwise be
issued or issuable in respect of fractional Rights exercised by Rightholders,
based on a value per whole share of Common Stock equal to the closing price of
the Common Stock on the Principal Market on the Expiration Date. Any such cash
payment will be made to the applicable Rightholder at the same time that shares
of Common Stock are issued in respect of whole rights exercised by
Rightholders. Fractional Rights can only be exercised concurrently with the
exercise of whole Rights. The Company intends to pay cash in lieu of all such
fractional shares of Common Stock. An election to exercise Rights, once made,
may not be revoked. The subscription agent (the "Subscription Agent") for the
Rights Offering will be .. All amounts received by the Subscription Agent
pursuant to the exercise of Rights will be held in a non-interest-bearing
escrow account until the completion of the Rights Offering. See "The Rights
Offering--Subscription Privilege." The Rights will be evidenced by non-
transferable subscription certificates. The issuance of shares of Common Stock
pursuant to the Rights Offering is conditioned upon consummation of the Spin-
Off, the Merger and transactions contemplated by the Lessee-Manager Acquisition
Agreement. The Company also reserves the right, at its sole option, to cancel
the Rights Offering if the Subscription Price is less than .. The Rights will
be exercisable at any time following 5:00 p.m., New York City time, on the last
day of the Measurement Period until 5:00 p.m., New York City time, on the
sixteenth calendar day immediately following the last day of the Measurement
Period, or such later date as the Company may determine (the "Expiration
Date"), unless the Rights Offering is earlier cancelled.

PRIOR TO DECIDING TO EXERCISE THE RIGHTS, RIGHTHOLDERS SHOULD CAREFULLY
CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS" BEGINNING ON PAGE . HEREOF.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUBSCRIPTION PROCEEDS TO
PRICE COMPANY(1)(2)(3)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Per Share............................................... $ $
- -----------------------------------------------------------------------------------------------------
Total................................................... $ $
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) The Common Stock issuable pursuant to the Rights Offering is being offered
and sold directly by the Company, and no commission or other remuneration
will be paid to any person for soliciting purchases of the Common Stock.
(2) Before deducting expenses payable by the Company.
(3) Assumes the sale of all of the . shares offered hereby.

The date of this Prospectus is , 1998.
<PAGE>

The Rights may not be exercised by any person, and neither this Prospectus
nor any Subscription Certificate shall constitute an offer to sell or a
solicitation of an offer to purchase any shares of Common Stock, in any
jurisdiction in which such transactions would be unlawful.

If the Rights Offering is not completed, the Subscription Agent will return
the Subscription Price paid by investors as soon as practicable thereafter.
See "The Rights Offering--Conditions to Sale of Shares" and "Risk Factors--
Risk of Termination of the Rights Offering Under Certain Circumstances." The
maximum number of shares which may be issued in the Rights Offering is .,
representing approximately .% of the shares of Common Stock that would be
outstanding after the Rights Offering.

The Company expects to apply to list the Common Stock on the NYSE, under the
symbol ".". No listing has been applied for with respect to the Rights. Prior
to the Spin-Off, there will be no established trading market for the Common
Stock and there can be no assurance that after the Spin-Off any such trading
market will develop.

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF SO GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR THE SALE OF ANY SECURITIES HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF MERISTAR HOTELS SINCE THE DATE HEREOF OR THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Prospectus constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended
(the "Securities Act"), and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause
actual results, performances or achievements of MeriStar Hotels to be
materially different from any future results, performances or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others things, the following: the matters described under "Risk
Factors"; the possibility that expected cost savings from the Merger
transactions may not be fully realized or may not be realized within the
expected time frames; the ability of the Company successfully to implement its
operating strategies; the Company's ability to manage rapid expansion; lease
rents and availability of financing; changes in economic cycles; competition
from other hospitality companies; and changes in the laws and government
regulations applicable to the REIT, the Company or the structure of the
transactions described herein. Readers should carefully review the Company's
financial statements and the notes thereto, as well as the risk factors
described herein.

AVAILABLE INFORMATION

Following the Spin-off, MeriStar Hotels will be subject to the informational
requirements of the Exchange Act, and in accordance therewith will file
reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Copies of such reports, proxy
statements and other information filed with the Commission can be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and
at the following Regional Offices of the Commission: 7 World Trade Center,
Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549 at prescribed rates.
MeriStar Hotels will file information electronically with the Commission, and
the Commission maintains a Web Site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's Web Site
on the Internet is http://www.sec.gov. In addition, the Company expects to
apply to list the Common Stock on the NYSE. If the Common Stock is so listed,
MeriStar Hotels will file reports, proxy and information statements and other
information with the NYSE. These documents may be inspected at the offices of
the NYSE, 20 Broad Street, New York, New York 10005.

MeriStar Hotels has filed with the Commission a registration statement on
Form S-1 (together with all amendments, exhibits and schedules thereto, the
"Registration Statement") under the Securities Act, relating to the Rights and
the shares of Common Stock that will be issued to Rightholders upon exercise
thereof in connection with the Rights Offering. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto filed by MeriStar Hotels with the Commission, certain
portions of which are omitted in accordance with the rules and regulations of
the Commission. Such additional information is available for inspection and
copying at the offices of the Commission. Statements contained in this
Prospectus as to the contents of any contract or other document referred to
herein are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.

The distribution of this Prospectus and the offering of the Rights and the
shares of Common Stock in certain jurisdictions may be restricted by law. No
action has been taken by MeriStar Hotels that would permit an offering of the
Rights or such shares or the circulation or distribution of this Prospectus or
any offering material in relation to the Company, the Rights or such shares in
any country outside the United States where action for that purpose is
required. Persons into whose possession this Prospectus comes are required by
the Company to inform themselves about and to observe any such restrictions.

2
<PAGE>

SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the financial statements and the notes thereto appearing
elsewhere in this Prospectus. Investors should carefully consider the
information set forth under the heading "Risk Factors." Unless the context
otherwise requires, references herein to "MeriStar Hotels" or the "Company"
include MeriStar Hotels & Resorts, Inc. and its subsidiaries, including its
subsidiary operating partnership, MeriStar H & R Operating Company, L.P., and,
with respect to periods prior to the Spin-Off, the Merger and the consummation
of transactions contemplated by the Lessee-Manager Acquisition Agreement
(collectively, the "Formation Transactions"), the real estate leasing,
management and related operations of CapStar. The historical combined financial
information of the Company included herein relates to the real estate leasing,
management and related operations of CapStar prior to the Formation
Transactions and the pro forma combined financial information of the Company
included herein reflects such historical combined financial information as
adjusted for the assumption by the Company of rights and liabilities under
hotel management contracts and operating leases of AGHI and AGH Leasing upon
consummation of the Formation Transactions.

THE COMPANY................. MeriStar Hotels & Resorts, Inc. ("MeriStar
Hotels" or the "Company") will be spun off (the
"Spin-Off") by CapStar Hotel Company, a Delaware
corporation ("CapStar"), to become the lessee,
manager and operator of various hotel assets,
including those currently owned, leased and
managed by CapStar ("CapStar"), and certain of
its affiliates. CapStar intends to transfer or
cause to be transferred certain assets and
liabilities constituting the hotel management and
leasing business currently operated by CapStar
and its subsidiaries to MeriStar Hotels, a wholly
owned subsidiary of CapStar. CapStar intends
initially to capitalize the Company with
approximately $52 million of cash including a $30
million draw on the Company's $100 million
revolving credit facility with the REIT. The
Company intends to draw an additional $35 million
from the revolving credit facility in connection
with the consummation of the transactions
contemplated by the Lessee-Manager Acquisition
Agreement (as defined herein). The rate on the
revolving credit facility will not exceed 350
basis points over LIBOR. Immediately following
the Spin-Off and the effective date of the
Merger, the Company will acquire 100% of the
limited partnership interests in the third-party
lessee of most of the hotels owned by AGH and
substantially all of the assets and certain
liabilities of the third-party manager of most of
the hotels owned by AGH, pursuant to an
Acquisition Agreement, dated as of March 15, 1998
(the "Lessee-Manager Acquisition Agreement"). See
"The Merger and the Spin-Off--The Lessee-Manager
Acquisition Agreement." Pursuant to the purchase
of AGHI and AGH Leasing, MeriStar Hotels will be
the manager and operator of most of the hotels
owned by American General Hospitality, a Maryland
corporation operating as a real estate investment
trust ("AGH"). Immediately following consummation
of the Formation Transactions, the Company
expects to be one of the largest independent
hotel management companies in the United States.
The Company will be the successor-in-interest and
will assume all of the rights and liabilities
with respect to hotel management contracts and
operating leases of CapStar, AGHI, and

3
<PAGE>

AGH Leasing. Pursuant to the Formation
Transactions, the Company will lease and manage
201 hotels containing 42,441 rooms (the
"Hotels"). Of the Hotels, MeriStar Hotels will
(i) lease and manage 100 hotels owned by MeriStar
Hospitality Corporation, a Maryland corporation
operating as a real estate investment trust (the
"REIT"), containing 26,025 rooms (the "REIT owned
Hotels"), (ii) lease 46 (of which they manage 35)
hotels that are not REIT Owned Hotels containing
6,629 rooms, and (iii) manage an additional 55
hotels that are not REIT Owned Hotels containing
9,787 rooms. The Hotels are located throughout
the United States and Canada including most major
metropolitan areas and rapidly growing secondary
cities. The Hotels include hotels operated under
nationally recognized brand names such as
Hilton(R), Sheraton(R), Westin(R), Marriott(R),
Doubletree(R) and Embassy Suites(R). The
Company's business strategy will be to renovate,
reposition and operate each hotel according to a
business plan specifically tailored to the
characteristics of the hotel and its market. See
"The Merger and the Spin-Off," "The Company,"
"Management's Discussion and Analysis of
Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Business."

THE SPIN-OFF................ CapStar intends to distribute on a share-for-
share basis to its stockholders of record as of
the effective time of the Merger (the "Spin-Off
Record Date") all of the outstanding Common
Stock, par value $0.01 per share, of MeriStar
Hotels (the "Common Stock"). The Spin-Off will
provide the stockholders of CapStar as of the
Spin-Off Record Date with the opportunity to
participate in the benefits of both ownership of
real estate through the REIT, and the leasing and
management operations (including the ownership of
certain non-real estate assets) of MeriStar
Hotels.

THE MERGER.................. Pursuant to the Agreement and Plan of Merger
dated as of March 15, 1998 (the "Merger
Agreement"), among AGH, American General
Hospitality Operating Partnership, L.P., a
Delaware limited partnership ("AGH Operating
Partnership"), CapStar, CapStar Management
Company, L.P., a Delaware limited partnership,
("CapStar Management"), and CapStar Management
Company II, L.P., a Delaware limited partnership
("CapStar Management II"), CapStar intends to
merge with and into AGH (the "Merger"), with the
result that (a) AGH will be the surviving
corporation operating under the name MeriStar
Hospitality Corporation (the "REIT") and (b) each
outstanding share of common stock, par value
$0.01 per share of CapStar ("CapStar Common
Stock"), will be converted into 1.0 share of
common stock of the REIT, par value $0.01 per
share ("REIT Common Stock") and each outstanding
share of common stock, par value $0.01 per share
of AGH ("AGH Common Stock"), will be converted
into 0.8475 shares of REIT Common Stock. See "The
Merger and the Spin-Off."

4
<PAGE>

Pursuant to the Intercompany Agreement (the
THE INTERCOMPANY AGREEMENT.. "Intercompany Agreement") among MeriStar Hotels
and its subsidiary operating partnership,
MeriStar H & R Operating Company, L.P., a
Delaware limited partnership that will be a
manager and lessee of hotels and resorts ("Hotels
OP" and, together with MeriStar Hotels, the
"Hotel Parties"), on the one hand, and the REIT
and its subsidiary operating partnership,
MeriStar Hospitality Operating Partnership, L.P.,
a Delaware limited partnership which will own
hotels, resorts and other real property (the
"REIT Operating Partnership" and, together with
the REIT, the "REIT Parties"), on the other hand,
the Hotel Parties and the REIT Parties will
provide each other with, among other things,
reciprocal rights to participate in certain
transactions entered into by such parties. In
particular, subject to certain exceptions, the
Hotel Parties will have a right of first refusal
to become the lessee of any real property
acquired by the REIT Parties if the REIT Parties
determine that, consistent with the REIT's status
as a real estate investment trust, the REIT
Parties are required to enter into such a lease
arrangement; provided that the Hotel Parties or
an entity that the Hotel Parties control is
qualified to be the lessee. Further, pursuant to
the Intercompany Agreement, MeriStar Hotels has
agreed, subject to certain exceptions, not to
acquire or make (i) investments in real estate
(which, for purposes of the Intercompany
Agreement, include the provision of services
related to real estate and investment in hotel
properties, real estate mortgages, real estate
derivatives or entities that invest in real
estate assets) or (ii) any other investments that
may be structured in a manner that qualifies
under the federal income tax requirements
applicable to a real estate investment trust,
unless in either case it has notified the REIT of
the acquisition or investment opportunity, in
accordance with the terms of the Intercompany
Agreement, and the REIT has determined not to
pursue such acquisition or investment. In
addition, the Hotel Parties intend to pursue
additional opportunities with other hotel owners
in the future. See "The Company--The Intercompany
Agreement."

THE LESSEE-MANAGER
ACQUISITION AGREEMENT...... Following the Spin-Off and the effective date of
the Merger, the Company will acquire 100% of the
partnership interests in AGH Leasing, the third-
party lessee of most of the hotels owned by AGH,
and substantially all of the assets and certain
liabilities of AGHI, the third-party manager of
most of the hotels owned by AGH, for $95 million
pursuant to an Agreement, dated as of March 15,
1998 (the "Lessee-Manager Acquisition
Agreement"), by and among Hotels OP, AGHI, AGHL
GP, Inc., a Delaware corporation, the general
partner of AGH Leasing, and the limited partners
of AGH Leasing. See "The Merger and the Spin-
Off--The Lessee-Manager Acquisition Agreement."

THE RIGHTS OFFERING......... The distribution of the Rights by the Company and
the sale of shares of Common Stock upon the
exercise of the Rights are referred to herein as
the "Rights Offering."

5
<PAGE>

RIGHTS...................... Non-transferable rights (the "Rights") to
subscribe for and purchase shares at the
Subscription Price.

RECIPIENTS OF RIGHTS;
RIGHTS RECEIVED............ MeriStar Hotels is distributing the Rights to
holders of record of (a) the REIT Common Stock
and/or (b) the units of limited partnership (the
"REIT OP Units") of the REIT Operating
Partnership (other than REIT OP Units held by the
REIT or any of its subsidiaries) as of the Record
Date defined below. Each holder of record of REIT
Common Stock and/or REIT OP Units on the Record
Date (a "Rightholder") will receive one-sixth of
a Right for each share of REIT Common Stock
and/or each REIT OP Unit so held.

RECORD DATE................. The effective time of the Merger (the "Record
Date"), which will be publicly announced by the
Company.

EXPIRATION DATE............. The Rights will be exercisable at any time
following 5:00 p.m., New York City time, on the
last day of the Measurement Period until 5:00
p.m., New York City time, on the sixteenth
calendar day immediately following the last day
of the Measurement Period, or such later date as
the Company may determine (the "Expiration
Date"), unless the Rights Offering is earlier
cancelled.

SUBSCRIPTION PRICE;
MEASUREMENT PERIOD......... An amount in cash per share of Common Stock equal
to 95% of the average of the daily high and low
prices of the Common Stock on the New York Stock
Exchange Inc. ("NYSE") or any other principal
trading market on which the Common Stock is
traded (the "Principal Market") for the period
(the "Measurement Period") of five consecutive
trading days (a "Trading Day") on the Principal
Market immediately following the third Trading
Day after the date that the Common Stock opens
for trading on the Principal Market (the
"Subscription Price"). The Company will publicly
announce the Subscription Price promptly
following determination thereof.

SUBSCRIPTION PRIVILEGE...... Each whole Right will entitle the Rightholder
(but not a subsequent transferee of the REIT
Common Stock and/or REIT OP Units held by such
Rightholder on the Record Date) to purchase one
share of Common Stock at the Subscription Price
(the "Subscription Privilege"). See "The Rights
Offering--Subscription Privilege."

COMMON STOCK OUTSTANDING
AFTER RIGHTS OFFERING...... A maximum of . shares. See "The Spin-Off and
the Merger," "Capitalization," "Management," and
"Security Ownership of Certain Beneficial Owners
and Management."

TRANSFERABILITY OF RIGHTS... The Rights are non-transferable. In the event
that Rightholders transfer the REIT Common Stock
and/or REIT OP Units owned by

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<PAGE>

them as of the Record Date, they will remain the
owners of Rights issued in respect of such shares
of REIT Common Stock or such REIT OP Units.

PROCEDURE FOR EXERCISING The Subscription Privilege may be exercised by
RIGHTS..................... properly completing the subscription certificate
evidencing the Rights (a "Subscription
Certificate") and forwarding such Subscription
Certificate (or following the Guaranteed Delivery
Procedures (as described in "The Rights
Offering--Exercise of Rights")), with payment of
the Subscription Price for each share subscribed
for pursuant to the Subscription Privilege, to
the Subscription Agent on or prior to the
Expiration Date. If the mail is used to forward
Subscription Certificates, it is recommended that
insured registered mail be used. Once a
Rightholder has exercised the Subscription
Privilege, such exercise may not be revoked. See
"The Rights Offering--Exercise of Rights."

PROCEDURE FOR EXERCISING
RIGHTS BY FOREIGN Subscription Certificates will not be mailed to
STOCKHOLDERS............... Rightholders whose addresses are outside the
United States or who have an APO or FPO address,
but will be held by the Subscription Agent for
their account. To exercise the Rights represented
thereby, such Rightholders must notify the
Subscription Agent by completing an International
Holder Subscription Form, which will be delivered
to such Rightholders in lieu of a Subscription
Certificate, and sending it by mail or telecopy
to the Subscription Agent. Rightholders located
in the United Kingdom will not initially be
provided with an International Holder
Subscription Form and, if they are interested in
participating in the Rights Offering, should
contact European Agent/broker-dealer, facsimile
number . , attention: . . International Holder
Subscription Forms must be returned to the
Subscription Agent on or prior to 11:00 a.m., New
York City time, on the date that is four Trading
Days prior to the Expiration Date. Certain
restrictions applicable to the exercise and sale
of Rights by persons located outside of the
United States are set forth elsewhere in this
Prospectus. See "The Rights Offering--Foreign and
Certain Other Stockholders."

PERSONS HOLDING SHARES OR
WISHING TO EXERCISE RIGHTS Rightholders holding or receiving the Rights
THROUGH OTHERS............. through a broker, dealer, commercial bank, trust
company or other nominee, as well as Rightholders
who would prefer to have such institutions effect
transactions relating to the Rights on their
behalf, should contact the appropriate
institution or nominee and request it to effect
the transactions for them. Such Rightholders
should be aware that brokers or other nominee
holders may establish deadlines for receiving
instructions from beneficial holders
significantly in advance of the Expiration Date.
See "The Rights Offering--Exercise of Rights."

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<PAGE>

Certificates representing shares of Common Stock
ISSUANCE OF COMMON STOCK.... purchased pursuant to the exercise of Rights will
be delivered to subscribers as soon as
practicable following the fourth business day
after the Expiration Date. The issuance of shares
pursuant to the exercise of Rights is conditioned
upon the consummation of the Formation
Transactions prior to the closing of the Rights
Offering. Although fractional Rights will be
issued to Rightholders, the Company reserves the
right, in its sole discretion, to pay cash in
lieu of fractional shares of Common Stock that
would otherwise be issued or issuable in respect
of fractional Rights exercised by Rightholders,
based on a value per whole share of Common Stock
equal to the closing price of the Common Stock on
the Principal Market on the Expiration Date. Any
such cash payment will be made to the applicable
Rightholder at the same time that shares of
Common stock are issued in respect of whole
rights exercised by Rightholders. Fractional
Rights can only be exercised concurrently with
the exercise of whole Rights. The Company intends
to pay cash in lieu of all such fractional shares
of Common Stock. The Company also reserves the
right, at its sole option, to cancel the Rights
Offering if the Subscription Price is less than
. . See "The Spin-Off and the Merger," "The
Rights Offering--Conditions to the Sale of
Shares."

USE OF PROCEEDS............. MeriStar Hotels will use the proceeds of the
Rights Offering to repay existing indebtedness
and for general corporate purposes. See "Use of
Proceeds."

SUBSCRIPTION AGENT.......... .

MARKET FOR COMMON STOCK;
PROPOSED TRADING SYMBOL.... The Company intends to apply to list the Common
Stock on the NYSE under the symbol ".". No
listing has been applied for with respect to the
Rights.

RISK FACTORS................ The purchase of the Common Stock involves certain
risks. See "Risk Factors."

POTENTIAL ANTI-TAKEOVER
EFFECT OF CERTAIN
PROVISIONS OF DELAWARE LAW
AND OF THE MERISTAR HOTELS
CHARTER AND BY-LAWS........
Certain provisions of Delaware General
Corporation Law ("DGCL") and of the Certificate
of Incorporation of MeriStar Hotels (the
"Charter") and the By-Laws of MeriStar Hotels
(the "By-laws") may have the effect of
discouraging a third party from making an
acquisition proposal for MeriStar Hotels and
could delay, defer or prevent a transaction or a
change in control of MeriStar Hotels under
circumstances that could otherwise give the
holders of

8
<PAGE>

Common Stock the opportunity to realize a premium
over the then prevailing market prices of the
Common Stock. See "Description of Capital Stock"
and "Certain Antitakeover Provisions."

FEDERAL INCOME TAX
CONSEQUENCES............... See "The Rights Offering--Federal Income Tax
Consequences."

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<PAGE>

RISK FACTORS

Rightholders, in considering whether to exercise their Rights in the Rights
Offering, should consider, in addition to the other information set forth in
this Prospectus, the matters discussed in this section. Such matters address
the risks of the Spin-Off, the risk arising from the relationship of MeriStar
Hotels and the REIT and the risks relating to the business in which MeriStar
Hotels is engaged. This Prospectus contains forward-looking statements which
involve material risks and uncertainties. See "Special Note Regarding Forward-
Looking Statements." MeriStar Hotels' actual results could differ materially
from those anticipated in these forward- looking statements as a result of
certain factors, including those set forth in the following risk factors and
elsewhere in this Prospectus.

IMPACT ON EXISTING SHAREHOLDERS

The Rights entitle the Rightholders to purchase shares of Common Stock from
the Company at a price below the prevailing average closing market price of
the Common Stock during the Measurement Period. If any Rightholders exercise
Rights, those Rightholders who do not exercise Rights will experience a
decrease in their proportionate interests in the Company.

RISK OF TERMINATION OF THE RIGHTS OFFERING UNDER CERTAIN CIRCUMSTANCES

The issuance of shares of Common Stock pursuant to the exercise of the
Rights is conditioned upon the consummation of the Spin-Off, the Merger and
related transactions and the transactions contemplated by the Lessee--Manager
Acquisition Agreement. The Company also reserves the right, at its sole
option, to cancel the Rights offering if the Subscription Price is less than
. . See "The Rights Offering--Conditions to the Sale of Shares."

LACK OF DIVIDENDS

The Company anticipates that for the foreseeable future the Company's
earnings, if any, will be retained for use in the operation of the business
and that no cash dividends will be paid on the Common Stock. Declaration of
dividends on the Common Stock will depend upon, among other things, future
earnings, the operating and financial condition of the Company, its capital
requirements and general business conditions. See "Dividend Policy."

INITIAL CAPITALIZATION; LIMITED FINANCIAL RESOURCES

CapStar intends initially to capitalize the Company with approximately $52
million of cash including a $30 million draw on the Company's $100 million
revolving credit facility with the REIT. In addition, in connection with the
consummation of the transactions contemplated by the Lessee--Manager
Acquisition Agreement, the Company intends to draw an additional $35 million
from the revolving credit facility. The rate on the revolving credit facility
will not exceed 350 basis points over LIBOR. There can be no assurance that
the Company will be able to satisfy its obligations under, or to pay amounts
due under, such revolving credit facility.

RISKS ASSOCIATED WITH THE MERGER TRANSACTIONS

INTEGRATION RISKS

To operate successfully following the Spin-Off and related transactions,
MeriStar Hotels must be able to successfully integrate all of the operations
of AGHI and AGH Leasing with and into the management and operating businesses
of CapStar, and the REIT must be able to successfully integrate operations for
the hotels owned by CapStar (the "CapStar Owned Hotels") and those owned by
AGH (the "AGH Owned Hotels"). The

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<PAGE>

consolidation of functions and integration of departments, systems and
procedures and the spin-off of MeriStar Hotels to manage the hotels owned by
the REIT (the "REIT Owned Hotels") will present a significant management
challenge, and the failure to integrate all of such hotels into MeriStar
Hotels' management and operating structures could have a material adverse
effect on the results of operations and financial condition of MeriStar
Hotels. There can be no assurance that such integration will be successfully
and timely implemented.

RISKS OF TRANSFER OF OPERATING LICENSES

In connection with the Merger, certain operating licenses, such as food and
beverage licenses, are to be transferred to MeriStar Hotels. It may not be
possible to transfer such licenses, or to obtain new licenses in a timely
manner in the event such licenses cannot be transferred. Although hotels can
provide alcoholic beverages under interim licenses or licenses held by the
hotel's previous owner, there can be no assurance that these licenses will
remain in effect until MeriStar Hotels obtains new licenses or that new
licenses will be obtained. The failure to have alcoholic beverage licenses or
other operating licenses could adversely affect the results of operations of
MeriStar Hotels.

CONFLICT OF INTEREST RISKS IN RELATIONSHIP BETWEEN THE REIT AND MERISTAR
HOTELS.

GENERAL CONFLICTS OF INTEREST

MeriStar Hotels and the REIT will have several common members of their
Boards of Directors and several common senior executives, including their two
top executives. MeriStar Hotels and the REIT will operate in a relationship
governed by the Intercompany Agreement which restricts each party from taking
advantage of certain business opportunities without first presenting those
opportunities to the other party. Also, in their relationship with MeriStar
Hotels as lessee and manager of hotels and the REIT as owner of hotels,
MeriStar Hotels and the REIT may have conflicting views on the manner in which
the hotels are operated and managed, and with respect to lease arrangements,
acquisitions and dispositions. As a result, the directors and senior
executives of MeriStar Hotels (who serve in similar capacities at the REIT)
may well be presented with several decisions which provide them the
opportunity to benefit the REIT to the detriment of MeriStar Hotels or benefit
MeriStar Hotels to the detriment of the REIT. Such inherent potential
conflicts of interest will be present in all of the numerous transactions
between MeriStar Hotels and the REIT.

See "The Company--The Intercompany Agreement" for a description of the
relationship between MeriStar Hotels and the REIT and the Intercompany
Agreement.

RESTRICTIONS ON MERISTAR HOTELS' AND THE REIT'S BUSINESS AND FUTURE
OPPORTUNITIES

The Charter provides that for so long as the Intercompany Agreement is in
effect, MeriStar Hotels is prohibited from engaging in activities or making
investments that a real estate investment trust could make unless the REIT was
first given the opportunity but elected not to pursue such activities or
investments. Under the Charter and the Intercompany Agreement, MeriStar Hotels
has agreed not to acquire or make (i) investments in real estate (which, for
purposes of the Intercompany Agreement, include the provision of services
related to real estate and investment in hotel properties, real estate
mortgages, real estate derivatives or entities that invest in real estate
assets) or (ii) any other investments that may be structured in a manner that
qualifies under the federal income tax requirements applicable to a real
estate investment trust, unless in either case it has notified the REIT of the
acquisition or investment opportunity, in accordance with the terms of the
Intercompany Agreement, and the REIT has determined not to pursue such
acquisition or investment; provided, however, that MeriStar Hotels may make
limited minority investments or contributions as part of a lease arrangement
with a party that is not an affiliate of MeriStar Hotels in a bona fide arms-
length transaction; provided further, that such investment or contribution
does not materially impact MeriStar Hotels' financial and legal qualifications
to lease and manage additional real estate investment trust properties. See
"The Company--The Intercompany Agreement." MeriStar Hotels also has agreed to
assist the REIT in structuring and consummating any such acquisition or
investment which the REIT elects to pursue, on terms determined by the REIT.
On the other hand, the Intercompany Agreement grants MeriStar Hotels the right
of first refusal to become the lessee of any real property acquired by

11
<PAGE>

the REIT as to which the REIT determines that, consistent with the REIT's
status as a real estate investment trust, it is required to enter into a
master lease arrangement. This lessee opportunity will be available to
MeriStar Hotels only if the REIT determines, in its sole discretion, that
MeriStar Hotels is qualified to be the lessee. Because of the provisions of
the Intercompany Agreement and the Charter, the nature of MeriStar Hotels'
business and the opportunities it may pursue are restricted.

MERISTAR HOTELS' DEPENDENCE UPON THE REIT; LIMITED RESOURCES FOR GROWTH
THROUGH NEW OPPORTUNITIES

Due to MeriStar Hotels' restricted corporate purpose and the Intercompany
Agreement, MeriStar Hotels will rely on the REIT to provide MeriStar Hotels
with opportunities described in the Intercompany Agreement only if it is
necessary for the REIT, consistent with its status as a real estate investment
trust, to enter into a master lease arrangement and only if MeriStar Hotels
and the REIT negotiate a mutually satisfactory master lease arrangements. If
the REIT in the future should fail to qualify as a real estate investment
trust, such failure could have a substantial adverse effect on those aspects
of MeriStar Hotels' business operations and business opportunities that are
dependent upon the REIT. For example, the Intercompany Agreement remains
effective even if the REIT ceases to qualify as a real estate investment
trust, with MeriStar Hotels' rights relating to lessee opportunities under the
Intercompany Agreement continuing to be based on the REIT's need to create a
master lease structure due to its status as a real estate investment trust.
Accordingly, if the REIT failed to qualify as a real estate investment trust
and thereafter acquired a property, the REIT would have the right under the
Intercompany Agreement to lease the property to any person or entity pursuant
to any type of lease (including a master lease arrangement) or to operate the
property itself. MeriStar Hotels, however, would remain subject to all of the
limitations on its operations contained in the Charter and the Intercompany
Agreement. In addition, although it is anticipated that any master lease
arrangement involving MeriStar Hotels generally will provide that MeriStar
Hotels' rights will continue following a sale of the property or an assignment
of the lease (with the likelihood of a sale or assignment of lease possibly
increasing if the REIT fails to qualify as a real estate investment trust),
MeriStar Hotels could lose its rights under any such master lease arrangement
upon the expiration of the lease. If MeriStar Hotels and the REIT do not
negotiate a mutually satisfactory lease arrangement within 30 days after the
REIT provides MeriStar Hotels with written notice of the lessee opportunity
(or such longer period to which MeriStar Hotels and the REIT may agree), the
REIT may offer the opportunity to others for a period of one year before it
must again offer the opportunity to MeriStar Hotels.

CONFLICTS RELATING TO SALE OF HOTELS SUBJECT TO LEASES

The REIT generally will be obligated under its master leases with MeriStar
Hotels to pay a lease termination fee to MeriStar Hotels if the REIT elects to
sell a hotel or if it elects not to restore a hotel after a casualty and does
not replace it with another hotel on terms that would create a leasehold
interest in such hotel with a fair market value equal to MeriStar Hotels'
remaining leasehold interest under the lease to be terminated. Where
applicable, the termination fee is equal to the fair market value of MeriStar
Hotels' leasehold interest in the remaining term of the lease to be
terminated. A decision to sell a hotel may, therefore, have significantly
different consequences for MeriStar Hotels and the REIT.

RISKS ASSOCIATED WITH THE LODGING INDUSTRY

OPERATING RISKS

Various factors could adversely affect the ability of MeriStar Hotels to
generate revenues and make lease payments to the REIT. MeriStar Hotels'
business will be subject to all of the operating risks inherent in the lodging
industry. These risks include the following: (i) changes in general and local
economic conditions; (ii) cyclical overbuilding in the lodging industry; (iii)
varying levels of demand for rooms and related services; (iv) competition from
other hotels, motels and recreational properties, some of which may have
greater marketing and financial resources than the REIT or MeriStar Hotels;
(v) dependence on business and commercial travelers

12
<PAGE>

and tourism, which business may fluctuate and be seasonal; (vi) the recurring
need for renovations, refurbishment and improvements of hotel properties;
(vii) changes in governmental regulations that influence or determine wages,
prices and construction and maintenance costs; and (viii) changes in interest
rates and the availability of credit. Demographic, geographic or other changes
in one or more of MeriStar Hotels' 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.

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
although this may not be true for hotels in major tourist destinations.
Revenues for hotels in tourist areas generally are substantially greater
during tourist season than other times of the year. Seasonal variations in
revenue at the hotels MeriStar Hotels manages can be expected to cause
quarterly fluctuations in the revenues of MeriStar Hotels. Quarterly earnings
also may be adversely affected by events beyond MeriStar Hotels' control, such
as extreme weather conditions, economic factors and other considerations
affecting travel.

FRANCHISE AGREEMENTS

Upon completion of the Merger, 94 of the REIT Owned Hotels will be operated
pursuant to existing franchise or license agreements with nationally
recognized hotel companies (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 REIT's and MeriStar Hotels' 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. Action or inaction on the part of any of the REIT, MeriStar
Hotels or third-party operators could result in a breach of such standards or
other terms and conditions of the franchise agreements and could result in the
loss or cancellation of a franchise license.

In connection with terminating or changing the franchise affiliation of a
REIT Owned Hotel or a subsequently acquired hotel, MeriStar Hotels or the REIT
may be required to incur significant expenses or capital expenditures.
Moreover, the loss of a franchise license could have a material adverse effect
upon the operations or the underlying value of the hotel covered by the
franchise because of the loss of associated name recognition, marketing
support and centralized reservation systems provided by the franchisor. The
Franchise Agreements covering the 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 a hotel.

Under certain of their existing Franchise Agreements, AGH and CapStar may be
required to obtain the consent of the franchisors under such agreements to
consummate the Merger and related transactions. Although AGH and CapStar
expect to obtain any such consents, there can be no assurance that they will
be obtained.

COMPETITION IN THE LODGING INDUSTRY

The lodging industry is highly competitive. There is no single competitor or
small number of competitors of the REIT and MeriStar Hotels that will be
dominant in the industry. MeriStar Hotels will operate in areas that contain
numerous competitors, many of which have substantially greater resources than
MeriStar Hotels and the ability to accept more risk than MeriStar Hotels will
be able to manage. Competition in the lodging industry is

13
<PAGE>

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 MeriStar
Hotels will compete, thereby adversely affecting MeriStar Hotels' operations
and the number of suitable business opportunities.

ENVIRONMENTAL RISKS

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

All of the REIT Owned Hotels have undergone Phase I environmental site
assessments ("Phase Is"), which generally provide a nonintrusive physical
inspection and database search, but not soil or groundwater analyses, by a
qualified independent environmental engineer, within the last 18 months. The
purpose of the Phase I is to identify potential sources of contamination for
which the REIT Owned Hotels may be responsible and to assess the status of
environmental regulatory compliance. The Phase Is have not revealed and the
Company is not aware of any environmental liability or compliance concerns
that MeriStar Hotels believes would have a material adverse effect on MeriStar
Hotels' results of operation or financial condition.

In addition, the REIT 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. ACMs are present in various building materials such as
sprayed-on ceiling treatments, roofing materials or floor tiles at some of the
REIT 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 REIT and its lenders, MeriStar Hotels believes that
the presence of ACMs in the REIT Owned Hotels will not have a material adverse
effect on MeriStar Hotels' 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 MeriStar Hotels' 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. MeriStar Hotels
believes that it is substantially in compliance with these requirements or, in
the case of liquor licenses, that it has or will promptly obtain the
appropriate licenses. 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 REIT
Owned Hotels and could otherwise adversely affect MeriStar Hotels' results of
operations or financial condition.

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<PAGE>

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 REIT Owned Hotels, a determination that the REIT 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 REIT is
likely to incur additional costs of complying with the ADA; however, such
costs are not expected to have a material adverse effect on MeriStar Hotel's
results of operations or financial condition.

RISKS ASSOCIATED WITH OPERATING REAL ESTATE

Upon consummation of the Formation Transactions, MeriStar Hotels will
continue the hotel management businesses as previously undertaken separately
by AGHI, AGH Leasing and CapStar. The business risks to be faced by MeriStar
Hotels will be similar to those now faced separately by AGHI, AGH Leasing and
CapStar. MeriStar Hotels' strategy to manage only hotels will be subject to
varying degrees of risk generally incident to the operation of real property
and investment in a single industry. The underlying value of MeriStar Hotels'
operations and income will be dependent upon the its ability to operate the
hotels in a manner sufficient to maintain or increase revenues and to generate
sufficient revenue in excess of operating expenses to make lease payments to
the REIT. Income from the hotels may be adversely affected by 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 or other losses, the
impact of present or future environmental legislation and compliance with
environmental laws, the ongoing need for capital improvements, changes in real
estate tax rates and other operating expenses and adverse changes in zoning
laws and other governmental rules and fiscal policies. Many of these risks are
beyond the control of MeriStar Hotels and the effects of these risks are
likely to be more pronounced than if MeriStar Hotels had diversified
operations.

DEPENDENCE ON KEY PERSONNEL

Upon consummation of the Merger, MeriStar Hotels will place substantial
reliance on the lodging industry knowledge and experience and the continued
services of both AGH and CapStar senior management, led by Messrs. Whetsell,
Jorns and McCaslin. MeriStar Hotels' future success and its ability to manage
future growth depend in large part upon the efforts of these persons and on
MeriStar Hotel's ability to attract and retain other highly qualified
personnel. Competition for such personnel is intense, and there can be no
assurance that MeriStar Hotels will be successful in attracting and retaining
such personnel. MeriStar Hotels' inability to attract and retain other highly
qualified personnel may adversely affect its results of operations and
financial condition. MeriStar Hotels will have employment agreements with
Messrs. Whetsell and Jorns for terms of five years, and with Mr. McCaslin for
a term of three years, in each case with automatic renewals on a year-to-year
bases thereafter. See "Executive Officers-Employment Agreements."

POSSIBLE ADVERSE EFFECTS ON MARKET PRICE OF COMMON STOCK ARISING FROM SHARES
AVAILABLE FOR FUTURE SALE

No prediction can be made as to the effect, if any, that any future sales of
shares, or the availability of shares for future sale, will have on the market
prices for Common Stock following the Spin-Off. Sales of substantial amounts
of Common Stock (including Common Stock issued in connection with the Rights,
outstanding stock options or the exchange or sale of units of limited partner
interest in Hotels OP) or the perception that such sales could occur could
adversely affect the prevailing market price for Common Stock. With the
exception of the Common Stock issued to affiliates of MeriStar Hotels in
connection with the Spin-Off and the Rights Offering, all of the Common Stock
to be issued in connection with the Spin-Off and the Rights Offering will be
freely transferable.

ABSENCE OF A PUBLIC MARKET FOR COMMON STOCK

There is currently no public market for the Common Stock. The Company
expects to apply to list the Common Stock on the NYSE under the symbol " . ".
There can be no assurance as to the prices at which

15
<PAGE>

trading in Common Stock will occur after the Spin-Off or that an active
trading market in the Common Stock will develop or be sustained in the future.
In the event no active trading market develops for the Common Stock, holders
of shares of Common Stock may not be able to sell their shares promptly at a
reasonable price. Accordingly, Rightholders and holders of Common Stock should
consider the Common Stock a long-term investment.

The prices at which the Common Stock trades will be determined by the
marketplace and may be influenced by many factors, including, among others,
MeriStar Hotels' and the REIT's performance and prospects, the depth and
liquidity of the market for the Common Stock, investor perception of MeriStar
Hotels and of the hotel industry in which MeriStar Hotels operate, economic
conditions in general, MeriStar Hotels' dividend policy, and general financial
and other market conditions. Such volatility and other factors may materially
adversely affect the market price of the Common Stock.

POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF DELAWARE LAW AND OF
THE CHARTER AND BY-LAWS

Certain provisions of Delaware law and of the Charter and By-Laws may have
the effect of discouraging a third party from making an acquisition proposal
for MeriStar Hotels and could delay, defer or prevent a transaction or a
change in control of MeriStar Hotels under circumstances that could otherwise
give the holders of Common Stock the opportunity to realize a premium over the
then prevailing market prices of the Common Stock. Certain provisions of the
Charter and By-laws, as each will be in effect as of the Rights Offering, and
of the DGCL, have the effect of making more difficult an acquisition of
control of the Company in a transaction not approved by the Board of
Directors. These provisions include (i) a provision for a classified Board,
with only approximately one-third of the Board to be elected in any year, to
serve for three-year terms, (ii) a requirement that directors be removed only
for cause upon the affirmative vote of holders of at least 80% of the total
voting power, (iii) a requirement that actions of stockholders be taken at a
meeting of stockholders, rather than by written consent, (iv) a prohibition on
the stockholders' ability to call a special meeting, (v) an advance notice
requirement for stockholders to make nominations of candidates for directors
or to bring other business before an annual meeting of stockholders, and (vi)
a requirement that certain amendments to the Charter be approved by the
affirmative vote of 80% of total voting power. See "Description of Capital
Stock" and "Certain Antitakeover Provisions." The Company expects to adopt the
Rights Plan at the time of or prior to the Rights Offering. If so adopted,
certificates issued in the Rights Offering representing Common Stock will also
initially represent an equivalent number of associated Preferred Rights. The
Rights Plan will make more difficult an acquisition of control of the Company
in a transaction not approved by the Company's Board. See "Certain
Antitakeover Provisions."

16
<PAGE>

SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION

The following table sets forth selected historical and pro forma financial
information for the Company. The historical balance sheet data of the Company
as of December 31, 1997 and 1996 and the historical operating results and
other financial data for the years ended December 31, 1997, 1996 and 1995,
have been derived from the combined financial statements of the Company which
are included elsewhere in this Prospectus. The historical balance sheet data
as of December 31, 1995, 1994 and 1993 and the historical operating results
and other financial data for the years ended December 31, 1994 and 1993 have
been derived from financial statements of the Company which are not required
to be included in this Prospectus. The following historical information should
be read in conjunction with the combined financial statements and notes
thereto of the Company and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.

The pro forma balance sheet data of the Company as of December 31, 1997 has
been prepared assuming that the Formation Transactions and the Rights Offering
had been consummated on such date. The pro forma operating results and other
financial data have been prepared assuming that the Formation Transactions and
the Rights Offering had been consummated at the beginning of 1997. The
following pro forma information should be read in conjunction with MeriStar
Hotels Unaudited Pro Forma Financial Statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.

17
<PAGE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
PRO FORMA
1997 1997 1996 1995 1994 1993
--------- -------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Revenue:
Rooms................. $ 642,151 $ 9,880 $ -- $ -- $ -- $ --
Food, beverage and
other................ 253,346 1,871 -- -- -- --
Management services
and other revenues... 10,510 12,088 7,050 5,354 4,418 4,234
--------- -------- -------- ------- ------- -------
Total revenues...... 906,007 23,839 7,050 5,354 4,418 4,234
--------- -------- -------- ------- ------- -------
Operating expenses:
Departmental expenses:
Rooms................. 156,738 2,533 -- -- -- --
Food, beverage and
other ............... 187,608 1,170 -- -- -- --
Undistributed operating
expenses:
Administrative and
general.............. 155,574 10,473 6,140 4,745 4,508 4,065
Participating lease
expense.............. 280,949 4,135 -- -- -- --
Property operating
costs................ 111,127 1,917 -- -- -- --
Depreciation and
amortization......... 4,690 636 349 84 23 14
--------- -------- -------- ------- ------- -------
Total operating
expenses........... 896,686 20,864 6,489 4,829 4,531 4,079
--------- -------- -------- ------- ------- -------
Net operating income
(loss)................. 9,321 2,975 561 525 (113) 155
Equity in earnings of
affiliates............. 46 46 -- -- -- --
Interest expense, net... 3,129 56 123 44 -- --
Minority interest....... 832 103 -- -- -- --
Income tax provision.... 2,163 -- -- -- -- --
--------- -------- -------- ------- ------- -------
Net income (loss)... $ 3,243 $ 2,862 $ 438 $ 481 $ (113) $ 155
========= ======== ======== ======= ======= =======
Basic and diluted net
income per common
share.................. $ 0.10 $ -- $ -- $ -- $ -- $ --
OTHER FINANCIAL DATA:
EBITDA (A).............. 14,057 3,657 910 609 (90) 169
Net cash provided by
(used in) operating
activities............. 9,629 4,465 1,226 208 66 (101)
Net cash used in
investing activities... (90,300) (6,501) (1,826) (61) (41) (24)
Net cash provided by
financing activities... 91,495 4,208 699 59 -- 244
BALANCE SHEET DATA:
Total assets ........... $ 189,200 $ 84,419 $ 24,366 $ 2,881 $ 1,232 $ 1,458
Debt.................... 42,546 981 885 950 -- --
</TABLE>
- --------
(A) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. Management believes that EBITDA is a useful
measure of operating performance because (i) it is industry practice to
evaluate hotel companies based on operating income before interest,
depreciation and amortization and minority interests, which is generally
equivalent to EBITDA, and (ii) EBITDA is unaffected by the debt and equity
structure of the entity. 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.

18
<PAGE>

UNAUDITED PRO FORMA FINANCIAL STATEMENTS

The Unaudited Pro Forma Balance Sheet of MeriStar Hotels as of December 31,
1997 is presented assuming the Formation Transactions and the Rights Offering
had occurred on December 31, 1997.

The Unaudited Pro Forma Statement of Operations of MeriStar Hotels for the
year ended December 31, 1997 is presented assuming the Formation Transactions
and the Rights Offering occurred at the beginning of 1997.

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 MeriStar Hotels Unaudited Pro Forma
Financial Statements. The MeriStar Hotels Unaudited Pro Forma Financial
Statements are not necessarily indicative of what MeriStar Hotels' financial
position or results of operations would have been if all the hotels were owned
on such dates and if the Spin-Off and other related transactions occurred on
such dates. Additionally, the pro forma information does not purport to
project MeriStar Hotels' financial position or results of operations at any
future date or for any future period. The MeriStar Hotels Unaudited Pro Forma
Financial Statements should be read in conjunction with the financial
statements and related notes thereto of MeriStar Hotels, AGH Leasing and AGHI
which are included elsewhere in this Prospectus.

19
<PAGE>

MERISTAR HOTELS

UNAUDITED PRO FORMA BALANCE SHEET
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
ACQUIRE
AGH
SPIN- PARTICIPATING LEASING AND RIGHTS
HISTORICAL(A) OFF(B) LEASES(C) SUBTOTAL AGHI(D) OFFERING(E) PRO FORMA
------------- -------- ------------- -------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents............ $27,022 $ 30,000 $ -- $ 57,022 $(48,799) $ -- $ 8,223
Prepaid expenses,
deposits and other..... 19,173 -- 28,580 47,753 -- -- 47,753
Intangible and fixed
assets, net............ 38,224 -- -- 38,224 95,000 -- 133,224
------- -------- ------- -------- -------- ------- --------
Total assets.......... $84,419 $ 30,000 $28,580 $142,999 $ 46,201 $ -- $189,200
======= ======== ======= ======== ======== ======= ========
LIABILITIES, MINORITY INTEREST AND
OWNERS'/STOCKHOLDERS' EQUITY
Due to affiliate........ $22,287 $(22,287) $ 1,933 $ 1,933 $ -- $ -- $ 1,933
Other liabilities....... 16,442 -- 26,647 43,089 -- -- 43,089
Credit facility......... -- 30,000 -- 30,000 35,000 (23,435) 41,565
Capital leases and other
debt................... 981 -- 981 -- -- 981
------- -------- ------- -------- -------- ------- --------
Total liabilities..... 39,710 7,713 28,580 76,003 35,000 (23,435) 87,568
Minority interest....... 3,800 932 -- 4,732 11,201 -- 15,933
Owners'/Stockholders'
equity................. 40,909 21,355 -- 62,264 -- 23,435 85,699
------- -------- ------- -------- -------- ------- --------
Total liabilities,
minority interest and
owners'/stockholders'
equity............... $84,419 $ 30,000 $28,580 $142,999 $ 46,201 $ -- $189,200
======= ======== ======= ======== ======== ======= ========
</TABLE>
- --------
(A) Reflects the audited historical condensed combined balance sheet of the
Company as of December 31, 1997.
(B) Reflects adjustments to capitalize MeriStar Hotels upon the Spin-Off for
(i) $30,000 of cash drawn from MeriStar Hotels' credit facility to be
provided by the REIT, and (ii) net cash contribution of $22,287 to
MeriStar Hotels by CapStar upon forgiveness of the amounts due to CapStar.
(C) Reflects the transfer of net hotel operating assets from CapStar in
conjunction with the execution of the Participating Leases.
(D) Reflects the acquisitions of AGH Leasing and AGHI for $95,000. Based on
preliminary estimates, the purchase price will be allocated $26,500 to
intangible hotel leases acquired and $68,500 to goodwill. The transaction
is to be financed with $48,799 in cash, an additional $35,000 drawn from
MeriStar Hotels' credit facility to be provided by the REIT, and $11,201
in operating partnership units.
(E) Reflects pro forma adjustments for the Rights Offering including: (i)
$23,435 of proceeds from the assumed issuance of 8,310,638 shares of
Common Stock at $2.85 per share, net of transaction expenses of
approximately $250 and (ii) the repayment of debt using proceeds from the
Rights Offering.

20
<PAGE>

MERISTAR HOTELS

UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
ACQUIRE AGH LEASING
AND AGHI
----------------------------------
SPIN-OFF PARTICIPATING AGH OTHER RIGHTS
HISTORICAL(A) PRO FORMA(B) LEASES(C) SUBTOTAL LEASING(D) AGHI(D) ADJUSTMENTS(E) OFFERING(F) PRO FORMA
------------- ------------ ------------- -------- ---------- ------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue from
hotel
operations:
Rooms........... $ 9,880 $68,738 $311,020 $389,638 $252,513 $ -- $ -- $ -- $642,151
Food and
beverage....... 1,397 3,316 128,787 133,500 76,703 -- -- -- 210,203
Other........... 474 3,237 23,742 27,453 15,690 -- -- -- 43,143
Hotel management,
accounting and
other........... 12,088 -- (7,238) 4,850 -- 7,351 (1,691) -- 10,510
------- ------- -------- -------- -------- ------ -------- ------- --------
Total revenue... 23,839 75,291 456,311 555,441 344,906 7,351 (1,691) -- 906,007
Hotel operating
expense by
department:
Rooms........... 2,533 14,300 80,402 97,235 59,503 -- -- -- 156,738
Food and
beverage....... 909 2,215 102,013 105,137 58,940 -- -- -- 164,077
Other operating
departments.... 261 1,648 13,363 15,272 8,259 -- -- -- 23,531
Undistributed
operating
expenses:
Administrative
and general.... 10,473 11,169 72,919 94,561 54,873 7,242 (1,102) -- 155,574
Property
operating
costs.......... 1,917 12,265 56,693 70,875 47,607 -- (7,355) -- 111,127
Participating
lease expense.. 4,135 32,002 124,684 160,821 120,128 -- -- -- 280,949
Depreciation and
amortization... 636 826 -- 1,462 104 124 3,000 -- 4,690
------- ------- -------- -------- -------- ------ -------- ------- --------
20,864 74,425 450,074 545,363 349,414 7,366 (5,457) -- 896,686
Interest expense
and other, net.. 10 2,775 -- 2,785 (373) (135) 2,974 (2,168) 3,083
------- ------- -------- -------- -------- ------ -------- ------- --------
Total expenses... 20,874 77,200 450,074 548,148 349,041 7,231 (2,483) (2,168) 899,769
------- ------- -------- -------- -------- ------ -------- ------- --------
Income (loss)
before minority
interest and
income taxes.... 2,965 (1,909) 6,237 7,293 (4,135) 120 792 2,168 6,238
Minority
interest........ 103 (14) 261 350 (1,663) -- 2,013 132 832
------- ------- -------- -------- -------- ------ -------- ------- --------
Income (loss)
before income
taxes........... 2,862 (1,895) 5,976 6,943 (2,472) 120 (1,221) 2,036 5,406
Income tax
provision....... -- 387 2,391 2,778 -- -- (1,429) 814 2,163
------- ------- -------- -------- -------- ------ -------- ------- --------
Net income
(loss).......... $ 2,862 $(2,282) $ 3,585 $ 4,165 $ (2,472) $ 120 $ 208 $ 1,222 $ 3,243
======= ======= ======== ======== ======== ====== ======== ======= ========
Basic net income
per common
share(G)........ NA $ 0.10
======= ========
Diluted net
income per
common
share(G)........ NA $ 0.10
======= ========
</TABLE>
- --------
(A) Reflects the audited historical condensed combined statement of operations
of the Company for the year ended December 31, 1997.

21
<PAGE>

(B) Reflects the pre-acquisition management operations and leases acquired
during 1997 as if they were acquired at the beginning of the year. The
pre-acquisition operations were obtained from each entity's pre-
acquisition financial statements. Also reflects adjustments to (i) record
pro forma depreciation and amortization at MeriStar Hotel's cost basis for
its acquisitions, (ii) record interest expense of $2,775 at 9.25% relating
to the $30,000 drawn from MeriStar Hotels' credit facility, (iii) adjust
minority interest for the effects of the acquisitions and (i) and (ii),
and (iv) record income taxes at 40% in conjunction with the change in tax
status to a C Corporation.
(C) Reflects the execution of the Participating Leases to (i) present a full
year of hotel operations for hotels leased from CapStar, (ii) eliminate
$7,238 of management fee revenue earned from CapStar-owned hotels, (iii)
adjust minority interest for the effects of (i) and (ii), and (iv) record
income taxes at 40%.
(D) Reflects the 1997 operations of AGH Leasing on a pro forma basis and the
1997 historical operations of AGHI. Pro forma financial statements of AGH
Leasing and the historical financial statements of AGHI are included
elsewhere in this prospectus.
(E) Other adjustments for the acquisition reflect (i) elimination of
historical management fees earned by AGHI from the AGH Owned Hotels of
$1,691, (ii) elimination of pro forma management fees incurred by AGH
Leasing for AGHI services of $7,355, (iii) elimination of a consulting fee
of $2,227 which will not be incurred in the future net of $1,125 of
addition general and administrative costs expected to be incurred upon the
Spin-Off and acquisition, (iv) amortization of $3,000 on intangible assets
acquired in the purchase, (v) interest expense of $3,238 relating to the
$35,000 draw from MeriStar Hotels's credit facility net of historical AGH
Leasing and AGHI interest expense of $264 which will not be incurred upon
acquisition, (vi) minority interest adjusted for (i) through (v), and
(vii) income taxes at 40%.
(F) Reflects pro forma adjustments for the Rights Offering to (i) reduce
interest expense by $2,168 for the repayment of $23,435 of debt using
proceeds from the Rights Offering, (ii) adjust minority interest for the
effects of the Rights Offering and (iii) record income taxes at 40%.
(G) Pro forma basic and diluted net income per common share has been
calculated using 33,177,843 shares of Common Stock.

22
<PAGE>

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

GENERAL

The Company's financial condition and results of operations both on a pro
forma basis as of December 31, 1997 and for the year then ended and on a
historical basis as of December 31, 1997 and 1996 and for the years then ended
reflect differing numbers of managed and leased hotels throughout the periods.
The historical results of operations for the years ended December 31, 1996 and
1995 reflect the same number of managed hotels; however, the number of rooms
under management increased significantly during 1996. The following table
outlines the Company's pro forma and historical portfolio of managed and
leased hotels:

<TABLE>
<CAPTION>
THIRD-PARTY
CAPSTAR HOTELS LEASED HOTELS
MANAGED HOTELS MANAGED TOTAL
---------------- ------------- ------------ -------------
HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
------- -------- ------ ------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pro Forma:
December 31, 1997... -- -- 146 32,654 55 9,787 201 42,441
Historical:
December 31, 1997... 47 12,019 40 5,687 27 4,631 114 22,337
December 31, 1996... 19 5,166 -- -- 28 4,619 47 9,785
December 31, 1995... 6 2,101 -- -- 41 6,089 47 8,190
</TABLE>

The increases described above affect the comparability of the Company's
financial condition and results of operations for these pro forma and
historical periods.

FINANCIAL CONDITION

PRO FORMA DECEMBER 31, 1997 COMPARED WITH HISTORICAL DECEMBER 31, 1997

Total assets increased by $104.8 million to $189.2 million at December 31,
1997 on a pro forma basis from $84.4 million at December 31, 1997 on a
historical basis. The increase is primarily due to the proposed acquisition of
AGH Leasing and AGHI for $95 million. The remaining increase reflects the net
effect of the transactions to finance the acquisition of AGH Leasing and AGHI
and to execute the leases on CapStar-owned hotels.

Total liabilities increased by $47.9 million to $87.6 million at December
31, 1997 on a pro forma basis from $39.7 million at December 31, 1997 on a
historical basis. This overall increase was primarily due to the Company's
draws on its revolving credit facility with the REIT of $65 million to
partially finance both the Spin-Off and the acquisition of AGH Leasing and
AGHI off-set by the paydown of $23.4 million outstanding under the credit
facility with proceeds from the Rights Offering. The remaining increase
reflects the net effect of this transaction to complete the Spin-Off and to
execute the leases on CapStar-owned hotels.

Minority interests increased by $12.1 million to $15.9 million at December
31, 1997 on a pro forma basis from $3.8 million at December 31, 1997 on a
historical basis. This increase was due to $11.2 million in operating
partnership units ("OP Units") issued to third parties to finance the
acquisition of AGH Leasing and AGHI and allocations to minority interests in
the Spin-Off.

HISTORICAL DECEMBER 31, 1997 COMPARED WITH HISTORICAL DECEMBER 31, 1996

Total assets increased by $60.0 million to $84.4 million at December 31,
1997 from $24.4 million at December 31, 1996. A major reason for the increase
was the acquisition in November 1997 of substantially all of the assets of
Winston Hospitality, Inc. ("Winston"), which included a management business
and 38 hotel leases, for approximately $34.0 million. Others reasons for the
overall increase included investments in affiliates and notes receivable
during 1997 of approximately $7.7 million; the increase in cash held on behalf
of affiliates of approximately $6.7 million which resulted from the increase
in CapStar hotels managed; and an increase of

23
<PAGE>

$11.6 million in operating and other assets (accounts receivable, prepaids and
other assets, and furniture, fixtures and equipment and certain intangible
assets) which resulted from the increase in the number of managed hotels and
the hotel leases acquired in 1997.

Total liabilities increased by $18.3 million to $39.7 million at December
31, 1997 from $21.4 million at December 31, 1996. This overall increase was
primarily due to an increase in the amount due to affiliates and operating
liabilities associated with the increase in the number of managed hotels and
the hotel leases acquired in 1997.

Minority interests increased to $3.8 million at December 31, 1997,
reflecting the Company's allocated portion of the value of OP Units of
CapStar's operating partnership subsidiaries which were issued to third
parties in conjunction with CapStar's acquisitions of certain hotels and the
acquisition of Winston.

RESULTS OF OPERATIONS

PRO FORMA YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE HISTORICAL YEAR
ENDED DECEMBER 31, 1997

Total revenue increased by $882.2 million to $906.0 million in 1997 on a pro
forma basis compared to $23.8 million in 1997 on a historical basis. Operating
expenses increased to $896.7 million in 1997 on a pro forma basis from $20.9
million in 1997 on a historical basis. Net operating income increased to $9.3
million in 1997 on a pro forma basis compared to $3.0 million in 1997 on a
historical basis and earnings before interest expense, income taxes,
depreciation and amortization ("EBITDA") increased to $14.1 million in 1997 on
a pro forma basis from $3.7 million in 1997 on a historical basis. These
increases result primarily from the increase in total leased and managed
hotels on a pro forma basis, as compared to a historical basis.

Net interest expense increased by $3.0 million to $3.1 million in 1997 on a
pro forma basis from $.1 million in 1997 on a historical basis. This increase
results from the interest expense on the $41.6 million pro forma outstanding
balance on the credit facility.

Minority interests increased by $0.7 million to $0.8 million on a pro forma
basis from $0.1 million on a historical basis as a result of the net effect of
the changes described above and the issuance of the OP Units in connection
with the acquisition of AGH Leasing and AGHI.

The pro forma statement of operations for 1997 reflects income tax expense
at an effective rate of 40 percent, as a result of the change in tax status to
a C Corporation.

HISTORICAL YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE HISTORICAL YEAR
ENDED DECEMBER 31, 1996

Total revenue increased by $16.7 million or 235% to $23.8 million in 1997
compared to $7.1 million in 1996. The increase results from revenue of $11.8
million from hotel leases acquired in 1997 and an increase of $4.9 million in
management fees and other revenue. The Company did not lease any hotels in
1996. The increase in management fees and other revenue is primarily due to
the increase in the number of managed hotels in 1997 and additional fees
resulting from improved operations of the managed hotels. Hotel management and
other revenue earned by the Company from hotels owned by CapStar were $7.2
million or 30% of total revenue in 1997, and $2.6 million or 37% of total
revenue in 1996.

Operating expenses increased to $20.9 million in 1997 from $6.5 million in
1996. This increase reflects the increase in the number of managed hotels and
the hotel leases acquired in 1997, which resulted in includes the costs of
additional personnel and other administrative costs incurred in conjunction
with the Company's growth.

Net operating income increased by 430% to $3.0 million in 1997 compared to
$0.6 million in 1996 and earnings before interest expense, income taxes,
depreciation and amortization ("EBITDA") grew to $3.7 million in 1997 from
$0.9 million in 1996. These increases resulted primarily from the increase in
the number of managed hotels and the hotel leases acquired in 1997, offset
partially by the costs of additional personnel and other administrative costs
incurred as described above.

24
<PAGE>

Minority interests of $0.1 million in 1997 are due to the Company's
allocated portion of minority interests related to the OP Units issued to
third parties in 1997.

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

Total revenue increased to $7.1 million in 1996 from $5.4 million in 1995.
The growth in management fees and other revenues between 1995 and 1996
reflects the increase in the number of hotel rooms managed and additional fees
resulting from improved operations of the managed hotels and new services
offered, such as tour and travel services. Hotel management and other revenue
earned by the Company from hotels owned by CapStar were $2.6 million or 37% of
total revenue in 1996, and $0.9 million or 17% of total revenue in 1995.

Operating expenses increased to $6.5 million in 1996 from $4.9 million in
1995. This increase reflects the increase in the number hotel rooms under
management, which resulted in costs of additional personnel and other
administrative costs incurred in conjunction with the Company's current and
anticipated growth.

Net operating income increased to $0.6 million in 1996 compared to $0.5
million in 1995 and EBITDA grew to $0.9 million in 1996 from $0.6 million in
1995. These increases resulted primarily from the increase in the number of
hotel rooms under management and additional fees earned as described above,
offset partially by the costs of additional personnel and other administrative
costs incurred as described above.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal sources of liquidity have been cash on hand, cash
generated from operations, capital contributions from CapStar and the issuance
of OP Units by CapStar's operating partnership subsidiaries. The Company's
continuing operations have been funded through cash generated from management
and hotel leasing operations. Business acquisitions and investments in
affiliates are financed through capital contributions and the issuance of OP
Units by CapStar's operating partnership subsidiaries.

At December 31, 1997, the Company had $2.5 million in cash and cash
equivalents, an increase of $2.2 million from $0.3 million at December 31,
1996. Net cash provided by operations increased to $4.5 million compared to
$1.2 million in 1996, mainly due to the increase in managed hotels and the
hotel leases acquired in 1997. The Company used $6.5 million of cash in
investing activities in 1997, primarily for investments in notes receivable,
investments in affiliates and purchases of fixed assets. Net cash provided by
financing activities was $4.2 million in 1997. Non-cash capital contributions
of $34.6 million were made to the Company related to the acquisition of
Winston and its investments in affiliates.

CapStar has conducted a review of its computer systems to identify the
systems that could be affected by the "Year 2000" issue and has initiated an
implementation plan to resolve the issue. The Year 2000 problem is the result
of computer programs being written using two digits rather than four to define
the applicable year. Any of CapStar's and the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations. CapStar presently believes that, with modifications to
existing software and converting to new software, the Year 2000 problem will
not pose significant operational problems for the computer systems of CapStar
or the Company as so modified and converted. Additionally, CapStar does not
expect the Year 2000 problem to have a material effect on CapStar's or the
Company's financial position or results of operations. However, if such
modifications and conversions are not completed timely, the Year 2000 problem
may have a material impact on the financial position and operations of CapStar
and the Company.

As described more fully elsewhere in this document (see "The Merger and the
Spin-Off"), the Company is expected to be spun-off from CapStar in
anticipation of CapStar's proposed Merger with AGH. In conjunction with the
Merger, the Company has entered into the Lessee-Manager Acquisition Agreement
to acquire substantially all of the assets and liabilities of AGHI and AGH
Leasing for a combined purchase price consisting of approximately $83.8
million in cash and approximately $11.2 in the form of OP Units of Hotels OP
which

25
<PAGE>

are convertible into Common Stock. Upon consummation of the transactions
contemplated by the Lessee-Manager Acquisition Agreement, the Company will
become the lessee and manager of all of the AGH Hotels and certain other
hotels, in addition to currently acting as manager for the CapStar Hotels and
other third party arrangements. It is a condition to the closing of the Merger
that the transactions set forth in the Lessee-Manager Acquisition Agreement
are consummated.

To finance the transactions set forth in the Lessee-Manager Acquisition
Agreement, the Company expects to enter into a $100 million revolving credit
facility at an interest rate no greater than LIBOR plus 350 basis points, with
other customary terms and conditions. It is a condition to the closing of the
Merger that the Company receive a commitment from the REIT's Operating
Partnership for such a credit facility. In addition to funding the Lessee-
Manager Acquisition Agreement transactions, the available capacity under the
new credit facility is expected to be used by the Company to pursue
investments in additional joint ventures and to secure additional third-party
management arrangements, as discussed above.

Following the Merger, pursuant to the Intercompany Agreement the Company
will have a right of first refusal to become the lessee of any real property
acquired by the REIT. In addition, the Intercompany Agreement prohibits the
Company from making certain acquisitions or investments in real estate unless
such acquisitions or investments are first offered to the REIT and the REIT
elects not to pursue such acquisitions or investments. As a result of these
provisions, the Company's future operations immediately following the Spin-
Off and the Merger are expected to rely significantly on the REIT to identify
business opportunities for the Company. There is no assurance that MeriStar
will identify opportunities for the Company or that any opportunities that
either identifies will be within the Company's financial, operational or
management parameters.

Also, the Company's current operations after the Merger are predominantly
with its affiliate, the REIT; based on pro-forma operating results for 1997,
approximately 89% of the Company's revenue is expected to come from hotels
owned by and leased from the REIT. Accordingly, the Company's current
operations are highly dependent upon the performance of the REIT Owned Hotels.

Following the Spin-Off, Merger and related transactions described above, the
Company believes cash generated by operations, together with its new borrowing
capacity under its credit facility, will be sufficient to fund its existing
working capital, ongoing capital expenditures, debt service requirements, and
future acquisitions and investment opportunities. Under the terms of the
Participating Leases between the Company and the REIT, the REIT will generally
be required to fund significant capital expenditures at the Hotels.
Consequently, the Company's ongoing capital expenditures are likely to be
substantially reduced from the levels of such expenditures prior to the
Formation Transactions. Additionally, the Company expects to finance future
acquisitions and investments though a combination of cash generated by
operations, borrowing capacity under the credit facility, and the issuance of
OP Units and/or Common Stock.

SEASONALITY

Demand in the lodging industry 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. Therefore, the Company's
operations are seasonal in nature. Assuming other factors remain constant, the
Company has lower revenue, operating income and cash flow in the first and
fourth quarters and higher revenue, operating income 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.

26
<PAGE>

THE COMPANY

The Company has been formed to become the lessee, manager and operator of
various hotel assets, including those currently owned, leased and managed by
CapStar and its affiliates. Immediately following the Spin-Off, the Company
will acquire 100% of the limited partnership interests in the third-party
lessee of most of the hotels owned by AGH and substantially all of the assets
and certain liabilities of the third-party manager of most of the hotels owned
by AGH, pursuant to an Acquisition Agreement, dated as of March 15, 1998 (the
"Lessee-Manager Acquisition Agreement"). See "The Merger and the Spin-Off--The
Lessee-Manager Acquisition Agreement." CapStar and AGHI have been two of the
fastest growing operators of upscale, full-service hotels in North America.
Following consummation of the Formation Transactions, the Company is expected
to be one of the largest independent hotel management companies in the United
States based on rooms under management. The Company will be the successor-in-
interest and will assume all of the rights and liabilities with respect to
hotel management contracts and operating leases of CapStar, AGHI and AGH
Leasing. Pursuant to the Formation Transactions, the Company will lease and/or
manage 201 Hotels containing 42,441 rooms. Of the Hotels, MeriStar Hotels will
(i) lease and manage 100 REIT Owned Hotels, containing 26,025 rooms, (ii)
lease 46 (of which they managed 35) hotels (that are not REIT Owned Hotels)
containing 6,629 rooms, (the "Leased Hotels") and (iii) manage an additional
55 hotels (that are not REIT Owned Hotels) containing 9,787 rooms (the
"Managed Hotels"). The Hotels are located throughout the United States and
Canada including most major metropolitan areas and rapidly growing secondary
cities. The Hotels include hotels operated under nationally recognized brand
names such as Hilton(R), Sheraton(R), Westin(R), Marriott(R), Doubletree(R)
and Embassy Suites(R). The Company's business strategy will be to renovate,
reposition and operate each hotel according to a business plan specifically
tailored to the characteristics of the hotel and its market.

MeriStar Hotels will capitalize on its management experience and expertise
by continuing to secure additional management contracts and improving the
operating performance of the hotels under its management. The Company's senior
management team, with an average of 20 years of lodging industry experience,
has successfully managed hotels in all segments of the lodging industry, with
particular emphasis on upscale, full-service hotels.

Management attributes its management success to its ability to analyze each
hotel as a unique property and identify those particular cash flow growth
opportunities which each hotel presents. The Company's principal operating
objectives will be to continue to analyze each hotel as a unique property, to
generate higher revenue per available room ("RevPAR"), to increase average
daily rates ("ADR") and to increase net operating income while providing its
hotel guests with high-quality service and value.

In addition to assuming the rights and obligations under all of the
operating leases and management agreements of CapStar, AGHI and AGH Leasing,
MeriStar Hotels will assume the interest of CapStar in two joint ventures. The
Company expects to form additional strategic alliances with institutional and
private hotel owners and to secure additional fee management arrangements. See
"Special Note Regarding Forward-Looking Statements."

Management believes that the upscale, full-service segment of the lodging
industry is the most attractive segment in which to lease and manage hotels
and therefore intends to focus its efforts on attaining management contracts
for such properties. The upscale, full-service segment is attractive for
several reasons. First, upscale, full-service hotels appeal to a wide variety
of customers, thus reducing the risk of decreasing demand from any particular
customer group. Secondly, 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. 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.

27
<PAGE>

THE INTERCOMPANY AGREEMENT

RIGHTS OF FIRST REFUSAL

The Company believes that the Intercompany Agreement represents an
attractive opportunity because (i) the REIT Owned Hotels are upscale, full-
service hotels under nationally recognized brand names located in major
metropolitan or growing secondary markets and (ii) they have attractive
current returns and potential for significant revenue and cash flow growth
through implementation of the Company's operating strategy.

Pursuant to the Intercompany Agreement, subject to certain exceptions, the
Hotel Parties will have a right of first refusal to become the lessee of any
real property acquired by the REIT Parties if the REIT Parties determine that,
consistent with the REIT's status as a real estate investment trust, the REIT
Parties are required to enter into such a lease arrangement; provided that the
Hotel Parties or an entity controlled by the Hotel Parties is, as determined
by the REIT in its sole discretion, qualified to be the lessee based on
experience in the industry and financial and legal qualifications.

As to opportunities for the Hotel Parties to become the lessee of any assets
under a lease arrangement, the Intercompany Agreement provides that the REIT
Parties must provide the Hotel Parties with written notice of the lessee
opportunity. During the 30 days following such notice, the Hotel Parties have
a right of first refusal with regard to the offer to become a lessee and the
right to negotiate with the REIT Parties on an exclusive basis regarding the
terms and conditions of the lease. If a mutually satisfactory agreement cannot
be reached within the 30-day period, or if the Hotel Parties indicate that
they are not interested in pursuing the lessee opportunity, the REIT Parties
may offer the opportunity to others for a period of one year thereafter, at a
price and on terms and conditions that are not more favorable to such other
parties than the price and terms and conditions proposed by the REIT Parties
to the Hotel Parties, before it must again offer the opportunity to the Hotel
Parties in accordance with the procedures specified above.

The REIT Parties and the Hotel Parties will each establish, following the
closing of the Merger, a leasing committee which will review all hotel leases
to be entered into between the REIT Parties and the Hotel Parties. The REIT
Parties' leasing committee will consist of directors of the REIT that are not
also directors of MeriStar Hotels and the Hotel Parties' leasing committee
will consist of directors of MeriStar Hotels that are not also directors of
the REIT.

The Hotel Parties will agree not to acquire or make (i) investments in real
estate which, for purposes of the Intercompany Agreement, includes the
provision of services related to real estate and investments in hotel
properties, real estate mortgages, real estate derivatives or entities that
invest in real estate assets or (ii) any other investments that may be
structured in a manner that qualifies under the federal income tax
requirements applicable to real estate investment trusts unless in either case
they have provided written notice to the REIT Parties of the material terms
and conditions of the acquisition or investment opportunity, and the REIT
Parties have determined not to pursue such acquisitions or investments either
by providing written notice to the Hotel Parties rejecting the opportunity
within 20 days from the date of receipt of notice of the opportunity or by
allowing such 20-day period to lapse. The Hotel Parties also have agreed to
assist the REIT Parties in structuring and consummating any such acquisition
or investment which the REIT Parties elect to pursue, on terms determined by
the REIT Parties.

PROVISION OF SERVICES

The Hotel Parties will provide the REIT Parties with certain services as the
REIT Parties may reasonably request from time to time, including
administrative, corporate, accounting, financial, insurance, legal, tax, data
processing, human resources and operational services. The REIT Parties will
compensate the Hotel Parties for services provided in an amount determined in
good faith by the Hotel Parties as the amount an unaffiliated third party
would charge the REIT Parties for comparable services.

28
<PAGE>

EQUITY OFFERINGS

If either the REIT Parties or the Hotel Parties desire to engage in a
securities issuance (the "Issuing Party"), then such Issuing Party will give
notice to such other party (the "Non-Issuing Party") as promptly as
practicable of their desire to engage in a securities issuance. The Non-
Issuing Party will cooperate with the Issuing Party to effect any securities
issuance of the Issuing Party by assisting in the preparation of any
registration statement or other document required in connection with such
issuance and, in connection therewith, providing the Issuing Party with such
information as may be required to be included in such registration statement
or other document.

TERM

The Intercompany Agreement will terminate upon the earlier of (a) the tenth
anniversary of the date of the Intercompany Agreement, and (b) a change in
ownership or control of MeriStar Hotels.

USE OF PROCEEDS

The net proceeds to be received by the Company from the Rights Offering
depend on the number of Rights exercised and the Subscription Price. The
maximum net proceeds to be received by the Company are estimated to be $.
after deducting estimated offering expenses payable by the Company. The
Company currently expects to use the net proceeds from the Rights Offering to
repay existing indebtedness under the Company's $100 million revolving credit
facility or for general corporate purposes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

CAPITALIZATION

The following table sets forth the historical and pro forma capitalization
of the Company as of December 31, 1997. The pro forma capitalization is
adjusted to reflect the Formation Transactions and the Rights Offering. The
information below should be read in conjunction with the historical combined
financial statements and notes thereto of the Company and the Unaudited Pro
Forma Financial Statements and notes thereto of the Company included elsewhere
in this Prospectus.

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1997
(IN THOUSANDS,
EXCEPT SHARE DATA)
--------------------
PRO FORMA HISTORICAL
--------- ----------
<S> <C> <C>
LIABILITIES AND MINORITY INTEREST:
Credit facility..................................... $ 41,565 $ --
Capital leases and other debt....................... 981 981
Minority interest................................... 15,933 3,800
-------- -------
Total liabilities and minority interest........... 58,479 4,781
-------- -------
OWNERS'/STOCKHOLDERS' EQUITY:
Owners' Equity...................................... -- 40,909
Preferred Stock ($.01 par value, 10,000,000 shares
authorized, no shares issued or outstanding)....... -- --
Common Stock ($.01 par value, 100,000,000 shares au-
thorized 33,177,843 shares issued and outstanding
on a pro forma basis).............................. 332 --
Additional paid-in capital and retained earnings.... 85,367 --
-------- -------
Total owners'/stockholders' equity................ 85,699 40,909
-------- -------
Total capitalization.............................. $144,178 $45,690
======== =======
</TABLE>

29
<PAGE>

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. Loan agreements and leases to be entered into by the
Company may 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 of Directors and will be dependent upon the Company's
results of operations, financial condition, contractual restrictions and other
factors deemed relevant by the Board of Directors.

30
<PAGE>

THE MERGER AND THE SPIN-OFF

GENERAL

The Company will be spun off, as further described below, to become the
lessee, manager and operator of various hotel assets, including those
currently owned, leased and managed by CapStar and certain of its affiliates.
CapStar intends to transfer or cause to be transferred certain assets and
liabilities constituting the hotel management and leasing business currently
operated by CapStar and its subsidiaries to MeriStar Hotels, a wholly owned
subsidiary of CapStar. CapStar then intends to distribute to its stockholders
of record on the Spin-Off Record Date on a share-for-share basis all of the
outstanding capital stock of MeriStar Hotels in the Spin-Off. The Spin-Off
will provide the stockholders of CapStar as of the Spin-Off Record Date with
the opportunity to participate in the benefits of both the ownership of real
estate through the REIT, and the leasing and management operations of MeriStar
Hotels.

Pursuant to the Merger Agreement, CapStar, after the Spin-Off, will merge
with and into AGH, with the result that (a) AGH will be the surviving
corporation operating under the name MeriStar Hospitality Corporation and (b)
each outstanding share of CapStar Common Stock will be converted into 1.0
share of REIT Common Stock, and each outstanding share of AGH Common Stock
will be converted into 0.8475 shares of REIT Common Stock.

Immediately following the Spin-Off and the effective date of the Merger, the
Company will acquire 100% of the partnership interests in AGH Leasing, the
third-party lessee of most of the hotels owned by AGH, and substantially all
of the assets and certain liabilities of AGHI, the third-party manager of most
of the hotels owned by AGH, pursuant to the Lessee-Manager Acquisition
Agreement.

Pursuant to the Intercompany Agreement, the Hotel Parties and the REIT
Parties will provide each other with reciprocal rights to participate in
certain transactions entered into by such parties. In particular, subject to
certain exceptions, the Hotel Parties will have a right of first refusal to
become the lessee of any real property acquired by the REIT Parties if the
REIT Parties determine that, consistent with the REIT's status as a real
estate investment trust, the REIT Parties are required to enter into such a
lease arrangement; provided that the Hotel Parties or an entity that the Hotel
Parties control is, as determined by the REIT in its sole discretion,
qualified to be the lessee. In addition, the Hotel Parties intend to pursue
additional opportunities with others in the future. See "The Company--The
Intercompany Agreement."

BACKGROUND OF AND REASONS FOR THE SPIN-OFF

The Company will be formed to become the lessee, manager and operator of the
various hotel assets, and to perform the services more fully described in the
Intercompany Agreement. The Spin-Off will provide the stockholders of CapStar
as of the Spin-Off Record Date with the opportunity to participate in the
benefits of both the ownership of real estate through the REIT, and the
leasing and management operations of MeriStar Hotels.

MeriStar Hotels will function principally as a hotel leasing, management and
operating company, while the REIT will focus on investment in real estate
assets. The Spin-Off is designed to provide CapStar's existing stockholders
with the long-term benefits of ownership in an entity devoted to the conduct
of operating business activities in addition to their investment interest in
the REIT itself. A small number of real estate investment trusts, operating
under tax provisions that no longer are available to newly formed real estate
investment trusts, have shares that are "paired" or "stapled" with shares of a
related operating company, and therefore cannot be owned or transferred
independently. The shares of MeriStar Hotels and the REIT are not, and will
not be, paired or stapled in any manner. Because the shares of the REIT and
MeriStar Hotels can be owned and transferred separately and independently of
each other, the REIT and MeriStar Hotels will not provide a paired investment
on an ongoing basis to investors who purchase or sell shares of only one
company or the other.

31
<PAGE>

Although the Spin-Off will not be effected unless the Merger is approved by
the stockholders of CapStar and AGH and all other conditions precedent have
been satisfied or waived, the Spin-Off is separate from the Merger and the
shares of MeriStar Hotels to be received by holders of CapStar Common Stock in
the Spin-Off do not constitute a part of the Merger consideration. The
stockholders of CapStar are being asked to vote on the approval and adoption
of the Merger Agreement, and are not being asked to vote on the Spin-Off.

RESTRUCTURING AND SPIN-OFF

GENERAL

In order to effectuate the Spin-Off, CapStar will effect a series of
mergers, asset and stock transfers and liability assumptions among itself and
its subsidiaries (the "CapStar OP Restructuring"). The purpose and effect of
the CapStar OP Restructuring is to separate substantially all of the
management and leasing business of CapStar from the real estate investments of
CapStar.

Substantially all of CapStar's assets are currently held indirectly by and
operated through CapStar Management and CapStar Management II, CapStar's
subsidiary operating partnerships. CapStar is the sole general partner of
CapStar Management, and CapStar, CapStar LP Corporation, a wholly owned
subsidiary of CapStar ("CapStar LP"), and certain third parties are the sole
limited partners of CapStar Management. CapStar General Corp., a wholly-owned
subsidiary of CapStar ("CapStar General"), is the sole general partner of
CapStar Management II, and CapStar Limited Corp., a wholly owned subsidiary of
CapStar General ("CapStar Limited"), and certain third parties are the sole
limited partners of CapStar Management II. The partnership agreements of
CapStar Management and CapStar Management II give the general partner full
control over the business and affairs of the partnerships.

THE CONTRIBUTIONS

Prior to the effectiveness of the Merger, CapStar Management and CapStar
Management II will effectuate the following transactions (the
"Contributions"):

1. CapStar Management and CapStar Management II will merge into a single
limited partnership that subsequently may convert to a Delaware limited
liability company ("Old CMC") that will have as its sole partners or
members CapStar, CapStar LP, CapStar General, CapStar Limited and certain
third parties;

2. Each of CapStar LP and CapStar General will merge with and into
CapStar;

3. Old CMC will contribute all of its hotel related assets together with
certain other assets, subject to all of its liabilities except as set forth
in the Merger Agreement, to MHR Hotel, L.P., a newly-formed Delaware
limited partnership ("CapStar Hotel OP"), in exchange for interests in
CapStar Hotel OP;

4. Old CMC will contribute all its management and substantially all its
leasehold related assets, together with certain other assets (including
cash), subject to $30.0 million of indebtedness and certain other
liabilities, to Hotels OP in exchange for interests in Hotels OP;

5. Old CMC will redeem CapStar's interests in Old CMC in exchange for
CapStar's pro rata share of its interests in Hotels OP and CapStar Hotel
OP; and

6. CapStar will contribute its general partnership interest (the
"Interest") in, and all of its rights and title in and to substantially all
of the assets and business of, Hotels OP represented by such Interest
(collectively, the "Contributed Assets") to MeriStar Hotels in exchange for
100% of the outstanding capital stock of MeriStar Hotels.

32
<PAGE>

7. MeriStar Hotels will assume all of the liabilities, obligations, debt
and commitments arising out of its ownership of the Interest, the
Contributed Assets and the operation of the business conducted by Hotels OP
(the "Assumed Liabilities"), and CapStar will retain, or will cause one of
its subsidiaries to retain, all other liabilities.

THE SPIN-OFF; RECORD DATE

Upon completion of the Contributions, the Spin-Off will be effected by the
distribution to each holder of record of CapStar Common Stock as of the close
of business on the Spin- Off Record Date of one share of Common Stock for
every share of CapStar Common Stock held by such holder. As a result of the
Spin-Off, the stockholders of record of CapStar at the closing of business on
the Spin-Off Record Date will own all of the outstanding Common Stock.

LISTING ON THE NYSE

The Company intends to apply for listing of the Common Stock to be issued
pursuant to the Spin-Off on the NYSE.

USE OF "MERISTAR" NAME

Pursuant to the terms of the Intercompany Agreement, the REIT Parties will
grant to the Hotel Parties a non-exclusive, royalty-free license to use
"MeriStar Hospitality Corporation" and other names that include "MeriStar"
(the "Licensed Property"). Upon termination of the Intercompany Agreement, all
rights of the Hotel Parties to the Licensed Property will terminate. See "The
Company --The Intercompany Agreement."

EMPLOYEES AND EMPLOYEE BENEFIT PLANS

On the effective date of the Spin-Off, CapStar will cause MeriStar Hotels to
offer employment to certain employees of CapStar, on the same terms and
conditions as were in effect immediately prior to the Spin-Off. Any such
transfer of employment from CapStar to MeriStar Hotels will not constitute a
termination or qualifying event under any severance policy.

MeriStar Hotels will establish new employee benefit plans substantially
similar to the existing CapStar benefit plans, including but not limited to an
Equity Incentive Plan and a Stock Purchase Plan. Employees who currently hold
CapStar Stock Options will be granted new stock options in the REIT and
MeriStar Hotels.

CONDITIONS TO THE SPIN-OFF

The obligations of CapStar to consummate the Spin-Off are subject to the
satisfaction or waiver of the same conditions to the consummation of the
Merger set forth in the Merger Agreement.

THE LESSEE-MANAGER ACQUISITION AGREEMENT

Pursuant to the Lessee-Manager Acquisition Agreement, following the Spin-Off
and immediately after the effective time of the Merger, Hotels OP will
acquire: (i) substantially all of the assets and certain liabilities of AGHI
for a cash purchase price of $10 million; and (ii) 100% of the partnership
interests in AGH Leasing for a purchase price of $85 million, consisting of
approximately $73.8 million in cash and $11.2 in the form of partnership units
of Hotels OP convertible into Common Stock. Upon consummation of the
transactions contemplated by the Lessee-Manager Acquisition Agreement, Hotels
OP will become the lessee and manager of most of the AGH Owned Hotels that are
currently leased by AGH Leasing. The Lessee-Manager Acquisition Agreement
further contemplates that the REIT and MeriStar Hotels will enter into new
lease agreements (the "Participating Leases") with respect to all of the
CapStar Owned Hotels and amend the lease agreements with respect to most the
AGH Owned Hotels. See "Business--The Participating Leases."

33
<PAGE>

It is a condition to the closing of the Merger that the transactions set
forth in the Lessee-Manager Acquisition Agreement are consummated.

INDEMNIFICATION OBLIGATIONS

MeriStar Hotels will indemnify, defend and hold harmless the REIT and its
affiliates and any directors, officers, employees and agents of the foregoing,
from and against any losses arising out of or resulting from the Assumed
Liabilities, the Contributed Assets or the business and operations of Hotels
OP.

The REIT will indemnify, defend and hold harmless MeriStar Hotels, its
affiliates and their respective successors and any directors, officers,
employees and agents of the foregoing, from and against any losses arising out
of any assets or liabilities retained by the REIT and its affiliates.

34
<PAGE>

BUSINESS

The Company seeks to increase shareholder value by (i) implementing its
operating strategy to improve hotel operations and increase cash flow and (ii)
expanding its management business.

EXPANSION STRATEGY

The Company anticipates that it will continue to expand its portfolio of
hotels under management and/or lease by securing additional management
contracts and/or leases. The Company will also seek to expand its management
operations into other hospitality-related businesses, such as time share
properties and conference centers. The Company will attempt to identify
promising management candidates located in markets with economic, demographic
and supply dynamics favorable to hotel lessees and operators. Through its
extensive due diligence process, the Company will select those expansion
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 will create detailed plans covering all areas of
renovation and operation. These plans will serve as the basis for the
Company's expansion decisions and guide subsequent renovation and operating
plans.

The Company will seek to lease and/or manage hotels that meet the following
criteria:

MARKET CRITERIA

Economic Growth. The Company will focus 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 will seek 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 Hotels are located in 32 states across the
nation, the District of Columbia, the U.S. Virgin Islands and Canada. See
"Properties" for additional information regarding the Hotels. The Company will
seek to maintain a geographically diverse portfolio of managed hotels to
offset the effects of regional economic cycles.

HOTEL CRITERIA

Location and Market Appeal. The Company will seek to operate 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) airports, (ii) convention centers, (iii) business parks, (iv)
shopping centers and other retail areas, (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 will enable 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 will seek to operate hotels that 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.

35
<PAGE>

Potential Performance Improvements. The Company seeks to operate
underperforming hotels where intensive management and selective capital
improvements can increase revenue and cash flow. These hotels represent
opportunities where a systematic management approach and targeted renovations
should result in improvements in revenue and cash flow.

The Company expects that its relationships throughout the industry will
continue to provide it with a competitive advantage in identifying, evaluating
and managing hotels that meet its criteria. Management has a record of
successfully renovating and repositioning hotels, in situations with varying
levels of service, room rates and market types, and the Company plans to
continue such renovation programs as its acquires new leases and management
contracts.

OPERATING STRATEGY

The Company's principal operating objectives will be to generate higher
RevPAR and to increase net operating income while providing its hotel guests
with high-quality service and value. The Company will seek 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 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 hotels, especially in upscale, full-
service hotels.

The Company's corporate headquarters will carry out financing and investment
activities and provide services to support as well as monitor the Company's
on-site hotel operating executives. Each of the Company's executive
departments, including Sales and Marketing, Human Resources and Training, Food
and Beverage, Technical Services, Development and Corporate Finance, will be
headed by an executive with significant experience in that area. These
departments will 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 will be able to 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 will employ 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 will 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 will
support each Hotel's local sales efforts with corporate sales executives who
will develop new marketing concepts and monitor and respond to specific market
needs and preferences. These executives will be active in implementing on-site
marketing programs developed in the central management office. The Company
will employ 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, will enable the Company to maximize revenue yields on a day-
to-day basis. Sales teams will be recruited locally and receive incentive-
based compensation bonuses. All of the Company's sales managers will complete
a highly developed sales training program.

36
<PAGE>

Strategic Capital Improvements. The Company and the REIT (through the
Intercompany Agreement) will plan renovations primarily to enhance a Hotel's
appeal to targeted market segments, thereby attracting new customers and
generating increased revenue and cash flow. For example, in many of the
Hotels, the banquet and meeting spaces have been or are intended to be
renovated and guest rooms have been upgraded with computer ports and
comfortable work spaces to better accommodate the needs of business travelers
and to increase ADRs. Capital spending decisions will be based on both
strategic needs and potential rate of return on a given capital investment.
Pursuant to the Intercompany Agreement, the REIT will be primarily responsible
for funding capital expenditures.

Selective Use of Multiple Brand Names. Management believes that the
selection of an appropriate franchise brand is essential in positioning a
hotel optimally within its local market. The Company will select brands based
on local market factors such as local presence of the franchisor, brand
recognition, target demographics and efficiencies offered by franchisors.
Management believes that its relationships with many major hotel franchisors
places the Company in a favorable position when dealing with those franchisors
and allows it to negotiate favorable franchise agreements with franchisors.
Management believes that its growth in acquiring management contracts will
further strengthen its relationship with franchisors.

37
<PAGE>

The following chart summarizes certain information with respect to the
national franchise affiliations of the Hotels:

<TABLE>
<CAPTION>
REIT THIRD-PARTY THIRD-PARTY
OWNED HOTELS LEASED HOTELS MANAGED HOTELS
------------------- ------------------ ------------------
GUEST % OF GUEST % OF GUEST % OF
FRANCHISE ROOMS HOTELS ROOMS ROOMS HOTELS ROOMS ROOMS HOTELS ROOMS
- --------- ------ ------ ----- ----- ------ ----- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hilton ................. 5,703 22 21% -- -- -- 225 1 2%
Sheraton ............... 2,978 9 11% -- -- -- 167 1 2%
Radisson(R) ............ 2,712 9 10% -- -- -- 756 4 8%
Doubletree ............. 2,055 6 8% 388 1 6% 363 2 3%
Marriott ............... 1,494 4 5% -- -- -- -- -- --
Holiday Inn(R).......... 2,548 12 10% 196 1 3% 1,763 9 18%
Embassy Suites ......... 728 3 3% -- -- -- 248 1 2%
Westin ................. 1,296 4 5% -- -- -- -- -- --
Wyndham................. 1,122 3 4% 219 1 3% -- -- --
Independent ............ 674 6 3% -- -- -- 1,235 11 12%
Four Points(R).......... 213 1 1% -- -- -- 400 1 4%
Doubletree Guest
Suites(R) ............. 292 2 1% -- -- -- -- -- --
Ramada(R) .............. 665 3 3% -- -- -- 1,037 5 11%
Crowne Plaza(R) ........ 705 3 3% -- -- -- 730 2 7%
Courtyard(R) ........... 1,044 5 4% 490 3 7% 455 2 5%
Hilton Garden Inn....... -- -- -- 474 3 7% -- -- --
Hilton Suites........... -- -- -- -- -- -- 174 1 2%
Comfort Suites(R) ...... -- -- -- 277 2 4% 359 3 4%
Clarion(R) ............. -- -- -- -- -- -- 432 2 4%
Quality Suites(R) ...... -- -- -- 168 1 2% 177 1 2%
Residence Inn(R) ....... -- -- -- -- -- -- 272 2 3%
Quality Inn(R) ......... -- -- -- -- -- -- 265 2 3%
Days Inn(R) ............ -- -- -- -- -- -- 96 1 1%
Holiday Inn Express(R).. 159 1 1% 208 2 3% 78 1 1%
Best Western(R) ........ -- -- -- -- -- -- 355 2 4%
Hampton Inn(R) ......... 292 2 1% 1,965 16 30% -- -- --
Comfort Inn(R) ......... -- -- -- 1,293 9 20% -- -- --
Holiday Inn Select(R) .. 1,245 4 5% 244 1 4% -- -- --
HomewoodSuites(R) ...... -- -- -- 461 4 7% -- -- --
Howard Johnson.......... 100 1 1% -- -- -- -- -- --
Hampton Inn &
Suites(R).............. -- -- -- 136 1 2% -- -- --
Fairfield Inn(R) ....... -- -- -- 110 1 2% 200 1 2%
------ --- ----- ----- --- ----- ----- --- ---
Total.................. 26,025 100 100.0% 6,629 46 100.0% 9,787 55 100%
====== === ===== ===== === ===== ===== === ===
</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 REIT Owned Hotels contain
restaurants ranging from Michel Richard's highly acclaimed CITRONELLE(R), to
Morgan's(R), a CapStar-designed concept which offers popular, moderately-
priced American cuisine. CapStar has also successfully placed national food
franchises such as Starbuck's Coffee(R) and "TCBY"(R) Yogurt in casual,
delicatessen-style restaurants in several of the REIT Owned Hotels. Popular
food concepts will strengthen the Company's ability to attract business
travelers and group meetings and improve the name recognition of the Hotels.
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

38
<PAGE>

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 will have a distinct management
culture that stresses creativity, loyalty and entrepreneurship. 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.

Computerized Reporting Systems. The Company will employ computerized
reporting systems at each of the Hotels and at its corporate offices to
monitor the financial and operating performance of the Hotels. Management
information services have been fully integrated through the installation of
Novell and Unix networks. Management also utilizes programs like Data Plus(R)
and cc:Mail(R) to facilitate daily communication. Such programs will enable
the Company to create and implement detailed reporting systems at each of the
Hotels and its corporate headquarters. Corporate executives will 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 will be better able to respond
to changes in the market of each hotel.

39
<PAGE>

PROPERTIES

The Company maintains its corporate headquarters in Washington, D.C.,
satellite offices in California, North Carolina and Texas and leases and/or
manages hotel properties throughout the United States and Canada. The Company
leases its offices. No one hotel property is material to the operation of the
Company. A typical Hotel has meeting and banquet facilities, food and beverage
facilities and guest rooms and suites.

The REIT Owned Hotels feature, or after contemplated 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.

The following table sets forth the 1997 operating information with respect
to the hotels owned by the REIT and leased and managed by the Company:

<TABLE>
<CAPTION>
GUEST AVERAGE
HOTEL LOCATION ROOMS ADR OCCUPANCY
- ----- -------- ----- ------- ---------
<S> <C> <C> <C> <C>
Sheraton Hotel................... Mesa, AZ 273 $ 89.49 53.6%
Crowne Plaza Phoenix............. Phoenix, AZ 249 72.83 63.7
Embassy Suites................... Tucson, AZ 204 74.39 78.5
Courtyard by Marriott Century
City............................ Century City, CA 134 106.02 84.1
Orange County Airport Hilton..... Irvine, CA 290 85.87 73.0
Marriott Hotel................... Los Angeles, CA 469 118.56 60.5
Courtyard by Marriott Marina del
Rey............................. Marina del Rey, CA 276 79.78 90.4
Monterey Hilton.................. Monterey, CA 204 107.33 66.4
DoubleTree Resort................ Palm Springs, CA 289 97.45 66.9
Sacramento Hilton................ Sacramento, CA 326 86.74 74.4
Holiday Inn Select Mission Val-
ley............................. San Diego, CA 317 71.99 72.6
Sheraton Fisherman's Wharf....... San Francisco, CA 524 133.28 84.5
Crowne Plaza Park Center ........ San Jose, CA 239 111.80 70.2
Wyndham San Jose Airport Hotel... San Jose, CA 356 115.93 59.3
San Pedro Hilton................. San Pedro, CA 226 61.66 76.3
Santa Barbara Inn................ Santa Barbara, CA 71 139.35 79.7
Holiday Inn...................... Colorado Springs, CO 201 67.16 70.7
Sheraton Hotel................... Colorado Springs, CO 502 74.15 72.1
Embassy Suites Denver............ Englewood, CO 236 103.75 76.2
Mystic Hotel..................... Mystic, CT 77 77.63 58.0
DoubleTree Bradley Airport....... Windsor Locks, CT 200 84.27 67.4
Embassy Row Hilton............... Washington, DC 195 119.63 73.5
Georgetown Inn................... Washington, DC 95 137.95 72.4
The Latham Hotel................. Washington, DC 143 113.32 81.1
DoubleTree Resort Surfside Clear-
water Beach..................... Clearwater Beach, FL 426 101.12 70.9
Ramada Inn Gulfview Clearwater
Beach........................... Clearwater Beach, FL 289 72.85 60.7
Hilton Hotel Cocoa Beach......... Cocoa Beach, FL 296 83.31 72.2
Holiday Inn Fort Lauderdale
Beach........................... Fort Lauderdale, FL 240 75.95 77.2
Westin Resort Key Largo.......... Key Largo, FL 200 126.87 76.8
Howard Johnson Resort Key Largo.. Key Largo, FL 100 86.06 83.4
Courtyard by Marriott Disney Vil-
lage............................ Lake Buena Vista, FL 323 105.41 93.8
Holiday Inn Madeira Beach........ Madeira Beach, FL 149 77.36 55.8
Radisson Twin Towers Orlando..... Orlando, FL 742 81.10 78.5
Wyndham Safari Resort Lake Buena
Vista........................... Orlando, FL 490 73.67 66.3
DoubleTree Hotel Tampa Airport... Tampa, FL 496 64.05 68.3
DoubleTree Guest Suites Atlanta.. Atlanta, GA 155 104.90 61.4
Westin Atlanta Airport........... Atlanta, GA 496 79.18 75.5
Jekyll Inn....................... Jekyll Island, GA 265 63.15 46.6
Radisson Hotel Arlington Heights. Arlington Heights, IL 201 81.72 74.5
Radisson Hotel & Suites.......... Chicago, IL 341 134.71 81.2
Holiday Inn Chicago O'Hare Inter-
national Airport................ Rosemont, IL 507 99.15 78.6
Radisson Hotel................... Schaumburg, IL 202 83.59 75.9
</TABLE>

40
<PAGE>

<TABLE>
<CAPTION>
GUEST AVERAGE
HOTEL LOCATION ROOMS ADR OCCUPANCY
- ----- -------- ----- ------ ---------
<S> <C> <C> <C> <C>
DoubleTree Guest Suites.............. Indianapolis, IN 137 87.05 71.0
Radisson Plaza....................... Lexington, KY 367 77.76 62.1
Seelbach Hilton...................... Louisville, KY 321 109.73 62.9
Holiday Inn Select New Orleans Inter-
national Airport.................... Kenner, LA 304 84.29 74.8
Lafayette Hilton & Towers............ Lafayette, LA 328 73.65 72.8
Hotel Maison de Ville................ New Orleans, LA 23 260.56 68.7
Holiday Inn Annapolis................ Annapolis, MD 220 82.51 59.4
Radisson Cross Keys.................. Baltimore, MD 146 89.63 72.6
Sheraton Columbia.................... Columbia, MD 289 90.72 69.8
Holiday Inn Express BWI Airport...... Hanover, MD 159 65.10 83.0
Hampton Inn Ocean City............... Ocean City, MD 168 85.21 47.3
Metro Airport Hilton Suites.......... Detroit, MI 151 81.37 85.7
Hilton Airport Hotel Grand Rapids.... Grand Rapids, MI 226 84.38 64.7
Holiday Inn Sports Complex........... Kansas City, MO 163 68.96 71.8
Holiday Inn Forest Park St. Louis.... St. Louis, MO 120 70.63 75.3
Sheraton Airport Plaza............... Charlotte, NC 226 88.79 69.8
Courtyard by Marriott Durham......... Durham, NC 146 78.98 73.2
Hilton Hotel Durham.................. Durham, NC 194 89.23 70.4
Four Points Hotel.................... Cherry Hill, NJ 213 73.72 60.7
Westin Morristown.................... Morristown, NJ 201 126.04 59.3
Courtyard by Marriott Meadowlands.... Secaucus, NJ 165 103.25 85.9
Marriott Hotel....................... Somerset, NJ 434 111.62 75.0
Holiday Inn.......................... Tinton Falls, NJ 171 78.89 72.2
DoubleTree Hotel..................... Albuquerque, NM 294 80.50 67.2
Wyndham Albuquerque Airport Hotel.... Albuquerque, NM 276 60.67 75.3
Radisson Inn Rochester............... Rochester, NY 171 65.23 72.0
Radisson Hotel Southwest............. Cleveland, OH 237 78.06 66.6
Hilton Hotel Toledo.................. Toledo, OH 213 67.80 67.4
Westin Oklahoma...................... Oklahoma City, OK 399 80.29 47.8
Great Valley Sheraton................ Frazer, PA 154 100.44 76.3
Embassy Suites Center City........... Philadelphia, PA 288 127.64 73.6
Holiday Inn Select Bucks County...... Trevose, PA 215 89.89 74.4
Arlington Hilton..................... Arlington, TX 310 85.92 72.2
Austin Hilton & Towers............... Austin, TX 320 75.64 72.9
DoubleTree Hotel..................... Austin, TX 350 88.08 74.9
Holiday Inn Dallas DFW Airport West.. Bedford, TX 243 62.53 81.1
Dallas Renaissance................... Dallas, TX 289 92.94 53.4
Radisson Hotel....................... Dallas, TX 305 61.07 74.1
Sheraton Hotel....................... Dallas, TX 348 64.61 61.4
Houston Southwest Hilton............. Houston, TX 293 71.43 68.5
Marriott Houston West Loop........... Houston, TX 302 103.60 72.6
Sheraton Houston Brookhollow......... Houston, TX 382 76.85 61.0
Westchase Hilton & Towers............ Houston, TX 295 95.72 79.5
Holiday Inn Select Dallas DFW Airport
South............................... Irving, TX 409 77.92 73.9
Midland Hilton & Towers.............. Midland, TX 249 71.14 54.2
Salt Lake Airport Hilton............. Salt Lake City, UT 287 80.05 78.6
Holiday Inn Historic District Alexan-
dria................................ Alexandria, VA 178 101.20 71.8
Ramada Old Town Alexandria........... Alexandria, VA 258 94.47 62.8
Arlington Hilton..................... Arlington, VA 209 110.31 78.3
National Airport Hilton.............. Arlington, VA 386 96.78 67.3
Hampton Inn Richmond Airport......... Richmond, VA 124 66.63 81.8
Holiday Inn Richmond West............ Richmond, VA 280 59.67 60.9
Bellevue Hilton...................... Bellevue, WA 180 110.38 79.3
Crowne Plaza Madison................. Madison, WI 227 91.48 74.3
Holiday Inn Calgary Airport.......... Calgary, Alberta 170 51.34 72.2
Sheraton Hotel....................... Guildford, B.C. 280 72.85 74.8
Holiday Inn-Metrotown................ Vancouver, B.C. 100 75.03 87.8
Ramada Vancouver Centre.............. Vancouver, B.C. 118 75.00 81.8
</TABLE>

41
<PAGE>

THE PARTICIPATING LEASES

Prior to the effective date of the Merger, MeriStar Hotels, operating
through Hotels OP, will enter into a lease with the REIT or its respective
subsidiary (a "Participating Lease") for each CapStar Owned Hotel. In
addition, the Company will enter into amended and restated Participating
Leases with the REIT for each of the AGH Owned Hotels that is currently leased
by AGH Leasing, which will conform the Participating Leases for the applicable
AGH Owned Hotels with the Participating Leases for the CapStar Owned Hotels,
except that (a) the base rent and percentage rent for each Participating Lease
of an applicable AGH Owned Hotel will not be modified and (b) the initial term
of each Participating Lease of an applicable AGH Owned Hotel will not be
modified.

The obligations of Hotels OP under each Participating Lease will be
guaranteed by MeriStar Hotels.

TERM

Each Participating Lease of an AGH Owned Hotel provides for an initial term
of 12 years commencing on the date on which the hotel was acquired. Each
Participating Lease of a CapStar Owned Hotel provides for an initial term of
12 years commencing on the effective date of the Merger. Each Participating
Lease of an AGH Owned Hotel will be modified to provide, and each
Participating Lease of a CapStar Owned Hotel will provide, MeriStar Hotels
with three renewal options of five years each (except in the case of
Properties with ground leases having a remaining term of less than 40 years)
provided that (a) MeriStar Hotels will not have the right to a renewal if
there shall have occurred a change in the tax law which would permit the REIT
to operate the hotel directly; (b) if MeriStar Hotels shall elect not to renew
a Participating Lease for any REIT Owned Hotel, then the REIT shall have the
right to reject the exercise of a renewal right on a Participating Lease of a
comparable hotel; and (c) the rent for each renewal term shall be adjusted to
reflect the then fair market rental value of the hotel. If the REIT and
MeriStar Hotels are unable to agree upon the then fair market rental value of
the hotel, the Participating Lease will terminate upon the expiration of the
then current term and MeriStar Hotels shall thereupon have a right of first
refusal to lease the hotel from the REIT on such terms as the REIT may have
agreed upon with a third-party lessee.

BASE RENT; PARTICIPATING RENT; ADDITIONAL CHARGES

Each Participating Lease requires the lessee to pay (i) fixed monthly Base
Rent (as defined in the Glossary), (ii) on a monthly basis, the excess of
Participating Rent (as defined in the Glossary) over Base Rent, with
Participating Rent based on certain percentages of room revenue, food and
beverage revenue and telephone and other revenue at each hotel, and (iii)
certain other amounts, including interest accrued on any late payments or
charges ("Additional Charges"). Base Rent and Participating Rent departmental
thresholds (departmental revenue on which the rent percentage is based) are
increased annually by a percentage equal to the percentage increase in the CPI
(as defined in the Glossary) (CPI percentage increase plus 0.75% in the case
of the participating Rent departmental revenue threshold) compared to the
price year. Base Rent is payable monthly in arrears. Participating Rent is
payable in arrears based on a monthly schedule adjusted to reflect the
seasonal variations in the hotel's revenue. Participating Rent payments during
each calendar quarter will be adjusted at the end of each quarter to reflect
actual results.

Other than real estate and personal property taxes and assessments, rent
payable under ground leases, casualty insurance, including loss of income
insurance, capital impositions and capital replacements and refurbishments
(determined in accordance with generally accepted accounting principles),
which are obligations of the REIT, the Participating Leases require the Lessee
to pay rent, liability insurance, all costs and expenses and all utility and
other charges incurred in the operation of the hotels. The Participating
Leases also provide for rent reductions and abatements in the event of damage
or destruction or a partial taking of any hotel.

The Participating Leases also provide for a rental adjustment under certain
circumstances in the event of (a) a major renovation of the hotel, (b) a
change in the franchisor of the hotel or (c) a major change in operations at
the hotel.

42
<PAGE>

LESSEE CAPITALIZATION

The Participating Leases require Hotels OP (or MeriStar Hotels as guarantor
of the Participating Leases) to maintain a book net worth of not less than
$25,000,000. Further, commencing January 1, 1999, for so long as the tangible
net worth of Hotels OP (or MeriStar Hotels as guarantor of the Participating
Leases) is less than 17.5% of the aggregate rents payable under the
Participating Leases for the prior calendar year, Hotels OP (or MeriStar
Hotels as guarantor of the Participating Leases) is prohibited from paying
dividends or making distributions other than dividends or distributions made
for the purpose of permitting the partners of Hotels OP to pay taxes on the
taxable income of Hotels OP attributable to its partners plus any required
preferred distributions to partners.

TERMINATION

The REIT will have the right to terminate the applicable Participating Lease
upon the sale of a hotel to a third-party or, upon the REIT's determination
not to rebuild after a casualty, upon payment to MeriStar Hotels of the fair
market value of the leasehold estate. The fair market value of the leasehold
estate will be determined by discounting to present value at a discount rate
of 10% per annum the cash flow for each remaining year of the then current
lease term, which cash flow will be deemed to be the cash flow realized by
MeriStar Hotels under the applicable Participating Lease for the 12-month
period preceding the termination date. The REIT will receive a credit against
any such termination payments an amount equal to any outstanding "New Lease
Credits" which shall mean the projected cash flow (determined on the same
basis as the termination payment) of any new Participating Leases entered into
between the REIT and Hotels OP or MeriStar Hotels after the Effective Date for
the initial term of such new Participating Lease amortized on a straight-line
basis over a period of 72 months commencing on the commencement of the new
Participating Lease.

PERFORMANCE STANDARDS

The REIT will have the right to terminate the applicable Participating Lease
if, in any calendar year, the gross revenues from a hotel are less than 95% of
the projected gross revenues for such year as set forth in the applicable
budget unless (a) MeriStar Hotels can reasonably demonstrate that the gross
revenue shortfall was caused by general market conditions beyond MeriStar
Hotels' control or (b) MeriStar Hotels "cures" the shortfall by paying to the
REIT the difference between the rent that would have been paid to the REIT had
the property achieved gross revenues of 95% of the budgeted amounts and the
rent paid based on actual gross revenues. MeriStar Hotels will not have such
cure right for more than two consecutive years.

The Participating Leases also require that Hotels OP spend in each calendar
year at least 95% of the amounts budgeted for marketing expenses and for
repair and maintenance expenses.

ASSIGNMENT AND SUBLEASING

MeriStar Hotels will not have the right to assign a Participating Lease or
sublet a hotel without the prior written consent of the REIT. For purposes of
the Participating Lease, a change in control of MeriStar Hotels will be deemed
an assignment of the Participating Lease and will require the REIT's consent,
which may be granted or withheld in its sole discretion.

LEGAL PROCEEDINGS

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

43
<PAGE>

THE RIGHTS OFFERING

MeriStar Hotels is distributing the Rights to holders of record of (a) the
REIT Common Stock and/or (b) the REIT OP Units (other than REIT OP Units held
by the REIT or any of its subsidiaries) as of the Record Date. Each
Rightholder will receive one sixth of a Right for each share of REIT Common
Stock and/or each REIT OP Unit so held. Each whole Right will be exercisable
for one share of Common Stock. Although fractional Rights will be issued to
Rightholders, the Company reserves the right, in its sole discretion, to pay
cash in lieu of fractional shares of Common Stock that would otherwise be
issued or issuable in respect of fractional Rights exercised by Rightholders,
based on a value per whole share of Common Stock equal to the closing price of
the Common Stock on the Principal Market on the Expiration Date. Any such cash
payment will be made to the applicable Rightholder at the same time that
shares of Common Stock are issued in respect of whole Rights exercised by
Rightholders. Fractional Rights can only be exercised concurrently with the
exercise of whole Rights. The Company intends to pay cash in lieu of all such
fractional shares of Common Stock.

EXPIRATION DATE

The Rights will be exercisable at any time following 5:00 p.m., New York
City time, on the last day of the Measurement Period until the Expiration
Date. After the Expiration Date, unexercised Rights will be null and void. The
Company will not be obligated to honor any purported exercise of Rights
received by the Subscription Agent after the Expiration Date, regardless of
when the documents relating to such exercise were sent, except pursuant to the
Guaranteed Delivery Procedures described below. Notice of any extension of the
Expiration Date will be made through a press release issued by the Company.

SUBSCRIPTION PRIVILEGE

Each whole Right will entitle the Rightholder (but not a subsequent
transferee of the REIT Common Stock and/or REIT OP Units held by such
Rightholder on the Record Date) to purchase one share of Common Stock at the
Subscription Price. Certificates representing shares of Common Stock purchased
pursuant to the Subscription Privilege will be delivered to subscribers as
soon as practicable after the fourth business day following the Expiration
Date.

CONDITIONS TO SALE OF SHARES

The issuance of shares of Common Stock pursuant to the exercise of the
Subscription Privilege is conditioned upon the consummation of the Spin-Off,
the Merger and the transactions contemplated by the Lessee-Manager Acquisition
Agreement prior to the closing of the Rights Offering. See "The Merger and the
Spin-Off." The Company also reserves the right, at its sole option, to cancel
the Rights Offering if the Subscription Price is less than .. All amounts
received by the Subscription Agent pursuant to the exercise of Rights will be
held in a non-interest-bearing escrow account until the completion of the
Rights Offering. If the Rights Offering is not completed, all funds received
by the Subscription Agent in payment of the Subscription Price and held in
escrow by the Subscription Agent will be returned by mail without interest or
deduction as soon as practicable following the termination or expiration of
the Rights Offering.

EXERCISE OF RIGHTS

Rights may be exercised by Rightholders by delivering to the Subscription
Agent, at or prior to the Expiration Date, the properly completed and executed
Subscription Certificate evidencing such Rights with any required signatures
guaranteed, together with payment in full of the Subscription Price for each
share subscribed for pursuant to the Subscription Privilege. Such payment in
full must be by (a) check or bank draft drawn upon a United States bank or
postal, telegraphic or express money order payable to ., as Subscription
Agent, or (b) wire transfer of funds to the account maintained by the
Subscription Agent for such purpose at ., New York, New York ., Account No. .;
ABA No. .. Any wire transfer of funds should clearly indicate the identity of
the subscriber who is paying the Subscription Price by the wire transfer. The
Subscription Price will be deemed to

44
<PAGE>

have been received by the Subscription Agent only upon (i) clearance of any
uncertified check, (ii) receipt by the Subscription Agent of any certified
check or bank draft drawn upon a United States bank or of any postal,
telegraphic or express money order or (iii) receipt of good funds in the
Subscription Agent's account designated above. IF PAYING BY UNCERTIFIED
PERSONAL CHECK, PLEASE NOTE THAT THE FUNDS PAID THEREBY MAY TAKE UP TO FIVE
BUSINESS DAYS TO CLEAR. ACCORDINGLY, RIGHTHOLDERS WHO WISH TO PAY THE
SUBSCRIPTION PRICE BY MEANS OF UNCERTIFIED PERSONAL CHECK ARE URGED TO MAKE
PAYMENT SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO ENSURE THAT SUCH
PAYMENT IS RECEIVED AND CLEARS BY SUCH DATE AND ARE URGED TO CONSIDER PAYMENT
BY MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER OF
FUNDS.

The address to which the Subscription Certificates and payment of the
Subscription Price should be delivered is:

New York, New York
Telephone: (212)

If a Rightholder wishes to exercise Rights, but time will not permit such
Rightholder to cause the Subscription Certificate or Subscription Certificates
evidencing such Rights to reach the Subscription Agent on or prior to the
Expiration Date, such Rights may nevertheless be exercised if all of the
following conditions (the "Guaranteed Delivery Procedures") are met:

(1) such Rightholder has caused payment in full of the Subscription Price
for each share being subscribed for pursuant to the Subscription Privilege
to be received (in the manner set forth above) by the Subscription Agent on
or prior to the Expiration Date;

(2) the Subscription Agent receives, on or prior to the Expiration Date,
a guarantee notice (a "Notice of Guaranteed Delivery"), substantially in
the form provided with the Instructions as to Use of Subscription
Certificates and International Holder Subscription Forms (the
"Instructions") distributed with the Subscription Certificates, from a
member firm of a registered national securities exchange or a member of the
National Association of Securities Dealers, Inc. (the "NASD"), or from a
commercial bank or trust company having an office or correspondent in the
United States (each, an "Eligible Institution"), stating the name of the
exercising Rightholder, the number of Rights represented by the
Subscription Certificate or Subscription Certificates held by such
exercising Rightholder, the number of shares being subscribed for pursuant
to the Subscription Privilege, and guaranteeing the delivery to the
Subscription Agent of any Subscription Certificate evidencing such Rights
within three Trading Days following the date of the Notice of Guaranteed
Delivery; and

(3) the properly completed Subscription Certificate evidencing the Rights
being exercised, with any required signatures guaranteed, is received by
the Subscription Agent within three Trading Days following the date of the
Notice of Guaranteed Delivery relating thereto. The Notice of Guaranteed
Delivery may be delivered to the Subscription Agent in the same manner as
Subscription Certificates at the address set forth above, or may be
transmitted to the Subscription Agent by telegram or facsimile transmission
(telecopy no. (.) .. Additional copies of the form of Notice of Guaranteed
Delivery are available upon request from the Subscription Agent, at the
address set forth above.

A Rightholder who purchases less than all of the shares of Common Stock
represented by such Rightholder's Subscription Certificate will receive from
the Subscription Agent a new Subscription Certificate representing the balance
of the unsubscribed Rights, to the extent the Subscription Agent is able to
reissue a Subscription Certificate prior to the Expiration Date.

Unless a Subscription Certificate (1) provides that the shares of Common
Stock to be issued pursuant to the exercise of Rights represented thereby are
to be delivered to the Rightholder or (2) is submitted for the account of an
Eligible Institution, signatures on such Subscription Certificate must be
guaranteed by an Eligible Institution.

45
<PAGE>

Rightholders who hold Rights for the account of others, such as brokers,
trustees or depositaries for securities, should provide a copy of this
Prospectus to the respective beneficial owners of such Rights as soon as
possible, ascertain such beneficial owners' intentions and obtain instructions
with respect to the Rights. If the beneficial owner so instructs, the record
Rightholder should complete Subscription Certificates and submit them to the
Subscription Agent with the proper payment. In addition, beneficial owners of
Rights held through such a Rightholder should contact the Rightholder and
request the Rightholder to effect transactions in accordance with the
beneficial owner's instructions. Beneficial holders should be aware that
brokers or other record Rightholders may establish deadlines for receiving
instructions from beneficial holders significantly in advance of the
Expiration Date.

The instructions accompanying the Subscription Certificates should be read
carefully and followed in detail.

The Company anticipates that the exercise of the Subscription Privilege may
be effected through the facilities of The Depository Trust Company.

DO NOT SEND SUBSCRIPTION CERTIFICATES TO THE COMPANY, AGH, CAPSTAR OR ANY OF
THEIR AFFILIATES, BUT RATHER SEND THEM TO THE SUBSCRIPTION AGENT AS REFERENCED
ABOVE.

THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND RISK
OF THE RIGHTHOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH
CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO
ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT AT OR PRIOR
TO THE EXPIRATION DATE. BECAUSE UNCERTIFIED, PERSONAL CHECKS MAY TAKE UP TO
FIVE BUSINESS DAYS TO CLEAR, RIGHTHOLDERS ARE STRONGLY URGED TO PAY, OR
ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR
WIRE TRANSFER OF FUNDS.

All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Company, whose determinations
will be final and binding. The Company in its sole discretion may waive any
defect or irregularity, or permit a defect or irregularity to be corrected
within such time as it may determine, or reject the purported exercise of any
Right. Subscriptions will not be deemed to have been received or accepted
until all irregularities have been waived or cured within such time as the
Company determines in its sole discretion. The Company reserves the right to
reject any purchases not properly submitted or the acceptance of which would,
in the opinion of its counsel, be unlawful. Neither the Company nor the
Subscription Agent will be under any duty to give notification of any defect
or irregularity in connection with the submission of Subscription Certificates
or incur any liability for failure to give such notification.

Any questions or requests for assistance concerning the method of exercising
Rights or requests for additional copies of this Prospectus, the Instructions
or the Notice of Guaranteed Delivery should be directed to the Subscription
Agent.

NO REVOCATION

ONCE A RIGHTHOLDER HAS EXERCISED THE SUBSCRIPTION PRIVILEGE, SUCH EXERCISE
MAY NOT BE REVOKED.

RIGHTS NOT TRANSFERABLE

The Rights may be not be transferred. The Rights will entitle only a
Rightholder (but not a subsequent transferee of the REIT Common Stock and/or
REIT OP Units held by such Rightholder on the Record Date) to purchase shares
of Common Stock at the Subscription Price. In the event that Rightholders
transfer REIT Common Stock and/or REIT OP Units owned by them as of the Record
Date, they will remain the owners of Rights issued in respect of such shares
of REIT Common Stock and/or such REIT OP Units.

46
<PAGE>

None of the Company nor the Subscription Agent nor any of their affiliates
will have any liability to a purported transferee or transferor of Rights in
connection with any purported transfer. Except for the fees charged by the
Subscription Agent (which will be paid by the Company), all commissions, fees
and other expenses (including brokerage commissions and transfer taxes)
incurred in connection with the exercise of Rights will be for the account of
the Rightholder, and none of such commissions, fees or expenses will be paid
by the Company or the Subscription Agent.

FOREIGN AND CERTAIN OTHER RIGHTHOLDERS

Subscription Certificates will not be mailed to Rightholders whose addresses
are outside the United States or who have an APO or FPO address, but will be
held by the Subscription Agent for their account. To exercise or sell Rights,
such Rightholders must notify the Subscription Agent by completing an
International Holder Subscription Form, which will be delivered to such
Rightholders (except those located in the United Kingdom) in lieu of a
Subscription Certificate, and sending it by mail or telecopy to the
Subscription Agent at the address and telecopy number specified above.
Rightholders located in the United Kingdom will not initially be provided with
International Holder Subscription Forms. Such Rightholders who are interested
in participating in the Rights Offering should contact broker-dealer,
telephone ., facsimile number ., attention: ..

FEDERAL INCOME TAX CONSEQUENCES

The following summary describes the material United States federal income
tax considerations affecting Rightholders in the Rights Offering. This summary
is based upon laws, regulations, rulings, and decisions currently in effect.
This summary does not discuss all aspects of federal taxation that may be
relevant to a particular investor or to certain types of investors subject to
special treatment under the federal tax laws (for example, banks, dealers in
securities, life insurance companies, tax-exempt organizations, and foreign
persons), nor does it discuss any aspect of state, local, or foreign tax laws.

RIGHTHOLDERS SHOULD THEREFORE CONSULT THEIR OWN TAX ADVISORS CONCERNING
THEIR INDIVIDUAL TAX SITUATIONS AND THE TAX CONSEQUENCES OF THE RIGHTS
OFFERING UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, AND UNDER ANY
APPLICABLE STATE, LOCAL, OR FOREIGN TAX LAWS.

FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF CAPSTAR COMMON STOCK

DISTRIBUTION OF RIGHTS TO HOLDERS OF CAPSTAR COMMON STOCK

Although the matter is not entirely free from doubt, because the Rights
Offering is an integral part of a series of related transactions culminating
in the Merger, the distribution of Rights to holders of CapStar Common Stock
should constitute taxable boot received in the Merger (as described in "The
Merger and the Spin-Off-- Restructuring and Spin-Off"). The distribution of
the Common Stock of MeriStar Hotels should also constitute taxable boot
received in the Merger.

As a result, holders of CapStar Common Stock will recognize gain in the
Merger equal to the lesser of (i) the fair market value of the Rights and the
Common Stock of MeriStar Hotels received by such stockholder and (ii) the fair
market value of the Common Stock of the REIT, the Common Stock of MeriStar
Hotels and the Rights received in the Merger minus the adjusted tax basis of
such stockholder in its CapStar Common Stock exchanged therefor. The amount of
gain recognized by holders of CapStar Common Stock that "has the effect of the
distribution of a dividend" will be treated as ordinary dividend income to the
extent of the stockholder's

47
<PAGE>

ratable share of the undistributed earnings and profits of CapStar as of the
effective time of the Merger, and any excess will be treated as gain from the
exchange of property. Such gain will be capital gain if such shares of the
Rights were held as a capital asset at the effective time of the Merger.

In general, the determination as to whether the gain recognized by a CapStar
stockholder in the Merger will be treated as capital gain or dividend income
depends upon whether and to what extent the transactions related to the Merger
will be deemed to reduce the stockholder's percentage ownership of the REIT
following the Merger. For purposes of that determination, the stockholder is
treated as if it first exchanged all of its shares of CapStar Common Stock
solely for Common Stock of the REIT and then the REIT immediately redeemed
(the "deemed redemption") a portion of such Common Stock of the REIT in
exchange for the boot the stockholder actually received. If, under section 302
of the Code, the deemed redemption is "substantially disproportionate" with
respect to a CapStar stockholder, the gain recognized will be treated as
capital gain. One requirement that must be met in order for the deemed
redemption to be "substantially disproportionate" is that the percentage of
the outstanding voting stock of the REIT following the Merger and the deemed
redemption considered owned by the stockholder is less than 80% of the
percentage of the outstanding voting stock of the REIT considered owned by the
stockholder following the Merger but immediately before the deemed redemption.
Based on calculations of the relative values of the Common Stock of the REIT,
the Common Stock of MeriStar Hotels and the Rights to be received by holders
of CapStar Common Stock, it is anticipated that the deemed redemption will not
be "substantially disproportionate" with respect to holders of CapStar Common
Stock. Accordingly, unless a CapStar shareholder qualifies for the exception
described below, the gain recognized by such shareholder will be taxed as
dividend income to the extent of the accumulated earnings and profits of
CapStar at the time of Merger.

However, section 302 of the Code also provides that if the deemed redemption
is "not essentially equivalent to a dividend" with respect to the stockholder,
then any gain recognized by the stockholder in the transaction will be capital
gain. In general, in order for the deemed redemption to be "not essentially
equivalent to a dividend", the deemed redemption must result in a "meaningful
reduction" in the stockholder's deemed percentage stock ownership of the REIT
following the Merger. That determination generally requires a comparison of
(i) the percentage of the outstanding stock of the REIT the stockholder is
considered to have owned immediately before the deemed redemption and (ii) the
percentage of the outstanding stock of the REIT the stockholder owns
immediately after the deemed redemption. The Internal Revenue Service has
indicated in a published ruling that, in the case of a small minority holder
of a publicly-held corporation who exercises no control over corporate
affairs, a reduction in the holder's proportionate interest in the corporation
from .0001118% to .0001081% would constitute a meaningful reduction.

In applying the foregoing tests, under the attribution rules of section 318
of the Code, a stockholder is deemed to own (i) stock owned and, in some
cases, constructively owned by family members, by certain estates and trusts
of which the stockholder is a beneficiary and by certain affiliated entities
and (ii) stock subject to an option actually or constructively owned by the
stockholder or such other persons. As the determination as to whether a
CapStar stockholder has recognized capital gain with respect to the receipt of
the Rights is complex, each stockholder that believes that it might qualify
for capital gain treatment under the above rules is urged to consult its tax
advisor with respect to such determination.

To the extent that the gain recognized by a holder of CapStar Common Stock
"has the effect of the distribution of a dividend", the amount that will be
treated as ordinary dividend income will depend on the earnings and profits of
CapStar at the effective time of the Merger. Earnings and profits immediately
prior to the effective time of the Merger will be increased by an amount equal
to the sum of the fair market value of the Rights and the excess of the fair
market value of the Common Stock of MeriStar Hotels over CapStar's tax basis
in such stock.

The tax basis of a CapStar stockholder in the Rights received in the
distribution will be the fair market value of such Rights, and the holding
period for such Rights will begin on the date of the distribution.

CapStar will recognize gain on the distribution of the Rights in an amount
equal to the fair market value of such Rights at the time of the distribution.
No gain or loss will be recognized by MeriStar as a result of the distribution
of the Rights in the Rights Offering.

48
<PAGE>

EXERCISE OF RIGHTS BY HOLDERS OF CAPSTAR COMMON STOCK

Holders of CapStar Common Stock will not recognize gain or loss upon the
exercise of the Rights. Such holders who receive shares of MeriStar Hotels
Common Stock upon such exercise will take a tax basis in those shares equal to
the sum of the price paid on exercise and the Rightholder's tax basis in the
Rights.

LAPSE OF RIGHTS BY HOLDERS OF CAPSTAR COMMON STOCK

Holders of CapStar Common Stock who fail to exercise their Rights prior to
the Expiration Date will be deemed to have sold their rights on that date for
an amount equal to zero. Assuming the rights are held as capital assets, such
holders will recognize a short-term capital loss equal to their adjusted tax
basis in the Rights upon failure to exercise such Rights.

FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF AGH COMMON STOCK

DISTRIBUTION OF RIGHTS TO HOLDERS OF AGH COMMON STOCK

Although the matter is not free from doubt, because the Rights Offering is
an integral part of a series of related transactions culminating in the
Merger, including the recapitalization in which the AGH shareholders exchange
their shares for shares of the REIT, the distribution of Rights should
constitute boot received in the AGH recapitalization.

As a result, a holder of AGH Common Stock will recognize gain equal to the
lesser of (i) the fair market value of the Rights received by such stockholder
or (ii) the fair market value of the Common Stock of the REIT, and of the
Rights minus the adjusted tax basis of such stockholder in its AGH Common
Stock exchanged therefor. The amount of gain recognized by a holder of AGH
Common Stock that "has the effect of the distribution of a dividend" will be
treated as ordinary dividend income to the extent of the stockholder's ratable
share of the undistributed earnings and profits of AGH as of the effective
time of the Merger and any excess will be treated as gain from the exchange of
property. Such gain will be capital gain if such shares of the Rights were
held as a capital asset at the effective time of the Merger.

In general, the determination as to whether the gain so recognized by an AGH
stockholder will be treated as capital gain or dividend income depends upon
whether and to what extent the transactions related to the Merger will be
deemed to reduce the stockholder's percentage ownership of the REIT following
the Merger. For purposes of that determination, the stockholder is treated as
if it first exchanged all of its shares of AGH Common Stock solely for Common
Stock of the REIT and then the REIT immediately redeemed (the "deemed
redemption") a portion of such Common Stock of the REIT in exchange for the
boot the stockholder actually received. If, under section 302 of the Code, the
deemed redemption is "substantially disproportionate" with respect to a AGH
stockholder, the gain recognized will be treated as capital gain. One
requirement that must be met in order for the deemed redemption to be
"substantially disproportionate" is that the percentage of the outstanding
voting stock of the REIT following the Merger and the deemed redemption
considered owned by the stockholder is less than 80% of the percentage of the
outstanding voting stock of the REIT considered owned by the stockholder
following the Merger but immediately before the deemed redemption. Although
the matter is not free from doubt, in determining whether this test is
satisfied, the reduction in percentage interests of the AGH stockholder as a
result of the issuance of additional shares of the REIT to former CapStar
stockholders in the Merger should be taken into account. Based on calculations
of the relative values of the Common Stock of the REIT, the Rights to be
received by holders of AGH Common Stock and the amount of stock to be issued
to former CapStar stockholders in the Merger, it is anticipated that the
deemed redemption will be "substantially disproportionate" with respect to
holders of AGH Common Stock. Accordingly, the gain recognized by such
shareholder will be taxed as a capital gain.

49
<PAGE>

whether an AGH stockholder has recognized capital gain with respect to the
receipt of the Rights is complex, each stockholder that believes that it might
qualify for capital gain treatment under the above rules is urged to consult
its tax advisor with respect to such determination.

The tax basis of an AGH stockholder in the Rights received in the
distribution will be the fair market value of such Rights, and the holding
period for such Rights will begin on the date of the distribution.

AGH will recognize gain on the distribution of the Rights in an amount equal
to the fair market value of such Rights at the time of the distribution.

EXERCISE OF RIGHTS BY HOLDERS OF AGH COMMON STOCK

Holders of AGH Common Stock will not recognize gain or loss upon the
exercise of the Rights. Such holders who receive shares of MeriStar Hotels
Common Stock upon such exercise will take a tax basis in those shares equal to
the sum of the price paid on exercise and the Rightholder's tax basis in the
Rights.

LAPSE OF RIGHTS BY HOLDERS OF AGH COMMON STOCK

Holders of AGH Common Stock who fail to exercise their Rights prior to the
Expiration Date will be deemed to have sold their rights on that date for an
amount equal to zero. Assuming the rights are held as capital assets, such
holders will recognize a short-term capital loss equal to their adjusted tax
basis in the Rights upon failure to exercise such Rights.

FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF REIT OP UNITS

DISTRIBUTION TO HOLDERS OF REIT OP UNITS

Although the matter is not free from doubt, the distribution of the Rights
by MeriStar Hotels to holders of REIT OP Units in their capacity as such
should not initially be a taxable event to the recipient.

EXERCISE OF RIGHTS BY HOLDERS OF REIT OP UNITS

Although there is not published authority directly on point, based upon
internal Internal Revenue Service ("IRS") memoranda, holders of REIT OP Units
who exercise their Rights will recognize ordinary taxable income in an amount
equal to the fair market value of such Rights on the date of exercise. Such
holders would take a tax basis in such shares received upon exercise equal to
the exercise price paid under the Rights Offering and the amount of ordinary
income recognized upon exercise as described herein.

LAPSE OF RIGHTS BY HOLDERS OF REIT OP UNITS

Holders of REIT OP Units who fail to exercise their Rights prior to the
Expiration Date should recognize no income, gain or loss upon the lapse of
such Rights unexercised.

RISK OF RECHARACTERIZATION TO HOLDERS OF REIT OP UNITS

Although MeriStar Hotels, the REIT and the REIT Operating Partnership intend
to take the position that the issuance of the Rights will be characterized for
federal income tax purposes as described above, it is possible that the IRS
might recharacterize the Rights Offering. For example, it is possible the IRS
could view the REIT Operating Partnership as the distributor of the Rights. If
this were the case, the distribution of the Rights to holders of REIT OP Units
would be treated as a partnership distribution of marketable securities so
that such unit-holder would have to recognize capital gain to the extent that
the fair market value of the Rights as of the date of distribution exceeds
such holder's basis in such units. Under such a view, holders of REIT OP Units
would take a basis in the Rights equal to the fair market value of the Rights
as of the date of distribution.

If the offering were recharacterized in this way, holders of REIT OP Units
would not recognize further gain or loss upon the exercise of his Rights.
Assuming such Rights were held as capital assets, holders of REIT OP Units
would recognize a short-term capital loss equal to their adjusted tax basis in
the Rights upon failure to exercise such Rights.

50
<PAGE>

MANAGEMENT

MeriStar Hotels was recently formed. None of the Company's executive
officers has yet received compensation from or on behalf of MeriStar Hotels
since its formation. The Company intends to enter into employment agreements
with certain executive officers and will pay a salary and/or other
compensation to such executive officers for their services in such capacities
as set forth below under "Executive Compensation." Options have been, and in
the future may be, granted to executive officers. See "Stock Option Grants."

THE BOARD OF DIRECTORS

The Board of Directors will be divided into three classes of directors. The
inital term of the first, second and third classes expires in 2001, 2002 and
2003, respectively. Directors of each class will be elected for three-year
terms upon the expiration of the initial class terms, and, beginning in 2001
and each year thereafter, each class of directors will be elected by the
stockholders. As of the date of this Prospectus, the following individuals are
expected to become directors of MeriStar Hotels:

<TABLE>
<CAPTION>
WILL SERVE AS A
DIRECTOR OF
NAME, PRINCIPAL OCCUPATION MERISTAR HOTELS
AND BUSINESS EXPERIENCE BEGINNING AGE CLASS
-------------------------- --------------- --- -----
<S> <C> <C> <C>
DANIEL L. DOCTOROFF.................................. 1998 39 I
Daniel L. Doctoroff has been a Director of CapStar
since 1996, a Managing Director of Oak Hill
Partners, Inc., the investment advisor to several
private investment funds (including Acadia Partners,
L.P.), 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.
KENT R. HANCE........................................ 1998 55 II
Kent R. Hance has been a director of AGH since July
1996. Since 1994, Mr. Hance has been a law partner
in the firm Hance, Scarborough, Woodward & Weisbart,
L.L.P., Austin, Texas, and from 1991 to 1994, he was
a law partner in the firm of Hance and Gamble. From
1985 to 1987, he was a law partner with Boyd, Viegal
and Hance. Mr. Hance also served as a member of the
Texas Railroad Commission from 1987 until 1991 and
as its Chairman from 1989 until 1990. From 1979 to
1985, he served as a member of the United States
Congress. In addition, Mr. Hance served as a State
Senator in the State of Texas from 1975 to 1979 and
was a professor of business law at Texas Tech
University from 1969 to 1973.
STEVEN D. JORNS...................................... 1998 49 I
Steven D. Jorns has been the Chairman of the Board
of Directors, Chief Executive Officer and President
of AGH since April 1996. Mr. Jorns is the founder
of, and has served since its formation in 1981 as
Chairman of the Board of Directors, Chief Executive
Officer and President of, AGHI, a hotel management
company. Prior to forming AGHI, Mr. Jorns spent
seven years with an affiliate of General Growth
Companies overseeing that company's hotel portfolio.
Prior to that, Mr. Jorns was associated with
Hospitality Motor Inns, a division of Standard Oil
of Ohio, and held marketing positions with Holiday
Inns, Inc.
</TABLE>

51
<PAGE>

<TABLE>
<CAPTION>
WILL SERVE AS A
DIRECTOR OF
NAME, PRINCIPAL OCCUPATION MERISTAR HOTELS
AND BUSINESS EXPERIENCE BEGINNING AGE CLASS
-------------------------- --------------- --- -----
<S> <C> <C> <C>
JOSEPH MCCARTHY..................................... 1998 65 I
Joseph McCarthy has been retired since 1994 and has
been a Director of CapStar since 1996. From 1993 to
1994 he 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.
DAVID E. MCCASLIN................................... 1998 41 III
David E. McCaslin has been a Director of CapStar
since 1996. He has served as Chief Operating
Officer of CapStar since 1994. Mr. McCaslin joined
CapStar 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.
JAMES MCCURRY....................................... 1998 49 III
James McCurry became a director of AGH in July
1996. Since July 1997, Mr. McCurry has been a
Partner at Bain & Company, an international
management consulting firm specializing in
corporate strategy. Mr. McCurry served from
December 1994 through December 1996 as Chief
Executive Officer of NeoStar Retail Group, Inc.
("NeoStar"), a specialty retailer of consumer
software. NeoStar filed a voluntary petition under
Chapter 11 of the U.S. Bankruptcy Code in September
1996. From April 1983 to December 1994, Mr. McCurry
was the Chairman of Babbage's Inc., a consumer
software retailer, which merged with Software Etc.
Stores, Inc. in December of 1994 to form NeoStar.
PAUL W. WHETSELL.................................... 1998 47 II
Paul W. Whetsell has been a Director of CapStar
since 1996. He has served as President and Chief
Executive Officer of CapStar and its predecessors
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.
JAMES R. WORMS...................................... 1998 51 II
James R. Worms has served as director of AGH since
July 1996. Mr. Worms has served since August 1995
as a Managing Director of William E. Simon & Sons
L.L.C., a private investment firm and merchant bank
and President of William E. Simon & Sons Realty,
through which the firm conducts its real estate
activities. Prior to joining William E. Simon &
Sons, Mr. Worms was employed since March 1987 by
Salomon Brothers Inc., an international investment
banking firm, most recently as a managing director.
ADDITIONAL DIRECTOR III
</TABLE>
[TO BE DETERMINED]

52
<PAGE>

BOARD COMMITTEES

The Board of Directors of MeriStar Hotels will have four committees: an
Audit Committee, a Compensation Committee, an Investment Committee and a
Leasing Committee.

The Audit Committee will consist of three directors who are not employees of
the Company ("Independent Directors"). The Audit Committee will be responsible
for making recommendations concerning the engagement of independent auditors,
reviewing with the independent auditors the plans and results of the audit
engagement, approving professional services provided by the independent
auditors, reviewing the independence of the independent auditors, considering
the range of audit and non-audit fees and reviewing the adequacy of the
Company's internal accounting controls.

The Compensation Committee will consist of four Independent Directors. The
Compensation Committee will be responsible for the determination of
compensation of the Company's executive officers and the administration of the
Company's employee incentive plans.

The Investment Committee of the Company will consist of the Chairman of the
Board and directors from each of MeriStar Hotels and the REIT. The Company's
Investment Committee will be responsible for the review and approval of
investments proposed by the Company.

The Leasing Committee will consist of the Chairman of the Board and three
Independent Directors. The Leasing Committee will be responsible for the
review and approval of leases to be entered into between the Hotel Parties and
the REIT Parties.

The entire Board of Directors of the Company will act as the nominating
committee for directors of the Company and will consider nominations by
stockholders for directors. The Board of Directors would be pleased to receive
suggestions from stockholders about persons it should consider as possible
members of the Board of Directors. Any such suggestion should be mailed to the
Secretary of the Company by December 31, 1998.

DIRECTORS COMPENSATION

Independent Directors of the Company will be paid an annual fee of $20,000.
In addition, each Independent Director will be paid $1,250 for attendance at
each meeting of the Board; $1,000 for attendance at each meeting of a
committee of the Board of Directors of which such director is a member and
$500 for each telephonic meeting of the Board or a committee thereof of which
such director is a member. Directors who are employees of the Company will not
receive any fees for their service on the Board of Directors or a committee
thereof. The Company will reimburse directors for their out-of-pocket expenses
in connection with their service on the Board of Directors.

OPTIONS

Pursuant to the MeriStar Hotels & Resorts, Inc. Non-Employee Incentive Plan
(the "MeriStar Hotels Directors' Plan"), each director, who is not an officer
or employee of MeriStar or its subsidiaries (each an "Independent Director"),
will be awarded an option to purchase 7,500 shares of Common Stock upon
initial commencement of service after the Spin-Off, whether by appointment or
election. Thereafter, each Independent Director will be granted an option to
purchase 5,000 shares of Common Stock on the first business day following the
Company's annual meeting of stockholders. The exercise price of option grants
will be 100% of the fair market value of the Common Stock on the date of
grant, and options will vest in three annual installments. The exercise price
may be paid in cash, cash equivalents acceptable to the Compensation
Committee, Common Stock or a combination thereof. Options granted under the
MeriStar Hotels Directors' Plan, once vested, are exercisable for ten years
from the date of grant. Upon termination of service as a director, options
which have not vested are forfeited and vested options may be exercised until
they expire. All options accelerate upon a change in control of MeriStar
Hotels.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES RELATING TO OPTIONS

Generally, an eligible director does not recognize any taxable income, and
the Company is not entitled to a deduction upon the grant of an option. Upon
the exercise of an option, the eligible director recognizes ordinary

53
<PAGE>

income equal to the excess of the fair market value of the shares acquired
over the option exercise price, if any. The director will then take a basis in
such shares equal to their fair market value at the time of option exercise,
and any gain or loss subsequently recognized upon a sale or exchange of such
shares will be treated as capital gain or loss to such director. Special rules
may apply as a result of Section 16 of the Exchange Act. The Company is
generally entitled to a deduction equal to the compensation taxable to the
eligible director as ordinary income. Eligible directors may be subject to
backup withholding requirements for federal income tax. Options are generally
non-transferable. However, the MeriStar Hotels Directors' Plan authorizes the
granting of options which are transferable to Permitted Family Members (as
defined therein).

The transfer of an option to a Permitted Family Member will have no
immediate tax consequences to the Company, the director or the Permitted
Family Member. Upon the subsequent exercise of the transferred option by the
Permitted Family Member, the director will realize ordinary income in an
amount measured by the difference between the option exercise price and the
fair market value of the shares on the date of exercise, and the employer will
be entitled to a deduction in the same amount. Any difference between such
fair market value and the price at which the Permitted Family Member may
subsequently sell such shares will be treated as capital gain or loss to the
Permitted Family Member, long-term or short-term depending on the length of
time the shares have been held by the Permitted Family Member.

COMMON STOCK IN LIEU OF FEES

Independent Directors may elect to receive all or a portion of their annual
retainer in shares of Common Stock rather than cash. Unless an Independent
Director elects otherwise, fees paid in stock will be paid at the same time as
fees paid in cash.

AMENDMENT AND TERMINATION

The MeriStar Hotels Directors' Plan provides that the Board of Directors may
amend or terminate the MeriStar Directors' Plan at any time. An amendment will
not become effective without stockholder approval if the amendment (i)
materially increases the number of shares that may be issued under the
MeriStar Hotels Directors' Plan or (ii) stockholder approval would be required
for compliance with stock exchange rules. No options may be granted under the
MeriStar Hotels Directors' Plan after December 31, 2008.

STOCK OPTION GRANTS

The following table sets forth information regarding the proposed grants of
options under the MeriStar Hotels Directors Plan:

<TABLE>
<CAPTION>
NUMBER OF MERISTAR
STOCK OPTIONS TO
NAME AND POSITION BE GRANTED
- ----------------- ------------------
<S> <C>
Daniel L. Doctoroff--Director................................ 7,500
Kent R. Hance--Director...................................... 7,500
Joseph McCarthy--Director.................................... 7,500
James McCurry--Director...................................... 7,500
James R. Worms--Director..................................... 7,500
</TABLE>

54
<PAGE>

EXECUTIVE OFFICERS

The following table sets forth the name, age, expected title and business
experience for each person who is expected to serve as an executive officer of
MeriStar Hotels. For information concerning the business experience of Messrs.
Whetsell, Jorns and McCaslin, who are also expected to be members of the
MeriStar Hotels Board of Directors, see "Management--The Board of Directors."

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Paul W. Whetsell................. 47 Chairman of the Board and Chief Executive Officer
Steven D. Jorns.................. 49 Vice Chairman and Chief Operating Officer
David E. McCaslin................ 41 President and Director
James A. Calder.................. 35 Chief Financial Officer
John E. Plunket.................. 42 Executive Vice President, Finance and Development
</TABLE>

James A. Calder

James A. Calder has served as Senior Vice President of Finance of CapStar
since September 1997. From May 1995 to September 1997, he served as Senior
Vice President and Corporate Controller of ICF Kaiser International, Inc.
Prior to that, from July 1984 to May 1995, he worked for Deloitte & Touche LLP
in various capacities, culminating with Audit Senior Manager for the real
estate industry. He is a Certified Public Accountant.

John E. Plunket

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

EXECUTIVE COMPENSATION

The following table sets forth the compensation that is expected to be paid
by the Company during 1998 with respect to the Chief Executive Officer and the
four most highly compensated executive officers (the "Named Executive
Officers").

<TABLE>
<CAPTION>
OPTIONS TO
ANNUAL COMPENSATION BE GRANTED
------------------- OTHER ANNUAL LONG-TERM
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
--------------------------- ---- -------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
PAUL W. WHETSELL............... 1998 $190,000 $ $ --
Chief Executive Officer and
Chairman of the Board
STEVEN D. JORNS................ 1998 190,000 250,000
Vice Chairman and Chief Oper-
ating Officer
DAVID E. MCCASLIN.............. 1998 300,000 87,500
President and Director
JAMES A. CALDER................ 1998 200,000 47,500
Chief Financial Officer
JOHN E. PLUNKET................ 1998 162,000 10,000
Executive Vice President, Fi-
nance and
Development
</TABLE>

55
<PAGE>

EMPLOYMENT AGREEMENTS

The Company has agreed to enter into employment agreements with Paul W.
Whetsell, Steven D. Jorns, David E. McCaslin, James A. Calder and John E.
Plunket effective upon the consummation of the Formation Transactions. With
respect to Messrs. Whetsell and Jorns, each agreement will be for an initial
term of five years with automatic renewals on a year-to-year basis thereafter
unless terminated in accordance with its terms. The other employment
agreements will be for an initial term of three years, with automatic renewals
on a year-to-year basis thereafter, unless terminated in accordance with their
respective terms. Certain material terms of these agreements are as follows:

BASE SALARY

Messrs. Whetsell and Jorns will each receive a base salary of $190,000 per
year (Messrs. Whetsell and Jorns will each receive a base salary of $285,000
per year as employees of the REIT). Mr. McCaslin will receive a base salary of
$300,000 per year, Mr. Calder will receive a base salary of $200,000 per year
and Mr. Plunket will receive a base salary of $162,000 per year. Each base
salary will be subject to review annually.

ANNUAL INCENTIVE BONUS

Each executive shall be eligible to receive an annual incentive bonus at the
following targeted amounts of base salary:

<TABLE>
<CAPTION>
THRESHOLD MAXIMUM
TARGET TARGET BONUS AMOUNT
--------- ------ ------------
<S> <C> <C> <C>
Paul W. Whetsell............................... 25% 75% 150%
Steven D. Jorns................................ 25% 75% 150%
David E. McCaslin.............................. 25% 50% 100%
James A. Calder................................ 25% 50% 100%
John E. Plunket................................ 25% 50% 100%
</TABLE>

The amount of the annual bonus will be based on the achievement of
predefined operating or performance goals and other criteria to be established
by the Compensation Committee of the Board of Directors.

LONG-TERM INCENTIVES

Each executive will be eligible to participate in the MeriStar Hotels
Incentive Plan. Awards will be made in the discretion of the Compensation
Committee.

Certain Severance Benefits

If, at any time during the term of their respective employment agreements or
any automatic renewal period, the employment of Messrs. Whetsell, Jorns,
McCaslin, Calder or Plunket is terminated, he shall be entitled to receive the
benefits described below.

Termination by the Company Without Cause or by the Executive with Good
Reason. In the case of Messrs. Whetsell and Jorns, if such executive is
terminated without cause or voluntarily terminates with "good reason," he is
entitled to a lump sum payment equal to two times the sum of his then annual
base salary plus his bonus for the preceding year. In addition, all of the
executive's options and restricted stock will vest, effective as of the
termination date. The other executives will receive (i) a lump sum payment
equal to one times their then annual base salary, (ii) the amount of their
bonus for the preceding year, and (iii) immediate vesting and exercisability
of all unvested stock options and restricted stock awards.

In the case of each of the executives, in the event that any accelerated
vesting of the executive's rights with respect to stock options, restricted
stock or any other benefit or compensation results in the imposition of an
excise tax payable by the executive under Section 4999 of the Code, or any
successor or other provision with respect to "excess parachute payments"
within the meaning of Section 280G(b) of the Internal Revenue Code, the
Company will make a cash payment to the executive in the amount of such taxes
and shall also make a cash

56
<PAGE>

payment to the executive in an amount equal to the total of federal, state and
local income and excise taxes for which the executive may be liable on account
of such cash payments made (the "280G Payment").

Termination Due to Death or Disability. Upon termination due to death or
disability, the executive or his estate will receive a lump sum payment equal
to the executive's base salary, plus the pro rata portion of his bonus for the
fiscal year in question, in addition to payment for one year of any other
compensation due the executive pursuant to his employment contract. The
executive's stock options and restricted stock will vest immediately.

Voluntary Termination or Termination for Cause. Upon voluntary termination
or termination for "cause" by the Company, the executive will receive the pro
rata portion of his base salary through the termination date. Any vested
options held by the executive will expire ninety (90) days after the
termination date.

Termination Following a Change in Control. If Mr. Whetsell or Mr. Jorns is
terminated without cause or voluntarily terminates with "good reason" within
24 months following a "Change in Control," the executive will receive the
following benefits: (i) a lump sum payment equal to three times the sum of his
then annual base salary and an amount equal to his bonus for the previous
year; (ii) all unvested stock options held by the executive will vest and be
exercisable immediately; and (iii) the 280G Payment. In the case of the other
executives, they would each be entitled to the same type of payments provided
the termination occurred within 18 months of the Change in Control, except
they will only receive two times the sum of their then annual base salary plus
bonus.

Termination within 24 Months of Effective Time

Notwithstanding anything to the contrary, stock options or other awards made
to Messrs. Whetsell, Jorns, McCaslin, Calder and Plunket will continue to vest
in accordance with their original terms if such executive's employment is
terminated voluntarily or involuntarily within 24 months after the
consummation of the Formation Transactions.

THE MERISTAR HOTELS INCENTIVE PLAN

The Board of Directors adopted the MeriStar Hotels & Resorts, Inc. Incentive
Plan (the "MeriStar Hotels Incentive Plan") for the purposes of (i) attracting
and retaining employees, directors and other service providers with ability
and initiative, (ii) providing incentives to those deemed important to the
success of the Company and related entities, and (iii) associating the
interests of these individuals with the interests of the Company and its
stockholders through opportunities for increased stock ownership.

ADMINISTRATION

The MeriStar Hotels Incentive Plan is administered by the Compensation
Committee. The Compensation Committee may delegate its authority to administer
the MeriStar Hotels Incentive Plan. The Compensation Committee may not,
however, delegate its authority with respect to grants and awards to
individuals subject to Section 16 of the Exchange Act. As used in this
summary, the term "Administrator" means the Compensation Committee or its
delegate, as appropriate.

ELIGIBILITY

Each employee of the Company or of an affiliate of the Company or any other
person whose efforts contribute to the Company's performance, including an
employee who is a member of the Board of Directors, is eligible to participate
in the MeriStar Hotels Incentive Plan ("Participants"). The Administrator may,
from time to time, grant stock options, stock awards, incentive awards, or
performance shares to Participants.

OPTIONS

Options granted under the MeriStar Hotels Incentive Plan may be incentive
stock options ("ISOs") or nonqualified stock options. An option entitles a
Participant to purchase shares of Common Stock from the

57
<PAGE>

Company at the option price. The option price may be paid in cash, with shares
of Common Stock, or with a combination of cash and Common Stock. The option
price will be fixed by the Administrator at the time the option is granted,
but the price cannot be less than 100% for existing employees (85% in
connection with the hiring of new employees) of the shares' fair market value
on the date of grant; provided, however, no more than 10% of the shares under
the MeriStar Hotels Incentive Plan will be granted at less than 100% of fair
market value. The exercise price of an ISO may not be less than 100% of the
shares' fair market value on the date of grant (110% of the fair market value
in the case of an ISO granted to a 10% stockholder of the Company). Options
may be exercised at such times and subject to such conditions as may be
prescribed by the Administrator but the maximum term of an option is ten years
in the case of an ISO or five years in the case of an ISO granted to a 10%
stockholder.

ISOs may only be granted to employees; however, no employee may be granted
ISOs (under the MeriStar Hotels Incentive Plan or any other plan of the
Company) that are first exercisable in a calendar year for Common Stock having
an aggregate fair market value (determined as of the date the option is
granted) exceeding $100,000. In addition, no Participant may be granted
options in any calendar year for more than 750,000 shares of Common Stock.

STOCK AWARDS

Participants also may be awarded shares of Common Stock pursuant to a stock
award. A Participant's rights in a stock award will be nontransferable or
forfeitable or both unless certain conditions prescribed by the Administrator
are satisfied. These conditions may include, for example, a requirement that
the Participant continue employment with the Company for a specified period or
that the Company or the Participant achieve stated, performance-related
objectives. The objectives may be stated with reference to the fair market
value of the Common Stock or the Company's, a subsidiary's, or an operating
unit's return on equity, earnings per share, total earnings, earnings growth,
return on capital, funds from operations or return on assets or other
acceptable performance criteria. A stock award, no portion of which is
immediately vested and nonforfeitable, will be restricted, in whole or in
part, for a period of at least three years; provided, however, that the period
will be at least one year in the case of a stock award that is subject to
objectives based on one or more of the foregoing performance criteria. The
maximum number of stock awards that may be granted to an individual in any
calendar year cannot exceed 50,000 shares of Common Stock.

INCENTIVE AWARDS

Incentive awards also may be granted under the MeriStar Hotels Incentive
Plan. An incentive award is an opportunity to earn a bonus, payable in cash,
upon attainment of stated performance objectives. The objectives may be stated
with reference to the fair market value of the Common Stock or on the
Company's, a subsidiary's, or an operating unit's return on equity, earnings
per share, total earnings, earnings growth, return on capital, funds from
operations or return on assets or other acceptable performance criteria. The
period in which performance will be measured will be at least one year. No
Participant may receive an incentive award payment in any calendar year that
exceeds the lesser of (i) 100% of the Participant's base salary (prior to any
salary reduction or deferral election) as of the date of grant of the
incentive award or (ii) $250,000.

PERFORMANCE SHARE AWARDS

The MeriStar Hotels Incentive Plan also provides for the award of
performance shares. A performance share award entitles the Participant to
receive a payment equal to the fair market value of a specified number of
shares of Common Stock if certain standards are met. The Administrator will
prescribe the requirements that must be satisfied before a performance share
award is earned. These conditions may include, for example, a requirement that
the Participant continue employment with the Company for a specified period or
that the Company or the Participant achieve stated, performance-related
objectives. The objectives may be stated with reference to the fair market
value of the Common Stock or on the Company's, a subsidiary's, or an operating
unit's return on equity, earnings per share, total earnings, earnings growth,
return on capital, funds from operations or return on assets or other
acceptable performance criteria. To the extent that performance shares are
earned, the obligation

58
<PAGE>

may be settled in cash, in Common Stock, or by a combination of the two. No
Participant may be granted performance shares for more than 12,500 shares of
Common Stock in any calendar year.

TRANSFERABILITY

Awards granted under the MeriStar Hotels Incentive Plan are generally
nontransferable. The Compensation Committee may, however, grant awards other
than ISOs, which are transferable to Permitted Family Members.

SHARE AUTHORIZATION

At any given time, the maximum number of shares of Common Stock that may be
issued pursuant to awards granted under the MeriStar Hotels Incentive Plan
will be the total of (i) twelve (12%) percent of the number of shares of
Common Stock that were outstanding as of the end of the immediately preceding
calendar year (rounded downward if necessary to eliminate fractional shares),
minus (ii) the number of shares subject to awards which were granted under the
MeriStar Hotels Incentive Plan through the last day of the immediately
preceding calendar year, plus (iii) as of the last day of the immediately
preceding calendar year, the number of shares with respect to which previously
granted awards have expired. For calendar year 1998, the maximum number of
shares of MeriStar Common Stock that may be issued pursuant to the plan will
be twelve (12%) percent of the
number of shares of Common Stock outstanding after the Spin-Off. In addition
to the foregoing, in no event may the total number of shares of Common Stock
covered by outstanding ISOs granted under the MeriStar Hotels Incentive Plan,
plus the number of shares of Common Stock issued pursuant to the exercise of
ISOs, whenever granted under the MeriStar Hotels Incentive Plan, exceed
approximately 1.4 million shares. All awards made under the MeriStar Hotels
Incentive Plan will be evidenced by written agreements between the Company and
the Participant. The share limitation and the terms of outstanding awards will
be adjusted, as the Compensation Committee deems appropriate, in the event of
a stock dividend, stock split, combination, reclassification, recapitalization
or other similar event.

TERMINATION AND AMENDMENT

No option or stock award may be granted and no performance shares may be
awarded under the MeriStar Hotels Incentive Plan more than ten years after the
earlier of the date that the MeriStar Hotels Incentive Plan is adopted by the
Board of Directors or the date that it is approved by the Company's
stockholders. The Board of Directors may amend or terminate the MeriStar
Hotels Incentive Plan at any time, but, except as set forth in the immediately
preceding paragraph, an amendment will not become effective without
stockholder approval if the amendment materially (i) increases the number of
shares of Common Stock that may be issued under the MeriStar Hotels Incentive
Plan (other than an adjustment as described above), (ii) changes the
eligibility requirements, or (iii) increases the benefits that may be provided
under the MeriStar Hotels Incentive Plan.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

In general, a Participant will not recognize taxable income upon the grant
or exercise of an ISO. However, upon the exercise of an ISO, the excess of the
fair market value of the shares received on the date of exercise over the
exercise price of the shares will be treated as an adjustment to alternative
minimum taxable income. When a Participant disposes of shares acquired by
exercise of an ISO, the Participant's gain (the difference between the sale
proceeds and the price paid by the Participant for the shares) upon the
disposition will be taxed as capital gain provided the Participant does not
dispose of the shares within two years after the date of grant nor within one
year after the date of exercise, and exercises the option while an employee of
the Company or of a subsidiary of the Company or within three months after
termination of employment for reasons other than death or disability. If the
first condition is not met, the Participant generally will realize ordinary
income in the year of the disqualifying disposition. If the second condition
is not met, the Participant generally will recognize ordinary income upon
exercise of the ISO.

In general, a Participant who receives a nonqualified stock option will
recognize no income at the time of the grant of the option. Upon exercise of a
nonqualified stock option, a Participant will recognize ordinary income in an
amount equal to the excess of the fair market value of the shares on the date
of exercise over the exercise price of the option. Special timing rules may
apply to a Participant who is subject to Section 16(a) of the Exchange Act.

59
<PAGE>

A Participant will recognize income on account of the settlement of a
performance share award or incentive award. A Participant will recognize
income equal to any cash that is paid and with respect to performance share
awards, which are settled in shares, will recognize the fair market value of
Common Stock (on the date that the shares are first transferable or not
subject to a substantial risk of forfeiture) that is received in settlement of
the award.

The employer (either the Company or its affiliate) will be entitled to claim
a federal income tax deduction on account of the exercise of a nonqualified
option, the vesting of a restricted share award, payment under an incentive
award and the settlement of a performance share award. The amount of the
deduction will be equal to the ordinary income recognized by the Participant.
The employer will not be entitled to a federal income tax deduction on account
of the grant or the exercise of an ISO. The employer may claim a federal
income tax deduction on account of certain disqualifying dispositions of
Common Stock acquired upon the exercise of an ISO.

The transfer of a nonqualified stock option to a Permitted Family Member
will have no immediate tax consequences to the Company, the Participant or the
Permitted Family Member. Upon the subsequent exercise of the transferred
option by the Permitted Family Member, the Participant will realize ordinary
income in an amount measured by the difference between the option exercise
price and the fair market value of the shares on the date of exercise, and the
employer will be entitled to a deduction in the same amount. Any difference
between such fair market value and the price at which the Permitted Family
Member may subsequently sell such shares will be treated as capital gain or
loss to the Permitted Family Member, long-term or short-term depending on the
length of time the shares have been held by the Permitted Family Member. There
has been no formal pronouncement on the tax consequences of the transfer of
other awards. Accordingly, if such transfers are permitted, Participants will
be directed to consult their own tax advisers.

Section 162(m) of the Code places a limitation of $1,000,000 on the amount
of compensation payable to each of the named executive officers that the
Company may deduct for federal income tax purposes. The limit does not apply
to certain performance-based compensation paid under a plan that meets the
requirements of the Code and regulations promulgated thereunder. While the
MeriStar Hotels Incentive Plan generally complies with the requirements for
performance-based compensation, options granted at less than 100% of fair
market value and stock awards granted under the MeriStar Hotels Incentive Plan
will not satisfy those requirements.

STOCK OPTIONS

The following table sets forth for certain executive officers of the Company
information regarding the grant of Stock Options as parity awards. See
"Management" for information concerning the business experience of the
proposed executive officers of the Company.

<TABLE>
<CAPTION>
NUMBER OF STOCK
OPTIONS TO BE
NAME AND POSITION GRANTED(1)
- ----------------- ---------------
<S> <C>
Steven D. Jorns............................................... 250,000
Vice Chairman, Chief Operating Officer
David E. McCaslin............................................. 87,500
President
James A. Calder............................................... 47,500
Chief Financial Officer
John E. Plunket............................................... 10,000
Executive Vice President, Finance and Development
</TABLE>
- --------
(1) The awards described herein are parity awards, such that after the Spin-
Off similarly situated executives will have the same number of options to
purchase Common Stock. Similar parity awards will be made by the REIT. The
options will vest in three annual installments beginning on the first
anniversary of the consummation of the Formation Transactions.

Except as set forth above, awards granted under the MeriStar Hotels
Incentive Plan are discretionary and are therefore not determinable at this
time.

60
<PAGE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial
ownership of shares of Common Stock that would be held as of the Spin-Off
Record Date by (i) each director of MeriStar Hotels, (ii) each executive
officer of MeriStar Hotels, (iii) all directors and executive officers of
MeriStar Hotels as a group, and (iv) persons who own more than 5% of the
outstanding shares of Common Stock, assuming that each such person's
beneficial interest in CapStar Common Stock as of February 15, 1998 remains
unchanged on the Spin-Off Record Date. Except as otherwise described below,
all shares are owned directly and the indicated person has sole voting and
investment power. The number of shares of Common Stock includes the number of
shares of Common Stock that such person could receive if it exchanged OP Units
for shares of Common Stock under certain circumstances.

<TABLE>
<CAPTION>
NUMBER OF
SHARES
BENEFICIALLY PERCENT OF
NAME OF BENEFICIAL OWNER OWNED CLASS*
------------------------ ------------ ----------
<S> <C> <C>
Franklin Resources, Inc.(1)......................... 2,082,637 8.4%
Pilgrim Baxter & Associates, Ltd.(2)................ 1,828,020 7.3%
Morgan Stanley, Dean Witter, Discover & Co.(3)...... 1,608,275 6.5%
Massachusetts Financial Services Company(4)......... 1,431,512 5.8%
Dresdner RCM Global Investors LLC(5)................ 1,427,800 5.7%
James A. Calder..................................... 2,000 *
Daniel L. Doctoroff................................. 65,996 *
Kent R. Hance....................................... 0 *
Steven D. Jorns..................................... 0 *
Joseph McCarthy..................................... 0 *
David E. McCashin................................... 63,203 *
James McCurry....................................... 0 *
John E. Plunket..................................... 32,719 *
Paul W. Whetsell.................................... 454,407 1.8%
James R. Worms...................................... 0 *
Executive officers and directors as a group (10
persons)........................................... 618,325 2.5%
</TABLE>
- --------
*Represents less than 1% of the class.
(1) The business address of Franklin Resources, Inc. ("FRI") is 777 Mariners
Island Blvd., San Mateo, California 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 subsidiaries of FRI. Such
advisory subsidiaries may be deemed to beneficially own such shares.
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.
(2) The business address of Pilgrim Baxter & Associates, Ltd. is 825 Duportail
Road, Wayne, Pennsylvania 19087.
(3) The business address of Morgan Stanley, Dean Witter, Discover & Co. is
1585 Broadway, New York, New York 10036. Such shares are owned by accounts
managed on a discretionary basis by Morgan Stanley, Dean Witter, Discover
& Co. No such account holds more than 5% of the class.
(4) The business address of Massachusetts Financial Services Company is 500
Boylston Street, Boston, Massachusetts 02116.
(5) The business address of Dresdner RCM Global Investors LLC is Four
Embarcadero Center, San Francisco, California 94111. Dresdner RCM Global
Investors LLC ("Dresdner RCM") is an investment advisor. RCM Limited L.P.
("RCM Limited") is the Managing Agent of Dresdner RCM. RCM Limited has
beneficial ownership of such shares only to the extent that RCM Limited
may be deemed to have beneficial ownership of securities beneficially
owned by Dresdner RCM. RCM General Corporation ("RCM General") is the
General Partner of RCM Limited. RCM General has beneficial ownership of
such shares only to the extent RCM General may be deemed to have
beneficial ownership of securities beneficially owned by Dresdner RCM.

61
<PAGE>

DESCRIPTION OF CAPITAL STOCK

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

The authorized capital stock of MeriStar Hotels consists of 100,000,000
shares of Common Stock, par value $.01 per share, and 10,000,000 shares of
preferred stock ("Preferred Stock"), of which 100 shares of Common Stock and
no shares of Preferred Stock are outstanding. Upon completion of the Rights
Offering, . shares of Common Stock and no shares of Preferred Stock will be
outstanding.

Prior to the Spin-Off, there has been no public market for the Common Stock
and there can be no assurance that any such market will develop. See "Risk
Factors--Absence of a Public Market for Common Stock."

COMMON STOCK

Voting Rights. Except as set forth below under "Certain Antitakeover
Provisions," the Charter provides that holders of Common Stock are entitled to
one vote per share on all matters submitted to a vote of stockholders.

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

Other Rights. Stockholders of MeriStar Hotels have no preemptive or other
rights to subscribe for additional shares. Subject to any rights of the
holders of any Preferred Stock, 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
MeriStar Hotels. 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 Rights Offering will be, fully paid
and nonassessable.

PREFERRED STOCK

MeriStar Hotels' Board is authorized to issue, without further authorization
from stockholders, up to 10,000,000 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 MeriStar Hotels.

62
<PAGE>

CERTAIN ANTITAKEOVER PROVISIONS

The Charter and By-laws, the Rights Plan and applicable sections of the DGCL
contain several provisions that may make the acquisition of control of the
Company more difficult without the prior approval of the Company's Board.
Certain provisions of the Charter and the By-laws, among other things: (i)
classify the Company Board into three classes, each of which serves for
staggered three-year terms; (ii) provide that a director of Company may be
removed by the stockholders only for cause; (iii) provide that only the
Chairman of the Board, Vice Chairman, President or the Company Board may call
special meetings of the stockholders; (iv) provide that the stockholders may
take action only at a meeting of Company stockholders, not by written consent;
(v) provide that stockholders must comply with certain advance notice
procedures in order to nominate candidates for election to the Company Board
or to place stockholders' proposals on the agenda for consideration at
meetings of the stockholders; (vi) provide that, under certain circumstances,
the affirmative vote of the holders of two-thirds of the Common Stock is
required to approve any merger or similar business combination involving
Company; (vii) provide that the holder of "control shares" of Company acquired
in a control share acquisition have no voting rights with respect to such
control shares except to the extent approved by the vote of the holders of
two-thirds of the Common Stock (the "control shares provision"); and (viii)
provide that the stockholders may amend or repeal any of the foregoing
provisions of the Charter or the By-laws only by a vote of 80% of the stock
entitled to vote generally in the election of directors. In general, Section
203 of the DGCL 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's becoming an interested stockholder is approved by the Board,
(ii) upon consummation of the transaction which resulted in the stockholder's
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.
The Charter provides that the control shares provision and DGCL Section 203 do
not apply to the REIT and its affiliates, and the Rights Plan will except the
REIT and its affiliates from its effects. Accordingly, the REIT and its
affiliates will be in a position to effect a business combination or other
transaction with the Company in situations where others would be restricted
from effecting a similar transaction. The Charter authorizes the Board of
Directors to issue up to 10 million shares of preferred stock, par value $.01
per share, in series, and to establish the rights and preferences (including
the convertibility of such shares of preferred stock into shares of Common
Stock) of any series of preferred stock so issued. The issuance of preferred
stock could have the effect of delaying or preventing a change in control of
Company, even if such a change in control were in the best interests of some,
or a majority, of Company's stockholders. See "Description of Company Capital
Stock" and "Certain Antitakeover Provisions."

The Rights Plan would cause substantial dilution to a person or group that
attempts to acquire Company on terms not approved in advance by the Company
Board. Under the Rights Plan, until 10 business days following such time as a
person or group has acquired beneficial ownership of, or has proposed a tender
offer or exchange offer that would result in a person or group's owning, 10%
or more of the outstanding shares of Common Stock, (the "Rights Distribution
Effective Date") the Preferred Rights will be transferred only with the Common
Stock. Following the Rights Distribution Effective Date, separate certificates
evidencing the Preferred Rights will be mailed to each holder of record on the
Rights Distribution Effective Date. Thereafter, each holder of a Preferred
Right (other than the person or group) will thereafter have the right to
receive, upon exercise of such Preferred Right, that number of shares of
Common Stock having a market value equal to two times the exercise price of
the Right. Similar provisions apply in the event of a merger or other business
combination as a result of which a

63
<PAGE>

person or group will own 10% or more of the outstanding shares of Common
Stock. Prior to the time that any such person or group acquires 10% or more of
the outstanding shares of Common Stock, the Board of Directors may redeem the
Preferred Rights in whole for $.01 per Preferred Right. After the time that
any such person or group acquires 10% or more, but less than 50%, of the
outstanding shares of Common Stock, the Board of Directors may exchange the
Preferred Rights, in whole or in part, at an exchange ratio of one share of
Common Stock, or one-hundredth of a share of Series A Junior Preferred Stock
per Preferred Right.

EXPERTS

The combined financial statements of the management and leasing business of
CapStar Hotel Company and subsidiaries ("OpCo") as of December 31, 1997 and
1996 and for each of the years in the three-year period ended December 31,
1997, included in this Prospectus, have been included herein in reliance on
the report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.

The financial statements of AGH Leasing, L.P. as of December 31, 1997 and
1996 and for the year ended December 31, 1997 and for the period from July 31,
1996 through December 31, 1996, the financial statements of American General
Hospitality, Inc. as of December 31, 1997 1997 and 1996, and for each of the
three years in the period ended December 31, 1997, and the balance sheets as
of October 31, 1997 and December 31, 1996 and the statements of income,
shareholders' equity, and cash flows for the ten months ended October 31, 1997
and each of the two years in the period ended December 31, 1996, included in
this registration statement have been audited by Coopers & Lybrand L.L.P.,
independent accounts, as set forth in their reports thereon. Each of the above
referenced financial statements have been included by reference herein in
reliance upon the authority of said firm as expert in accounting and auditing.

LEGAL MATTERS

Paul, Weiss, Rifkind, Wharton & Garrison will pass on the validity of the
Rights and the Common Stock to be issued in connection with the Rights
Offering and certain federal income tax consequences of the Rights Offering.

64
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
OPCO
Independent Auditors' Report............................................. F-2
Combined Balance Sheets as of December 31, 1997 and 1996................. F-3
Combined Statements of Operations for the years ended December 31, 1997,
1996 and 1995........................................................... F-4
Combined Statements of Owner's Equity for the years ended December 31,
1997, 1996 and 1995..................................................... F-5
Combined Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995........................................................... F-6
Notes to Combined Financial Statements................................... F-7
WINSTON HOSPITALITY, INC.
Report of Independent Accountants........................................ F-14
Balance Sheets as of October 31, 1997 and December 31, 1996.............. F-15
Statements of Income (for the ten months ended October 31, 1997 and 1996
and the years ended December 31, 1996 and 1995)......................... F-16
Statements of Shareholders' Equity (for the ten months ended October 31,
1997 and the years ended December 31, 1996 and 1995).................... F-17
Statements of Cash Flows (for the ten months ended October 31, 1997 and
1996 and the years ended December 31, 1996 and 1995).................... F-18
Notes to Financial Statements............................................ F-19
AMERICAN GENERAL HOSPITALITY, INC.
Report of Independent Accountants........................................ F-21
Balance Sheets as of December 31, 1997 and 1996.......................... F-22
Statements of Operations for the years ended December 31, 1997, 1996 and
1995.................................................................... F-23
Statements of Stockholders' Equity for the years ended December 31, 1997,
1996 and 1995........................................................... F-24
Statements of Cash Flows for the years ended December 31, 1997, 1996 and
1995.................................................................... F-25
Notes to Financial Statements............................................ F-26
AGH LEASING, L.P.
Report of Independent Accountants........................................ F-29
Consolidated Balance Sheets as of December 31, 1997 and 1996............. F-30
Consolidated Statements of Operations for the Year ended December 31,
1997 and the period July 31, 1996 (Inception of Operations) through
December 31, 1996....................................................... F-31
Consolidated Statements of Partners' Deficit for the period from July 31,
1996 (Inception of Operations) through December 31, 1996 and for the
Year then ended December 31, 1997....................................... F-32
Consolidated Statements of Cash Flows for the year ended December 31,
1997 and for the period July 31, 1996 (Inception of Operations) through
December 31, 1996....................................................... F-33
Notes to Consolidated Financial Statements............................... F-34
AGH LEASING, L.P.
Proforma Consolidated Statements of Operations........................... F-39
Notes to Proforma Consolidated Statements of Operations.................. F-42
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
CapStar Hotel Company:

We have audited the accompanying combined balance sheets of the management
and leasing business of CapStar Hotel Company and subsidiaries ("OpCo") as of
December 31, 1997 and 1996 and the related combined statements of operations,
owners' equity and cash flows for each of the years in the three-year period
ended December 31, 1997. These combined financial statements are the
responsibility of OpCo's management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.

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

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of OpCo as of
December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997,
in conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

Washington, D.C.
March 30, 1998

F-2
<PAGE>

OPCO

COMBINED BALANCE SHEETS

DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................. $ 2,477 $ 305
Cash and cash equivalents held on behalf of affiliates..... 24,545 17,843
Accounts receivable, net of allowance for doubtful accounts
of $72 in 1997
and $33 in 1996........................................... 7,162 1,703
Prepaid expenses........................................... 1,097 777
Deposits, inventory and other.............................. 756 111
------- -------
Total current assets..................................... 36,037 20,739
Fixed assets:
Furniture, fixtures and equipment.......................... 2,701 726
Accumulated depreciation................................... (418) (210)
------- -------
Total fixed assets, net.................................. 2,283 516
Investments in affiliates.................................... 8,058 1,926
Notes receivable............................................. 2,100 500
Intangible assets, net of accumulated amortization of $719 in
1997 and $362 in 1996....................................... 35,941 685
------- -------
$84,419 $24,366
======= =======
LIABILITIES AND OWNERS' EQUITY
Current Liabilities:
Accounts payable........................................... $ 2,082 $ 543
Accrued expenses and other liabilities..................... 8,532 1,282
Percentage lease payable................................... 5,682 --
Due to affiliates, net..................................... 22,287 18,649
Advance deposits........................................... 146 --
Long-term debt, current portion............................ 392 336
------- -------
Total current liabilities................................ 39,121 20,810
Long-term debt............................................... 589 549
------- -------
Total liabilities........................................ 39,710 21,359
Commitments and contingencies
Minority interest............................................ 3,800 --
Owners' equity............................................... 40,909 3,007
------- -------
$84,419 $24,366
======= =======
</TABLE>

See accompanying notes to combined financial statements.

F-3
<PAGE>

OPCO

COMBINED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Revenue:
Leased hotels' operations:
Rooms................................................ $ 9,880 $ -- $ --
Food and beverage.................................... 1,397 -- --
Other operating departments.......................... 474 -- --
Hotel management and other revenue..................... 12,088 7,050 5,354
------- ------ ------
Total revenue...................................... 23,839 7,050 5,354
------- ------ ------
Leased hotels' operating expenses by department:
Rooms.................................................. 2,533 -- --
Food and beverage...................................... 909 -- --
Other operating departments............................ 261 -- --
Undistributed operating expenses:
Administrative and general............................. 10,473 6,140 4,745
Lease expense.......................................... 4,135 -- --
Property operating costs............................... 1,917 -- --
Depreciation and amortization.......................... 636 349 84
------- ------ ------
Total operating expenses........................... 20,864 6,489 4,829
------- ------ ------
Net operating income..................................... 2,975 561 525
Equity in earnings of affiliates......................... 46 -- --
Interest expense......................................... 56 123 44
------- ------ ------
Income before minority interests......................... 2,965 438 481
Minority interests....................................... 103 -- --
------- ------ ------
Net income............................................... $ 2,862 $ 438 $ 481
======= ====== ======
</TABLE>

See accompanying notes to combined financial statements.

F-4
<PAGE>

OPCO

COMBINED STATEMENTS OF OWNERS' EQUITY

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)

<TABLE>
<S> <C>
Capital contributions since January 12, 1995........................... $ 398
Capital distributions.................................................. (116)
Net income............................................................. 481
-------
Balance, December 31, 1995............................................. 763
Capital contributions.................................................. 1,806
Net income............................................................. 438
-------
Balance, December 31, 1996............................................. 3,007
Capital contributions.................................................. 35,040
Net income............................................................. 2,862
-------
Balance, December 31, 1997............................................. $40,909
=======
</TABLE>

See accompanying notes to the combined financial statements.

F-5
<PAGE>

OPCO

COMBINED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
1997 1996 1995
------ ------- ------
<S> <C> <C> <C>
Operating activities:
Net income.......................................... $2,862 $ 438 $ 481
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 636 349 84
Equity in earnings of affiliates.................. (46) -- --
Minority interests................................ 103 -- --
Changes in operating assets and liabilities:
Accounts receivable, net........................ (5,459) (412) (1,290)
Prepaid expenses................................ (320) (724) (11)
Deposits, Inventory and other................... (645) (111) --
Cash and cash equivalents held on behalf of
affiliates..................................... (6,702) (17,843) --
Accounts payable................................ 1,539 276 267
Due to affiliates, net.......................... 3,638 18,344 305
Accrued expenses and other liabilities.......... 7,250 909 372
Percentage lease payable........................ 1,463 -- --
Advance deposits................................ 146 -- --
------ ------- ------
Net cash provided by operating activities............. 4,465 1,226 208
------ ------- ------
Investing activities:
Purchases of fixed assets........................... (2,046) (382) (61)
Purchases of intangible assets...................... (924) (824) --
Investments in affiliates........................... (2,078) (150) --
Distributions from investments in affiliates........ 147 30 --
Additions to notes receivable....................... (1,600) (500) --
------ ------- ------
Net cash used in investing activities................. (6,501) (1,826) (61)
------ ------- ------
Financing activities:
(Principal payments on) proceeds from long-term
debt, net.......................................... 96 662 (38)
Capital contributions............................... 4,112 -- 250
Capital distributions............................... -- -- (116)
Loan from (repayments to) affiliate................. -- (950) 950
Repayments from (loans to) management............... -- 987 (987)
------ ------- ------
Net cash provided by financing activities............. 4,208 699 59
------ ------- ------
Net increase in cash and cash equivalents............. 2,172 99 206
Cash and cash equivalents, beginning of year.......... 305 206 --
------ ------- ------
Cash and cash equivalents, end of year................ $2,477 $ 305 $ 206
====== ======= ======
</TABLE>

See accompanying notes to combined financial statements.

F-6
<PAGE>

OPCO

NOTES TO COMBINED FINANCIAL STATEMENTS

DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

1. ORGANIZATION

CapStar Hotel Company and its subsidiaries ("CapStar") was formed pursuant
to certain formation transactions prior to or on August 20, 1996. Prior to its
August 20, 1996 initial public offering (the "IPO"), CapStar's business was
conducted through its predecessor entities, EquiStar Hotel Investors, L.P. and
subsidiaries (collectively, "EquiStar") and CapStar Management Company, L.P.
("CMC").

The principal activity of CapStar is to acquire, renovate, reposition and
manage upscale, full-service hotels. CapStar also leases and manages certain
other hotels. CapStar owns, leases and manages hotels through its two
operating partnerships: CMC and CapStar Management Company II, L.P. ("CMC
II"). Separate wholly-owned limited liability companies or limited
partnerships directly own the hotels and leases. The owned, leased and managed
hotels are located in 29 states, the District of Columbia, the U.S. Virgin
Islands and Canada, and are operated under various franchise agreements.

OpCo is comprised of the assets, liabilities, and related operations
(collectively "OpCo") associated with the hotel management and leasing
business of CapStar, and certain hotel ownership investments of CapStar which
are directly owned by certain CapStar subsidiaries, as follows:

. the hotel management business and certain investments in affiliates
owned by CMC;

. the hotel management business and 38 hotel leases owned by CapStar
Winston Company, LLC "CapStar Winston" which was purchased by CapStar
in 1997;

. the hotel lease and investment in BoyStar Ventures, L.P. owned by
CapStar BK Company, LLC "CapStar BK" which was purchased by CapStar
in 1997; and

. the investment in CapStar Wyandotte Company, LLC owned by CapStar KC
Company, LLC "CapStar KC" which was purchased by CapStar in 1997.

. the investment in Ballston Parking Associates owned by CapStar
Virginia Company, LLC "CapStar Virginia" which was purchased by
CapStar in 1996.

The following table outlines OpCo's portfolio of managed and leased hotels:

<TABLE>
<CAPTION>
CAPSTAR
HOTELS THIRD PARTY LEASED
MANAGED MANAGED HOTELS HOTELS TOTAL
------------- ----------------- ------------ -------------
HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS HOTELS ROOMS
------ ------ ------- -------- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997.... 47 12,019 27 4,631 40 5,687 114 22,337
December 31, 1996.... 19 5,166 28 4,619 -- -- 47 9,785
December 31, 1995.... 6 2,101 41 6,089 -- -- 47 8,190
</TABLE>

These financial statements present the financial position and operations of
OpCo as of December 31, 1997 and 1996, and for each of the years in the three-
year period ended December 31, 1997.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Combination- The combined financial statements include the
operations of CMC, CapStar Winston, CapStar BK, CapStar KC, and CapStar
Virginia, as described above. All significant intercompany transactions and
balances have been eliminated in the combination.

Investments in affiliates in which OpCo holds a voting interest of 50% or
less and exercises significant influence are accounted for using the equity
method. OpCo uses the cost method to account for its investment in an entity
in which it does not have the ability to exercise significant influence.

F-7
<PAGE>

OPCO

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

Cash and Cash Equivalents--OpCo considers all highly liquid investments with
an original maturity of three months or less to be cash equivalents.

OpCo invests excess cash balances on behalf of the CapStar-owned hotels it
manages. This cash is recorded as cash and cash equivalents held on behalf of
affiliates with the offsetting liability recorded in due to affiliates, net.

Fixed Assets--Fixed assets are recorded at cost and are depreciated using
the straight-line method over lives ranging from five to seven years.

Intangible Assets--Intangible assets consist of the value of goodwill and
lease contracts purchased, organization and franchise costs, and costs
incurred to obtain management contracts. Goodwill represents the excess of
cost over the fair value of the net assets of the acquired businesses.
Intangible assets are amortized on a straight-line basis over the estimated
useful lives of the underlying assets ranging from five to 40 years.

The carrying values of long-lived intangible assets, which include fixed
assets and all intangible assets, are evaluated periodically in relation to
the operating performance and expected future undiscounted cash flows of the
underlying assets. Adjustments are made if the sum of expected future
undiscounted net cash flows is less than book value. No impairment losses were
recorded during 1997, 1996 or 1995.

Income Taxes--No provision is made for income taxes as the operations of
OpCo are directly owned by a partnership and four limited liability companies,
and therefore, any such liability is the liability of the partners and
members.

Revenue Recognition--Revenue is earned through the operation and management
of the hotel properties and is recognized when earned.

Minority Interests--Minority interests represent OpCo's proportionate share
of the value of operating partnership units ("OP Units") of CMC and CMC II
issued to third parties in conjunction with CapStar's purchases of certain
hotels and CapStar Winston.

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

3. INVESTMENTS IN AFFILIATES

OpCo has ownership interests in certain corporate joint ventures and
affiliated companies. OpCo's investments in affiliates are summarized as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
OWNERSHIP -------------
INTEREST 1997 1996
--------- ------ ------
<S> <C> <C> <C>
CapStar Wyandotte Company LLC..................... 50% $3,023 $ --
HGI Holdings, LLC................................. 1,895 --
BoyStar Ventures, L.P. ........................... 9% 1,175 --
Ballston Parking Associates....................... 36% 1,629 1,776
Other............................................. 336 150
------ ------
$8,058 $1,926
====== ======
</TABLE>

F-8
<PAGE>

OPCO

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

Combined summarized financial information of OpCo's investments in
affiliates accounted for using the equity method as of and for the years ended
December 31, 1997 and 1996 is as follows:

<TABLE>
<CAPTION>
1997 1996
------ -----
<S> <C> <C>
Balance Sheet data:
Current assets............................................. $1,773 34
Non-current assets......................................... 32,766 5,469
Current liabilities........................................ 1,094 --
Non-current liabilities.................................... 7,000 --
Operating data:
Revenue.................................................... $1,742 589
Net income (loss).......................................... (110) 141
</TABLE>

4. NOTES RECEIVABLE

Notes receivable consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996
------- -----
<S> <C> <C>
Loans to managed hotels.................................... $ 2,000 $ 500
Other...................................................... 100 --
------- -----
$ 2,100 $ 500
======= =====

In the normal course of business, OpCo makes interest bearing loans to
certain managed hotels and other affiliates. These loans generally require
monthly payments of interest. Of the outstanding notes receivable at December
31, 1997 and 1996, $900 and $0, respectively, of the balances are secured by a
second mortgage on a certain hotel; $250 and $500 of the balances,
respectively, are guaranteed by third parties; and $950 and $0, respectively,
is unsecured. The loans bear interest at market rates between 8% and 9%. The
loans to managed hotels mature between 2001 and 2007 while loans to other
affiliates are payable on 30 days notice. OpCo earned interest income on these
loans of $82 and $11 during 1997 and 1996, respectively.

5. INTANGIBLE ASSETS

Intangible assets consist of the following:

<CAPTION>
DECEMBER 31,
--------------
1997 1996
------- -----
<S> <C> <C>
Goodwill................................................... $27,605 $ --
Lease contracts............................................ 6,576 --
Organization costs......................................... 897 897
Management contracts....................................... 867 150
Other...................................................... 715 --
------- -----
36,660 1,047
Less accumulated amortization.............................. (719) (362)
------- -----
$35,941 $ 685
======= =====
</TABLE>

F-9
<PAGE>

OPCO

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

6. LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996
------ ------
<S> <C> <C>
Note payable............................................ $ 855 $ 665
Capital leases.......................................... 126 220
------ ------
981 885
Less current portion.................................... (392) (336)
------ ------
$ 589 $ 549
====== ======
</TABLE>

Note Payable--In June 1996, OpCo entered into a note payable to finance
liability insurance premiums. This note was amended in December 1997 to
increase the principal balance. The principal balance was changed to $887 and
the maturity date was extended to May 2000. The note accrues interest at an
annual rate of 6.4% and requires monthly payments of principal and interest.
OpCo incurred interest expense of $33 and $19 during 1997 and 1996,
respectively.

Capital Leases--OpCo has entered into various capital leases for office
equipment which expire between 1998 and 2000. The leases require monthly
payments of principal and interest. Interest rates on the leases range from
6.4% to 13.3%. The Company incurred interest expense on the leases of $23 in
1997, $28 in 1996, and $18 in 1995.

Future Maturities--Aggregate future maturities of the above obligations are
as follows:

During 1996 and 1995, OpCo incurred interest expense of $76 and $26,
respectively, on the note payable to an affiliate of OpCo.

7. RELATED-PARTY TRANSACTIONS

OpCo manages hotels owned by CapStar. Hotel management revenue associated
with these hotels was $7,238, $2,625 and $917 during 1997, 1996 and 1995,
respectively. Management believes these contracts are at prevailing market
rates. In the normal course of business, OpCo manages cash on behalf of
CapStar and its owned hotels and advances and receives amounts on behalf of
CapStar and its owned hotels. At December 31, 1997 and 1996, the net amount
due to CapStar and its owned hotels was $24,545 and $17,843, respectively.

OpCo also manages hotels that are owned in part by affiliates or officers of
CapStar. Hotel management revenue associated with these hotels was $943, $824
and $1,104 during 1997, 1996 and 1995, respectively. At December 31, 1997,
1996 and 1995, the amount due from these properties related to hotel
management fees was $798, $304 and $237, respectively. Management believes
these contracts are at prevailing market rates.

F-10
<PAGE>

OPCO

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

8. COMMITMENTS AND CONTINGENCIES

OpCo leases certain hotels under non-cancelable operating leases with
initial terms ranging from 5 to 15 years, expiring through 2012. OpCo also
leases corporate office space. Future minimum lease payments required under
these operating leases as of December 31, 1997 were as follows:

<TABLE>
<S> <C>
1998.................................... $ 20,533
1999.................................... 20,728
2000.................................... 20,653
2001.................................... 20,674
2002.................................... 20,701
Thereafter.............................. 189,757
---------
$ 293,046
=========
</TABLE>

In connection with the CapStar Winston hotel leases, CapStar has guaranteed
certain lease obligations of OpCo. CapStar was contingently liable for lease
guarantees on 38 of the hotel leases aggregating up to a maximum of
approximately $20 million at December 31, 1997. In addition, two other hotel
leases are secured by CapStar BK's and CapStar KC's pledges of their interests
in the affiliate companies that own those leased hotels. OpCo knows of no
event of default that would require either CapStar, CapStar Winston, CapStar
BK, or CapStar KC to satisfy these guarantees or pledges of security
interests.

OpCo operates and manages 27 hotels owned by third parties containing 4,631
rooms. OpCo's management agreements (the "Management Agreements") have
remaining terms ranging from one month to nine years. Substantially all of the
Management Agreements permit the hotel owners to terminate such agreements
prior to the stated expiration dates if the applicable hotel is sold, and
several of the Management Agreements permit the hotel owners 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.

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

9. ACQUISITIONS

In November 1997, CapStar acquired substantially all of the assets of
Winston Hospitality, Inc. ("Winston") for a purchase price of $34,000 and
contributed the assets to OpCo. Winston leased 38 and managed 28 of the
operating hotels of Winston Hotels, Inc., a real estate investment trust. The
acquisition of Winston has been accounted for as a purchase and, accordingly,
the operating results of Winston have been included in OpCo's combined
financial statements since the date of acquisition. The excess of the
aggregate purchase price over the fair market value of net identifiable assets
acquired was approximately $27,605 and is being amortized over 40 years.

F-11
<PAGE>

OPCO

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

The following unaudited pro forma summary presents information as if Winston
had been acquired at the beginning of the periods presented. 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 OpCo.

PRO FORMA INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Total revenue............................................. $94,911 $68,895
Net income before minority interest....................... 3,991 253
Net income................................................ 3,698 235
</TABLE>

10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following is a summary of the OpCo's quarterly results of operations:

<TABLE>
<CAPTION>
1997
-------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenue............................... $1,838 $2,816 $4,794 $14,391
Total operating expenses.................... 1,390 2,129 3,911 13,434
Net operating income........................ 448 687 883 957
Net income.................................. 424 650 861 927
<CAPTION>
1996
-------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenue............................... $1,158 $1,812 $1,982 $ 2,098
Total operating expenses.................... 1,066 1,668 1,824 1,931
Net operating income........................ 92 144 158 167
Net income.................................. 72 113 123 130
</TABLE>

11. SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ----
<S> <C> <C> <C>
Cash paid for interest................................. $ 56 $ 138 $ 18
Assets contributed (liabilities assigned) to OpCo:
Percentage lease payable............................... $(4,219) $ -- $--
Investments in affiliates.............................. 4,155 1,806 --
Intangible assets...................................... 34,689 -- --
Non-cash investing and financing activities:
Capital contributions by owners........................ $30,928 $1,806 $148
Minority interests..................................... 3,697 -- --
Additions to equipment through capital leases.......... -- -- 261
</TABLE>

F-12
<PAGE>

OPCO

NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

12. SUBSEQUENT EVENTS

On March 15, 1998, CapStar and American General Hospitality Corporation
signed a definitive agreement to merge. As part of the merger, CapStar will
spin-off OpCo to its current shareholders as a C corporation to be called
MeriStar Hotels & Resorts, Inc. Subsequently, CapStar will merge into American
General Hospitality Corporation. The combined entity will be renamed MeriStar
Hospitality Corporation and will own 110 hotels with 27,739 rooms in 30 states
and Canada.

As a condition of the proposed merger, MeriStar Hotels & Resorts is to
acquire privately-held American General Hospitality, Inc. and AGH Leasing,
L.P., which together currently operate and/or lease 46 of American General
Hospitality Corporation's 54 owned hotels and manage 15 additional properties
for third party owners. The aggregate purchase price for American General
Hospitality, Inc. and AGH Leasing, L.P. is $95 million, payable in a mixture
of cash and units of limited partnership interest. Upon completion of OpCo's
spin-off and acquisitions, MeriStar Hotels & Resorts will lease and manage 202
hotel in 31 states, 110 of which will be owned by MeriStar Hospitality
Corporation.

F-13
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

The Shareholders
Winston Hospitality, Inc.

We have audited the accompanying balance sheets of Winston Hospitality, Inc.
as of October 31, 1997 and December 31, 1996 and the related statements of
income, shareholders' equity and cash flows for the 10 months ended October
31, 1997 and the years ended December 31, 1996 and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with 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 Winston Hospitality, Inc.
as October 31, 1997 and December 31, 1996 and the results of its operations
and its cash flows for the 10 months ended October 31, 1997 and the years
ended December 31, 1996 and 1995, in conformity with generally accepted
accounting principles.

Coopers & Lybrand L.L.P.

Raleigh, North Carolina
February 6, 1998

F-14
<PAGE>

WINSTON HOSPITALITY, INC.

BALANCE SHEETS

AS OF OCTOBER 31, 1997 AND DECEMBER 31, 1996
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
1997 1996
ASSETS ------- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 6,926 $5,463
Accounts receivable:
Trade....................................................... 2,303 1,166
Lessor...................................................... 768 1,391
Affiliates.................................................. 125 95
Shareholders................................................ -- 71
Prepaid expenses and other assets............................. 182 220
------- ------
Total current assets...................................... 10,304 8,406
------- ------
Furniture, fixtures and equipment:
Furniture and equipment....................................... 399 323
Leasehold improvements........................................ 113 113
------- ------
512 436
Less accumulated depreciation and amortization................ 245 178
------- ------
Net furniture, fixtures and equipment..................... 267 258
------- ------
$10,571 $8,664
======= ======

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable--trade....................................... $ 1,918 $1,259
Percentage lease payable to Lessor............................ 3,882 4,661
Accounts payable--affiliates.................................. -- 146
Accrued salaries and wages.................................... 1,204 874
Accrued sales and occupancy taxes............................. 814 462
Other current liabilities..................................... 842 618
------- ------
Total current liabilities................................... 8,660 7,970
------- ------
Commitments (Note 3)
Shareholders' equity:
Common stock, $.01 par value, 100 shares authorized, issued
and outstanding.............................................. 1 1
Additional paid-in capital.................................... 49 49
Retained earnings............................................. 1,861 644
------- ------
Total shareholders' equity.................................. 1,911 694
------- ------
$10,571 $8,664
======= ======
</TABLE>

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

F-15
<PAGE>

WINSTON HOSPITALITY, INC.

STATEMENTS OF INCOME

FOR THE TEN MONTHS ENDED OCTOBER 31, 1997 AND 1996 AND
THE YEARS ENDED DECEMBER 31, 1996 AND 1995
($ IN THOUSANDS)

<TABLE>
<CAPTION>
TEN MONTHS ENDED YEARS ENDED
OCTOBER 31, DECEMBER 31,
------------------- ---------------
1997 1996 1996 1995
------- ----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Room...................................... $67,145 $49,633 $58,956 $39,677
Food and beverage......................... 2,419 1,240 1,685 138
Other operating, net...................... 1,373 1,068 1,191 877
Interest income........................... 152 82 93 85
------- ------- ------- -------
Total revenue........................... 71,089 52,023 61,925 40,777
------- ------- ------- -------
Expenses:
Property and operating.................... 24,112 17,388 21,550 14,124
Property repairs and maintenance.......... 3,193 2,614 3,181 1,909
Food and beverage......................... 1,715 924 1,281 189
General and administrative................ 2,090 1,603 2,050 1,526
Franchise costs........................... 6,167 4,327 5,361 3,565
Management fees........................... 1,015 1,109 1,126 784
Percentage lease payments................. 30,980 22,800 26,611 17,148
------- ------- ------- -------
Total expenses.......................... 69,272 50,765 61,160 39,245
------- ------- ------- -------
Net income.............................. $ 1,817 $ 1,258 $ 765 $ 1,532
======= ======= ======= =======
</TABLE>

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

F-16
<PAGE>

WINSTON HOSPITALITY, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE TEN MONTHS ENDED OCTOBER 31, 1997,
AND THE YEARS ENDED DECEMBER 31, 1996 AND 1995
($ IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES DOLLARS CAPITAL EARNINGS EQUITY
------ ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balances at December 31,
1994................... 100 $ 1 $49 $ 15 $ 65
Net income.............. -- -- -- 1,532 1,532
Distributions........... -- -- -- (1,112) (1,112)
--- --- --- ------- -------
Balances at December 31,
1995................... 100 1 49 435 485
Net income.............. -- -- -- 765 765
Distributions........... -- -- -- (556) (556)
--- --- --- ------- -------
Balances at December 31,
1996................... 100 1 49 644 694
Net income.............. -- -- -- 1,817 1,817
Distributions........... -- -- -- (600) (600)
--- --- --- ------- -------
Balances at December 31,
1997................... 100 $ 1 $49 $ 1,861 $ 1,911
=== === === ======= =======
</TABLE>

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

F-17
<PAGE>

WINSTON HOSPITALITY, INC.

STATEMENTS OF CASH FLOWS

FOR THE TEN MONTHS ENDED OCTOBER 31, 1997 AND 1996 AND THE YEARS ENDED DECEMBER
31, 1996 AND 1995
($ IN THOUSANDS)

<TABLE>
<CAPTION>
TEN MONTHS ENDED YEARS ENDED
OCTOBER 31, DECEMBER 31,
------------------ ---------------
1997 1996 1996 1995
-------- -------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.............................. $ 1,817 $ 1,258 $ 765 $ 1,532
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization......... 67 65 83 63
Changes in assets and liabilities:
Accounts receivable--trade.......... (1,137) (1,525) (330) (310)
Prepaid expenses and other assets... 38 (137) (103) (65)
Accounts payable--trade............. 659 547 666 132
Percentage lease payable to Lessor.. (729) 532 2,064 1,159
Accrued expenses and other
liabilities........................ 906 1,045 914 30
-------- -------- ------ -------
Net cash provided by operating
activities....................... 1,621 1,785 4,059 2,541
-------- -------- ------ -------
Cash flows from inventing activities:
Purchases of furniture, fixtures and
equipment.............................. (76) (107) (144) (67)
Repayments from (advances to) Lessor,
affiliates and shareholders, net....... 518 (265) (145) (1,233)
-------- -------- ------ -------
Net cash provided by (used in)
investing activities............. 442 (372) (289) (1,300)
-------- -------- ------ -------
Cash flows from financing activities:
Distributions to shareholders........... (600) (485) (556) (1,112)
-------- -------- ------ -------
Net cash used in financing
activities....................... (600) (485) (556) (1,112)
-------- -------- ------ -------
Net increase in cash and cash equivalents. 1,463 928 3,214 129
Cash and cash equivalents at beginning of
the period............................... 5,463 2,249 2,249 2,120
-------- -------- ------ -------
Cash and cash equivalents at end of the
period................................... $ 6,926 $ 3,177 $5,463 $ 2,249
======== ======== ====== =======
</TABLE>

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

F-18
<PAGE>

WINSTON HOSPITALITY, INC.

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

1. ORGANIZATION:

Winston Hospitality, Inc. ("Hospitality") was formed to lease and operate
hotels owned by WINN Limited Partnership (the "Partnership") and Winston
Hotels, Inc. ("WHI") (collectively, the "Company"). Approximately 90.15% of
the Partnership is owned by WHI. The two shareholders of Hospitality (Robert
W. Winston, III and John B. Harris, Jr.) are also shareholders of WHI and/or
partners in the Partnership. The Company owned 21 hotels as of December 31,
1995, 31 hotels as of December 31, 1996 and 38 hotels as of October 31, 1997
(collectively, all 38 hotels are the "Current Hotels").

Each hotel was separately leased by the Company to Hospitality under a
Percentage Lease Agreement. These leases required minimum base rental payments
to be made to the Company on a monthly basis and additional quarterly payments
to be made based on a percentage of gross room revenue and certain food and
beverage revenues.

Thirty-seven of the 38 hotels are limited-service hotels and one is a full-
service hotel. All 38 hotels are operated under franchise agreements with
Promus Hotels, Inc., Choice Hotels International, Inc., Holiday Inns
Franchising, Inc. and Marriott International, Inc. The cost of obtaining the
franchise licenses was paid by the Company and the on-going franchise fees
were paid by Hospitality.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Revenue Recognition. Revenue is recognized as earned. Ongoing credit
evaluations are performed and an allowance for potential credit losses is
provided against the portion of accounts receivable which is estimated to be
uncollectible.

Cash Equivalents. All highly liquid investments with a maturity date of
three months or less when purchased are considered to be cash equivalents.
Hospitality places cash deposits with federally insured depository
institutions. At October 31, 1997, bank account balances exceeded federal
depository insurance limits by approximately $6,252.

Fair Value of Financial Instruments. Hospitality's financial instruments
consist of cash and cash equivalents whose carrying value approximates fair
value because of their short maturity. Hospitality's remaining assets and
liabilities are not considered financial instruments.

Furniture, Fixtures and Equipment. Furniture and equipment are recorded at
cost and are depreciated using the straight-line method over estimated useful
lives of the assets of five and seven years. Leasehold improvements are being
amortized using the straight-line method over the terms of the related leases.
Upon disposition, both the asset and accumulated depreciation accounts are
relieved and the related gain or loss is credited or charged to the income
statement. Repairs and maintenance of hotel properties owned by the Company
are paid by Hospitality and are charged to expense as incurred.

Income Taxes. Hospitality has made an election under Subchapter S of the
Internal Revenue Code of 1986, as amended. Any taxable income or loss is
recognized by the shareholders and, therefore, no provision for income taxes
has been provided in the accompanying financial statements.

Reclassifications. Certain reclassifications have been made to the 1996 and
1995 financial statements to conform with the 1997 presentation. These
reclassifications have no effect on net income or shareholders' equity as
previously reported.

Unaudited October 31, 1996 operating results. Operating results for the 10
months ended October 31, 1996, presented for comparison purposes, are
unaudited. The unaudited financial statements for the period ended October 31,
1996 reflect, in the opinion of management, all adjustments necessary for a
fair presentation of the financial statements. All such adjustments are normal
and recurring in nature.

F-19
<PAGE>

WINSTON HOSPITALITY, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)

3. COMMITMENTS:

Under the terms of the Percentage Lease Agreements, Hospitality had future
lease commitments to the Company through 2006. As disclosed in Note 6 below,
all Percentage Leases were sold as of November 24, 1997.

Hospitality incurred minimum rents of $13,535, $11,154 and $7,853 as well as
percentage rents of $17,445, $15,457 and $9,295 for the ten months ended
October 31, 1997 and the years ended December 31, 1996 and 1995, respectively.

Hospitality had entered into separate contracts with unrelated parties for
the management of 10 of the hotels. The terms of these agreements provided for
management fees to be paid based on predetermined formulas for a period of ten
years through 2006. The contracts were cancelable under certain circumstances
as outlined in the agreements. As disclosed in Note 6 below, all such
contracts were sold as of November 24, 1997.

Various legal proceedings against Hospitality have arisen from time to time
in the normal course of business. Management believes liabilities arising from
these proceedings, if any, will have no material adverse effect on the
financial positions or results of operations of Hospitality.

4. DISTRIBUTIONS:

Beginning with the year ended December 31, 1996, the shareholders agreed to
limit distributions by Hospitality to amounts necessary to pay their income
taxes on the net income derived from Hospitality until such time as the
tangible net worth of Hospitality reached $4,000. Thereafter, they agreed to
invest at least 75% of their after-tax distributions of net income from
Hospitality in Common Stock of the Company. These agreements terminated
effective November 24, 1997, due to the sale of the leases to CapStar.

5. PROFIT SHARING PLAN:

On January, 1, 1996, Hospitality adopted the Winston 401(k) Plan (the
"Plan") for substantially all employees, except any highly compensated
employee, as defined in the Plan, who had attained the age of 21 and completed
one year of service. Under the Plan, employees were able to contribute from 1%
to 15% of compensation, subject to an annual maximum as determined under the
Internal Revenue Code. Hospitality made matching contributions of a specified
percentage of the employee's contribution currently 3% of the first 6% of the
employee's contribution, and may make additional discretionary contributions.
Hospitality contributed $54, $50 (unaudited) and $61 during the 10-month
periods ended October 31, 1997 and 1996, and the year ended December 31, 1996,
respectively.

6. SUBSEQUENT EVENT:

On November 24, 1997, Hospitality completed the sale of substantially all of
its assets and all 38 existing Percentage Leases to CapStar Management
Company, L.P. ("CMC") for total consideration of $34,000. The $34,000 sale
price consisted of $10,000 in cash and 674,236 CMC Partnership Units.

F-20
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
of American General Hospitality, Inc.

We have audited the accompanying balance sheets of American General
Hospitality, Inc. (the "Company") as of December 31, 1997 and 1996 and the
related statements of operations, stockholders' equity and cash flows for the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 American General
Hospitality, Inc. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.

Coopers & Lybrand LLP

Dallas, Texas
April 1, 1998

F-21
<PAGE>

AMERICAN GENERAL HOSPITALITY, INC.

BALANCE SHEETS

DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
1997 1996
ASSETS ---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................... $1,900,176 $ 455,058
Accounts and management fees receivable................. 1,756,317 1,731,204
Accounts receivable, affiliates......................... 167,621 103,574
Prepaid expenses........................................ 36,010 13,229
---------- ----------
Total current assets................................ 3,860,124 2,303,065
Investments in property and equipment, at cost:
Furniture and equipment............................... 1,155,220 522,696
Leasehold improvements................................ 88,049 6,960
---------- ----------
1,243,269 529,656
Less accumulated depreciation......................... 300,362 334,933
---------- ----------
Net investments in property and equipment........... 942,907 194,723
---------- ----------
Deposits................................................ 78,860 50
Goodwill, net of accumulated amortization of $2,250 and
$2,000 as of December 31, 1997 and 1996, respectively.. 7,750 8,000
Other assets............................................ -- 1,477
---------- ----------
Total assets........................................ $4,889,641 $2,507,315
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable........................................ $ 77,499 $ 474,253
Accounts payable, affiliates............................ 1,275,000 42,770
Accrued liabilities..................................... 2,795,477 1,268,895
Deferred revenue........................................ 48,699 148,586
---------- ----------
Total current liabilities........................... 4,196,675 1,934,504
---------- ----------
Commitments and contingencies (Notes 3 and 5)
Stockholders' equity:
Common stock, $.01 par value, 100,000 shares
authorized, 600 shares issued and outstanding........ 6 6
Additional paid-in capital............................ 584,143 584,143
Retained earnings..................................... 108,817 (11,338)
---------- ----------
Total stockholders' equity.......................... 692,966 572,811
---------- ----------
Total liabilities and stockholders' equity.......... $4,889,641 $2,507,315
========== ==========
</TABLE>

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

F-22
<PAGE>

AMERICAN GENERAL HOSPITALITY, INC.

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Revenues:
Management and consulting fee revenue.... $7,350,851 $9,818,069 $10,070,090
---------- ---------- -----------
Operating expenses:
Salaries and employee benefits........... 3,705,366 4,253,358 4,498,855
Professional fees........................ 520,067 412,994 562,152
Rent and related expense................. 378,699 292,103 320,515
Travel and entertainment................. 69,328 114,110 397,740
General and administrative expenses...... 130,863 82,429 227,081
Office expenses.......................... 113,513 139,013 190,190
Advertising and promotion................ 29,127 36,813 50,135
---------- ---------- -----------
4,946,963 5,330,810 6,246,668
---------- ---------- -----------
Income before depreciation, amortization,
consulting fees and other income (ex-
pense).................................... 2,403,888 4,487,259 3,823,422
---------- ---------- -----------
Consulting fees.......................... 2,227,077 3,979,446 4,056,477
Depreciation expense..................... 123,927 101,891 93,974
Amortization expense..................... 250 250 250
---------- ---------- -----------
2,351,254 4,081,587 4,150,701
---------- ---------- -----------
Income (loss) from operations............ 52,634 405,672 (327,279)
---------- ---------- -----------
Other income (expense):
Interest income.......................... 134,931 187,750 135,600
Other expense............................ (67,410) -- (189,204)
---------- ---------- -----------
67,521 187,750 (53,604)
---------- ---------- -----------
Net income (loss)........................ $ 120,155 $ 593,422 $ (380,883)
========== ========== ===========
</TABLE>

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

F-23
<PAGE>

AMERICAN GENERAL HOSPITALITY, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------ ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994.... 600 $ 6 $584,143 $(223,877) $ 360,272
Net loss...................... (380,883) (380,883)
--- --- -------- --------- ---------
Balance, December 31, 1995.... 600 6 584,143 (604,760) (20,611)
Net income.................... 593,422 593,422
--- --- -------- --------- ---------
Balance, December 31, 1996.... 600 6 584,143 (11,338) 572,811
Net income.................... 120,155 120,155
--- --- -------- --------- ---------
Balance, December 31, 1997.... 600 $ 6 $584,143 $ 108,817 $ 692,966
=== === ======== ========= =========
</TABLE>

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

F-24
<PAGE>

AMERICAN GENERAL HOSPITALITY, INC.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................... $ 120,155 $ 593,422 $(380,883)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:.....................
Amortization............................... 250 250 250
Depreciation............................... 123,927 101,891 93,974
Loss from disposition of assets............ 33,269 -- 36,425
Changes in assets and liabilities:.........
Accounts and management fees receivable.. (25,113) (980,292) (151,928)
Accounts receivable--affiliates.......... (64,047) (35,071) 231,687
Prepaid expenses......................... (22,781) 4,906 11,073
Deposits................................. (78,810) (20) 54,750
Accounts payable......................... (396,754) 152,191 (185,613)
Accounts payable--affiliates............. 1,232,230 -- (245,691)
Accrued liabilities...................... 1,526,582 272,663 449,100
Deferred revenue......................... (99,887) 89,169 59,417
---------- --------- ---------
Net cash provided by (used in) operating
activities.................................. 2,349,021 199,109 (27,439)
---------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of investment........... 1,477 -- --
Loan to affiliates......................... -- -- (25,000)
Proceeds from loans to affiliates........ -- -- 282,218
Purchase of property and equipment....... (916,746) (87,076) (167,160)
Proceeds from sale of furniture and
equipment............................... 11,366 -- --
---------- --------- ---------
Net cash provided by (used in) investing
activities................................ (903,903) (87,076) 90,058
---------- --------- ---------
Net increase in cash and equivalents......... 1,445,118 112,033 62,619
Cash and equivalents at beginning of year.... 455,058 343,025 280,406
---------- --------- ---------
Cash and equivalents at end of year.......... $1,900,176 $ 455,058 $ 343,025
========== ========= =========
</TABLE>

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

F-25
<PAGE>

AMERICAN GENERAL HOSPITALITY, INC.

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION:

American General Hospitality, Inc. (the "Company"), a Texas corporation, was
incorporated in November 1988 and provides hotel management and consulting
services to hotels throughout the United States.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CASH AND CASH EQUIVALENTS

For the purposes of the statement of cash flows, the Company considers all
certificates of deposit and debt instruments with original maturities of three
months or less to be cash equivalents. The Company maintains its cash in bank
deposit accounts which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts. The Company believes
it is not exposed to any significant credit risk on cash and cash equivalents.

INVESTMENTS IN PROPERTY AND EQUIPMENT

Property and equipment consist of furniture, equipment, computer equipment
and leasehold improvements and are stated at cost. Depreciation is provided by
using the straight-line method over estimated useful lives of five to seven
years for furniture and equipment and three years for leasehold improvements.
This is considered reasonable for financial reporting purposes and is not
materially different from estimated useful lives.

Maintenance and repairs are charged to operations as incurred; major
renewals and improvements are capitalized. Upon the sale or disposition of a
fixed asset, the asset and related accumulated depreciation accounts are
removed from the accounts and the related gain or loss is included in
operations.

GOODWILL

Goodwill in the amount of $10,000 was recorded when the S Corporation was
originally formed in 1988. The goodwill is being amortized using the straight
line method over a 40 year period.

REVENUE RECOGNITION

Revenue is recognized as earned. Ongoing credit evaluations are performed
and an allowance for potential credit losses is provided against the portion
of accounts receivable which is estimated to be uncollectible.

ADVERTISING COST

The Company participates in various advertising and marketing programs. All
advertising costs are expensed in the period incurred.

CONCENTRATIONS OF RISK

The Company places cash deposits at a major bank. At December 31, 1997, bank
account balances exceed Federal Deposit Insurance Corporation limits by
approximately $2,330,000. Management believes credit risk related to these
deposits is minimal.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and

F-26
<PAGE>

AMERICAN GENERAL HOSPITALITY, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

INCOME TAXES

The Company, with the consent of its shareholders, elected to be treated as
a small business corporation under Subchapter S of the Internal Revenue Code.
In this status, the Company is not a taxable entity, and elements of income
and expense flow through and are taxed to the shareholders on an individual
basis; therefore, no provision or liability for income taxes is reflected in
these financial statements. The Company's tax returns and the amount of
allocable income or loss are subject to examination by federal and state
taxing authorities. If such examinations result in changes to income or loss,
the tax liability of the shareholder could be changed accordingly.

3. OPERATING LEASES:

During 1997, the Company entered into a sublease agreement with Federal Home
Loan Bank of Dallas to lease 18,668 square feet of office space. The agreement
requires monthly rental payments of $28,780 and expires in September 2000.
Federal Home Loan Bank of Dallas lease from Crescent Real Estate Funding II,
L.P.

The Company also has various equipment leases on office equipment expiring
in future years.

Future minimum lease payments under these noncancelable lease agreements are
as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
----------------------- --------
<S> <C>
1998.......................................... $360,072
1999.......................................... 360,072
2000.......................................... 260,806
--------
$980,950
========
</TABLE>

4. EMPLOYEE BENEFIT PLANS:

The Company sponsors a 401(k) retirement plan and provides discretionary
matching contributions of 50% of eligible employees' contributions, up to 6%
of employee compensation. During 1997, 1996 and 1995, the Company contributed
$26,033, $63,933 and $53,365 to this plan, respectively.

The Company has an employee stock ownership plan which covers all eligible
employees meeting age and length of service requirements. Under the terms of
this plan, contributions are at the discretion of the Board of Directors up to
the maximum allowable for tax purposes. During 1997, 1996 and 1995, the
Company contributed $71,625, $98,255 and $94,814 in cash to this plan,
respectively. This approximated 3% of eligible employee compensation. No
contributions of stock have been made to the plan to date.

5. CONTINGENCIES:

The Company is a defendant in various litigation arising in the ordinary
course of its business. No provision for liability related to this litigation
has been recorded in the financial statements as the Company believes that no
material uninsured loss will result.

6. CONCENTRATIONS OF CREDIT RISK:

Most of the Company's business activity is with or on behalf of the hotels
it manages across the United States, and substantially all of the Company's
trade and management fee receivables are from these hotels. The

F-27
<PAGE>

AMERICAN GENERAL HOSPITALITY, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Company employs all hotel employees for the properties and is reimbursed by
the property owners. At December 31, 1997, there were approximately 7,500
employees.

7. RELATED PARTY TRANSACTIONS:

Accounts receivable-affiliates represents amounts due from affiliates for
property renovations, purchases, potential investments, shared expenses and
other advances.

Accounts payable-affiliates represents amounts due to affiliates for
advances.

During 1997, 1996 and 1995, the Company received fee revenue for management,
consulting and accounting services provided in the amount of $866,969,
$121,087 and $249,088, respectively, from entities affiliated with the Company
through common ownership.

In addition, the Company paid consulting fees of $2,227,077, $3,979,446 and
$4,056,477 during 1997, 1996 and 1995, respectively, to an affiliated entity.

8. FAIR VALUE OF FINANCIAL INSTRUMENTS:

Statements of Financial Accounting Standards No. 107 requires all entities
to disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the Company reports the carrying amounts of cash and
cash equivalents, accounts receivable, accounts payable, accrued expenses and
other liabilities at cost, which approximates fair value due to the short
maturity of these instruments.

9. SUBSEQUENT EVENTS (UNAUDITED):

On March 15, 1998 American General Hospitality Corporation (the "REIT") and
an affiliate and CapStar Hotel Company ("CapStar") entered into a definitive
agreement (the "Merger Agreement") pursuant to which the parties agreed,
subject to stockholder approval and other conditions and covenants, to merge
as equals (the "Proposed Merger"). Accordingly, no assurance can be given that
the Proposed Merger will be consummated. Pursuant to the Merger Agreement,
CapStar will spin off (the "Spin-Off") in a taxable transaction, its hotel
operations and management business to its current stockholders as a new C
Corporation to be called MeriStar Hotels & Resorts, Inc. ("MeriStar Resorts").
CapStar will subsequently merge with and into the REIT, which will qualify as
a reorganization under Section 368 of the Internal Revenue Code of 1986, as
amended (the "Code"). The REIT will be renamed MeriStar Hospitality
Corporation after the Proposed Merger. In a separate transaction, which will
close immediately after the closing of the Proposed Merger, MeriStar Resorts
will acquire AGH Leasing (an affiliate) and the Company for $95 million, which
is payable through the issuance of $11.2 million of units of limited
partnership interests of a subsidiary owned by MeriStar Resorts and $83.8
million in cash. This acquisition is a condition to closing the Proposed
Merger.

The Merger Agreement defines the exchange ratios for both the REIT's and
CapStar's stockholders. CapStar stockholders will receive one share each of
MeriStar Hospitality Corporation and MeriStar Resorts for each CapStar share
owned. The REIT's stockholders will receive 0.8475 shares of MeriStar
Hospitality Corporation for each share of common stock owned. Both exchange
ratios are fixed, with no adjustment mechanism.

The REIT expects the Proposed Merger to close in June 1998. The Proposed
Merger will be submitted for approval at separate meetings of the stockholders
of the REIT and CapStar. Prior to such stockholder meetings, the REIT will
file a registration statement with the SEC registering under the Securities
Act of 1933, as amended, the shares of MeriStar Hospitality Corporation to be
issued in the Proposed Merger.

F-28
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Partners
AGH Leasing, L.P.

We have audited the accompanying balance sheets of AGH Leasing, L.P. (The
"Partnership") as of December 31, 1997 and 1996, and the related statements of
operations, changes in partners' deficit, and cash flows for the year ended
December 31, 1997 and for the period from July 31, 1996 (inception of
operations) through December 31, 1996. 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.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AGH Leasing, L.P. as of
December 31, 1997 and 1996 and its results of operations and its cash flows
for the year ended December 31, 1997 and for the period from July 31, 1996
(inception of operations) through December 31, 1996 in conformity with
generally accepted accounting principles.

Coopers & Lybrand l.l.p.
Dallas, Texas
January 30, 1998,
except for Note 6, as
to which the date is
March 16, 1998

F-29
<PAGE>

AGH LEASING, L.P.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1997 AND DECEMBER 31, 1996

<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Investments in hotel properties, at cost
Furniture, fixtures and equipment.................. $ 315,000 $ 315,000
Less accumulated depreciation......................
(89,250) (26,250)
----------- -----------
Net investment in hotel properties................... 225,750 288,750
Cash and cash equivalents............................ 8,781,329 5,673,232
Accounts receivable, net of allowance for doubtful
accounts of $73,915 and $5,291 as of December 31,
1997 and 1996, respectively......................... 6,247,083 2,822,936
Inventories.......................................... 1,007,296 448,234
Prepaid expenses..................................... 1,067,384 553,400
Deferred expenses.................................... 159,207 194,287
Other assets......................................... 283,997 47,985
----------- -----------
Total assets..................................... $17,772,046 $10,028,824
=========== ===========
LIABILITIES AND PARTNERS' DEFICIT
Accounts payable, trade.............................. $ 2,642,639 $ 1,054,902
Participating Lease payable, American General Hospi-
tality
Operating Partnership, L.P......................... 7,999,122 3,979,242
Note payable to American General Hospitality Operat-
ing Partnership, L.P................................ 234,321 287,684
Accrued expenses and other liabilities............... 5,327,522 4,198,035
Deferred income...................................... 2,100,000 730,000
Minority interest in Twin Towers Leasing, L.P........ 1,197,442 --
----------- -----------
Total liabilities................................ 19,501,046 10,249,863
----------- -----------
Commitments and contingencies (Notes 1 and 2)
Partners' capital.................................... 442,894 500,000
Accumulated deficit.................................. (2,171,894) (721,039)
----------- -----------
Total partners' deficit.......................... (1,729,000) (221,039)
----------- -----------
Total liabilities and partners' deficit.......... $17,772,046 $10,028,824
=========== ===========
</TABLE>

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

F-30
<PAGE>

AGH LEASING, L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1997
AND THE PERIOD JULY 31, 1996 (INCEPTION OF OPERATIONS)
THROUGH DECEMBER 31, 1996

<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Revenues
Room revenue...................................... $123,965,649 $26,725,200
Food and beverage revenue......................... 35,595,835 8,374,459
Other revenue..................................... 8,031,070 1,691,472
Minority interest income.......................... 1,802,558 0
------------ -----------
Total revenue................................... 169,395,112 36,791,131
------------ -----------
Expenses
Property operating costs and expenses............. 33,894,184 7,235,297
Food and beverage costs and expenses.............. 27,646,671 6,262,071
General and administrative........................ 15,871,676 3,270,481
Advertising and promotion......................... 12,792,700 2,305,776
Repairs and maintenance........................... 6,712,883 1,450,987
Utilities......................................... 7,258,674 1,628,490
Management fees................................... 1,691,639 947,632
Franchise costs................................... 4,754,285 950,307
Depreciation...................................... 63,000 26,250
Amortization...................................... 40,997 6,753
Interest expense.................................. 26,808 13,314
Other expense..................................... 158,113 27,093
Participating Lease expenses...................... 59,934,337 13,387,719
------------ -----------
Total expenses.................................. 170,845,967 37,512,170
------------ -----------
Net loss........................................ $ (1,450,855) $ (721,039)
============ ===========
</TABLE>

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

F-31
<PAGE>

AGH LEASING, L.P.

CONSOLIDATED STATEMENTS OF PARTNERS' DEFICIT

FOR THE PERIOD FROM JULY 31, 1996 (INCEPTION OF OPERATIONS)
THROUGH DECEMBER 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1997

<TABLE>
<S> <C>
Initial capitalization at inception............................... $ 500,000
Net loss for the period from July 31, 1996 through December 31,
1996............................................................. (721,039)
-----------
Balance at December 31, 1996...................................... (221,039)
Partner distributions............................................. (57,106)
Net loss for the year ended December 31, 1997..................... (1,450,855)
-----------
Balance at December 31, 1997...................................... $(1,729,000)
===========
</TABLE>

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

F-32
<PAGE>

AGH LEASING, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 1997

AND THE PERIOD JULY 31, 1996 (INCEPTION OF OPERATIONS)
THROUGH DECEMBER 31, 1996

<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
Cash flow from operating activities:
Net loss............................................ $ (1,450,855) $ (721,039)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation...................................... 63,000 26,250
Amortization...................................... 40,997 6,753
Minority interest................................. (1,802,558) --
Changes in assets and liabilities:
Accounts receivable............................... (3,424,147) (2,822,936)
Inventories....................................... (559,062) (448,234)
Prepaid expenses.................................. (513,984) (553,400)
Deferred expenses................................. (5,917) (201,040)
Other assets...................................... (236,012) (47,985)
Accounts payable, trade........................... 1,587,737 1,054,902
Participating Lease payable, American General
Hospitality Operating Partnership, L.P........... 4,019,880 3,979,242
Accrued expenses and other liabilities............ 1,129,487 4,198,035
Deferred income................................... 1,370,000 730,000
------------ ----------
Net cash flow provided by operating activities.. 218,566 5,200,548
------------ ----------
Cash flow from financing activities:
Capital contributions, AGH Leasing, L.P............. -- 500,000
Capital contributions, Twin Leasing, L.P............ 3,000,000 --
Partner distributions .............................. (57,106) --
Principal payments on borrowings.................... (53,363) (27,316)
------------ ----------
Net cash provided by financing activities......... 2,889,531 472,684
------------ ----------
Net change in cash and cash equivalents........... 3,108,097 5,673,232
Cash and cash equivalents at beginning of periods... 5,673,232 --
------------ ----------
Cash and cash equivalents at end of periods......... $ 8,781,329 $5,673,232
============ ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest............ $ 26,808 $ 13,314
============ ==========
</TABLE>

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

F-33
<PAGE>

AGH LEASING, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

AGH Leasing, L.P. is a Delaware limited partnership which was formed on May
29, 1996, and commenced operations on July 31, 1996. AGH Leasing is owned in
part by certain executive officers of American General Hospitality Corporation
(the "Company") and American General Hospitality, Inc. ("AGHI"). AGH Leasing,
L.P. leases 26 of the 27 Hotels (the "December 31 Hotels") owned by American
General Hospitality Operating Partnership, L.P. (the "Operating Partnership")
at December 31, 1997, pursuant to operating leases ("Participating Leases")
which provide for rent based on the revenues of the December 31 Hotels.

Twin Towers Leasing, L.P. ("Twin Towers Leasing" and, together with AGH
Leasing, L.P., "AGH Leasing") leases the remaining December 31 Hotel, the
Radisson Twin Towers Orlando, pursuant to a Participating Lease which is
substantially similar in form to the other Participating Leases. Twin Towers
Leasing is a Florida limited partnership which was formed on June 1, 1997, and
commenced operations on June 25, 1997. AGH Leasing is the 51% sole general
partner of Twin Towers Leasing. The remaining 49% is owned by Regent Carolina
Corporation ("Regent"), an affiliate of the selling entity. Based on the
partnership agreement, Regent is allocated 100% of any losses generated by
Twin Towers Leasing up to their capital contribution of $3 million. The
operations of Twin Towers Leasing are consolidated with the operations of AGH
Leasing for financial statement purposes.

The consolidated financial statements of AGH Leasing include the results of
operations of the December 31 Hotels leased from the Operating Partnership due
to AGH Leasing's control over the operations of the December 31 Hotels during
the 12-year term of the Participating Leases. AGH Leasing has complete
discretion in establishing room rates and all rates for hotel goods and
services. Likewise, all operating expenses of the December 31 Hotels are under
the control of AGH Leasing. AGH Leasing has the right to manage or to enter
into management contracts with other parties to manage the December 31 Hotels.
If AGH Leasing elects to enter into management contracts with parties other
than AGHI, AGH Leasing must obtain the prior written consent of the Operating
Partnership, which consent may not be unreasonably withheld. AGH Leasing has
entered into management agreements pursuant to which 26 of the December 31
Hotels are managed by AGHI and the remaining December 31 Hotel is managed by
Wyndham Hotel Corporation.

AGH Leasing's results of operations are seasonal. The aggregate room
revenues in the second and third quarters of each fiscal year may be higher
than room revenues in the first quarter and fourth quarter of each fiscal
year. Consequently, AGH Leasing may have net income in some quarters and may
have net losses in other quarters of the same year.

Upon consummation of the Company's Initial Public Offering ("IPO"), the
partners of AGH Leasing capitalized AGH Leasing with $500,000 cash and pledged
275,000 units of limited partnership interest in the Operating Partnership
("OP Units") to the Company to collateralize the Lessee's obligations under
the Participating Leases. Twin Towers Leasing was capitalized with $3 million
by the 49% limited partner upon commencement of operations.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Investment in Hotel Properties--Hotel properties consist principally of
furniture, fixtures and equipment and are stated at the lower of cost or net
realizable value and are depreciated using the straight-line method over
estimated useful lives ranging from 3 to 7 years.

Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. Upon the sale or disposition of a
fixed asset, the asset and the related accumulated depreciation are removed
from the accounts and the gain or loss is included in operations.

F-34
<PAGE>

AGH LEASING, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Cash and Cash Equivalents--All highly liquid investments with a maturity of
three months or less when purchased are considered to be cash equivalents.

Inventories--Inventories, consisting primarily of food and beverage items,
are stated at the lower of cost (generally, first-in first-out) or market.

Deferred Expenses--Deferred expenses at December 31, 1997 and 1996 include
organizational costs of $5,916 and $1,041, respectively and a $200,000 payment
made in connection with the Wyndham Safari Resort Lake Buena Vista cash flow
guarantee. Amortization is computed using the straight-line method over five
years.

Deferred Income--Deferred income of $2,100,000 and $730,000 at December 31,
1997 and 1996, respectively, represents the cash received from one of the
sellers of the Wyndham Safari Resort Lake Buena Vista for recurring
association fee agreements with the sellers as described in Note 4. The gain
will be amortized over the term of the agreements of ten years. The agreements
commence January 1, 1998.

Income Taxes--AGH Leasing is a Maryland limited partnership, which is not a
taxable entity. The results of operations are included in the tax returns of
the partners. The partnerships' tax returns and the amount of allocable income
or loss are subject to examination by federal and state taxing authorities. If
such examinations result in changes to income or loss, the tax liability of
the partners could be changed accordingly.

Revenue Recognition--Revenue is recognized as earned. Ongoing credit
evaluations are performed and an allowance for potential credit losses is
provided against the portion of accounts receivable which is estimated to be
uncollectible.

Advertising Cost--The December 31 Hotels participate in various advertising
and marketing programs. All advertising costs are expensed in the period
incurred. The Lessee recognized advertising expense of $7.4 million and $1.3
million for the years ended December 31, 1997 and 1996, respectively.

Concentration of Credit Risk--AGH Leasing places cash deposits at a major
bank. At December 31, 1997 and 1996, bank account balances exceeded Federal
Deposit Insurance Corporation limits by approximately $5.7 million and $2.5
million, respectively. Management believes the credit risk related to these
deposits is minimal.

3. FAIR VALUE OF FINANCIAL INSTRUMENTS

Statements of Financial Accounting Standards 107 requires all entities to
disclose the fair value of certain financial instruments in their financial
statements. Accordingly, the Lessee reports the carrying amounts of cash and
cash equivalents, accounts receivable, accounts payable, participating lease
payable, note payable, accrued expenses and other liabilities at cost, which
approximates fair value due to the short maturity of these instruments.

4. COMMITMENTS AND RELATED PARTY TRANSACTIONS

Franchise costs represent the annual expense for franchise royalties and
reservation services under the terms of hotel franchise agreements, which
expire from 1998 to 2013. Franchise costs are based upon varying

F-35
<PAGE>

AGH LEASING, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
percentages of gross room revenue ranging from 2.0% to 5.0%. These fees are
paid by the Lessee. No franchise costs were incurred for the Hotel Maison de
Ville.

Twenty-six of the December 31 Hotels are managed by AGHI on behalf of AGH
Leasing. AGH Leasing pays AGHI a base management fee of 1.5% of total revenue
and an incentive fee of up to 2.0% of total revenue. The incentive fee, if
applicable, is equal to 0.025% of annual total revenue for each 0.1% increase
in annual total revenue over the total revenues for the preceding twelve-month
period up to the maximum incentive fee.

The remaining December 31 Hotel, the Wyndham Garden Hotel Marietta, is
managed by Wyndham Hotel Corporation ("Wyndham") on behalf of AGH Leasing. AGH
Leasing pays Wyndham a base management fee equal to 1.5% of gross revenues at
the hotel plus an incentive management fee of up to 1.5% of gross revenues.
The incentive fee, if applicable, will be earned if gross revenues exceed
certain year over year thresholds.

Each December 31 Hotel, except the Hotel Maison de Ville, is required to
remit varying percentages of gross room revenue ranging from 1.0% to 5.0% to
the various franchisors for sales and advertising expenses incurred to promote
the hotel at the national level. Additional sales and advertising costs are
incurred at the local property level. These fees are paid by AGH Leasing.

The Company entered into an agreement for a license and an association
membership from one of the sellers of the Wyndham Safari Lake Buena Vista,
which the Company immediately assigned to AGH Leasing. Commencing January
1998, in connection with the license and the association membership, the
Lessee is required to pay recurring association fees including a base monthly
fee equal to 1.0% of the prior month's gross room revenues generated at the
Hotel, and an additional fee of 0.5% to 1.0% of gross monthly revenues if the
trailing twelve month's gross room revenues at the Hotel exceed a threshold of
approximately $13 million (subject to increase based on the percentage
increase in the CPI). In addition, the Lessee is obligated to pay a recurring
royalty for the African Safari theme equal to an amount which ranges from 10%
to 25% of net operating income in excess of $6 million (subject to adjustment
if the Operating Partnership invests more than $40 million in the Hotel). AGH
Leasing is also obligated to pay a marketing assistance fee equal to .25% of
gross room revenues. The marketing and association fees are not expected to
exceed 2.25% of gross room revenues for any twelve-month period. The
association membership agreement terminates in October 2008; AGH Leasing is
obligated to pay liquidated damages if the agreement is terminated earlier.

AGH Leasing has future lease commitments to the Company under the
Participating Leases, which have various expiration dates between July 2008 to
June 2009. The Participating Lease expenses are based on percentages of room
revenues, food and beverage revenues, telephone and other revenues. The
departmental revenue thresholds in the Participating Leases are seasonally
adjusted for interim periods and the Participating Lease formulas are adjusted
annually effective January 1, by a percentage equal to the percentage increase
in the CPI, plus .75% as compared to the prior year. Additionally, several of
the December 31 Hotels will have further adjustments to the Participating
Lease formulas due to the significant renovations expected to be completed in
those hotels in 1997. Minimum future rental expense (i.e., base rents) under
these noncancellable Participating Leases is as follows:

<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------------
<S> <C>
1998...................................... $ 48,960,000
1999...................................... 50,527,600
2000...................................... 52,143,028
2001...................................... 53,814,309
2002...................................... 55,428,738
2003 and thereafter....................... 342,549,603
------------
Minimum future base rents $603,423,278
============
</TABLE>

F-36
<PAGE>

AGH LEASING, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

5. PRO FORMA INFORMATION (UNAUDITED)

Due to the impact of the IPO and other hotel acquisitions made by the
Company and leased to AGH Leasing, the historical results of operations may
not be indicative of future results of operations. The following unaudited pro
forma information of AGH Leasing is presented as if the transactions
previously described had occurred on January 1, 1996 and all of the Current
Hotels had been leased pursuant to the Participating Leases since that date.

In management's opinion, all adjustments necessary to reflect the effects of
the transactions previously described have been made. The pro forma
information does not purport to present what the actual results of operations
of AGH Leasing would have been if the previously mentioned transactions had
occurred on such date or to project the future financial position or results
of operations of AGH Leasing for any future period.

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Room revenue.................................. $151,771,990 $136,811,842
Food and beverage revenue..................... 44,882,294 44,176,435
Other revenue................................. 9,804,140 9,537,309
Minority interest income...................... 2,874,156 1,284,177
------------ ------------
Total revenue............................... 209,332,580 191,809,763
------------ ------------
Hotel operating expenses...................... 134,759,239 126,515,121
Depreciation and amortization................. 103,997 69,753
Interest expense.............................. 264,064 31,689
Other expenses................................ 331,229 359,009
Participating Lease expense................... 74,192,463 65,776,641
------------ ------------
Net loss...................................... $ (318,412) $ (942,450)
============ ============
</TABLE>

6. SUBSEQUENT EVENTS (UNAUDITED)

Subsequent to year end, AGH Leasing and the Operating Partnership entered
into 19 operating lease agreements for 19 hotels which were acquired by the
Operating Partnership. The Operating Partnership has also entered in an
agreement to acquire another hotel in the second quarter of 1998 which it
intends to lease to AGH Leasing. The leases are substantially similar to the
other Participating Lease agreements between AGH Leasing and the Operating
Partnership.

The pro forma information does not purport to represent what AGH Leasing's
financial position or AGH Leasing's results of operations would have been if
the acquisition of all Hotels had, in fact, occurred on such dates, or to
project AGH Leasing's financial position or results of operations at any
future date or for any future period.

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Room revenue.................................. $252,513,441 $221,451,484
Total revenue................................. $348,417,878 $310,406,682
Percentage Lease expense...................... $120,128,336 $103,506,853
Net loss...................................... $ (1,320,000) $ (2,596,594)
</TABLE>

PROPOSED MERGER

On March 15, 1998 the Company and CapStar Hotel Company ("CapStar") entered
into a definitive agreement (the "Merger Agreement") pursuant to which the
parties agreed, subject to stockholder approval and

F-37
<PAGE>

AGH LEASING, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
other conditions and covenants, to merge as equals (the "Proposed Merger").
Accordingly, no assurance can be given that the Proposed Merger will be
consummated. Pursuant to the Merger Agreement, CapStar will spin off (the
"Spin-Off") in a taxable transaction, its hotel operations and management
business to its current stockholders as a new C-Corporation to be called
MeriStar Hotels & Resorts, Inc. ("MeriStar Resorts"). CapStar will
subsequently merge with and into the Company, which will qualify as a
reorganization under Section 368 of the Internal Revenue Code of 1986, as
amended (the "Code"). The Company will be renamed MeriStar Hospitality
Corporation after the Proposed Merger. In a separate transaction, which will
close immediately after the closing of the Proposed Merger, MeriStar Resorts
will acquire AGH Leasing and AGHI which is payable through the issuance of
$11.2 million of units of limited partnership interests of a subsidiary owned
by MeriStar Resorts and $83.8 million in cash. This acquisition is a condition
to closing the Proposed Merger. If the Proposed Merger is consummated,
MeriStar Resorts will become the lessee and manager of all of the Current
Hotels currently leased by AGH Leasing and will have a right of first refusal
to become the lessee of hotels acquired by the Company in the future except
for the Prime Group II Acquisition hotels.

The Merger Agreement defines the exchange ratios for both the Company's and
CapStar's stockholders. CapStar stockholders will receive one share each of
MeriStar Hospitality Corporation and MeriStar Resorts for each CapStar share
owned. The Company's stockholders will receive 0.8475 shares of MeriStar
Hospitality Corporation for each share of Common Stock owned. Both exchange
ratios are fixed, with no adjustment mechanism.

The Company expects the Proposed Merger to close in June 1998. The Proposed
Merger will be submitted for approval at separate meetings of the stockholders
of the Company and CapStar. Prior to such stockholder meetings, the Company
will file a registration statement with the SEC registering under the
Securities Act of 1933, as amended, the shares of MeriStar Hospitality
Corporation to be issued in the Proposed Merger.

F-38
<PAGE>

AGH LEASING, L.P.

PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997

The following unaudited Pro Forma Consolidated Statements of Operations are
presented as if the Company had completed the acquisition of the 27 hotels
owned as of December 31, 1997 and the acquisition of 20 of the Acquired and
Proposed Acquisition Hotels leased to AGH Leasing, L.P. (collectively the "AGH
Hotels") including the Potomac Portfolio Acquisition Hotels, the FSA Portfolio
Acquisition Hotels, the Holiday Inn O'Hare International Hotel and the Madison
Hotel Acquisition as of January 1, 1996.

In management's opinion, all material adjustments necessary to reflect the
effect of these transactions have been made.

The following unaudited Pro Forma Consolidated Statements of Operations are
derived from AGH Leasing's Consolidated Statements of Operations as of
December 31, 1996 and 1997.

The following Pro Forma Consolidated Statements of Operations are not
necessarily indicative of what the actual results of operations would have
been assuming such transactions had been completed as of January 1, 1996.

F-39
<PAGE>

AGH LEASING, L.P.

PRO FORMA STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
HISTORICAL
JULY 31, 1996 DECEMBER 31
THROUGH HOTELS ACQUIRED AND
DECEMBER 31, PRO FORMA PROPOSED MANAGEMENT FEES
1996 ADJUSTMENTS ACQUISITIONS ADJUSTMENT COMBINED PRO
(A) (B) (B) (F) FORMA
------------- ------------ ------------ --------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues
Room revenue (C)....... $26,725,200 $110,086,642 $ 84,639,642 $ -- $221,451,484
Food and beverage
revenue (C)........... 8,374,459 35,801,976 27,587,810 -- 71,764,245
Other revenue (C)...... 1,691,472 7,845,837 6,369,467 -- 15,906,776
Minority interest
income D)............. -- 1,284,177 -- -- 1,284,177
----------- ------------ ------------ ----------- ------------
Total revenue........ $36,791,131 $155,018,632 $118,596,919 -- $310,406,682
----------- ------------ ------------ ----------- ------------
Expenses
Property operating
costs and expenses
(E)................... 7,235,297 30,349,334 24,467,818 -- 62,052,449
Food and beverage
costs and expenses
(E)................... 6,262,071 26,331,855 21,719,066 -- 54,312,992
General and
administrative (E).... 3,270,481 13,129,314 11,376,346 -- 27,776,141
Advertising and
promotion (E)......... 2,305,776 10,413,836 7,925,128 -- 20,644,740
Repairs and
maintenance (E)....... 1,450,987 7,503,668 6,364,962 -- 15,319,617
Utilities (E).......... 1,628,490 6,835,787 6,356,010 -- 14,820,287
Management fees (F).... 947,632 4,123,386 2,363,095 (1,273,350) 6,160,763
Franchise costs (G).... 950,307 3,776,900 3,221,776 -- 7,948,983
Depreciation (H)....... 26,250 36,750 -- -- 63,000
Amortization (I)....... 6,753 -- -- -- 6,753
Interest expense (J)... 13,314 18,375 -- -- 31,689
Other expense.......... 27,093 331,916 37,730,212 -- 359,009
Participating Lease
expenses (K).......... 13,387,719 52,388,922 -- -- 103,506,853
----------- ------------ ------------ ----------- ------------
Total expenses....... 37,512,170 155,240,043 121,524,413 (1,273,350) 313,003,276
----------- ------------ ------------ ----------- ------------
Net income (loss).... $ (721,039) $ (221,411) $ (2,927,494) $ 1,273,350 $ (2,596,594)
=========== ============ ============ =========== ============
</TABLE>

F-40
<PAGE>

AGH LEASING, L.P.

PRO FORMA STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)

<TABLE>
<CAPTION>
HISTORICAL YEAR DECEMBER 31, 1997 ACQUIRED AND
ENDED HOTELS PRO FORMA PROPOSED MANAGEMENT FEES COMBINED PRO
DECEMBER 31, 1997(L) ADJUSTMENTS(B) ACQUISITIONS(B) ADJUSTMENT(F) FORMA
-------------------- ----------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues
Room revenue(C)........ $123,965,649 $27,806,341 $100,741,451 $ -- $252,513,441
Food and beverage
revenue(C)............ 35,595,835 9,286,459 31,820,756 -- 76,703,050
Other revenue(C)....... 8,031,070 1,773,070 6,523,091 -- 16,327,231
Minority interest
income(D)............. 1,802,558 (139,150) -- -- 1,663,408
------------ ----------- ------------ ----------- ------------
Total Revenue........ $169,395,112 $38,726,720 $139,085,298 $ -- $347,207,130
------------ ----------- ------------ ----------- ------------
Expenses
Property operating
costs and
expenses(E)........... 33,894,184 6,754,081 27,114,514 -- 67,762,779
Food and beverage
costs and
expenses(E)........... 27,646,671 6,425,715 24,867,295 -- 58,939,681
General and
administrative(E)..... 15,871,676 2,978,176 12,033,776 -- 30,883,628
Advertising and
promotion(E).......... 12,792,700 2,489,673 8,706,828 -- 23,989,201
Repairs and
maintenance(E)........ 6,712,883 1,756,796 6,494,420 -- 14,964,099
Utilities(E)........... 7,258,674 1,532,149 6,294,496 -- 15,085,319
Management fees(F)..... 1,691,639 1,158,265 2,737,008 1,767,977 7,354,889
Franchise costs(G)..... 4,754,285 1,041,672 3,995,256 -- 9,791,213
Depreciation(H)........ 63,000 -- -- -- 63,000
Amortization(I)........ 40,997 -- -- -- 40,997
Interest expense(J).... 26,808 237,256 -- -- 264,064
Other expense.......... 158,113 173,116 79,997 -- 411,226
Participating Lease
expenses(K)........... 59,934,337 14,258,126 45,935,873 -- 120,128,336
------------ ----------- ------------ ----------- ------------
Total expenses....... 170,845,967 38,805,025 138,259,463 1,767,977 349,678,432
------------ ----------- ------------ ----------- ------------
Net income(loss)..... $ (1,450,855) $ (78,305) $ 825,835 $(1,767,977) $ (2,471,302)
============ =========== ============ =========== ============
</TABLE>

F-41
<PAGE>

AGH LEASING, L.P.

NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

The pro forma consolidated statements of operations of AGH Leasing, L.P.
("AGH Leasing") include the results of operations of the 47 hotels leased from
the American General Hospitality Operating Partnership, L.P. (the "Operating
Partnership") due to AGH Leasing's control over the operations of the hotels
during the twelve-year term of the Participating Leases. AGH Leasing has
complete discretion in establishing room rates and all rates for hotel goods
and services. Likewise, all operating expenses of the hotels are under the
control of AGH Leasing. AGH Leasing has the right to manage or to enter into
management contracts with other parties to manage the hotels. If AGH Leasing
elects to enter into management contracts with parties other than American
General Hospitality, Inc. ("AGHI"), AGH Leasing must obtain the prior written
consent of the Company, which consent may not be unreasonably withheld.

AGH Leasing's results of operations are seasonal. Generally, hotel revenue
is greater in the second and third quarters of a calendar year, although this
may not be true for hotels in major tourist destinations. With the Company's
acquisition and subsequent leasing of the FSA Portfolio Acquisition Hotels,
which include several hotels in tourist destinations, the AGH Hotels may now
produce greater revenues in the first and second quarters.

(A) Represents the historical consolidated statement of operations of the
Company for the period July 31, 1996 (inception of operations) through
December 31, 1996.

(B) Represents the adjustments to reflect the pro forma statements of
operations of the 27 hotels owned by the Company as of December 31, 1997
and leased to AGH Leasing and the 20 Acquired and Proposed Acquisition
Hotels leased to AGH Leasing as if all of the AGH Hotels were acquired on
January 1, 1996 and leased to AGH Leasing pursuant to a Participating
Lease since that date.

(D) Represents the amount of AGH Leasing's minority interest investment in
Twin Towers Leasing, L.P. (the "Twin Towers Lessee", together with AGH
Leasing, L.P., "AGH Leasing") which leases the Radisson Orlando Twin
Towers hotel from the Operating Partnership. The Twin Towers Lessee is
owned 51% by AGH Leasing, which is the sole general partner, and 49% by
Regent Carolina Corporation, which is the sole limited partner. Regent
Carolina Corporation is not affiliated with the Company, the Operating
Partnership or AGH Leasing.

(E) Represents the historical expenses of the AGH Hotels.

(F) Represents management fees to be incurred under the Management Agreements.
The management fees payable to AGHI consist of a base fee of 1.5% of total
revenue and an incentive fee of up to 2.0% of total revenue. The incentive
fee, if applicable, is equal to 0.025% of annual total revenue for each
0.01% increase in annual total revenues over the total revenues for the
preceding twelve month period up to the maximum incentive fee. The payment
of the management fees to AGHI by AGH Leasing is subordinate to AGH
Leasing's obligations to the Company under the Participating Leases. The
full management fee payable during 1996 and 1997 will be earned only to
the extent that AGH Leasing has taxable income equal to or greater than
$50,000. If AGH Leasing's taxable net operating income is below $50,000 in
1997 and 1996, management fees are forfeited by AGHI to increase AGH
Leasing's taxable net operating income to $50,000.

(G) Represents the historical franchise fees of the AGH Hotels. Franchise fees
associated with the hotel conversions are not included in the pro forma
statements of operations since other impact including possible revenue
enhancements and operating expense reductions are also not included.

(H) Historical depreciation at the AGH Hotels has been eliminated due to
depreciation being recorded by the Operating Partnership. Represents
depreciation related to the $315,000 of furniture, fixtures and equipment
("FF&E") purchased by AGH Leasing from the Operating Partnership. The FF&E
is depreciated over an estimated useful life of 5 years.

F-42
<PAGE>

AGH LEASING, L.P.

NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS--(CONTINUED)

(I) Historical deferred loan costs and the related amortization has been
eliminated since AGH Leasing is not expected to incur similar costs.
Amortization expense relates to the amortization of organization costs
which are being amortized over a 60 month period.

(J) Any future interest expense related to debt for the AGH Hotels will be
incurred and paid by the Operating Partnership. Interest expense related
to an advance made by the Operating Partnership to AGH Leasing for the
FF&E purchase. The advance of $315,000 bears interest at 10%. The December
31, 1997 balance of the note is $234,231.

(K) Represents lease payments to the Operating Partnership from AGH Leasing
pursuant to the Participating Leases calculated on a pro forma basis by
applying the rent provisions of the Participating Leases to the revenues
of the AGH Hotels. The departmental thresholds in the Participating Leases
are seasonally adjusted for interim periods.

(L) Represents the Company's historical statement of operations for the year
ended December 31, 1997.

F-43
<PAGE>

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

UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK DISTRIBUTED PURSUANT HERETO,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 3
Risk Factors.............................................................. 10
Selected Historical and Pro Forma Financial Information................... 17
Unaudited Pro Forma Financial Statements.................................. 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 23
The Company............................................................... 27
Use of Proceeds........................................................... 29
Capitalization............................................................ 29
Dividend Policy........................................................... 30
The Merger and the Spin-Off............................................... 31
Business.................................................................. 35
The Rights Offering....................................................... 44
Management................................................................ 51
Security Ownership of Certain Beneficial Owners and Management............ 61
Description of Capital Stock.............................................. 62
Certain Antitakeover Provisions........................................... 63
Experts................................................................... 64
Legal Matters............................................................. 64
Index to Financial Statements............................................. F-1
</TABLE>

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

MERISTAR HOTELS & RESORTS, INC.

SHARES OF COMMON STOCK AND RIGHTS TO ACQUIRE UP TO OF SUCH SHARES

The date of this Prospectus is , 1998

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

PART II. INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the various expenses payable in connection
with the Rights Offering. All the amounts shown are estimates, except the
Securities and Exchange Commission registration fee. All of such expenses are
being borne by the Company.

<TABLE>
<S> <C>
SEC Registration Fee............................................... $6,394
Listing Fee........................................................
Accounting Fees and Expenses.......................................
Legal Fees and Expenses............................................
Printing and Engraving Expenses....................................
Registrar and Transfer Agent's Fees................................
Subscription Agent's Fees..........................................
Miscellaneous Fees and Expenses....................................
Total.......................................................... $
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 102(b)(7) of the Delaware Law permits a provision in the certificate
of incorporation of each corporation organized thereunder, eliminating or
limiting, with certain exceptions, the personal liability of a director to the
corporation or its stockholders for monetary damages for certain breaches of
fiduciary duty as a director. The Certificate of Incorporation of the Company
eliminates the personal liability of directors to the fullest extent permitted
by the Delaware Law.

Section 145 of the Delaware Law ("Section 145"), in summary, empowers a
Delaware corporation, within certain limitations, to indemnify its officers,
directors, employees and agents against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement, actually and reasonably
incurred by them in connection with any suit or proceeding other than by or on
behalf of the corporation, if they acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interest of the
corporation, and, with respect to a criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful.

With respect to actions by or on behalf of the corporation, Section 145
permits a corporation to indemnify its officers, directors, employees and
agents against expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit,
provided such person meets the standard of conduct described in the preceding
paragraph, except that no indemnification is permitted in respect of any claim
where such person has been found liable to the corporation, unless the Court
of Chancery or the court in which such action or suit was brought approves
such indemnification and determines that such person is fairly and reasonably
entitled to be indemnified.

Article Eight of the Certificate of Incorporation of the Company provides
for the indemnification of officers and directors and certain other parties
(the "Indemnitees") of the Company to the fullest extent permitted under the
Delaware Law; provided, that except in the case of proceedings to enforce
rights to indemnification, the Company shall indemnify such Indemnitee in
connection with a proceeding initiated by such Indemnitee only if such
proceeding was authorized by the Board.

Each of the employment agreements described in "Management--Employment
Agreements" contains provisions entitling the executive to indemnification for
losses incurred in the course of service to the Company or its subsidiaries,
under certain circumstances.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

In connection with the formation of the Company on March 13, 1998, CapStar
became the Company's sole stockholder, acquiring 100 shares of Common Stock
for nominal consideration. In addition, CapStar expects

II-1
<PAGE>

initially to capitalize the Company with approximately $52 million of cash,
including a $30 million draw on the Company's $100 million revolving credit
facility within the REIT.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(A) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
<C> <C> <S>
2.1** -- Acquisition Agreement, dated as of March 15, 1998, among
MeriStar H & R Operating Company, L.P., American General
Hospitality Corporation, American General Hospitality, Inc.,
AGHL GP, Inc., the general partner of AGH Leasing, L.P., and
the limited partners of AGH Leasing, Inc.
2.2 -- Form of Contribution, Assumption and Indemnity Agreement
between CapStar Hotel Company and MeriStar H & R Operating
Company, L.P. (Incorporated by reference to Exhibit 99.4 to
CapStar Hotel Company's Report on Form 8-K dated March 17,
1998, No. 1-11903)
2.3 -- Agreement and Plan of Merger dated as of March 15, 1998, among
American General Hospitality Corporation, American General
Hospitality Operating Partnership, L.P., CapStar Hotel
Company, CapStar Management Company, L.P. and CapStar
Management Company II, L.P. (Incorporated by reference to
Exhibit 99.4 to CapStar Hotel Company's Report on Form 8-K
dated March 17, 1998, No. 1-11903)
3.1** -- Amended and Restated Certificate of Incorporation of the
Company
3.2** -- By-laws of the Company
4.1** -- Specimen Common Stock certificate
4.2** -- Specimen Rights Certificate
5.1** -- Opinion as to Validity of Common Stock and Rights
10.1**+ -- Form of Employment Agreement between the Company and Paul W.
Whetsell
10.2**+ -- Form of Employment Agreement between the Company and Steven D.
Jorns
10.3**+ -- Form of Employment Agreement between the Company and David E.
McCaslin
10.4**+ -- Form of Employment Agreement between the Company and James A.
Calder
10.5**+ -- Form of Employment Agreement between the Company and John E.
Plunket
10.6**+ -- Form of Equity Incentive Plan of the Company
10.7**+ -- Form of Employee Stock Purchase Plan of the Company
10.8**+ -- Form of Management Bonus Plan of the Company
10.9 -- Form of Intercompany Agreement among MeriStar Hotels &
Resorts, Inc., MeriStar H & R Operating Company, L.P.,
MeriStar Hospitality Corporation and MeriStar Hospitality
Operating Partnership, L.P. (Incorporated by reference to
Exhibit 99.4 to CapStar Hotel Company's Report on Form 8-K
dated March 17, 1998, No. 1-11903)
23.1* -- Consent of KPMG Peat Marwick LLP
23.2.1* -- Consent of Coopers & Lybrand L.L.P. (Dallas Office)
23.2.2* -- Consent of Coopers & Lybrand L.L.P. (Raleigh Office)
23.3** -- Consent of Daniel L. Doctoroff
23.4** -- Consent of Kent Hance
23.5** -- Consent of Steven D. Jorns
23.6** -- Consent of Joseph McCarthy
23.7** -- Consent of David E. McCaslin
23.8** -- Consent of James McCurry
23.9** -- Consent of Paul W. Whetsell
23.10** -- Consent of James Worms
23.11** -- Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included
in Exhibit 5)
</TABLE>

II-2
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
<C> <C> <S>
27 -- Financial Data Schedule
99.1** -- Form of Subscription Agency Agreement
Instructions as to use of Subscription Certificates and
99.2** -- International Holder Subscription Forms
99.3** -- International Holder Subscription Form
</TABLE>
- --------
* Filed herewith.
** To be filed by amendment.
+ Management contract or compensatory plan or arrangement.

(B) FINANCIAL STATEMENT SCHEDULES

Not applicable.

ITEM 17. UNDERTAKINGS.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to its Certificate of Incorporation, By-laws, or otherwise,
the Company has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act of 1933 shall be deemed to be a part of
this Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of the securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.

II-3
<PAGE>

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (1)(i) and (1)(ii) of this section
do not apply if the registration statement is on Form S-3, Form S-8 or
Form F-3, and the information required to be included in a post-
effective amendment by those paragraphs is contained in periodic
reports filed with or furnished to the Commission by the registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act
of 1934 that are incorporated by reference in the registration
statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

II-4
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF WASHINGTON, DISTRICT OF
COLUMBIA, ON THE 10TH DAY OF APRIL, 1998.

MeriStar Hotels & Resorts, Inc.

/s/ Paul W. Whetsell
By:__________________________________
NAME: PAUL W. WHETSELL
TITLE: CHAIRMAN AND CHIEF EXECUTIVE
OFFICER

KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS PAUL W. WHETSELL AND JAMES A. CALDER, SUCH
PERSON'S TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL POWER OF
SUBSTITUTION AND REVOCATION, FOR SUCH PERSON AND IN SUCH PERSON'S NAME, PLACE
AND STEAD, IN ANY AND ALL CAPACITIES TO SIGN ANY AND ALL AMENDMENTS (INCLUDING
POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT FILED PURSUANT TO
THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AND TO FILE THE SAME WITH ALL
EXHIBITS THERETO, AND THE OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE
SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT AND
AGENTS, AND EACH OF THEM, FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND
EVERY ACT AND THINGS REQUISITE AND NECESSARY TO BE DONE, AS FULLY TO ALL
INTENTS AND PURPOSES AS SUCH PERSON MIGHT OR COULD DO IN PERSON, HEREBY
RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS, OR ANY OF
THEM, OR THEIR OR HIS SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO
DONE BY VIRTUE HEREOF.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND THE FOREGOING POWER OF ATTORNEY HAVE BEEN SIGNED BY
THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.

SIGNATURE TITLE

/s/ Paul W. Whetsell Chief Executive Officer and Chairman
- ------------------------------------- of the Board (Principal Executive
PAUL W. WHETSELL Officer)

/s/ James A. Calder Chief Financial Officer (Principal
- ------------------------------------- Financial and Accounting Officer)
JAMES A. CALDER

President and Director
/s/ David E. McCaslin
- -------------------------------------
DAVID E. MCCASLIN

DATED: APRIL 10, 1998

II-5

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EXHIBIT 23.1

ACCOUNTANTS' CONSENT

The Board of Directors
CapStar Hotel Company:

We consent to the use of our report dated March 30, 1998 related to the
combined balance sheets of the management and leasing business of CapStar
Hotel Company and subsidiaries ("OpCo") as of December 31, 1997 and 1996 and
the related combined statements of operations, owners' equity and cash flows
for each of the years in the three-year period ended December 31, 1997,
included in the registration statement on Form S-1 of MeriStar Hotels &
Resorts, Inc.

We also consent to the reference to our firm under the heading "Experts" in
the registration statement.

/s/ KPMG Peat Marwick LLP

Washington, D.C.
April 10, 1998

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EXHIBIT 23.2.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in this registration statement of MeriStar
Hotels & Resorts, Inc. on Form S-1 (File No. 333-xxxx) of our report dated
February 6, 1998 on our audits of the financial statements of Winston
Hospitality, Inc. as of October 31, 1997 and December 31, 1996 and for the ten
months ended October 31, 1997 and the years ended December 31, 1996 and 1995.
We also consent to the references to our firm under the caption "Experts".

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

Raleigh, North Carolina
April 8, 1998

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EXHIBIT 23.2.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in this registration statement of MeriStar
Hotels & Resorts, Inc. on Form S-1 (File No. 333-xxxx) of our report dated
January 30, 1998, except for Note 6, as to which the date is March 16, 1998,
on our audits of the financial statements of AGH Leasing, L.P. and our report
dated April 1, 1998, on our audits of the financial statements of American
General Hospitality, Inc. We also consent to the references to our firm under
the caption "Experts".

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

Dallas, Texas
April 9, 1998