INTERSTATE HOTELS CORP, 10-K/A, 2000-05-01

INTERSTATE HOTELS CORP
10-K/A, 2000-05-01
HOTELS & MOTELS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FORM 10-K/A

ANNUAL REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

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

INTERSTATE HOTELS CORPORATION
FOSTER PLAZA TEN
680 ANDERSEN DRIVE
PITTSBURGH, PENNSYLVANIA 15220
(412) 937-0600

<TABLE>
<S> <C> <C>
MARYLAND 0-26805 75-2767215
(State of Incorporation) (Commission File No.) (IRS Employer
Identification No.)
</TABLE>

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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<TABLE>
<S> <C>
Name of each exchange
Title of each class on which registered
- - ------------------------------------------ ------------------------------------------
Common Stock, $.01 par value (6,394,996 Nasdaq SmallCap Market
shares outstanding as of April 27, 2000)
</TABLE>

The Company (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the period that the Company
was required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days.

Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
contained in this Report.

There were 5,505,180 shares of the Company's Common Stock outstanding as of
April 27, 2000 that were held by non-affiliates. The aggregate market value of
these shares, based upon the last sale price as reported on the Nasdaq SmallCap
Market on April 27, 2000, was approximately $14,800,000.

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INDEX

INTERSTATE HOTELS CORPORATION

<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
PART I
Items 1 & 2 Business and Properties..................................... 2
Item 3 Legal Proceedings........................................... 3
Item 4 Submission of Matters to a Vote of Security Holders......... 3

PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 4
Item 6 Selected Financial Data..................................... 4
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7
Item 7A Quantitative and Qualitative Disclosures About Market
Risk........................................................ 13
Item 8 Financial Statements and Supplementary Data................. 13
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 13

PART III
Item 10 Directors and Executive Officers of the Registrant.......... 14
Item 11 Executive Compensation...................................... 16
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 24
Item 13 Certain Relationships and Related Transactions.............. 25

PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 26
</TABLE>
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PART I

ITEMS 1 & 2. BUSINESS AND PROPERTIES

Interstate Hotels Corporation (together with its subsidiaries and
predecessors, the "Company") was formed pursuant to a series of events
culminating in the spin-off of the Company's operations from Wyndham
International, Inc., formerly Patriot American Hospitality, Inc. ("Wyndham"), on
June 18, 1999. On June 2, 1998, Interstate Hotels Company (together with its
subsidiaries, "Old Interstate") merged into Wyndham (the "Merger"). Prior to the
Merger, Marriott International, Inc. ("Marriott") filed a lawsuit to stop the
closing of the Merger as a result of a dispute over certain franchise agreements
between Marriott and Old Interstate. On June 18, 1999, pursuant to a settlement
agreement with Marriott, Wyndham transferred to the Company, which was then a
newly formed corporation, the third-party hotel management business of Old
Interstate, equity interests in The Charles Hotel Complex, a hotel, retail and
office complex located in Cambridge, Massachusetts, and long-term leasehold
interests in 79 hotels. Wyndham then spun-off the Company to its shareholders
(the "Spin-off"). In connection with the Spin-off, Marriott purchased 4% of the
Company's common stock, Wyndham retained 4% of the Company's common stock, and
the remaining 92% of the Company's common stock was distributed to Wyndham's
shareholders. In addition, Wyndham continued to own a 55% non-controlling
ownership interest in Interstate Hotels, LLC ("IH LLC"), a subsidiary of the
Company and the successor to the third-party hotel management business and
leasehold interests conducted by Old Interstate prior to the Merger.

The Company is one of the largest independent hotel management companies in
the United States based on number of properties, number of rooms and total
revenues produced for owners. At December 31, 1999, the Company managed, leased
or performed related services for 158 hotels with a total of 29,379 rooms in 37
states in the United States, and in Canada, the Caribbean and Russia. The
Company operates these hotels under a variety of major brand names, including
AmeriSuites, Colony, Comfort Inn, Courtyard by Marriott, Embassy Suites,
Fairfield Inn by Marriott, Hampton Inn, Hilton, Holiday Inn, Homewood Suites,
Marriott, Radisson, Residence Inn by Marriott, Sheraton and Westin. The Company
is the largest franchisee of upscale hotels in the Marriott system, operating 16
hotels with 5,294 rooms bearing the Marriott flag, and is the largest franchisee
and independent manager in the Hampton Inn system, operating 60 hotels with
7,491 rooms bearing the Hampton Inn flag.

The Company operates its hotels under two separate operating
segments -- Interstate, which operates luxury and upscale hotels, and
Crossroads, which operates mid-scale, upper economy and budget hotels.

On June 18, 1999, the Company sold substantially all of its equity
interests in The Charles Hotel Complex for $19.25 million, and on November 1,
1999, the Company acquired the 156-suite Pittsburgh Airport Residence Inn by
Marriott for a total acquisition cost, including closing costs, of $13.0
million. In the first quarter of 2000, the Company has entered into new
management contracts for and commenced management of nine mid-scale, upper
economy and budget hotels and one luxury hotel. The Company has also entered
into management contracts to manage five hotels which are currently scheduled to
open in either 2000 or 2001.

In 1999, the Company incurred an impairment loss of $16.4 million related
to its leased hotel intangible assets of 42 leased hotels included in the
mid-scale, upper economy and budget hotels segment. The impairment loss was the
result of a permanent impairment of the future profitability of these hotels for
the remainder of the hotel lease contract terms. These hotels had experienced
lower than expected operating cash flows during 1999, primarily due to decreased
occupancy rates and higher operating costs resulting from significant
construction that has occurred within this industry segment. This recent
construction has caused a significant over-supply of mid-scale, upper economy
and budget hotels in certain markets. The long-term impact of this over-supply
on the profitability of the Company's leased hotels was determined and
quantified as a result of a negative trend in operating statistics and higher
operating costs increasing through the fourth quarter of 1999 and during the
completion of the Company's budgeting process in the fourth quarter of 1999.

2
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ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of its business, the Company is named as a defendant
in legal proceedings resulting from incidents at the hotels it operates. In
addition, legal proceedings were or may be commenced against Old Interstate in
the ordinary course of its business. To the extent that such legal proceedings
relate to operations that are now conducted by the Company, the Company will
succeed to any liabilities resulting from such legal proceedings, and under the
terms of the Spin-off, the Company is required to indemnify Wyndham with respect
thereto, whether arising before or after the Spin-off. The Company maintains
liability insurance, requires hotel owners to maintain adequate insurance
coverage and is generally entitled to indemnification from third-party hotel
owners for lawsuits and damages against it in its capacity as a hotel manager.
Old Interstate had similar arrangements prior to the Merger. In addition, in
connection with the Spin-off, Wyndham is agreed to indemnify the Company against
liabilities relating to, among other things, the assets of Old Interstate that
Wyndham retained. As a result, the Company believes that the legal proceedings
to which it is subject will not have a material effect on the Company's
financial condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of 1999.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock has been listed on the Nasdaq SmallCap Market
("Nasdaq") since June 18, 1999 under the symbol "IHCO." Prior to that date, the
Common Stock was not publicly traded. The following table sets forth, for the
periods indicated, the high and low sales prices per share of Common Stock as
reported on Nasdaq.

<TABLE>
<CAPTION>
STOCK PRICE
-----------
PERIOD HIGH LOW
- - ---------------------------------------------------------- ------ ------
<S> <C> <C>
1999:
June 18, 1999 through June 30, 1999..................... $ 5.00 $ 3.06
Quarter ended September 30, 1999........................ 5.06 2.88
Quarter ended December 31, 1999......................... 3.75 2.88
2000:
Quarter ended March 31, 2000............................ 4.75 2.75
Second Quarter (through April 27, 2000)................. 3.75 1.88
</TABLE>

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.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected historical financial data for the
Company, prior to the Merger of Old Interstate into Wyndham, as the predecessor,
as of and for the years ended December 31, 1995, 1996 and 1997 and for the
period from January 1, 1998 to June 1, 1998, and for the Company, subsequent to
the Merger of Old Interstate into Wyndham, as the successor, as of December 31,
1998 and for the period from June 2, 1998 to December 31, 1998 and as of and for
the year ended December 31, 1999. The following table also includes an unaudited
column that combines the predecessor for the period from January 1, 1998 to June
1, 1998 and the successor for the period from June 2, 1998 to December 31, 1998.
In addition, selected unaudited pro forma financial data for the years ended
December 31, 1998 and 1999 are presented to include the effects of the Spin-off,
the sale of the equity interests in The Charles Hotel Complex and certain other
adjustments as if all of the transactions had occurred on January 1, 1998. The
unaudited pro forma financial data does not purport to present what the actual
results of operations of the Company would have been if these transactions had
occurred on such dates or to project what the results of operations of the
Company will be for any future period.

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SELECTED FINANCIAL AND OTHER DATA

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>

PREDECESSOR SUCCESSOR
--------------------------------------------------- -------------
YEAR ENDED DECEMBER 31, JAN. 1, 1998 JUNE 2, 1998
------------------------------------ THROUGH THROUGH
1995 1996 1997 JUNE 1, 1998 DEC. 31, 1998
---------- ---------- ---------- ------------ -------------

<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Lodging revenues:
Rooms................................... -- $ 9,258 $ 158,343 $ 74,265 $ 108,698
Other departmental...................... -- 721 9,512 4,504 6,455
Net management fees...................... $ 27,022 33,023 39,136 18,018 22,763
Other fees............................... 17,996 20,710 23,426 9,976 10,478
---------- ---------- ---------- ---------- ----------
Total revenues...................... 45,018 63,712 230,417 106,763 148,394
Lodging expenses:
Rooms................................... -- 2,334 36,919 16,115 25,114
Other departmental...................... -- 591 5,487 2,674 3,962
Property costs.......................... -- 3,201 43,225 21,045 31,714
General and administrative............... 9,811 10,369 13,212 6,115 5,822
Payroll and related benefits............. 15,469 17,666 21,892 10,982 10,439
Non-cash compensation (2)................ -- 11,896 -- -- --
Lease expense............................ -- 3,477 73,283 34,515 51,165
Depreciation and amortization............ 4,188 4,385 4,845 2,152 10,659
Loss on impairment of investment
in hotel lease contracts (3)............ -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Operating income (loss).................. 15,550 9,793 31,554 13,165 9,519
Other income (expense):
Interest, net........................... 146 501 498 204 390
Other, net.............................. 346 -- 431 474 1,391
Loss on sale of investment
in hotel real estate (4).............. -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Income (loss) before income tax expense
(benefit)............................... 16,042 10,294 32,483 13,843 11,300
Income tax expense (benefit) (5)......... -- 4,117 12,986 5,528 4,436
---------- ---------- ---------- ---------- ----------
Income (loss) before minority interest... 16,042 6,177 19,497 8,315 6,864
Minority interest........................ -- -- 18 24 209
---------- ---------- ---------- ---------- ----------
Net income (loss)........................ $ 16,042 $ 6,177 $ 19,479 $ 8,291 $ 6,655
========== ========== ========== ========== ==========
Pro forma net income (loss) per common
share :
Basic...................................
Diluted.................................
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents................ $ 14,035 $ 11,168 $ 2,432 $ 1,652
Total assets............................. 38,420 88,204 118,185 161,157
Long-term debt........................... 1,270 541 370 --
Total equity............................. 24,345 56,886 80,730 92,607
OTHER FINANCIAL DATA:
EBITDA (unaudited) (6)................... $ 14,178 $ 36,812 $ 15,767 $ 21,360
Net cash provided by operating
activities:............................. 15,331 12,517 18,359 9,593
Net cash (used in) provided by investing
activities:............................. (4,338) (35,707) 2,674 (27,707)
Net cash (used in) provided by financing
activities.............................. (13,860) 14,454 (19,298) 15,599
TOTAL HOTEL DATA (UNAUDITED): (7)
Total hotel revenues..................... $1,056,279 $1,326,581 $1,600,958
Number of hotels (8)..................... 150 212 223
Number of rooms (8)...................... 35,044 43,178 45,329

<CAPTION>
SUCCESSOR
----------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------- ------------------------
COMBINED PRO FORMA PRO FORMA
1998(1) 1998 1999 1999
----------- ----------- ---------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Lodging revenues:
Rooms................................... $ 182,963 $ 182,963 $ 183,695 $ 183,695
Other departmental...................... 10,959 10,959 10,693 10,693
Net management fees...................... 40,781 30,995 33,275 28,967
Other fees............................... 20,454 15,741 12,691 12,034
---------- ---------- ---------- ----------
Total revenues...................... 255,157 240,658 240,354 235,389
Lodging expenses:
Rooms................................... 41,229 41,229 44,237 44,237
Other departmental...................... 6,636 6,636 6,975 6,975
Property costs.......................... 52,759 52,759 56,258 56,258
General and administrative............... 11,937 12,399 14,069 14,513
Payroll and related benefits............. 21,421 19,052 19,619 20,069
Non-cash compensation (2)................ -- -- -- --
Lease expense............................ 85,680 85,680 89,174 87,174
Depreciation and amortization............ 12,811 18,184 20,833 20,833
Loss on impairment of investment
in hotel lease contracts (3)............ -- -- 16,406 16,406
---------- ---------- ---------- ----------
Operating income (loss).................. 22,684 4,719 (27,217) (31,076)
Other income (expense):
Interest, net........................... 594 1,169 1,368 1,630
Other, net.............................. 1,865 (174) 1,516 (9)
Loss on sale of investment
in hotel real estate (4).............. -- -- (876) --
---------- ---------- ---------- ----------
Income (loss) before income tax expense
(benefit)............................... 25,143 5,714 (25,209) (29,455)
Income tax expense (benefit) (5)......... 9,964 1,155 (5,078) (5,203)
---------- ---------- ---------- ----------
Income (loss) before minority interest... 15,179 4,559 (20,131) (24,252)
Minority interest........................ 233 2,826 (12,514) (16,447)
---------- ---------- ---------- ----------
Net income (loss)........................ $ 14,946 $ 1,733 $ (7,617) $ (7,805)
========== ========== ========== ==========
Pro forma net income (loss) per common
share :
Basic................................... $ 0.27 $ (1.22)
Diluted................................. $ 0.27 $ (1.22)
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents................ $ 1,652 $ 22,440
Total assets............................. 161,157 142,459
Long-term debt........................... -- --
Total equity............................. 92,607 60,006
OTHER FINANCIAL DATA:
EBITDA (unaudited) (6)................... $ 37,127 $ 10,229 $ 7,771 $ 2,515
Net cash provided by operating
activities:............................. 27,952 23,793
Net cash (used in) provided by investing
activities:............................. (25,033) (10,121)
Net cash (used in) provided by financing
activities.............................. (3,699) 7,116
TOTAL HOTEL DATA (UNAUDITED): (7)
Total hotel revenues..................... $1,490,132 $1,042,488 $1,202,000 $1,018,329
Number of hotels (8)..................... 176 155 158 158
Number of rooms (8)...................... 35,214 29,174 29,379 29,379
</TABLE>

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(1) Represents the sum of the balances from the predecessor for the period from
January 1, 1998 to June 1, 1998 and the successor for the period from June
2, 1998 to December 31, 1998.

(2) Represents a non-recurring expense related to the issuance of 785,533 shares
of common stock to executives and key employees of Old Interstate in
consideration for the cancellation of stock options issued by one of Old
Interstate's predecessors in 1995.

(3) Represents a non-cash impairment charge on the Company's leased hotel
intangible assets resulting from a permanent impairment of the future
profitability of 42 of the Company's leased hotels, which experienced lower
than expected operating cash flows during 1999, primarily due to decreased
occupancy rates and higher operating costs caused by a significant
over-supply of mid-scale, upper economy and budget hotels in certain
markets.

(4) Represents a loss resulting from the sale of the Company's equity interests
in The Charles Hotel Complex on June 18, 1999, which was allocated 100% to
Wyndham through minority interest.

(5) Prior to 1996, Old Interstate and its predecessors were organized as S
corporations, partnerships and limited liability companies and, accordingly,
were not subject to federal or significant state income taxes.

(6) EBITDA represents earnings (losses) before interest, income tax expense
(benefit), depreciation and amortization and the loss on impairment of
investment in hotel lease contracts. The 1998 and 1999 pro forma EBITDA was
calculated based on the Company's 45% share of EBITDA for the full year, and
historical 1999 EBITDA was calculated based on the Company's 45% share of
EBITDA for the period from June 18, 1999 to December 31, 1999. Management
believes that EBITDA is a useful measure of operating performance because it
is industry practice to evaluate hotel properties based on operating income
before interest, taxes, depreciation and amortization, which is generally
equivalent to EBITDA, and EBITDA is unaffected by the debt and equity
structure of the property owner. EBITDA, as calculated by the Company, may
not be consistent with computations of EBITDA by other companies. EBITDA
does not represent cash flow from operations as defined by generally
accepted accounting principles, 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 generally accepted accounting principles for
purposes of evaluating the Company's results of operations.

(7) Represents all hotels, including the leased hotels, for which the Company
provides management or related services.

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

6
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

In addition to historical information, this Report contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 and information based on the beliefs of the Company's management, as well
as assumptions made by and information currently available to the Company's
management. When used herein, the words or phrases "will likely result," "are
expected to," "will continue," "anticipates," "believes," "intends,"
"estimates," "projects" or similar expressions, as they relate to the Company or
the Company's management, are intended to identify these forward-looking
statements. Such statements are subject to risks and uncertainties that could
cause the Company's business and results of operations to differ materially from
those reflected in the Company's forward-looking statements.

Forward-looking statements are not guarantees of future performance. They
are subject to the Company:

- reversing the current negative trend in its business and financial
results;

- successfully implementing its business strategy;

- limiting the costs and realizing the expected benefits of that strategy;
and

- generating sufficient cash flow to fund its lease payments, debt service
requirements, working capital needs and other significant expenditures.

The Company's forward-looking statements are based on trends that the
Company's management anticipates in the lodging industry and the effect on those
trends of such factors as industry capacity, the seasonal nature of the lodging
industry, product demand and pricing.

The following discussion and analysis includes discussion and analysis of
the Company's pro forma financial position and results of operations in addition
to its historical data. The pro forma discussion includes the effects of the
Spin-off, the sale of equity interests in The Charles Hotel Complex and certain
other adjustments as if all of the transactions had occurred on January 1, 1998.
Such other adjustments principally include the elimination and addition of
certain management fee and other fee revenues related to Wyndham-owned hotels,
the management of which was transferred to Wyndham, Marriott or the Company as a
result of the Spin-off. The adjustments also include the elimination of a $2.0
million one-time charge for additional incentive lease expense for 1999 paid in
settlement of a dispute with Equity Inns, Inc. resulting from the Merger, and
the addition of minority interest to reflect Wyndham's 55% non-controlling
interest in IH LLC prior to the Spin-off. In management's opinion, all material
pro forma adjustments necessary to reflect the effects of these transactions
have been made. The pro forma information does not include earnings on the
Company's pro forma cash and cash equivalents or certain one-time charges to
income relating to the Merger. Management of the Company believes that the pro
forma discussion is meaningful because the pro forma information presents a
year-to-year comparison of the financial position and results of operations of
the Company that reflects the previously mentioned transactions. However, the
pro forma information does not purport to present what the actual results of
operations of the Company would have been if the previously mentioned
transactions had occurred on such date or to project the results of operations
of the Company for any future period.

PRO FORMA YEAR ENDED DECEMBER 31, 1999 COMPARED TO PRO FORMA YEAR ENDED DECEMBER
31, 1998

Lodging revenues, which consist of rooms, food and beverage and other
departmental revenues from the leased hotels and one hotel acquired by the
Company on November 1, 1999, increased slightly on a pro forma basis to $194.4
million in 1999. This increase was partially due to revenues of $0.4 million for
the acquired hotel. The increase was offset by the net loss of ten hotel
operating leases since January 1, 1998, increased competition and general
negative trends in the limited-service hotel sector. In addition, some of the
Company's leased hotels underwent renovations, which reduced rooms available and
negatively impacted operating results.

The average daily room rate for the leased hotels increased by 6.6%, from
$71.98 during 1998 to $76.76 during 1999, and the average occupancy rate
decreased to 65.0% during 1999 from 68.2% during 1998. This resulted in a slight
increase in room revenue per available room to $49.92 during 1999. The operating
results of
7
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the Company's leased hotels were consistent with the current trends within the
lodging industry. The increase in the average daily room rate primarily resulted
from inflationary rate increases, and the decrease in the average occupancy rate
resulted from both an increase of new supply within the lodging industry and the
renovations noted above.

Pro forma net management fees decreased by $2.0 million, or 6.5%, from
$31.0 million in 1998 to $29.0 million in 1999. This decrease was due to the net
loss of 24 management contracts since January 1, 1998, primarily as a result of
the divestiture of hotels by third-party owners. Contributing to the net loss of
management contracts was the uncertainty surrounding the timing and completion
of the Merger and subsequent Spin-off, which impaired the Company's ability to
add new management contracts. Pro forma other fees decreased by $3.7 million, or
23.5%, from $15.7 million in 1998 to $12.0 million in 1999. This decrease was
due to the decrease in the total number of hotels operated by the Company in
1999 as compared to 1998. A significant portion of this decrease resulted from a
decrease in pro forma insurance revenues, which decreased by $1.4 million from
1998 to 1999. This decrease was primarily due to the decrease in the total
number of hotels operated by the Company in 1999 as compared to 1998 and a
reduction in the amount of financial indemnity revenue for the Company's
self-insured health and welfare plan.

Lodging expenses consist of rooms, food and beverage, property costs and
other departmental expenses from the leased hotels and one hotel acquired by the
Company on November 1, 1999. Pro forma lodging expenses increased by $6.9
million, or 6.8%, from $100.6 million in 1998 to $107.5 million in 1999. This
increase was partially due to incremental expenses related to the acquired
hotel. For the leased hotels, increased competition resulting from an increased
supply of limited-service hotels in certain markets required higher operating
costs to maintain revenue levels during 1999. In addition, the Company entered
into leases for two newly constructed hotels during 1999 which incurred expenses
of approximately $8.5 million. The operating margin of the leased and owned
hotels decreased from 48.1% during 1998 to 44.7% during 1999 due primarily to
the increased costs associated with the leased hotels. The Company expects the
increased competition and over-supply of limited-service hotels to continue to
affect negatively the future operating margins of the Company's leased hotels.

General and administrative expenses are associated with the management of
hotels and consist primarily of centralized management expenses such as
operations management, sales and marketing, finance and other hotel support
services, as well as general corporate expenses. Pro forma general and
administrative expenses increased by $2.1 million, or 17.0%, from $12.4 million
in 1998 to $14.5 million in 1999. This increase resulted in part from a $2.0
million deficiency between the amount of premiums received as compared to actual
and estimated claims incurred under the Company's self-insured health and
welfare plan. Pro forma general and administrative expenses as a percentage of
pro forma revenues increased to 6.2% during 1999 compared to 5.2% during 1998.
This increase was primarily due to the decrease in total revenues and the
increase in general and administrative expenses.

Pro forma depreciation and amortization increased by $2.6 million, or
14.6%, from $18.2 million in 1998 to $20.8 million in 1999. This increase was
due to accelerated amortization of $2.0 million in 1999 related to three leased
hotels that were sold by Equity Inns, Inc., and the incremental depreciation
related to one hotel acquired by the Company on November 1, 1999. Future
terminations of hotel leases by Equity Inns, Inc. could result in accelerated
amortization of the remaining leased hotel intangible assets.

The loss on impairment of investment in hotel lease contracts of $16.4
million in 1999 represents a non-cash impairment loss related to the Company's
leased hotel intangible assets. The loss was the result of a permanent
impairment of the future profitability of 42 of the Company's leased hotels for
the remainder of the hotel lease contract terms. These hotels had experienced
lower than expected operating cash flows during 1999, primarily due to decreased
occupancy rates and higher operating costs resulting from a significant over-
supply of mid-scale, upper economy and budget hotels in certain markets.
Management will continue to evaluate the recoverability of the remaining leased
hotel intangible assets on a quarterly basis based on the financial results of
these properties compared to future expectations. A significant decrease in
occupancy rates or average daily room rates or a significant increase in
operating costs from expectations could trigger future impairment.

8
<PAGE> 10

Pro forma operating income decreased by $35.8 million from $4.7 million in
1998 to a pro forma operating loss of $31.1 million in 1999. This decrease is
primarily due to the decrease in total revenues and the increase in operating
expenses from 1998 to 1999, including the loss on impairment of investment in
hotel lease contracts, as discussed above.

Pro forma income tax expense (benefit) for both 1998 and 1999 was computed
based on an effective tax rate of 40% after reduction of minority interest.

Pro forma minority interest reflects Wyndham's 55% non-controlling interest
in IH LLC, the successor to the third-party hotel management and leasing
businesses previously conducted by Old Interstate prior to the Merger.

As a result of the changes noted above, a pro forma net loss of $7.8
million was incurred in 1999 as compared to pro forma net income of $1.7 million
in 1998.

HISTORICAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO HISTORICAL YEAR ENDED
DECEMBER 31, 1998

Lodging revenues increased slightly to $194.4 million in 1999 partially due
to revenues of $0.4 million for one hotel acquired by the Company on November 1,
1999. The increase was offset by the net loss of ten hotel operating leases
since January 1, 1998, increased competition and general negative trends in the
limited-service hotel sector. In addition, some of the Company's leased hotels
underwent renovations, which reduced rooms available and negatively impacted
operating results.

Net management fees decreased by $7.5 million, or 18.4%, from $40.8 million
in 1998 to $33.3 in 1999. This decrease was due to the net loss of 53 management
contracts since January 1, 1998, which included 29 hotels whose management was
transferred to either Wyndham or Marriott in connection with the Merger and
Spin-off. Contributing to the net loss of management contracts was the
uncertainty surrounding the timing and completion of the Merger and subsequent
Spin-off, which impaired the Company's ability to add new management contracts.
Other fees decreased by $7.8 million, or 38.0%, from $20.5 million in 1998 to
$12.7 million in 1999. This decrease was due to the decrease in the total number
of hotels operated by the Company in 1999 as compared to 1998. A significant
portion of this decrease resulted from a decrease in insurance revenues, which
decreased by $3.8 million from 1998 to 1999. This decrease was primarily due to
the decrease in the total number of hotels operated by the Company in 1999 as
compared to 1998 and a reduction in the amount of financial indemnity revenue
for the Company's self-insured health and welfare plan.

Lodging expenses increased by $6.9 million, or 6.8%, from $100.6 million in
1998 to $107.5 million in 1999. This increase was partially due to incremental
expenses related to one hotel acquired by the Company on November 1, 1999. For
the leased hotels, increased competition resulting from an increased supply of
limited-service hotels in certain markets required higher operating costs to
maintain revenue levels during 1999. In addition, the Company entered into
leases for two newly constructed hotels during 1999 which incurred expenses of
approximately $8.5 million. The operating margin of the leased and owned hotels
decreased from 48.1% during 1998 to 44.7% during 1999 due primarily to the
increased costs associated with the leased hotels. The Company expects the
increased competition and over-supply of limited-service hotels to continue to
affect negatively the future operating margin of the Company's leased hotels.

General and administrative expenses increased by $2.2 million, or 17.9%,
from $11.9 million in 1998 to $14.1 million in 1999. This increase resulted in
part from a $2.0 million deficiency between the amount of premiums received as
compared to actual and estimated claims incurred under the Company's
self-insured health and welfare plan. General and administrative expenses as a
percentage of revenues increased to 5.8% during 1999 compared to 4.7% during
1998. This increase was primarily due to the decrease in total revenues and the
increase in general and administrative expenses.

Payroll and related benefits decreased by $1.8 million, or 8.4%, from $21.4
million in 1998 to $19.6 million in 1999. This decrease was due to elimination
of salaries and related benefits of employees who were terminated subsequent to
the Merger and whose positions have been eliminated. Payroll and related
benefits as a percentage of revenues decreased slightly to 8.2% during 1999
compared to 8.4% during 1998.
9
<PAGE> 11

Lease expense represents base rent and participating rent that is based on
a percentage of rooms and food and beverage revenues from the leased hotels,
adjusted for increases in the consumer price index. Lease expense increased by
$3.5 million, or 4.1%, from $85.7 million in 1998 to $89.2 million in 1999 due
to a slight increase in lodging revenues from 1998 to 1999, and from a $2.0
million one-time charge in the first quarter for additional incentive rent for
1999 paid in settlement of a dispute with Equity Inns, Inc. resulting from the
Merger.

Depreciation and amortization increased by $8.0 million from $12.8 million
in 1998 to $20.8 million in 1999. This increase was due to incremental
amortization of $5.9 million related to management contract costs associated
with the step-up in basis arising from the allocation of Merger consideration.
The management contract costs have been stated at their estimated fair market
values and are being amortized using the straight-line method over five years.
In addition, accelerated amortization of $2.0 million was incurred in 1999
related to three leased hotels that were sold by Equity Inns, Inc. Future
terminations of hotel leases by Equity Inns, Inc. could result in accelerated
amortization of the remaining leased hotel intangible assets.

Operating income decreased by $49.9 million from $22.7 million in 1998 to
an operating loss of $27.2 million in 1999. This decrease is primarily due to
the decrease in total revenues and the increase in operating expenses from 1998
to 1999, including the loss on impairment of investment in hotel lease
contracts, as discussed above.

Other income consists primarily of equity in earnings from The Charles
Hotel Complex.

Loss on sale of investment in hotel real estate resulted from the sale of
the Company's equity interests in The Charles Hotel Complex on June 18, 1999.

Income tax expense (benefit) for both 1998 and 1999 was computed based on
an effective tax rate of 40% after reduction of minority interest, except for
the $0.9 million loss on the sale of equity interests in The Charles Hotel
Complex in 1999, which was allocated 100% to Wyndham.

Minority interest in 1999 primarily reflects Wyndham's 55% non-controlling
interest in IH LLC that it retained after the Spin-off.

As a result of the changes noted above, a net loss of $7.6 million was
incurred in 1999 as compared to net income of $14.9 million in 1998.

HISTORICAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO HISTORICAL YEAR ENDED
DECEMBER 31, 1997

Total revenues increased by $24.8 million, or 10.7%, from $230.4 million in
1997 to $255.2 million in 1998. The most significant portion of this increase
related to lodging revenues, which increased by $26.0 million, or 15.5%, from
$167.9 million in 1997 to $193.9 million in 1998. This increase was due to the
addition of the operations of the leased hotels since their respective inception
dates.

The average daily room rate for the leased hotels increased by 6.0%, from
$67.93 during 1997 to $71.98 during 1998, and the average occupancy rate
decreased to 68.2% during 1998 from 71.1% during 1997. This resulted in an
increase in room revenue per available room of 1.7% to $49.08 during 1998. The
operating results of the Company's leased hotels were consistent with the trends
within the lodging industry during the same time period. The increase in the
average daily room rate primarily resulted from inflationary rate
10
<PAGE> 12

increases. The decrease in the average occupancy rate primarily resulted from an
increase of new supply within the lodging industry.

Net management fees increased by $1.7 million, or 4.2%, from $39.1 million
in 1997 to $40.8 in 1998. This increase was due to increased revenues associated
with incentive management fees earned as a result of the performance improvement
of existing managed hotels. Other fees decreased by $2.9 million, or 12.7%, from
$23.4 million in 1997 to $20.5 million in 1998 due to a decrease in the total
number of hotels operated by the Company in 1998 as compared to 1997. Other fees
also include insurance revenues of $8.4 million in 1998 compared to $9.1 million
in 1997.

Lodging expenses increased by $15.0 million, or 17.5%, from $85.6 million
in 1997 to $100.6 million in 1998. This increase was due to the addition of the
operations of the leased hotels since their respective inception dates. The
operating margin of the leased hotels decreased from 49.0% during 1997 to 48.1%
during 1998.

General and administrative expenses decreased by $1.3 million, or 9.7%,
from $13.2 million in 1997 to $11.9 million in 1998. This decrease was primarily
due to a reduction in development activities and legal and accounting costs.
General and administrative expenses as a percentage of revenues decreased to
4.7% during 1998 compared to 5.7% during 1997. This decrease was primarily due
to the increase in lodging revenues resulting from the inclusion of the
operations of the leased hotels since their respective inception dates.

Payroll and related benefits decreased slightly by $0.5 million, or 2.2%,
from $21.9 million in 1997 to $21.4 million in 1998. Payroll and related
benefits as a percentage of revenues decreased to 8.4% during 1998 compared to
9.5% during 1997, primarily due to the increase in lodging revenues resulting
from the inclusion of the operations of the leased hotels since their respective
inception dates.

Lease expense increased by $12.4 million, or 16.9%, from $73.3 million in
1997 to $85.7 million in 1998. This increase was due to the addition of the
operations of the leased hotels since their respective inception dates.

Depreciation and amortization increased by $8.0 million from $4.8 million
in 1997 to $12.8 million in 1998. This increase was due to incremental
amortization of management contract costs associated with the step-up in basis
arising from the allocation of Merger consideration. The management contract
costs have been stated at their estimated fair market values and are being
amortized using the straight-line method over five years.

Operating income decreased by $8.9 million, or 28.1%, from $31.6 million in
1997 to $22.7 million in 1998. The operating margin decreased from 13.7% during
1997 to 8.9% during 1998. This decrease in operating income and in the operating
margin reflects the inclusion of the operating results of the leased hotels
since their respective inception dates and the increase in depreciation and
amortization during 1998.

Other income increased by $1.5 million primarily due to an increase in
equity in earnings from The Charles Hotel Complex, which resulted from the
Company's acquisition of additional equity interests in The Charles Hotel
Complex during the latter half of 1998.

Income tax expense for both 1997 and 1998 was computed based on an
effective tax rate of 40%.

As a result of the changes noted above, net income decreased by $4.6
million, or 23.3%, from $19.5 million in 1997 to $14.9 million in 1998. The net
income margin decreased from 8.5% during 1997 to 5.9% during 1998, reflecting
the inclusion of the operating results of the leased hotels since their
respective inception dates and the increase in depreciation and amortization
during 1998.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash and cash equivalent assets were $22.4 million at
December 31, 1999 compared to $1.7 million at December 31, 1998, and current
assets exceeded current liabilities by $5.6 million at December 31, 1999. In
connection with the Spin-off, Wyndham provided working capital to the Company in
the amount of $16.3 million, less positive working capital of IH LLC.

11
<PAGE> 13

In addition to the working capital provided by Wyndham, the Company's
principal source of liquidity during 1999 was cash from operations. Net cash
provided by operating activities was $23.8 million during 1999 compared to $28.0
million during 1998. The decrease resulted primarily from a decrease in
operating income (adjusted for non-cash items) of $20.3 million from 1998 to
1999, offset by an increase of $16.1 million in cash provided by changes in
assets and liabilities. Net cash of $10.1 million was used in investing
activities during 1999 compared to net cash of $25.0 million used in investing
activities during 1998. The increase was primarily related to the receipt of
$13.6 million of proceeds from the sale of equity interests in The Charles Hotel
Complex during 1999 and a decrease of $17.5 million in amounts paid in
connection with the Merger during 1999 compared to 1998. These amounts were
offset by the Company's acquisition of one hotel for a total acquisition cost,
including closing costs, of $13.0 million, which was funded with cash received
from Wyndham in connection with the Spin-off. The Company's capital expenditure
budget for the year ending December 31, 2000 relating to current operations is
approximately $150,000 consisting primarily of expenditures for office and
telephone equipment. Net cash of $7.1 million was provided by financing
activities during 1999 compared to net cash of $3.7 million used in financing
activities during 1998. During 1999, $32.0 million was received from Wyndham in
connection with the Spin-off and $2.1 million was received from Marriott in
exchange for 4% of the Company's common stock. These amounts were offset by the
use of $11.9 million for net distributions to Wyndham and the repayment of $11.6
million that was borrowed from related entities to meet short-term cash
requirements in connection with Old Interstate's centralized cash accounts.

In February 2000, the Company entered into a $7.6 million limited-recourse
mortgage note that is collateralized by one hotel that was acquired by the
Company during 1999. Monthly payments are due based on a 25-year amortization
schedule for principal, with interest based on variable rate options using the
prime rate or the LIBOR rate. The outstanding principal balance on the note is
due and payable in 2002.

In accordance with the terms of IH LLC's limited liability company
agreement, the Company is required to distribute 55% of IH LLC's cash flows from
operations to Wyndham. At December 31, 1999, the Company's required distribution
to Wyndham amounted to $4.0 million. In addition, the agreement requires the
Company to allocate between IH LLC and the Company the costs and expenses
relating to services provided by one party for the benefit of the other in
accordance with generally accepted accounting principles, on the basis of which
party benefited from the expenditure. To the extent that the allocation of any
such costs and expenses, including general and administrative expenses, cannot
be fairly apportioned, IH LLC and the Company will allocate such costs and
expenses based upon their respective gross revenues, so that each party's profit
margins are substantially the same for similar services.

The Company intends to pursue future opportunities to manage or lease
hotels on behalf of third-party owners, as well as pursue other business
opportunities, such as selective hotel investments and the formation of
strategic alliances. Such opportunities may require capital investments by the
Company. The Company believes that the cash that was provided by Wyndham at the
time of the Spin-off and future cash flow provided by operations may be
insufficient to fund fully the execution of its business and growth strategy. As
a result, the Company will be required to obtain debt or equity financing or
modify its business plan. While the Company presently intends to seek to obtain
additional debt or equity financing, there can be no assurance that any such
financing will be available to the Company on acceptable terms, or at all. If
the Company does not obtain additional financing, its pursuit of its business
strategy and growth may be impaired. Management is currently pursuing possible
alternatives to augment its capital resources to enable it to more effectively
pursue its growth strategy. The principal focus of this effort to date has been
potential capital partners. There can be no assurance that these efforts will be
successful or, if so, as to the timing or terms thereof.

In the first quarter of 2000, the Company has entered into management
contracts for and commenced management of nine mid-scale, upper economy and
budget hotels and one luxury hotel. The Company has also entered into management
contracts to manage five hotels which are currently scheduled to open in either
2000 or 2001.

12
<PAGE> 14

YEAR 2000 COMPLIANCE

The Company did not experience any significant malfunctions or errors in
its operating or business systems when the date changed from 1999 to 2000. Based
on operations since January 1, 2000, the Company does not expect any significant
impact to its ongoing business as a result of year 2000 computer complications.
However, it is possible that the full impact of the date change, which was a
concern due to computer programs that use two digits instead of four digits to
define years, has not been fully recognized. For example, it is possible that
year 2000 or similar issues may occur with billing, payroll or financial
closings at quarter- or year-end. The Company believes that any such problems
are likely to be minor and correctable. In addition, the Company could still be
negatively impacted if the year 2000 or similar complications adversely affect
its customers or suppliers. The Company currently is not aware of any
significant year 2000 or similar problems that have arisen for its customers or
suppliers.

The Company expended approximately $2.0 million on year 2000 readiness
efforts from 1997 to 1999. These efforts included replacing some outdated,
noncompliant hardware and software, as well as identifying and remediating year
2000 problems. In connection with the Spin-off, Wyndham agreed to pay up to
$929,000 of the corporate level year 2000 compliance related expenses, and this
amount was funded into an escrow account at the time of the Spin-off. In
addition, to the extent that the Company is responsible for any year 2000
compliance related expenses with respect to the leased hotels, Wyndham is
obligated to indemnify the Company for up to $1.2 million of such expenses. The
Company is in the process of calculating the total costs to be reimbursed by
Wyndham, and intends to submit such costs to Wyndham for reimbursement in the
second quarter of 2000. Any remaining expenses not funded by Wyndham will be
funded by the Company through operating cash flow.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The quantitative and qualitative disclosures required by this item and by
Rule 305 of SEC Regulation S-K are not material to the Company at this time.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is set forth in the Company's
Consolidated Financial Statements and Supplementary Data contained in this
Report and is incorporated herein by reference. Specific financial statements
and supplementary data can be found at the pages listed below:

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-1
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-2
Consolidated Statements of Operations for the year ended
December 31, 1997, for the period from January 1, 1998 to
June 1, 1998, for the period from June 2, 1998 to December
31, 1998 and for the year ended December 31, 1999......... F-3
Consolidated Statements of Stockholders' Equity for the year
ended December 31, 1997, for the period from January 1,
1998 to June 1, 1998, for the period from June 2, 1998 to
December 31, 1998 and for the year ended December 31,
1999...................................................... F-4
Consolidated Statements of Cash Flows for the year ended
December 31, 1997, for the period from January 1, 1998 to
June 1, 1998, for the period from June 2, 1998 to December
31, 1998 and for the year ended December 31, 1999......... F-5
Notes to Consolidated Financial Statements.................. F-6
</TABLE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

13
<PAGE> 15

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Thomas F. Hewitt 56 Chairman of the Board and Chief Executive Officer
J. William Richardson 52 Vice Chairman and Chief Financial Officer
Kevin P. Kilkeary 48 President and Chief Operating Officer
Executive Vice President, International Operations and
Henry L. Ciaffone 59 Development
Charles R. Tomb 45 Senior Vice President, Development and Acquisitions
Timothy Q. Hudak 37 Senior Vice President and General Counsel
Michael L. Ashner 47 Director
Benjamin D. Holloway 75 Director
Stephen P. Joyce 40 Director
Phillip H. McNeill, Sr. 61 Director
Anne L. Raymond 41 Director
</TABLE>

THOMAS F. HEWITT became the Company's Chairman of the Board and Chief
Executive Officer in March 1999. Mr. Hewitt previously was President and Chief
Operating Officer of Carnival Resorts & Casinos, where he headed all hotel and
resort operations. At Carnival, Mr. Hewitt was responsible for over 80 hotels
and 17,000 employees in the United States, South America, the Caribbean and
Mexico. Mr. Hewitt joined Carnival in 1985 (when it was known as The Continental
Companies) after a career spanning more than 20 years with Sheraton Corporation,
most recently as the President of its North American division from 1983 to 1985.
Mr. Hewitt's term as a Class A-3 director expires in 2002.

J. WILLIAM RICHARDSON has served as the Company's Vice Chairman and Chief
Financial Officer since July 1999. Previously Mr. Richardson was the Company's
Chief Financial Officer and Executive Vice President, Finance and
Administration, and also served in those capacities for Old Interstate, from
1994 until June 1998. Before that, Mr. Richardson served as Controller and
Treasurer of Old Interstate since 1988. Prior to 1988, Mr. Richardson was Vice
President and a partner in an Atlanta-based hotel management and development
company and also worked with Marriott Corporation. His experience in the
hospitality industry spans over a period of 28 years. He served as the Company's
acting President and Chief Executive Officer from January to March of 1999.

KEVIN P. KILKEARY became the Company's President and Chief Operating
Officer in April 1999. Mr. Kilkeary previously served as the Company's Executive
Vice President and as Senior Vice President, as well as President and Chief
Operating Officer of the Company's subsidiary, Crossroads Hospitality Company.
Mr. Kilkeary joined Old Interstate in 1972 and has held a variety of other
positions in hotels and at the corporate office, including executive positions
as General Manager, Regional Vice President of Operations, Vice President of
Sales and Marketing and Vice President of Staff Operations.

HENRY L. CIAFFONE is the Company's Executive Vice President, International
Operations and Development, a position he has held since January 1999. Mr.
Ciaffone, who joined Old Interstate in 1989, previously served as the Company's
Senior Vice President and Treasurer. Prior to joining Old Interstate, Mr.
Ciaffone held positions in hotel finance and real estate development at Koala
Inns of America, Sheraton Corporation and the Howard Johnson Company.

CHARLES R. TOMB is the Company's Senior Vice President, Development and
Acquisitions. He joined Old Interstate in 1992, and most recently, he oversaw
Old Interstate's development activities in the Western Region as Vice President
of Development. Mr. Tomb has approximately 20 years of experience in the hotel
industry, including prior positions with Holiday Inns Worldwide, Americana
Hotels & Resorts and Hyatt Hotels.

TIMOTHY Q. HUDAK joined Old Interstate in 1992 as Assistant General Counsel
and now serves as the Company's Senior Vice President and General Counsel. Prior
to joining Old Interstate, Mr. Hudak held the

14
<PAGE> 16

position of Associate General Counsel for Cyclops Industries, Inc. and, prior to
that, practiced law at the firm of Tucker Arensberg.

MICHAEL L. ASHNER joined the Board in May 1999. Mr. Ashner presently serves
as President and Chief Executive Officer of Winthrop Financial Associates, a
real estate investment banking firm which owns and manages approximately 6
million square feet of office and commercial space and 300 hotel rooms, a
general partner of Cecil Associates, which owns 20 Days Inns hotels, and Chief
Executive Officer of Newkirk Associates, which owns and manages more than 40
million square feet of office and retail space. Mr. Ashner also serves as
President of Exeter Capital Corporation and from 1984 to 1994 served as
President and Chief Executive Officer of National Property Investors, Inc., a
real estate investment banking firm which owned and managed over 40,000
apartments, 5 million square feet of office and commercial space and 4,500 hotel
rooms. Mr. Ashner also serves as a member of the Boards of Directors of
Nexthealth, Inc. and NBTY, Inc. Mr. Ashner's term as a Class A-2 director
expires in 2001.

BENJAMIN D. HOLLOWAY joined the Board in May 1999. Mr. Holloway is
presently a financial consultant who serves as a member of the Board of
Directors of Alliance Capital Management L.P. Mr. Holloway served in numerous
capacities over a nearly 40-year career with Equitable Life Assurance Society,
where he most recently served as Vice Chairman of the Board (and director) from
1987 to 1990. Mr. Holloway also served as a director or trustee of many
charitable and educational organizations, including Duke University, The
American Academy in Rome and the Cathedral Church of St. John the Divine. Mr.
Holloway's term as a Class A-2 director expires in 2001.

STEPHEN P. JOYCE joined the Board in May 1999. Mr. Joyce is Senior Vice
President of Franchising for Marriott International's full-service brands,
Marriott Hotels, Resorts and Suites, and Renaissance Hotels. Mr. Joyce is a
18-year veteran of Marriott. Before joining Marriott Lodging in 1988, Mr. Joyce
was the senior manager of Marriott's Corporate Finance Group and Partnership and
Syndication Group, and has also served as a financial and operational
consultant. He currently serves on the Board of Directors of the International
Franchise Association. Mr. Joyce's term as a Class B director expires in 2001.

PHILLIP H. MCNEILL, SR. joined the Board in May 1999. Mr. McNeill is
Chairman of the Board and Chief Executive Officer of Equity Inns, Inc. and has
been Chairman and President of McNeill Investment Company, Inc. since 1977. From
1963 to 1977, he served in various capacities, including President and Chief
Executive Officer, with Schumacher Mortgage Company, Inc., a mortgage banking
firm and subsidiary of Time, Inc. Mr. McNeill has served as President and
director of the Memphis Mortgage Bankers Association and the Tennessee State
Mortgage Bankers Association. He is currently serving as a member of the Board
of Directors of National Commerce Bancorporation, a trustee of Rhodes College
and board member of the Society of Entrepreneurs and Memphis Museum System. Mr.
McNeill's term as a Class A-3 director expires in 2002.

ANNE L. RAYMOND joined the Board in May 1999. Ms. Raymond served as
Executive Vice President and Chief Investment Officer of Wyndham until April
2000. Ms. Raymond joined Wyndham in January 1998. Prior thereto, Ms. Raymond
served as Executive Vice President and Chief Financial Officer and director of
Wyndham's predecessor. Ms. Raymond's term as Class A-1 director expires on the
date of the 2000 annual meeting of stockholders of the Company.

NOMINEE FOR ELECTION AS CLASS C DIRECTOR

The Company has been advised by Wyndham and PAH-Interstate Holdings, Inc.,
the holders of the Company's Class C Common Stock, that it is the intention of
such holders to vote all of their respective Class C shares in favor of the
election of Fred J. Kleisner, as the sole Class C Director for a one-year term
to expire at the 2001 annual meeting of stockholders of the Company.

FRED J. KLEISNER, age 55, is Chief Executive Officer of Wyndham. Prior to
this position he was President and Chief Operating Officer of Wyndham since
August 1999. He was President and Chief Operating Officer of The Americas for
Starwood Hotels & Resorts Worldwide, Inc. Hotel Group from 1998 to 1999. His
experience in the lodging industry also includes senior positions with Westin
Hotels and Resorts, where he was

15
<PAGE> 17

President and Chief Operating Officer from 1995 to 1998; Old Interstate, where
he was Executive Vice President and Group President of Operations from 1990 to
1995; The Sheraton Corporation, where he was Senior Vice President, Director of
Operations, North America Division-East from 1985 to 1990; and Hilton Hotels,
where for 16 years he served as General Manager of several landmark hotels,
including The Waldorf Astoria and The Waldorf Towers in New York, The Capital
Hilton in Washington, D.C. and The Hilton Hawaiian Village in Honolulu. Mr.
Kleisner, who holds a B.A. degree in Hotel Management from Michigan State
University, completed advanced studies at the University of Virginia and
Catholic University of America.

COMMITTEES OF THE BOARD

The Board has established three directorate committees--a Compensation
Committee, an Audit Committee and a Nominating Committee.

Compensation Committee. The Compensation Committee reviews executive
salaries, administers the bonus, incentive compensation and stock option plans
of the Company and approves the salaries and other benefits of the executive
officers of the Company. In addition, the Compensation Committee consults with
the Company's management regarding pension and other benefit plans and the
compensation policies and practices of the Company. The Compensation Committee
was formed in June 1999 in connection with the Spin-off and is composed of
Benjamin D. Holloway (Chairman), Michael L. Ashner, Stephen P. Joyce and Anne L.
Raymond. The members of the Compensation Committee are not employed by the
Company or any of its affiliates ("Non-Employee Directors") and are not eligible
to receive options or other rights under any employee stock or other benefit
plan (other than plans in which only directors may participate).

Audit Committee. The Audit Committee reviews the professional services
provided by the Company's independent accountants and the independence of such
accountants from the management of the Company. The Audit Committee also reviews
the scope of the audit by the Company's independent accountants, the annual
financial statements of the Company, the Company's system of internal accounting
controls and such other matters with respect to the accounting, auditing and
financial reporting practices and procedures of the Company as it finds
appropriate or as are brought to its attention, and meets from time to time with
members of the Company's internal audit staff. The Audit Committee was formed in
June 1999 in connection with the Spin-off and is required to consist solely of
Non-Employee Directors. The members of the Audit Committee are Benjamin D.
Holloway (Chairman) and Michael L. Ashner.

Nominating Committee. The Nominating Committee was formed in June 1999 in
connection with the Spin-off and is empowered to nominate persons solely for
election as Class A directors at the annual meetings of stockholders. The
Committee will consider candidates for nominees for directors recommended by
Class A Common stockholders if such recommendations are submitted in writing to
the Secretary of the Company giving the background and qualifications of the
candidate. The Nominating Committee is composed of Michael L. Ashner, Benjamin
D. Holloway, Stephen P. Joyce and Anne L. Raymond.

DIRECTOR COMPENSATION

Directors who are Non-Employee Directors are paid an annual retainer of
$15,000 plus $1,000 for each Board meeting or working session attended in
person, as well as $500 for each Board meeting in which the director
participates by telephone. In addition, members of directorate committees are
paid $1,000 for each committee meeting attended in person on days on which the
Board does not also meet, as well as $500 for each committee meeting in which
the director participates by telephone.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth certain information regarding the
compensation paid to Thomas F. Hewitt, who is the Company's Chairman of the
Board and Chief Executive Officer, and each of the four other most highly
compensated executive officers of the Company in 1999 (collectively, the "Named
Executive Officers").

16
<PAGE> 18

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
----------------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS PAYOUTS COMPENSATION
--------------------------- ---- -------- -------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas F. Hewitt(1)................. 1999 $338,462 $450,000 225,000(2) $ 27,077(3) $ 236,722(4)
Chairman of the Board and Chief 1998 -- -- -- -- --
Executive Officer
J. William Richardson............... 1999 303,654 400,000 175,000(2) 24,292(3) 140,762(5)
Vice Chairman and Chief Financial 1998 265,123 397,684 -- 853,205(6) 3,292,485(7)
Officer
Kevin P. Kilkeary................... 1999 287,788 325,000 150,000(2) 23,023(3) 6,700(8)
President and Chief Operating 1998 242,844 273,199 -- -- 2,346,519(9)
Officer
Henry L. Ciaffone................... 1999 237,404 200,000 50,000(2) 17,515(3) 101,804(10)
Executive Vice President, 1998 181,610 187,567 -- -- 2,016,934(11)
International Operations and
Development
Charles R. Tomb..................... 1999 195,885 150,000 35,000(2) 15,671(3) 149,312(12)
Senior Vice President, Development 1998 160,284 75,000 -- -- 1,113,663(13)
and Acquisitions
</TABLE>

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

(1) Mr. Hewitt became the Chairman of the Board and Chief Executive Officer in
March 1999. Mr. Hewitt's 1999 compensation is for the period from March 1,
1999 through December 31, 1999.

(2) Consists of shares underlying options granted under the Company's Equity
Incentive Plan, with an exercise price of $4.50 per share.

(3) Consists entirely of compensation under the Company's Executive Retirement
Plan (the "ERP").

(4) Consists of restricted stock compensation under the Company's Equity
Incentive Plan of $123,173, a reimbursement of costs for relocation of
$89,730, imputed interest on a loan by the Company of $15,400, a car
allowance of $7,615 and miscellaneous expense reimbursements of $804.

(5) Consists of restricted stock compensation under the Company's Equity
Incentive Plan of $81,250, compensation for services as a director of the
Company's subsidiary, Northridge Insurance Company, of $25,000,
amortization of loan forgiveness of $23,601 and imputed interest on a loan
by the Company of $10,911.

(6) Consists of compensation under the ERP of $34,466 and a deferred
compensation payment of $818,739.

(7) Consists of stock option proceeds of $1,921,875, loan forgiveness of
$1,060,920, a special bonus of $300,000 and a change-in-control payment of
$9,690.

(8) Consists entirely of imputed interest on a loan by the Company.

(9) Consists of a change-in-control payment of $1,186,394, stock option
proceeds of $1,070,125 and loan forgiveness of $90,000.

(10) Consists of a housing allowance of $61,130, a cost of living allowance of
$30,429 and a car allowance of $10,245.

(11) Consists of a change-in-control payment of $955,314 with a tax gross up of
$479,120, stock option proceeds of $412,500 and loan forgiveness of
$170,000.

(12) Consists of amortization of loan forgiveness of $74,771, a reimbursement of
costs for relocation of $44,752, imputed interest on a loan by the Company
of $21,029 and a car allowance of $8,760.

(13) Consists of a change-in-control payment of $747,713, stock option proceeds
of $155,000, a reimbursement of costs for relocation of $111,212,
restricted stock compensation of $79,844, commissions of $11,134 and a car
allowance of $8,760.

17
<PAGE> 19

1999 STOCK OPTION GRANTS

The following table sets forth certain information with respect to options
granted to the Named Executive Officers during 1999.

OPTION GRANTS IN FISCAL YEAR 1999

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT
NUMBER OF ASSUMED ANNUAL RATES OF
SECURITIES % OF TOTAL STOCK PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED FOR OPTION TERM(2)
OPTIONS TO EMPLOYEES EXERCISE OR EXPIRATION ---------------------------
NAME GRANTED IN 1999(1) BASE PRICE DATE 5% 10%
---- ---------- --------------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas F. Hewitt........... 225,000 12.7% $4.50 2009 $636,756 $1,613,664
J. William Richardson...... 175,000 9.9% 4.50 2009 495,255 1,255,072
Kevin P. Kilkeary.......... 150,000 8.5% 4.50 2009 424,504 1,075,776
Henry L. Ciaffone.......... 50,000 2.8% 4.50 2009 141,501 358,592
Charles R. Tomb............ 35,000 2.0% 4.50 2009 99,051 251,014
</TABLE>

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

(1) Based on 1,768,000 options granted to all employees during 1999.

(2) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the rules of the Securities and Exchange Commission (the
"SEC"). The actual stock price appreciation over the ten-year option term
will likely differ from these assumed annual rates. Unless the market price
of the Common Stock appreciates over the option term, no value will be
realized from the option grants made to the executive officers.

The following table sets forth information regarding the values of the
options held by the Named Executive Officers at December 31, 1999.

OPTION VALUES AT DECEMBER 31, 1999

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
NAME DECEMBER 31, 1999 (1) AT DECEMBER 31, 1999 (1)(2)
---- ---------------------- ---------------------------
<S> <C> <C>
Thomas F. Hewitt.................................. 225,000 $ --
J. William Richardson............................. 175,000 --
Kevin P. Kilkeary................................. 150,000 --
Henry L. Ciaffone................................. 50,000 --
Charles R. Tomb................................... 35,000 --
</TABLE>

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

(1) All options held by the Named Executive Officers at December 31, 1999 were
unexercisable.

(2) The last sale price as reported on the Nasdaq SmallCap Market on April 27,
2000 was $2.69, which was below the option exercise price of $4.50.

Outstanding Options. Pursuant to the Equity Incentive Plan, the Company has
granted stock options to purchase an aggregate of 1,768,000 shares of Class A
Common Stock at an exercise price of $4.50 per share. Each of the options has a
ten-year term and becomes exercisable as to one-third of the shares covered
thereby on each of the first three anniversaries of the date of grant so long as
the holder thereof remains a full-time employee of the Company, except that the
options become immediately exercisable in the event of the holder's death,
disability or termination of employment by the Company for any reason other than
cause (as defined) or in the event a change in control occurs, including an
event in which any person or group becomes

18
<PAGE> 20

the beneficial owner of more than 50% of the outstanding shares of capital stock
of the Company entitled generally to vote in the election of directors.
Unexercised options terminate 30 calendar days after the holder's termination of
employment by the Company, except that such period is 180 days in the event of
disability and 360 days in the event of death.

COMPENSATION PLANS AND ARRANGEMENTS

Management Bonus Plan. The Company has established a Management Bonus Plan
under which all key management employees who are directly involved in the
Company's growth and success (other than Messrs. Hewitt, Richardson and
Kilkeary, whose bonuses are to be determined pursuant to their employment
agreements) are eligible to receive bonuses based upon the achievement of
specified targets and goals for the Company and the individual employee. Awards
under the Management Bonus Plan are granted by the Compensation Committee of the
Board of Directors and range from zero to specified levels depending on the
position of the individual. Currently, 85 corporate employees are eligible for
awards under the Management Bonus Plan, with 81 of such employees eligible to
receive a bonus ranging from 10% to 70% of their base salaries and four of such
employees eligible to receive up to 125% of their base salaries.

Executive Loans. Pursuant to Mr. Hewitt's employment agreement, on March 1,
1999 the Company loaned Mr. Hewitt $400,000, which loan is due on the earlier of
March 1, 2005 or 30 days after termination of his employment. If Mr. Hewitt's
employment is terminated for any reason other than cause, the loan will be
forgiven. In addition, the Company has loaned Mr. Hewitt $259,254 for payment of
income tax liabilities associated with a restricted stock grant in 1999. If, on
the earlier of February 28, 2003 or the date Mr. Hewitt's employment is
terminated other than for cause, the market value of the stock granted to Mr.
Hewitt is less than $1.5 million, the Company will forgive such loan in
proportion to the amount by which the market value of the stock granted to Mr.
Hewitt is less than $1.5 million.

In 1996, Old Interstate loaned $1.0 million to Mr. Richardson. The
remaining unpaid balance of this loan was forgiven as of June 2, 1998 in
connection with the merger of Old Interstate into Wyndham and in accordance with
the change of control provisions of his severance agreement with Old Interstate.
In 1998, the Company loaned Mr. Richardson $354,018, which loan was forgiven,
pursuant to his employment agreement, once he remained with the Company for at
least 90 days following the Spin-off. The loan is being amortized over a
60-month period beginning on September 16, 1999, so long as his employment
agreement remains in full force and effect.

On June 2, 1998, in connection with the Merger and in accordance with the
change of control provisions of their respective severance agreements with Old
Interstate, the Company forgave loans in the amount of $90,000 and $170,000 to
Messrs. Kilkeary and Ciaffone, respectively. Pursuant to Mr. Kilkeary's
employment agreement, the Company loaned Mr. Kilkeary $300,000, 50% of which
loan will be forgiven at the rate of $50,000 per year on June 17, 2000, 2001 and
2002, so long as his employment is not terminated by the Company for cause or
voluntarily by Mr. Kilkeary prior to such dates. The loan will be forgiven upon
the occurrence of a change in control.

Pursuant to Mr. Tomb's employment agreement, Mr. Tomb received a loan of
$373,857 from the Company, which was an amount equal to 50% of the severance
compensation he was entitled to receive under his severance agreement with Old
Interstate. This loan amortizes over a 30-month period beginning on June 18,
1999, and is automatically forgiven upon the expiration of his non-compete
period following termination of his employment. In addition, the Company also
loaned $238,000 to Mr. Tomb in 1998 to cover expenses incurred in his relocation
to Pittsburgh, which loan was repaid in full.

Executive Retirement Plan. Each of the General Managers of the Company's
hotels who are employees of the Company and other employees holding job
classifications of Vice President or above, including the Named Executive
Officers, is eligible to participate in the Company's Executive Retirement Plan.
The plan is intended to be a non-qualified and unfunded plan maintained
primarily for the purpose of providing deferred compensation for a select group
of management or highly compensated employees. Actual participation in the plan
is determined by the Board or the Compensation Committee.

19
<PAGE> 21

The Company annually to contributes 8.0% of each participant's base salary
to the plan and may make discretionary contributions of up to an additional 5.0%
of each participant's base salary. These discretionary contributions are based
on the Company's net increase in earnings per share in a given year. In
addition, plan participants are eligible to designate a portion (to be specified
by the Board or the Compensation Committee) of their annual cash bonus to be
contributed to the plan.

The funds contributed by the Company or participants are held in a grantor
trust established by the Company. Unless the Board or the Compensation Committee
determines that the amounts contributed to the plan on behalf of a participant
are payable earlier, in general, a participant in the plan will receive his plan
benefits one year after his retirement or termination of employment. Plan
benefits are paid out in a lump sum and are deductible by the Company and
taxable to the plan participant as ordinary income upon receipt by the
participant.

Employee Stock Purchase Plan. Under the Employee Stock Purchase Plan, each
full-time employee who has completed 12 consecutive months of employment with
the Company or a predecessor, excluding any employee whose customary employment
is not for more than 20 hours per week or more than five months per calendar
year, is eligible to participate. A participating employee may elect to
authorize the Company to withhold a maximum of 8.0% of such employee's salary.
The withheld amount is held in the participating employee's account and used to
purchase the Company shares on a semi-annual basis at a price equal to a
designated percentage, established semi-annually by the Compensation Committee,
from 85% to 100% of the average closing sale price for the Company shares as
reported by The Nasdaq SmallCap Market on the date the shares are purchased.
Such sale price may not be less than the lesser of (i) 85% of the fair market
value of such shares on the date of the regular offering of the right to
participate in such plan and (ii) 85% of the fair market value of such shares on
the date the shares are purchased. The fair market value of the shares available
for purchase by a participating employee (determined as of the offering date)
generally may not exceed $25,000 per calendar year.

Equity Incentive Plan. The Company's Equity Incentive Plan is designed to
attract and retain qualified officers and other key employees. The Equity
Incentive Plan authorizes the grant of:

- options to purchase Company shares;

- restricted shares;

- unrestricted shares; and

- deferred shares.

The Compensation Committee administers the Equity Incentive Plan and
determines to whom grants will be made and the terms and conditions thereof.

The number of Company shares that may be issued or transferred and covered
by outstanding awards granted under the Equity Incentive Plan is initially
2,300,000 shares. As of December 31, 1999 and each June 30 and December 31
thereafter, an additional positive number equal to 20% of the additional shares
of Common Stock issued during that six-month period will be added to the total
number of Company shares subject to the plan. Officers, directors, and key
employees and consultants and those of our subsidiaries may be selected to
receive benefits under the Equity Incentive Plan. Shortly after the Spin-off,
331,917 restricted shares of Class A Common Stock and options to purchase
1,768,000 shares of Class A Common Stock were granted to Company employees, and
approximately 200,000 shares are available for additional awards under the
Equity Incentive Plan.

EMPLOYMENT AND CHANGE-IN-CONTROL AGREEMENTS

The Company has entered into an employment agreement with Mr. Hewitt
pursuant to which:

-- He serves as the Company's Chairman of the Board and Chief Executive
Officer.

-- Mr. Hewitt is employed for a term beginning March 1, 1999 and ending
February 28, 2003 subject to, on the second anniversary of the date of
his employment and every even-numbered anniversary

20
<PAGE> 22

thereafter, automatic two-year extensions, unless either party gives
90 days prior written notice otherwise.

-- In the event of termination of Mr. Hewitt's employment, he will be
entitled to receive:

- his minimum bonus, if he resigns without good reason;

- his minimum bonus, an amount equal to twice his base pay and minimum
bonus, continuation for 24 months of his health and welfare
benefits, and acceleration of his restricted stock grant, if his
employment is terminated for any reason other than cause or
disability; and

- his minimum bonus for the year of termination of his employment, his
base pay and minimum bonus for a period of 12 months following the
termination of his employment, and acceleration of his restricted
stock grant, if his employment is terminated as a result of his
death or disability.

-- In the event of a change in control of the Company, Mr. Hewitt will be
entitled to:

- a $2 million cash payment, acceleration of his restricted stock
grant, and health and welfare benefits continuation, in the event
that his employment is terminated by the Company without cause or he
resigns for good reason within 36 months of the change in control,
or he terminates his employment for any reason within the first 24
months immediately following the change in control; and

- a gross-up of his compensation if he is taxed on "excess parachute
payments" under the Internal Revenue Code.

-- Mr. Hewitt has agreed to non-compete and non-solicitation provisions.

-- Mr. Hewitt is obligated to keep in strict confidence any trade secrets
and confidential business and technical information of the Company.

-- Mr. Hewitt is entitled to have his legal fees and related expenses
paid by the Company in connection with interpretation, enforcement or
defense of his rights under the employment agreement.

-- Mr. Hewitt was issued 181,917 restricted shares of the Company's Class
A Common Stock, which vests over four years. The Company also loaned
Mr. Hewitt $259,254 for payment of his income tax liabilities
associated with the restricted stock grant. If, on the earlier of
February 28, 2003 or the date Mr. Hewitt's employment is terminated
other than for cause, the market value of the stock granted to Mr.
Hewitt is less than $1.5 million, the Company will forgive such loan
in proportion to the amount by which the market value of the stock
granted to Mr. Hewitt is less than $1.5 million.

-- Additionally, the Company provided Mr. Hewitt with a loan of $400,000
which is due in either six years or 30 days after the termination of
Mr. Hewitt's employment, whichever is earlier. If Mr. Hewitt's
employment is terminated other than for cause, however, the loan will
be forgiven.

The Company has also entered into employment agreements with Mr.
Richardson, Mr. Kilkeary, Mr. Ciaffone and Mr. Tomb.

Pursuant to the terms of Mr. Richardson's employment agreement:

-- He serves as the Company's Vice Chairman and Chief Financial Officer.

-- The term of Mr. Richardson's employment is three years, ending June
17, 2002, which will be automatically extended for additional one-year
terms unless terminated by either party by giving written notice to
the other 90 days prior to a scheduled term expiration date.

-- In the event of the termination of Mr. Richardson's employment for any
reason other than cause, disability or a change in control, he will be
entitled to: (1) the greater of (a) his salary and bonus for the
immediately preceding year and (b) his salary and bonus for the
remainder of the term of the agreement and (2) the continuation of
health and welfare benefits for one year following termination of
employment.

21
<PAGE> 23

-- In the event of a change in control of the Company, Mr. Richardson
will be entitled to:

- a $1.5 million cash payment, acceleration of his restricted stock
grant and health and welfare benefits continuation, in the event that
his employment is terminated by the Company without cause within 36
months of the change in control or if he terminates his employment for
any reason within the first 12 months immediately following the change
in control; and

- a gross-up of his compensation if he is taxed on "excess parachute
payments" under the Internal Revenue Code.

-- Mr. Richardson has agreed to non-compete and non-solicitation
provisions.

-- Mr. Richardson is obligated to keep in strict confidence any trade
secrets and confidential business and technical information of the
Company.

-- Mr. Richardson is entitled to have his legal fees and related expenses
paid by the Company in connection with interpretation, enforcement or
defense of his rights under the employment agreement.

-- Mr. Richardson was issued 150,000 restricted shares of the Company's
Class A Common Stock which vests over three years.

-- The Company forgave a loan in the amount of $354,018 once Mr.
Richardson had remained with the Company for at least 90 days
following the Spin-off. The loan is being amortized over a 60-month
period beginning on September 16, 1999, so long as his employment
agreement remains in full force and effect.

Pursuant to the terms of Mr. Kilkeary's employment agreement:

-- Mr. Kilkeary serves as the Company's President and Chief Operating
Officer.

-- The term of Mr. Kilkeary's employment is three years ending, June 17,
2002, which will be automatically extended for additional one-year
terms unless terminated by either party by giving written notice to
the other 90 days prior to a scheduled term expiration date.

- In the event of the termination of Mr. Kilkeary's employment for any
reason other than cause, disability or a change in control, he will be
entitled to: (1) the greater of (a) his salary and bonus for the
immediately preceding year and (b) his salary and bonus for the
remainder of the agreement and (2) the continuation of health and
welfare benefits for one year following termination of employment.

-- In the event of a change in control of the Company, Mr. Kilkeary will
be entitled to:

- a $1 million cash payment and health and welfare benefits
continuation, in the event that his employment is terminated by the
Company without cause within 36 months of the change in control or if
he terminates his employment for any reason within the first 12 months
immediately following the change in control; and

- a gross-up of his compensation if he is taxed on "excess parachute
payments" under the Code.

-- Mr. Kilkeary has agreed to non-compete and non-solicitation
provisions.

-- Mr. Kilkeary is obligated to keep in strict confidence any trade
secrets and confidential business and technical information of the
Company.

-- Mr. Kilkeary is entitled to have his legal fees and related expenses
paid by the Company in connection with enforcing or defending his
rights under the employment agreement.

-- The Company loaned Mr. Kilkeary $300,000, 50% of which will be
forgiven over a three-year period, at the rate of $50,000 per year on
June 17, 2000, 2001 and 2002, so long as his employment is not
terminated by the Company for cause or voluntarily by Mr. Kilkeary
prior to such dates. The loan will be forgiven upon the occurrence of
a change in control.

22
<PAGE> 24

Pursuant to the terms of Mr. Ciaffone's employment agreement:

-- The term of Mr. Ciaffone's employment is three years, ending November
30, 2001, which will be automatically extended for additional one-year
terms unless otherwise terminated by either party by giving written
notice to the other 90 days prior to a scheduled term expiration date.

-- In the event of the termination of Mr. Ciaffone's employment for any
reason other than cause or disability, he will be entitled to: (1) the
greater of (a) his salary and bonus for the immediately preceding six
months and (b) his salary and bonus for the remainder of the term of
the agreement, and (2) the continuation of health and welfare benefits
for six months following termination of employment.

-- Mr. Ciaffone has agreed to non-compete and non-solicitation
provisions.

-- Mr. Ciaffone is obligated to keep in strict confidence any trade
secrets and confidential business and technical information of the
Company.

-- Mr. Ciaffone is entitled to have his legal fees and related expenses
paid by the Company in connection with interpretation, enforcement or
defense of his rights under the employment agreement.

Pursuant to the terms of Mr. Tomb's employment agreement:

-- The term of Mr. Tomb's employment is three years, ending June 1, 2001,
which will be automatically extended for additional one-year terms
unless otherwise terminated by either party by giving written notice
to the other 90 days prior to a scheduled term expiration date.

-- As a result of the change in control triggered by the merger of Old
Interstate into Wyndham, Mr. Tomb received 50% of the severance
compensation he was entitled to receive under his severance agreement
with Old Interstate.

-- Mr. Tomb received a loan of $373,857, which was an amount equal to the
remaining 50% of such severance compensation, which amortizes over a
30-month period beginning on June 18, 1999, and is automatically
forgiven upon the expiration of his non-compete period following
termination of his employment.

-- If Mr. Tomb terminates his employment for reasons other than a change
in control or a material change in his job responsibilities, he is
required to repay the unamortized portion of the severance loan.

-- In the event the Company terminates Mr. Tomb without cause or either
Mr. Tomb or the Company terminates his employment as the result of a
change in control or a material change in his job responsibilities
during the initial three-year term of his employment, he is entitled
both to forgiveness of the severance loan and continuation of health
and welfare benefits for the greater of 18 months or the remainder of
the term of the agreement.

-- If the Company terminates Mr. Tomb without cause or he terminates his
employment as a result of a change in control or a material change in
his job responsibilities after the expiration of the initial three-
year term of his employment, he is entitled to an amount equal to his
salary and bonus for up to a maximum of six months.

-- Mr. Tomb has agreed to non-compete and non-solicitation provisions.

-- Mr. Tomb is obligated to keep in strict confidence any trade secrets
and confidential business and technical information of the Company.

-- Mr. Tomb is entitled to have his legal fees and related expenses paid
by the Company in connection with interpretation, enforcement or
defense of his rights under the employment agreement.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee was formed in June 1999 and currently is
composed of Benjamin D. Holloway (Chairman), Michael L. Ashner, Stephen P. Joyce
and Anne L. Raymond.
23
<PAGE> 25

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

BENEFICIAL OWNERSHIP OF COMMON STOCK

The following table sets forth certain information regarding the beneficial
ownership of Class A Common Stock as of April 27, 2000 by (1) each person known
by the Company to own beneficially more than 5% of the Class A Common Stock, (2)
each director and Named Executive Officer of the Company, and (3) all directors
and executive officers of the Company as a group. Unless indicated otherwise,
the address for each of the persons named in the table is c/o Interstate Hotels
Corporation, Foster Plaza Ten, 680 Andersen Drive, Pittsburgh, Pennsylvania
15220. For purposes of the table, a person or group of persons is deemed to have
"beneficial ownership" of any shares as of a given date which such person has
the right to acquire within 60 days after such date.

<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
NAME SHARES OWNED SHARES OWNED
---- ------------ -------------
<S> <C> <C>
Thomas F. Hewitt............................................ 191,434(1) 3.0%
J. William Richardson....................................... 151,476(2) 2.4%
Kevin P. Kilkeary........................................... 166 *
Henry L. Ciaffone........................................... -- --
Charles R. Tomb............................................. 123 *
Michael L. Ashner........................................... 5,000 *
Benjamin D. Holloway........................................ -- --
Stephen P. Joyce............................................ -- --
Phillip H. McNeill, Sr...................................... 36,230 *
Anne L. Raymond............................................. 20,177 *
Fred J. Kleisner............................................ -- --
KFP Grand, Ltd.(3).......................................... 613,666 9.6%
Gary M. Goldberg and affiliates(4).......................... 432,547 6.8%
Corporate Capital, L.L.C.(5)................................ 360,000 5.6%
All directors and executive officers as a group (11
persons).................................................. 404,606 6.3%
</TABLE>

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

* Less than 1%

(1) Includes 181,917 restricted shares, 25% of which vests on each of March 1,
2000, March 1, 2001, March 1, 2002 and February 28, 2003, respectively.

(2) Includes 150,000 restricted shares, 33.33% of which vests on each of June
18, 2000, June 18, 2001 and June 2002, respectively. Also includes 43 shares
held by Mr. Richardson's daughter.

(3) As reported in a Schedule 13D filed with the SEC on July 7, 1999. The
address of KFP Grand, Ltd. is 545 E. John Carpenter Freeway, Suite 1400,
Irving, Texas 75062.

(4) As reported in an amended Schedule 13D filed with the SEC on April 26, 2000.
Represents shares held in managed discretionary and non-discretionary
accounts for clients advised by Gary M. Goldberg & Co., Inc., VIP 100, L.P.
and/or Gary Goldberg VIP 100, Inc. Gary M. Goldberg is a controlling person
of all of these entities and, as such, is deemed to be the beneficial owner
of any shares of the Company's Common Stock of which these entities may be
deemed to beneficially own. This information is based solely upon the
contents of joint filings made by Mr. Goldberg and his affiliates pursuant
to Section 13 of the Securities Exchange Act of 1934. The address of the
Gary M. Goldberg group is c/o Gary M. Goldberg, Montebello Park, 75
Montebello Road, Suffern, New York 10901.

(5) As reported in a Schedule 13D filed with the SEC on April 18, 2000. The
address of Corporate Capital, L.L.C. is 909 Poydras Street, New Orleans,
Louisiana 70112.

24
<PAGE> 26

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

VOTING AGREEMENT

General. Upon consummation of the Spin-off, three directors and/or
executive officers of Wyndham and entities with which the directors and/or
officers are affiliated entered into a Voting Agreement with the Company. Such
directors, officers and affiliated entities are referred to as the "Voting
Stockholders."

Voting Provisions. The Voting Agreement applies to all stockholder votes
taken at any time when the Voting Stockholders, together with Wyndham and other
identified directors and executive officers of Wyndham (collectively referred to
in this section as the "Affiliated Stockholders"), own greater than 9.9% of the
outstanding shares of the Company's Class A Common Stock. The Voting Agreement
provides that, in such circumstances, the Voting Stockholders will vote their
Company shares in proportion with the results of voting on the particular matter
by all Company Class A stockholders other than the Voting Stockholders and the
Affiliated Stockholders. This proportional voting will have the effect of
nullifying the impact of voting by the Voting Stockholders on the particular
matter and reducing the impact of voting by the Affiliated Stockholders on such
matter.

Divestiture Provisions. The Voting Agreement also provides that the Voting
Stockholders will use reasonable efforts to sell or otherwise dispose of a
number of shares of the Company's Class A Common Stock such that the Voting
Stockholders and the Affiliated Stockholders will collectively own 9.9% or less
of the outstanding shares of the Company's Class A Common Stock by the first
anniversary of the Spin-off. The Voting Stockholders are thus obligated under
the Voting Agreement to sell an aggregate of approximately 690,000 Company
shares, or 10.8% of the outstanding shares of the Company's Class A Common
Stock, by June 18, 2000. Thereafter, the Voting Stockholders' selling
obligations will become effective again at any time within five years after the
Spin-off that the Voting Stockholders are informed by the Company that the
Voting Stockholders and the Affiliated Stockholders collectively own greater
than 9.9% of the outstanding shares of the Company's Class A Common Stock.

The Company's Call Right. In the event that the Voting Stockholders fail to
comply with their obligations to sell Company shares as described above within
five years after the Spin-off, the Company has a call right to purchase from the
Voting Stockholders for fair market value the number of shares of the Company's
Class A Common Stock the Voting Stockholders were obligated to sell. Marriott
has the right to compel the Company to exercise its call right if the Company
fails to do so.

TRANSACTIONS WITH OFFICERS AND DIRECTORS.

The Company has granted loans from time to time to its senior executives,
including each of the Named Executive Officers. Such loans are payable upon
demand and, in general, do not bear interest until such demand is made. See
"--Compensation Plans and Arrangements--Executive Loans and --Employment and
Change-in-Control Agreements" for a description of loans from the Company to the
Named Executive Officers.

In November 1999, the Company acquired 100% of the ownership interests in
the Pittsburgh Airport Residence Inn by Marriott for a total acquisition cost of
approximately $13.0 million. Prior to the acquisition by the Company, Mr.
Richardson beneficially owned a 10% limited partnership interest in the entity
that sold the hotel to the Company.

SECTION 16(a) BENEFICIAL OWNERSHIP COMPLIANCE

Based solely on a review of copies of reports furnished to the Company and
written representations signed by all directors and executive officers that no
other reports were required with respect to their beneficial ownership of Common
Stock during 1999, the Company believes that the directors and executive
officers and all beneficial owners of more than 10% of the Class A Common Stock
outstanding complied with all applicable filing requirements under Section 16(a)
of the Securities Exchange Act of 1934, as amended, with respect to their
beneficial ownership of Class A Common Stock during 1999 except that a
transaction required to be reported on Form 4 was not reported by Mr. Ashner
until the filing of his Form 5 for the year ended December 31, 1999.

25
<PAGE> 27

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this Report.

1. Financial Statements

The list of financial statements required by this item is set forth
in Item 8, "Consolidated Financial Statements and Supplementary Data,"
and is incorporated herein by reference.

2. Financial Statement Schedules

All financial statement schedules are omitted as they are either
not applicable or the required information is included in the
consolidated financial statements or the notes thereto.

3. Exhibits

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- - ----------- -----------
<S> <C>
2.1 Distribution Agreement, dated June 18, 1999, among Patriot
American Hospitality, Inc., Wyndham International, Inc., the
Company and Interstate Hotels, LLC(1)
3.1 Articles of Amendment and Restatement of the Company(1)
3.2 Articles Supplementary Classifying and Designating Series A
Junior Participating Cumulative Preferred Stock(2)
3.3 Amended and Restated Bylaws of the Company(1)
3.4 Shareholder Rights Agreement, dated July 8, 1999, among the
Company and American Stock Transfer and Trust Company, as
Rights Agent(2)
4.1 Specimen certificate for shares of Class A Common Stock of
the Company(3)
10.1 Form of Limited Liability Company Agreement of IHC II,
LLC(3)
10.2 Amended and Restated Limited Liability Company Agreement,
dated June 18, 1999, of Interstate Hotels, LLC(1)
10.3 Voting Agreement, dated June 18, 1999, among the Company and
the identified stockholders of the Company(1)
10.4 Form of Owner Agreement among Patriot American Hospitality
Partnership, L.P., Wyndham International Operating
Partnership, L.P., IHC II, LLC and Marriott International,
Inc./Marriott Hotel Services, Inc.(3)
10.5 Form of Lease Agreement(3)
10.6 Form of Management Agreement among Wyndham International
Operating Partnership, L.P. and IHC II, LLC(3)
10.7 Form of Submanagement Agreement among Marriott
International, Inc./Marriott Hotel Services, Inc. and IHC
II, LLC(3)
10.8 Form of Interstate Hotels Corporation Guaranty(3)
10.9 Settlement Agreement, dated May 27, 1998, among Marriott
International, Inc., the Company, Interstate Hotels Company,
Patriot American Hospitality, Inc. and Wyndham
International, Inc.(3)
10.10 First Amendment to Settlement Agreement dated August 26,
1998(3)
10.11 Second Amendment to Settlement Agreement dated October 29,
1998(3)
10.12 Third Amendment to Settlement Agreement dated January 6,
1999(3)
10.13 Fourth Amendment to Settlement Agreement dated March 11,
1999(3)
10.14 Fifth Amendment to Settlement Agreement dated April 23,
1999(3)
10.15 Sixth Amendment to Settlement Agreement dated May 14,
1999(3)
10.16 Employment Agreement, dated March 1, 1999, among Interstate
Hotels Management, Inc. and Thomas F. Hewitt(3)
</TABLE>

26
<PAGE> 28

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- - ----------- -----------
<S> <C>
10.17 Employment Agreement, dated December 1, 1998, among
Interstate Hotels Management, Inc. and Henry L. Ciaffone(3)
10.18 Employment Agreement, dated June 2, 1998, among Interstate
Hotels Management, Inc. and Charles R. Tomb, as amended(3)
10.19 Employment Agreement, dated June 18, 1999, among the Company
and
J. William Richardson(1)
10.20 Employment Agreement, dated June 18, 1999, among the Company
and
Kevin P. Kilkeary(4)
10.21 Interstate Hotels Corporation 1999 Equity Incentive Plan(1)
10.21.1 Form of Standard Stock Option Agreement(1)
10.21.2 Form of Stock Option Agreement for certain employees with
employment agreements(1)
10.22 Interstate Hotels Corporation Employee Stock Purchase
Plan(1)
10.23 Asset Purchase Agreement, dated May 7, 1999, among IHC/Chaz
Corporation, PAH-Management Corporation and F&H Realty,
LLC(5)
10.24 Instrument of Assignment and Assumption, dated June 18,
1999, among IHC/Chaz Corporation and PAH-Management
Corporation in favor of Interstate Hotels, LLC(5)
10.25 Instrument of Assignment and Assumption, dated June 18,
1999, among F&H Realty, LLC in favor of F&H GP
Corporation(5)
10.26 Certificate and Agreement, dated November 1, 1999, among
Syracuse Office Associates, L.P. Syracuse/Pittsburgh Hotel
Holdings, L.L.C., Interstate Property Partnership, L.P. and
the Company(6)
10.27 Assignment and Assumption of Membership Interest, effective
as of November 1, 1999, among Syracuse Office Associates,
L.P. and Interstate Property Partnership, L.P.(6)
21.1 List of Subsidiaries of Interstate Hotels Corporation
23.1 Consent of PricewaterhouseCoopers LLP
24.1 Powers of Attorney
27.1 Financial Data Schedule
</TABLE>

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

(1) Filed previously as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999 and incorporated herein by
reference.

(2) Filed previously as an exhibit to the Company's Current Report on 8-K dated
July 8, 1999 and incorporated herein by reference.

(3) Filed previously as an exhibit to the Company's Registration Statement on
Form S-1, as amended (Registration No. 333-67065), and incorporated herein
by reference.

(4) Filed previously as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1999 and incorporated
herein by reference.

(5) Filed previously as an exhibit to the Company's Current Report on 8-K dated
June 18, 1999 and incorporated herein by reference.

(6) Filed previously as an exhibit to the Company's Current Report on 8-K dated
November 1, 1999 and incorporated herein by reference.

(b) Reports on Form 8-K

During the three months ended December 31, 1999, the Company filed a
Current Report on Form 8-K, dated November 1, 1999, under Item 2, which
reported the acquisition by the Company of the Pittsburgh Airport
Residence Inn by Marriott.

27
<PAGE> 29

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this Annual Report on Form 10-K/A to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Pittsburgh, in the Commonwealth of Pennsylvania, on May 1, 2000.

INTERSTATE HOTELS CORPORATION

By: /s/ J. WILLIAM RICHARDSON
------------------------------------
J. William Richardson
Vice Chairman and Chief Financial
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K/A has been signed below by the following persons on
behalf of the Company and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>

* Chief Executive Officer and Chairman May 1, 2000
- - ------------------------------------- of the Board of Directors (Principal
Thomas F. Hewitt Executive Officer)

/s/ J. WILLIAM RICHARDSON Vice Chairman and Chief Financial May 1, 2000
- - ------------------------------------- Officer (Principal Financial and
J. William Richardson Accounting Officer)

* Director May 1, 2000
- - -------------------------------------
Michael L. Ashner

* Director May 1, 2000
- - -------------------------------------
Benjamin D. Holloway

* Director May 1, 2000
- - -------------------------------------
Stephen P. Joyce

* Director May 1, 2000
- - -------------------------------------
Phillip H. McNeill, Sr.

* Director May 1, 2000
- - -------------------------------------
Anne L. Raymond
</TABLE>

The undersigned, by signing his name hereto, does sign and execute this
Annual Report on Form 10-K/A pursuant to the powers of attorney executed by the
above-named officers and directors and filed herewith.

By: /s/ J. WILLIAM RICHARDSON
------------------------------------
J. William
Richardson
Attorney-in-Fact

28
<PAGE> 30

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of Interstate Hotels Corporation:

We have audited the accompanying consolidated balance sheets of Interstate
Hotels Corporation (together with its subsidiaries and predecessors, the
"Company"), as described in Note 1 of the consolidated financial statements, as
of December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year ended December 31,
1999, for the period from January 1, 1998 to June 1, 1998, for the period from
June 2, 1998 to December 31, 1998 and for the year ended December 31, 1997, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

As discussed in Note 1, the Company was not a separate legal entity prior
to June 18, 1999. The accompanying consolidated financial statements have been
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission and are not intended to be a complete
presentation of the consolidated financial statements of Interstate Hotels
Company or its affiliates.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company as of December 31, 1999 and 1998, and the consolidated results of
its operations, stockholders' equity and cash flows for the year ended December
31, 1999, for the period from January 1, 1998 to June 1, 1998, for the period
from June 2, 1998 to December 31, 1998 and for the year ended December 31, 1997,
in conformity with accounting principles generally accepted in the United
States.

As discussed in Note 5, the Company adopted the provisions of Emerging
Issues Task Force Issue 97-14 effective September 30, 1998.

/s/ PRICEWATERHOUSECOOPERS LLP

600 Grant Street
Pittsburgh, Pennsylvania
February 16, 2000

F-1
<PAGE> 31

INTERSTATE HOTELS CORPORATION

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- ---------
DECEMBER 31,
------------------------
1998 1999
----------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,652 $ 22,440
Accounts receivable, net of allowance for doubtful
accounts of $291 in 1998 and
$486 in 1999............................................ 16,816 16,779
Deferred income taxes..................................... 615 1,172
Net investment in direct financing leases................. 827 464
Prepaid expenses and other assets......................... 741 1,148
Related party receivables -- management contracts......... 1,085 423
-------- --------
Total current assets.................................. 21,736 42,426
Restricted cash............................................. 2,201 1,701
Marketable securities....................................... 2,609 2,134
Property and equipment, net................................. 4,076 16,049
Officers and employees notes receivable..................... 2,803 3,541
Notes receivable -- affiliates.............................. 3,381 10,838
Net investment in direct financing leases................... 1,680 928
Investment in hotel real estate............................. 21,850 --
Intangible and other assets................................. 100,821 64,842
-------- --------
Total assets.......................................... $161,157 $142,459
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade................................. 2,413 3,430
Accounts payable -- health trust.......................... 1,785 3,358
Accounts payable -- related parties....................... 18,597 3,991
Accrued payroll and related benefits...................... 6,120 8,252
Accrued rent.............................................. 5,043 5,348
Accrued merger costs...................................... 9,344 --
Other accrued liabilities................................. 9,236 12,486
-------- --------
Total current liabilities............................. 52,538 36,865
Deferred income taxes....................................... 11,053 2,454
Deferred compensation....................................... 2,609 2,134
-------- --------
Total liabilities..................................... 66,200 41,453
Minority interest........................................... 2,350 41,000
Commitments and contingencies............................... -- --
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; no shares issued or outstanding at December
31, 1999................................................ -- --
Common stock, $.01 par value; 65,000,000 shares
authorized; 6,394,996 shares issued and outstanding at
December 31, 1999....................................... -- 64
Paid-in capital........................................... -- 66,705
Retained deficit.......................................... -- (5,889)
Unearned compensation..................................... -- (874)
Owners' equity............................................ 92,607 --
-------- --------
Total stockholders' equity............................ 92,607 60,006
-------- --------
Total liabilities and stockholders' equity............ $161,157 $142,459
======== ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE> 32

INTERSTATE HOTELS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS)

The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 33

INTERSTATE HOTELS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(IN THOUSANDS)
---------

<TABLE>
<CAPTION>
RETAINED
COMMON PAID-IN EARNINGS UNEARNED OWNERS'
STOCK CAPITAL (DEFICIT) COMPENSATION EQUITY TOTAL
----- ------- --------- ------------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996............... $-- $ -- $ -- $ -- $ 56,886 $ 56,886
Net capital contributions................ -- -- -- -- 4,365 4,365
Net income............................... -- -- -- -- 19,479 19,479
--- ------- ------- ------- --------- --------
Balance at December 31, 1997............... -- -- -- -- 80,730 80,730
Net capital distributions................ -- -- -- -- (9,840) (9,840)
Net income............................... -- -- -- -- 8,291 8,291
--- ------- ------- ------- --------- --------
Balance at June 1, 1998.................... -- -- -- -- 79,181 79,181
Net capital distributions................ -- -- -- -- (49,981) (49,981)
Change in Basis.......................... -- -- -- -- 56,752 56,752
Net income............................... -- -- -- -- 6,655 6,655
--- ------- ------- ------- --------- --------
Balance at December 31, 1998............... -- -- -- -- 92,607 92,607
Net capital contributions................ -- -- -- -- 25,816 25,816
Spin-off transaction..................... 59 63,511 1,728 -- (118,423) (53,125)
Issuance of Common Stock................. 2 2,118 -- -- -- 2,120
Unearned compensation related to the
issuance of Common Stock.............. 3 1,076 -- (1,079) -- --
Amortization of unearned compensation.... -- -- -- 205 -- 205
Net loss................................. -- -- (7,617) -- -- (7,617)
--- ------- ------- ------- --------- --------
Balance at December 31, 1999............... $64 $66,705 $(5,889) $ (874) $ -- $ 60,006
=== ======= ======= ======= ========= ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 34

INTERSTATE HOTELS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------------ --------------------------------
PERIOD FROM
-----------------------------------
YEAR ENDED JANUARY 1, 1998 JUNE 2, 1998 YEAR ENDED
DECEMBER 31, TO TO DECEMBER 31,
1997 JUNE 1, 1998 DECEMBER 31, 1998 1999
------------ --------------- ----------------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $ 19,479 $ 8,291 $ 6,655 $ (7,617)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................ 4,845 2,152 10,659 20,833
Equity in earnings from unconsolidated
subsidiaries....................................... (373) (513) (1,526) (1,525)
Loss on impairment of investment in hotel lease
contracts.......................................... -- -- -- 16,406
Loss on sale of investment in hotel real estate...... -- -- -- 876
Minority interest.................................... 18 24 209 (12,514)
Deferred income taxes................................ 167 (1,555) 8,346 (3,867)
Other................................................ -- 176 135 165
Cash (used in) provided by assets and liabilities:
Accounts receivable, net............................. (8,158) (3,661) 2,552 662
Prepaid expenses and other assets.................... (267) 307 1,092 (285)
Related party receivables............................ 1,312 (341) 1,017 662
Accounts payable..................................... (2,572) 1,053 (5,181) 4,625
Accrued liabilities.................................. (1,934) 12,426 (14,365) 5,372
-------- -------- -------- --------
Net cash provided by operating activities.......... 12,517 18,359 9,593 23,793
-------- -------- -------- --------
Cash flows from investing activities:
Net investment in direct financing leases.............. (33) 145 (377) 1,115
Change in restricted cash.............................. (219) 540 (417) 500
Purchase of property and equipment, net................ (2,170) (709) (487) (970)
Acquisition of hotel, net of cash received............. -- -- -- (12,981)
Purchases of marketable securities..................... -- -- (10,725) (2,245)
Proceeds from sale of marketable securities............ -- -- 14,567 1,958
Proceeds from sale of investment in hotel real
estate............................................... -- -- -- 13,654
Net cash (invested in) received from unconsolidated
subsidiaries......................................... (16,147) 1,085 (2,327) 1,176
Change in officers and employee notes receivable,
net.................................................. (7,554) (2) (989) (960)
Net investment in management contracts................. (2,116) (666) (548) (291)
Merger-related acquisition costs....................... -- -- (26,484) (8,941)
Change in notes receivable -- affiliates, net.......... (5,071) 2,043 (311) (2,057)
Acquisitions of leases................................. (2,500) -- -- (16)
Other.................................................. 103 238 391 (63)
-------- -------- -------- --------
Net cash (used in) provided by investing
activities...................................... (35,707) 2,674 (27,707) (10,121)
-------- -------- -------- --------
Cash flows from financing activities:
Repayment of long-term debt............................ (171) (180) (190) --
Proceeds from sale of Common Stock..................... -- -- -- 2,120
Net (distributions to) contributions from minority
interest............................................. -- (44) (55) 6,934
Related party payables................................. 10,260 (9,234) 17,571 (18,597)
Net contributions from (distributions to) owners....... 4,365 (9,840) (1,727) 16,659
-------- -------- -------- --------
Net cash provided by (used in) financing
activities...................................... 14,454 (19,298) 15,599 7,116
-------- -------- -------- --------
Net (decrease) increase in cash and cash equivalents..... (8,736) 1,735 (2,515) 20,788
Cash and cash equivalents at beginning of period......... 11,168 2,432 4,167 1,652
-------- -------- -------- --------
Cash and cash equivalents at end of period............... $ 2,432 $ 4,167 $ 1,652 $ 22,440
======== ======== ======== ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 35

INTERSTATE HOTELS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1. ORGANIZATION AND BASIS OF PRESENTATION:

Interstate Hotels Corporation (together with its subsidiaries and
predecessors, the "Company") was formed pursuant to a series of events
culminating in the spin-off of the Company's operations from Wyndham
International, Inc., formerly Patriot American Hospitality, Inc. ("Wyndham"), on
June 18, 1999. On June 2, 1998, Interstate Hotels Company (the predecessor of
the Company, and together with its subsidiaries, "Old Interstate") merged into
Wyndham (the "Merger"). Prior to the Merger, Marriott International, Inc.
("Marriott") filed a lawsuit to stop the closing of the Merger as a result of a
dispute over certain franchise agreements between Marriott and Old Interstate.
On June 18, 1999, pursuant to a settlement agreement with Marriott, Wyndham
transferred to the Company, which was then a newly formed corporation, the
third-party hotel management business of Old Interstate, equity interests in The
Charles Hotel Complex, a hotel, retail and office complex located in Cambridge,
Massachusetts, and long-term leasehold interests in 79 hotels. Wyndham then
spun-off the Company to its shareholders (the "Spin-off"). In connection with
the Spin-off, Marriott purchased 4% of the Company's common stock, Wyndham
retained 4% of the Company's common stock, and the remaining 92% of the
Company's common stock was distributed to Wyndham's shareholders.

The financial statements have been prepared using the predecessor basis of
accounting for the year ended December 31, 1997 and for the period from January
1, 1998 to June 1, 1998 (the "June 1998 period"), and the successor basis of
accounting for the period from June 2, 1998 to December 31, 1998 (the "December
1998 period"), as well as for the year ended December 31, 1999, to coincide with
the periods before and after the Merger. The Merger was accounted for using the
purchase method of accounting, and the Merger consideration was allocated by
Wyndham on the basis of the estimated fair market value of the assets of Old
Interstate. The Spin-off was accounted for using the historical basis of
accounting. When used herein, "consolidated financial statements" refers to the
historical combined financial statements of the Company prior to the Spin-off
and the historical consolidated financial statements of the Company thereafter.

Prior to the Spin-off, the Company was not a separate legal entity.
Therefore, the accompanying consolidated financial statements of the Company
have been carved out of Old Interstate's financial statements prior to the
Merger using the predecessor basis of accounting, and from Wyndham's financial
statements subsequent to the Merger through the Spin-off date using the
successor basis of accounting, which gives effect to the allocation of the
Merger consideration. The financial statements include only those assets,
liabilities, revenues and expenses directly attributable to the third-party
hotel management business, the equity interests in The Charles Hotel Complex and
the leased hotels which were retained by the Company in connection with the
Spin-off. These consolidated financial statements have been prepared as if the
Company had operated as a separate entity for all periods presented.

The Company's principal subsidiaries include Interstate Hotels, LLC and
Interstate Pittsburgh Hotel Holdings, L.L.C. Interstate Hotels, LLC ("IH LLC")
has assumed the third-party hotel management business previously conducted by
Old Interstate and holds the leasehold interests in the Company's leased hotels,
as well as provides ancillary services such as centralized purchasing, equipment
leasing and insurance services. The Company owns a 45% managing member interest
and Wyndham owns a 55% non-controlling ownership interest in IH LLC. Interstate
Pittsburgh Hotel Holdings, L.L.C. is a wholly owned subsidiary which owns the
Pittsburgh Airport Residence Inn by Marriott.

In accordance with IH LLC's limited liability company agreement, the
Company is required to distribute 55% of IH LLC's cash flows from operations to
Wyndham and allocate between IH LLC and the Company the costs and expenses
relating to services provided by one party for the benefit of the other in
accordance with generally accepted accounting principles, on the basis of which
party benefited from the expenditure. To the extent that the allocation of any
such costs and expenses, including general and administrative expenses, cannot
be fairly apportioned, IH LLC and the Company will allocate such costs and
expenses based upon their respective gross revenues, so that each party's profit
margins are substantially the same for similar services.

F-6
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1. ORGANIZATION AND BASIS OF PRESENTATION, CONTINUED:

The Company includes the revenues and expenses and the working capital of
the leased hotels in the financial statements because the risk of operating
these hotels is borne by the Company, as lessee, under the terms of the leases.
Revenues and expenses from the operation of the managed hotels are not included
in the financial statements because the hotel management contracts are generally
cancellable, not transferable and do not shift the risks of operation to the
Company. Therefore, the Company records revenues from management fees only for
its managed hotels.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation:

The consolidated financial statements include the accounts of the Company
as described in Note 1. All significant intercompany transactions and balances
have been eliminated in consolidation. Minority interests represent the
proportionate share of the equity that is owned by third parties in entities
controlled by the Company. The net income or loss of such entities is allocated
to the minority interests based on their percentage ownership throughout the
year.

Cash and Cash Equivalents:

All unrestricted, highly liquid investments purchased with a remaining
maturity of three months or less are considered to be cash equivalents. The
Company maintains cash and cash equivalents with various financial institutions
in excess of the amount insured by the Federal Deposit Insurance Corporation.
Management believes the credit risk related to these cash and cash equivalents
is minimal. Prior to the Spin-off, certain cash of the Company was swept from
individual accounts and combined with Old Interstate's cash in a central
account.

For periods prior to the Spin-off, amounts owed to related entities to meet
short-term cash requirements in connection with Old Interstate's centralized
cash account are recorded as accounts payable -- related parties.

Restricted Cash:

Capital restricted under applicable government insurance regulations is
included in restricted cash, and represents approximately 20% of the annual
insurance premiums written by the Company.

Direct Financing Leases:

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

Property and Equipment:

Property and equipment are recorded at cost, which includes the allocated
purchase price for hotel acquisitions, and are depreciated on the straight-line
method over their estimated useful lives. Expenditures for repairs and
maintenance are expensed as incurred. Expenditures for major renewals and
betterments that significantly extend the useful life of existing property and
equipment are capitalized and depreciated. The cost and the related accumulated
depreciation applicable to property no longer in service are eliminated from the
accounts and any gain or loss thereon is included in operations.

F-7
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

Officers and Employees Notes Receivable:

The Company grants loans from time to time to officers and employees, which
are payable upon demand and generally do not bear interest until such demand is
made. Certain notes may be forgiven and expensed provided certain conditions are
satisfied.

Intangible and Other Assets:

Intangible and other assets consist of the amounts paid to obtain
management and lease contracts including the allocation of the Merger
consideration by Wyndham. Intangibles and other assets are amortized on the
straight-line method over the life of the underlying contracts or estimated
useful lives.

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of:

The carrying values of long-lived assets, which include property and
equipment and all intangible assets, are evaluated quarterly in relation to the
operating performance and future undiscounted operating cash flows of the
underlying assets. Adjustments are made if the sum of expected future
undiscounted net cash flows is less than book value. See Note 4 for the results
of the current year evaluation.

Deferred Income Taxes:

Deferred income taxes are recorded using the liability method. Under this
method, deferred tax assets and liabilities are provided for the differences
between the financial statement basis and the tax basis of assets and
liabilities using enacted tax rates in effect for the years in which the
differences are expected to reverse.

Income Tax Status:

Prior to the Spin-off, the entities that comprised the Company were
included in the consolidated federal income tax return of either Old Interstate
or Wyndham and all tax liabilities were paid by either Old Interstate or
Wyndham. The income tax provision presented in these consolidated financial
statements through the Spin-off date has been calculated as if the Company had
prepared and filed a separate income tax return for those periods. The income
tax liability for all current income taxes for purposes of these consolidated
financial statements through the Spin-off date have been settled with either Old
Interstate or Wyndham through owners' equity. For periods after the Spin-off,
the Company will file a separate consolidated income tax return. Such return
will include an allocation of the operating results of IH LLC based on its 45%
share of the taxable operating results of IH LLC.

The effective tax rate used after the Spin-off is based on the Company's
effective tax rate for the year ended December 31, 1999, and varies from the
statutory tax rate as a result of the allocations of the taxable operating
results of IH LLC to minority interests, as discussed above.

Insurance:

Insurance revenues are earned through reinsurance premiums, direct premiums
written and reinsurance premiums ceded. Reinsurance premiums are recognized when
policies are written and any unearned portion of the premium is recognized to
account for the unexpired term of the policy (as-reported basis). Direct
premiums written are recognized pursuant to the underlying policy and
reinsurance premiums ceded are recognized on a pro-rata basis over the life of
the related policies. Unearned premiums represent the portion of premiums
applicable to the unexpired term of policies in force. Losses are provided for
reported claims, claims incurred but not reported and claims settlement expense
at each balance sheet date. Such losses are based on management's estimate of
the ultimate cost of settlement of claims and historical loss rates. Accrued
claims liabilities are carried at present value without discounting since the
contracts are of a short duration and discounting would not be significant.
Actual liabilities may differ from estimated amounts. Any changes in estimated
losses and settlements are reflected in current earnings.

F-8
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

Owners' Equity:

Owners' equity prior to the Spin-off represents the net equity of Old
Interstate and Wyndham in the Company. Net contributions/distributions from
owners represent non-operating transfers to and from Old Interstate and Wyndham.

Revenue Recognition:

The owned and leased hotels recognize revenue from their rooms, food and
beverage and other departments as earned on the close of each business day.
Management and other related fees are recognized when earned.

Reimbursable Expenses:

The Company is reimbursed for costs associated with providing insurance and
risk management services, purchasing and project management services, MIS and
legal support, centralized accounting, training and relocation programs to the
owned, managed and leased hotels. These revenues are included in other fees and
the corresponding costs are included in general and administrative and payroll
and related benefits in the consolidated statements of operations.

Financial Instruments:

As a policy, the Company does not engage in speculative or leveraged
transactions, nor does the Company hold or issue financial instruments for
trading purposes.

Use of Estimates:

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

Reclassifications:

Certain amounts in previously issued financial statements have been
reclassified to conform to the presentation adopted in the 1999 consolidated
financial statements.

3. MERGER:

In connection with the Merger, Wyndham allocated the Merger consideration
on the basis of the estimated fair market value of the assets of Old Interstate.
The fair market value of these assets was determined using historical and
projected cash flow and earnings at then current market multiples and discount
rates. As a result, on June 2, 1998, Old Interstate recorded an additional
intangible asset related to management contracts of $69,862, a net decrease in
other assets of $7,652 related to hotel leases and a net deferred tax liability
of $5,458, resulting in a net increase to owners' equity of $56,752 ("Change in
Basis"). The intangible asset related to the management contracts is being
amortized over five years, based on the average remaining contract term, and the
intangible asset related to the leased hotels is being amortized over the
average remaining periods of the leases of 11 and 13.5 years, beginning June 2,
1998.

Merger-related costs incurred by Old Interstate were not reflected in the
accompanying consolidated statement of operations for the June 1998 period, as
they did not relate specifically to ongoing business. In connection with the
Merger, severance payments and other merger-related costs were incurred by
Wyndham and capitalized as part of the purchase price of Old Interstate.

F-9
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

4. IMPAIRMENT OF INVESTMENT IN HOTEL LEASE CONTRACTS:

In 1999, the Company recorded a non-cash impairment loss of $16,406 related
to its leased hotel intangible assets included in the mid-scale, upper economy
and budget hotels segment. The impairment loss was the result of a permanent
impairment of the future profitability of these hotels for the remainder of the
hotel lease contract terms. These hotels had experienced lower than expected
operating cash flows during 1999, primarily due to decreased occupancy rates and
higher operating costs resulting from significant construction that has occurred
within this industry segment. This recent construction has caused a significant
over-supply of mid-scale, upper economy and budget hotels in certain markets.
The long-term impact of this over-supply on the profitability of the Company's
leased hotels was determined and quantified as a result of a negative trend in
operating statistics increasing through the fourth quarter of 1999 and during
the completion of the Company's budgeting process in the fourth quarter of 1999.

In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Assets to be
Disposed Of," the Company evaluated the recoverability of the intangible assets
by measuring the carrying amount of the intangible assets against the estimated
future cash flows of the individual properties. As a result of the current year
evaluation, the Company recognized the impairment loss on 42 of its leased hotel
intangible assets. The remaining limited-service leased hotel intangible assets
will continue to be amortized over the remainder of the original lease contract
terms.

5. CHANGE IN ACCOUNTING:

Effective September 30, 1998, the Company adopted the provisions of
Emerging Issues Task Force Issue 97-14 "Accounting for Deferred Compensation
Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested" (EITF
97-14). The issue requires that the accounts of the rabbi trust (the "Trust") be
consolidated with the accounts of the employer. Previously the accounts of the
Trust were not consolidated.

The Company provides deferred compensation for certain executives and hotel
general managers by depositing amounts into a Trust for the benefit of the
participating employees. Deposits into the Trust are expensed and amounted to
$662, $178, $250 and $530 for the year ended December 31, 1997, for the June
1998 and December 1998 periods and for the year ended December 31, 1999,
respectively. Amounts in the Trust earn investment income, which serves to
increase the corresponding deferred compensation obligation. Amounts in the
Trust are always fully vested.

The effect of adopting EITF 97-14 as of September 30, 1998 was an increase
in investments and deferred compensation of $6,451. Investments, which are
recorded at market value, are directed by the Company and consist principally of
mutual funds. The adoption did not have any effect on net income in 1999 or the
December 1998 period and is not expected to significantly impact net income in
future periods. Unrealized gains and losses were not significant at December 31,
1999 and 1998.

In October 1998, the Company paid $4,213 in deferred compensation from the
Trust to certain executives.

6. PRO FORMA FINANCIAL INFORMATION (UNAUDITED):

The following unaudited pro forma information is presented to include the
effects of the Spin-off, the sale of equity interests in The Charles Hotel
Complex and certain other adjustments as if all of the transactions had occurred
on January 1, 1998. Such other adjustments principally include the elimination
and addition of certain management fee and other fee revenues related to
Wyndham-owned hotels, the management of which was transferred to Wyndham,
Marriott or the Company as a result of the Spin-off. The adjustments also
include the elimination of a $2,000 one-time charge for additional incentive
lease expense for 1999 paid in settlement of a dispute with Equity Inns, Inc.
resulting from the Merger, and the addition of minority interest to reflect
Wyndham's 55% non-controlling interest in IH LLC prior to the Spin-off. In
management's opinion,

F-10
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

6. PRO FORMA FINANCIAL INFORMATION (UNAUDITED), CONTINUED:

all material pro forma adjustments necessary to reflect the effects of these
transactions have been made. The unaudited pro forma information does not
include earnings on the Company's pro forma cash and cash equivalents or certain
one-time charges to income relating to the Merger, and does not purport to
present what the actual results of operations of the Company would have been if
the previously mentioned transactions had occurred on such date or to project
the results of operations of the Company for any future period.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1999
-------- --------
<S> <C> <C>
Total revenues.............................................. $240,658 $235,389
Operating income (loss)..................................... 4,719 (31,076)
Net income (loss)........................................... 1,733 (7,805)
Pro forma basic earnings per common share................... .27 (1.22)
Pro forma diluted earnings per common share................. .27 (1.22)
</TABLE>

7. ACQUISITIONS:

On November 1, 1999, the Company acquired the Pittsburgh Airport Residence
Inn by Marriott for a total acquisition cost, including closing costs, of
$12,981. This acquisition was accounted for using the purchase method of
accounting. The purchase price was allocated to the following assets: net
working capital $288; land $1,344; buildings $9,813; and furniture, fixtures and
equipment $1,536. Prior to the acquisition, an officer of the Company
beneficially owned a 10% limited partnership interest in the entity that sold
the hotel to the Company.

8. PROPERTY AND EQUIPMENT:

Property and equipment consisted of the following at December 31:

<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Land........................................................ $ -- $ 1,344
Buildings and leasehold improvements (10 to 40 years)....... 1,000 11,070
Furniture, fixtures and equipment (5 to 20 years)........... 3,522 4,874
------- -------
4,522 17,288
Less accumulated depreciation............................... (446) (1,239)
------- -------
$ 4,076 $16,049
======= =======
</TABLE>

Depreciation expense was approximately $666, $313, $446 and $857 for the
year ended December 31, 1997, for the June 1998 and December 1998 periods and
for the year ended December 31, 1999, respectively.

9. NET INVESTMENT IN DIRECT FINANCING LEASES:

The Company leases office, computer and telephone equipment to managed
hotels under capital leases. The following represents the components of the net
investment in direct financing leases at December 31:

<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Total future minimum lease payments receivable.............. $ 3,118 $ 1,745
Less unearned income........................................ 611 353
------- -------
2,507 1,392
------- -------
Less current portion........................................ 827 464
------- -------
$ 1,680 $ 928
======= =======
</TABLE>

F-11
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

9. NET INVESTMENT IN DIRECT FINANCING LEASES, CONTINUED:

Future minimum lease payments to be received under these leases for each of
the years ending December 31 are as follows:

10. INTANGIBLE AND OTHER ASSETS:

Intangible and other assets consisted of the following at December 31:

<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Management contracts (3 to 6 years through the June 1998
period, 5 years thereafter)........................... $ 74,109 $ 74,086
Lease contracts (15 and 11 years through the June 1998
period,
13.5 and 11 years thereafter)......................... 36,832 20,442
Other................................................... 300 362
-------- --------
111,241 94,890
Less accumulated amortization........................... (10,420) (30,048)
-------- --------
$100,821 $ 64,842
======== ========
</TABLE>

11. COMMITMENTS AND CONTINGENCIES:

Leases for hotels have initial terms of 10 to 15 years expiring through
2014, and provide for fixed base rent and variable components based on a
percentage of hotel revenues. Future fixed minimum lease payments are computed
based on the base rent of each lease, as defined, and are as follows:

<TABLE>
<S> <C>
2000........................................................ $ 58,888
2001........................................................ 58,888
2002........................................................ 58,888
2003........................................................ 58,888
2004........................................................ 58,888
Thereafter.................................................. 393,348
--------
$687,788
========
</TABLE>

The Company accounts for the leases of office space (the office leases
expire at varying times through 2005) and certain office equipment (the
equipment leases expire at varying times through 2005) as operating leases.
Total rent expense amounted to approximately $1,571, $911, $1,305 and $2,216 for
the year ended December 31, 1997, for the June 1998 and December 1998 periods
and for the year ended December 31, 1999, respectively. The following is a
schedule of future minimum lease payments under these leases:

<TABLE>
<S> <C>
2000........................................................ $ 1,998
2001........................................................ 1,862
2002........................................................ 1,850
2003........................................................ 1,411
2004........................................................ 377
Thereafter.................................................. 224
--------
$ 7,722
========
</TABLE>

F-12
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

11. COMMITMENTS AND CONTINGENCIES, CONTINUED:

Risk Related to Dispute Over Leased Hotel Portfolio:

As of December 31, 1998, the Company was engaged in a dispute with Equity
Inns Partnership, L.P. ("Equity Inns") regarding, among other matters, the
status of leases for 79 Hotels the Company leased from Equity Inns or its
affiliates. The principal issue in the dispute was whether the Company or Equity
Inns was responsible for funding property improvement plans ("PIPs") which were
issued by franchisors under whose brand names the Company operated the leased
hotels. Although franchise agreements generally provide to franchisors the right
to require third-party operators to fund PIPs at any time, these PIPs were
issued as a result of Old Interstate's Merger into Wyndham. The total amount
required to be funded under the PIPs was approximately $6,000.

On March 31, 1999, the Company settled the above-described dispute and
entered into a consolidated amendment to the Company's lease agreements and
master agreement with Equity Inns. As part of the amendment, Equity Inns
acknowledged that the Company is not responsible for the funding of the PIPs.
The Company agreed to pay a one-time additional incentive rent payment for the
1999 lease year in the amount of $2,000. In addition, the amended lease
agreements now include, among other things, performance standards with respect
to the leased hotels, including requirements to maintain room revenue per
available room and expenditures to within specified percentages of the amounts
targeted in the hotels' operating budgets and a minimum net worth covenant.
Equity Inns' sole remedy for a failure to satisfy the performance standards is
to terminate the subject lease or leases, without penalty. A failure to maintain
the minimum net worth would be a default under the leases.

The Company is currently engaged in a dispute with Equity Inns regarding 41
of the 76 hotels leased from Equity Inns or its affiliates. Equity Inns has
asserted that the Company has failed to spend the required percentages of the
amounts targeted in certain categories of the hotels' operating budgets for the
measuring period from July 1, 1999 through December 31, 1999 with respect to 41
leases. The Company disagrees with and is vigorously disputing Equity Inns'
interpretation of this requirement. If, however, the Company is determined to
have failed to spend the required amount under the leases, Equity Inns' sole
remedy is to terminate the subject lease or leases. The carrying value of the
Company's leased hotel intangible assets related to the 41 hotel leases amounted
to approximately $6,400 at December 31, 1999. The termination of the subject
lease or leases could result in accelerated amortization of all or the
applicable portion of the leased hotel intangible assets on the date of
termination. At this time, Equity Inns has not notified the Company of its
intent to terminate any of the 41 subject leases.

12. PREFERRED AND COMMON STOCK:

The Company has the authority to issue up to 10,000,000 shares of preferred
stock having such rights, preferences and privileges as designated by the Board
of Directors of the Company without stockholder

F-13
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

12. PREFERRED AND COMMON STOCK, CONTINUED:

approval. The rights of the holders of the Company's Common Stock will be
subject to, and may be affected by, the rights of the holders of any such
preferred stock that may be issued in the future. No preferred stock has been
issued to date.

Each holder of Class A, Class B and Class C Common Stock is entitled to one
vote for each share held by such holder, and no stockholders have cumulative
voting rights or preemptive, subscription or redemption rights, and no liability
exists for further calls or assessments. Holders of Class B shares are entitled
to elect one director, and holders of Class C shares are entitled to elect one
director. Holders of Class A shares elect the remaining directors. Upon the
liquidation or dissolution of the Company, all holders of shares of Common Stock
share ratably in the assets of the Company available for distribution to
stockholders, subject to the preferential rights of any then outstanding shares
of preferred stock.

The following table represents the number of shares of Common Stock
authorized, issued and outstanding at December 31, 1999.

<TABLE>
<CAPTION>
ISSUED AND
PAR VALUE AUTHORIZED OUTSTANDING
--------- ---------- -----------
<S> <C> <C> <C>
Class A common stock..................... $.01 62,000,000 6,091,802
Class B common stock..................... $.01 1,500,000 242,555
Class C common stock..................... $.01 1,500,000 60,639
---------- ---------
65,000,000 6,394,996
========== =========
</TABLE>

The following represents the number of shares of Common Stock authorized
for issuance under the Company's stock plans:

<TABLE>
<S> <C>
1999 Equity Incentive Plan.................................. 2,300,000
Employee Stock Purchase Plan................................ 400,000
---------
2,700,000
=========
</TABLE>

The 1999 Equity Incentive Plan provides for long-term incentives to be
awarded to eligible employees through grants of restricted stock and grants of
stock options to purchase shares of Common Stock. The options generally vest
over a three-year period and expire after ten years. During 1999, the Company
issued 331,917 restricted shares of Class A Common Stock to two executives under
the 1999 Equity Incentive Plan. The shares vest over a three to four year period
and the unvested portion of compensation has been reflected as unearned
compensation in the accompanying consolidated statements of stockholders'
equity. The Employee Stock Purchase Plan is designed to be a non-compensatory
plan, whereby eligible employees may elect to withhold a maximum of 8% of their
salary and use such amounts to purchase Common Stock.

The Company has elected to account for stock-based employee compensation
arrangements under the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," rather than SFAS No. 123,
"Accounting for Stock-Based Compensation." Based on the fair value of the
options at the grant dates according to SFAS No. 123, the Company's net loss
would not have changed for compensation cost related to the stock options for
the year ended December 31, 1999.

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes pricing model with the following assumptions:

<TABLE>
<S> <C>
Weighted average risk-free interest rate.................... 6.2%
Expected dividend yield..................................... --
Expected volatility......................................... 55.0%
Expected life (number of years)............................. 10
</TABLE>

F-14
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

12. PREFERRED AND COMMON STOCK, CONTINUED:

The transactions for stock options issued under the 1999 Equity Incentive
Plan were as follows:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
-----------------------------------
NUMBER OF REMAINING VALUE EXERCISE RANGE OF
OPTIONS LIFE (YEARS) PER SHARE PRICE EXERCISE PRICE
--------- ------------ --------- -------- --------------
<S> <C> <C> <C> <C> <C>
Outstanding, December 31, 1998.......... --
Granted................................. 1,768,000 $4.50 $4.50
Exercised............................... -- -- --
Canceled................................ (30,000) $4.50 $4.50
---------
Outstanding, December 31, 1999.......... 1,738,000 9.5 $3.25 $4.50 $4.50
=========
Shares reserved for future options at
December 31, 1999..................... 562,000
</TABLE>

13. NET MANAGEMENT FEES:

The Company's management agreements have initial terms that range from one
month to 49 years, expire through the year 2044 and are generally cancelable
under certain conditions, including the sale of the hotel.

The management agreements specify the base management fees to be earned,
which are generally based on percentages of gross revenues. In certain cases,
incentive management fees are earned based on the hotels' profitability as
defined by the management agreements. The net management fees earned for the
years ended December 31, 1997 and 1999 and for the June 1998 and December 1998
periods were as follows:

<TABLE>
<CAPTION>
JUNE DECEMBER
1997 1998 1998 1999
------- ------- -------- -------
<S> <C> <C> <C> <C>
Base management fees..................... $32,220 $14,435 $16,108 $25,107
Incentive management fees................ 7,238 3,882 7,096 8,656
------- ------- ------- -------
39,458 18,317 23,204 33,763
Less:
Administrative fees.................... 322 299 441 488
------- ------- ------- -------
$39,136 $18,018 $22,763 $33,275
======= ======= ======= =======
</TABLE>

14. INCOME TAXES:

Income tax expense (benefit) consisted of the following for the years ended
December 31, 1997 and 1999 and for the June 1998 and December 1998 periods:

<TABLE>
<CAPTION>
JUNE DECEMBER
1997 1998 1998 1999
------- ------- -------- -------
<S> <C> <C> <C> <C>
Current:
Federal.................................. $11,217 $ 6,198 $(3,421) $ 1,113
State.................................... 1,602 885 (489) 195
------- ------- ------- -------
12,819 7,083 (3,910) 1,308
------- ------- ------- -------
Deferred:
Federal.................................. 146 (1,360) 7,303 (5,552)
State.................................... 21 (195) 1,043 (834)
------- ------- ------- -------
167 (1,555) 8,346 (6,386)
------- ------- ------- -------
Income tax expense (benefit)............. $12,986 $ 5,528 $ 4,436 $(5,078)
======= ======= ======= =======
</TABLE>

F-15
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

14. INCOME TAXES, CONTINUED:

A reconciliation of the Company's effective tax rate to the federal
statutory rate for the year ended December 31, 1999 is as follows:

<TABLE>
<S> <C>
Federal statutory rate...................................... 35%
State taxes, net of federal benefit......................... 3
Minority interest........................................... (17)
Other....................................................... (1)
---
Effective tax rate.......................................... 20%
===
</TABLE>

For periods prior to the Spin-off, the provision for income tax was
recorded based on the federal statutory rate of 35% plus the state tax rate, net
of federal income tax benefit of 5% after consideration of minority interests in
passthrough tax entities. These rates approximate Old Interstate's historical
rates.

The financial statement components that give rise to the net deferred tax
assets and liabilities consisted of the following at December 31:

<TABLE>
<CAPTION>
1998 1999
--------------------- ---------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Depreciation and amortization........................ $ -- $11,749 $ -- $ 1,742
Payroll and related benefits......................... 139 -- 189 --
Self-insured health trust............................ 614 -- 605 --
Retirement plan...................................... -- 90 34 --
Other................................................ -- 48 -- 368
Investment in hotel real estate...................... 696 -- -- --
------ ------- ------ -------
$1,449 $11,887 $ 828 $ 2,110
====== ======= ====== =======
</TABLE>

15. EARNINGS PER SHARE:

Prior to the Spin-off, the Company was not a separate legal entity.
Therefore, the accompanying consolidated financial statements of the Company
have been carved out of the financial statements of Old Interstate and Wyndham,
and principally include those assets, liabilities, revenues and expenses
directly attributable to the third-party hotel management and leasing businesses
conducted by the Company. The Company believes that the historical earnings per
share calculations required in accordance with SFAS No. 128 are not meaningful
for periods prior to the Spin-off and, therefore, have not been provided. In
addition, the Company does not believe that a historical earnings per share
calculation for the period between the date of the Spin-off through December 31,
1999 is meaningful. Rather, earnings per share for the three-month periods ended
September 30, 1999 and December 31, 1999 and pro forma earnings per share for
the years ended December 31, 1998 and 1999 are a more meaningful measure of the
Company's results of operations (see Notes 6 and 23).

The historical earnings per share for the three-month periods ended
September 30, 1999 and December 31, 1999 have been calculated by dividing net
loss by the weighted average number of shares of common stock deemed to be
outstanding. The pro forma earnings per share for the years ended December 31,
1998 and 1999 have been calculated by dividing pro forma net loss by the pro
forma weighted average number of common shares deemed to be outstanding, which
includes certain restricted common shares that were issued in October 1999. Pro
forma net loss reflects the transactions discussed in Notes 1 and 3 and other
required adjustments discussed in Note 6 as if all of the transactions had
occurred on January 1, 1998.

F-16
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

16. SUPPLEMENTAL CASH FLOW INFORMATION:

Cash paid for interest amounted to $29, $20 and $10 for the year ended
December 31, 1997 and for the June 1998 and December 1998 periods, respectively.
No cash was paid for interest for the year ended December 31, 1999.

In connection with the Merger, in the December 1998 period, the Company
excluded from the consolidated statements of cash flows a non-cash step-up in
basis of $30,268 arising from the allocation of Merger consideration, which
includes an increase to management contract costs of $43,378, a decrease in
other assets related to hotel leases of $7,652 and a deferred tax liability of
$5,458. In addition, as a result of the change in accounting discussed in Note
5, the Company recorded marketable securities and deferred compensation in the
amount of $6,451 as of September 30, 1998, which was also excluded from the
December 1998 period statement of cash flows.

In 1999, as a result of the Spin-off, the Company excluded from the
consolidated statements of cash flows non-cash equity transfers of $57,614 to
minority interests, representing the net book value of Wyndham's 55%
non-controlling ownership interest in IH LLC, a transfer of Wyndham's share of
the net deferred tax liability of $5,289, and the net book value of the Common
Stock distributed to the stockholders of the Company of $65,456. Prior to the
Spin-off, the Company excluded from the consolidated statements of cash flows
the contribution of Wyndham stock valued at $2,172 that was used to reduce
accrued liabilities recorded in connection with the Merger. In addition, as a
result of the sale of the equity interests in The Charles Hotel Complex, the
Company excluded from the consolidated statements of cash flows a $5,750 secured
non-recourse promissory note, which was received as proceeds from the sale, and
the elimination of $2,409 of third-party minority interests of Intercarp Limited
Partnership. The Company also excluded from the consolidated statements of cash
flows non-cash unearned compensation of $1,079 related to the issuance of Common
Stock to two executives during 1999.

17. INSURANCE:

The Company provides certain insurance coverage to hotels under the terms
of the various management and lease contracts. This insurance is generally
arranged through third-party carriers. Northridge Insurance Company
("Northridge"), a subsidiary of IH LLC, reinsures a portion of the coverage from
these third-party primary insurers. The policies provide for layers of coverage
with minimum deductibles and annual aggregate limits. The policies are for
coverage relating to innkeepers' losses (general/comprehensive liability),
wrongful employment practices, garagekeeper's legal liability, replacement cost
automobile losses and real and personal property insurance.

The Company is liable for any deficiencies in the IHC Employee Health and
Welfare Plan (and related Health Trust), which provides employees of the Company
with group health insurance benefits. The Company has a financial indemnity
liability policy with Northridge which indemnifies the Company for certain
obligations for the deficiency in the related Health Trust. The premiums for
this coverage received from the properties managed by the Company, net of
intercompany amounts paid for employees at the Company's corporate offices and
leased hotels, are recorded as direct premiums written. There was a deficiency
of $1,451 and $2,949 in the related Health Trust as of December 31, 1998 and
1999, respectively, which was recorded as a liability of the Company in the
accompanying consolidated balance sheets.

All accounts of Northridge are classified with assets and liabilities of a
similar nature in the consolidated balance sheets. Amounts restricted due to
statutory requirements consist of cash and cash equivalents of $1,610 and $1,083
at December 31, 1998 and 1999, respectively. These amounts are included in
restricted cash in the accompanying consolidated balance sheets. The
consolidated statements of operations include the insurance income earned and
related insurance expenses incurred. The insurance income earned is included in

F-17
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

17. INSURANCE, CONTINUED:

other fees in the consolidated statements of operations and is comprised of the
following for the years ended December 31, 1997 and 1999 and for the June 1998
and December 1998 periods:

<TABLE>
<CAPTION>
JUNE DECEMBER
1997 1998 1998 1999
------ ------ -------- ------
<S> <C> <C> <C> <C>
Reinsurance premiums written.................. $5,811 $3,191 $2,585 $3,907
Direct premiums written....................... 2,221 625 875 800
Reinsurance premiums ceded.................... (544) (130) (170) (100)
Change in unearned premiums reserve........... (55) (87) (103) 2
Loss sharing premiums......................... 1,687 702 926 10
------ ------ ------ ------
Insurance income.............................. $9,120 $4,301 $4,113 $4,619
====== ====== ====== ======
</TABLE>

18. EMPLOYEE BENEFIT PLANS:

The Company maintains a defined contribution savings plan for all employees
of the Company. Eligibility for participation in the plan is based on the
employee's attainment of 21 years of age and on the completion of one year of
service with the Company. Employer contributions are based on a percentage of
employee contributions. Participants may make voluntary contributions to the
plan of up to 6% of their compensation, as defined. The Company incurred
expenses related to employees at its corporate offices of approximately $230,
$105, $147, and $221 for the year ended December 31, 1997, for the June 1998 and
December 1998 periods and for the year ended December 31, 1999, respectively.

19. FINANCIAL INSTRUMENTS:

The carrying values and fair values of the Company's financial instruments
consisted of the following at December 31:

<TABLE>
<CAPTION>
1998 1999
------------------ -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------ -------- -------
<S> <C> <C> <C> <C>
Cash and cash equivalents.................... $1,652 $1,652 $22,440 $22,440
Restricted cash.............................. 2,201 2,201 1,701 1,701
Officers and employees notes receivable...... 2,803 2,803 3,541 3,541
Notes receivable-affiliates.................. 3,381 3,381 10,838 10,838
Marketable securities........................ 2,609 2,609 2,134 2,134
</TABLE>

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:

Cash and cash equivalents and restricted cash: The carrying amounts
approximate fair value because of the short maturity of these investments.

Notes receivable: The fair value of notes receivable is based on
anticipated cash flows and approximates carrying value.

Marketable securities: The fair value of marketable securities is based
principally on the quoted market prices of the underlying security.

20. RELATED PARTY TRANSACTIONS:

Transactions with Significant Related Parties:

Included in net management fees are management fees earned pursuant to
management agreements between the Company and the affiliates of Old Interstate
or Wyndham that owned the owned hotels. In addition, certain of the owned hotels
were subject to management agreements between the Company and the

F-18
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

20. RELATED PARTY TRANSACTIONS, CONTINUED:

third-party owners of these hotels prior to the owned hotels' acquisition by Old
Interstate. Included in net management fee revenue in the accompanying
consolidated statements of operations are fees related to the owned hotels
(including periods prior to their acquisition by Old Interstate, if applicable)
amounting to $15,752, $6,987, $6,129 and $7,410 for the year ended December 31,
1997, for the June 1998 and December 1998 periods and for the year ended
December 31, 1999, respectively. Receivables from management fee revenues from
the owned hotels comprise the related party receivables -- management contracts
in the accompanying consolidated balance sheets and amount to $705 and $261 at
December 31, 1998 and 1999, respectively.

Revenues from other fees include primarily insurance revenues and
purchasing fees. Insurance revenues from owned hotels amounted to $2,842,
$1,378, $1,929 and $750 for the year ended December 31, 1997, for the June 1998
and December 1998 periods and for the year ended December 31, 1999,
respectively. Purchasing fees from owned hotels amounted to $1,574, $616, $552
and $357 for the year ended December 31, 1997, for the June 1998 and December
1998 periods and for the year ended December 31, 1999, respectively.

Concentration of Risk:

Notes receivable -- affiliates at December 31, 1999 include two notes
receivable from the current owner of The Charles Hotel Complex in the amounts of
$5,750 and $2,500, and mature on June 18, 2002 and October 1, 2002,
respectively. Both notes pay quarterly interest only, at a rate of 10% per
annum, until maturity, at which time the outstanding principal balances on the
notes are due and payable. The notes are not collateralized. In addition, the
Company manages three hotels located in Russia, one of which opened in December
1998. As of December 31, 1998 and 1999, receivables from these hotels amounted
to $3,772 and $4,019, respectively. The Company currently estimates that all of
these receivables are collectable; however, actual collections could differ from
current estimates.

Account Payable -- Related Parties:

Accounts payable -- affiliates at December 31, 1999 represents the
Company's required distribution to Wyndham for the period subsequent to the
Spin-off. In accordance with the term of IH LLC's limited liability company
agreement, the Company is required to distribute 55% of IH LLC's cash flows from
operations to Wyndham.

21. INVESTMENT IN HOTEL REAL ESTATE:

On October 2, 1997, the Company, through a 95% owned subsidiary, Intercarp
Limited Partnership ("Intercarp"), purchased a 55% non-controlling general
partnership interest in Charles Square Associates ("CSA"), a joint venture
general partnership, which serves as the managing general partner of CH&S
Limited Partnership ("CHS"), and a 25% interest in Cambridge Hotel Associates
("CHA") from an unrelated third party for approximately $13,000. CHS owns The
Charles Hotel Complex, which includes the hotel and related offices and retail
space in Cambridge, Massachusetts. CHA manages The Charles Hotel.

On October 10, 1997, Intercarp purchased 7.5 limited partnership units of
CHS for $150. During 1998, Intercarp purchased an additional 99.25 limited
partnership units for $2,948 and exchanged an 11.68% interest in Intercarp for
an additional 66.25 limited partnership units. As of December 31, 1998 Intercarp
held 173 of the 289 outstanding limited partnership units of CHS.

The Company accounted for its investment in CSA and CHA using the equity
method of accounting. Equity in earnings was included in other income in the
consolidated statements of operations and the investments were included in
investment in hotel real estate in the consolidated balance sheets. The Company
recognized equity in earnings from CHA of $136, $146, $213 and $162 for the year
ended December 31, 1997, for the June 1998 and December 1998 periods and for the
year ended December 31, 1999, respectively.

F-19
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

21. INVESTMENT IN HOTEL REAL ESTATE, CONTINUED:

On June 18, 1999, the Company completed the sale of substantially all of
its equity interests in The Charles Hotel Complex by selling a 1% general
partnership interest and an 82.9% limited partnership interest in Intercarp and,
through IH LLC, received $13,500 in cash and a $5,750 secured non-recourse
promissory note in connection with the sale. The promissory note pays quarterly
interest only, at a rate of 10% per annum, until maturity in 2002. The loss of
$876 on the sale is included in "loss on sale of investment in hotel real
estate" in the consolidated statements of operations and is allocated 100% to
Wyndham in "minority interest" in the consolidated statements of operations in
accordance with IH LLC's limited liability company agreement. This agreement
also requires that the proceeds and interest from the promissory note be
allocated entirely to the Company.

The Company is the sole general partner of CHA, the manager of The Charles
Hotel. The management contract for The Charles Hotel was amended in connection
with the sale to provide for a reduction in management fees payable to the
Company in exchange for an extension of the term of the management contract to
ten years. In addition, the Company loaned the owner of the hotel $2,500 on
October 1, 1999 under the terms of the amended management contract.

22. SEGMENT INFORMATION:

The Company adopted the provisions of SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information," effective December 31, 1998.
The statement requires disclosure of segment information for all periods
presented.

The Company determined that its reportable segments are those that are
based on the Company's method of internal reporting, which disaggregates its
business by operating entities which provide differing services.

The Company's reportable segments historically were: (i) operations of
luxury and upscale hotels, (ii) operations of mid-scale, upper economy and
budget hotels, and (iii) The Charles Hotel (hotel ownership). The luxury and
upscale hotels segment derives revenues from management fees and other services
which directly relate to providing management services, including revenues from
insurance, purchasing and equipment leasing. The mid-scale, upper economy and
budget segment derives revenues from managing and leasing hotels and certain
specialized support services. The Charles Hotel segment consisted principally of
an equity investment in The Charles Hotel Complex, which was sold during the
second quarter.

F-20
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

22. SEGMENT INFORMATION, CONTINUED:

The table below presents revenue and operating income (loss) information
for each reportable segment for the years ended December 31, 1997 and 1999 and
for the June 1998 and December 1998 periods.

<TABLE>
<CAPTION>
JUNE DECEMBER
1997 1998 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Luxury and Upscale Hotels............... $ 57,961 $ 26,010 $ 30,745 $ 41,808
Mid-Scale, Upper Economy
and Budget Hotels..................... 172,456 80,753 117,649 198,546
-------- -------- -------- --------
Consolidated totals................... $230,417 $106,763 $148,394 $240,354
======== ======== ======== ========
OPERATING INCOME (LOSS):
Luxury and Upscale Hotels............... $ 28,322 $ 11,887 $ 10,727 $ 2,868
Mid-Scale, Upper Economy and Budget
Hotels*............................... 3,232 1,278 (1,208) (30,085)
-------- -------- -------- --------
Consolidated totals................... $ 31,554 $ 13,165 $ 9,519 $(27,217)
======== ======== ======== ========
</TABLE>

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

* The 1999 amount includes a $2,000 one-time charge for additional incentive
rent paid in settlement of a dispute with Equity Inns resulting from the
Merger, and a $16,406 impairment charge on leased hotel intangible assets.

Depreciation and amortization included in segment operating income (loss)
for the years ended December 31, 1997 and 1999 and for the June 1998 and
December 1998 periods were as follows:

<TABLE>
<CAPTION>
JUNE DECEMBER
1997 1998 1998 1999
------ ------ -------- -------
<S> <C> <C> <C> <C>
Luxury and Upscale Hotels..................... $1,646 $ 776 $ 7,844 $13,569
Mid-Scale, Upper Economy and Budget Hotels.... 3,199 1,376 2,815 7,264
------ ------ ------- -------
Consolidated totals......................... $4,845 $2,152 $10,659 $20,833
====== ====== ======= =======
</TABLE>

The net book value of intangible and other assets by segment consisted of
the following at December 31:

<TABLE>
<CAPTION>
1998 1999
-------- -------
<S> <C> <C>
Luxury and Upscale Hotels................................... $ 55,487 $42,736
Mid-Scale, Upper Economy and Budget Hotels.................. 45,334 22,106
-------- -------
Consolidated totals....................................... $100,821 $64,842
======== =======
</TABLE>

The following table reconciles the Company's measure of segment profit to
consolidated net income (loss) for the years ended December 31, 1997 and 1999
and for the June 1998 and December 1998 periods.

<TABLE>
<CAPTION>
JUNE DECEMBER
1997 1998 1998 1999
------- ------ --------- --------
<S> <C> <C> <C> <C>
Total after-tax operating income (loss)............ $18,932 $7,899 $5,711 $(16,330)
Unallocated amounts, net of tax:
Interest, net.................................... 299 122 234 821
Other, net....................................... 259 284 835 910
Loss on sale of investment in hotel real
estate........................................ -- -- -- (526)
Minority interest................................ (11) (14) (125) 7,508
------- ------ ------ --------
Consolidated net income (loss)..................... $19,479 $8,291 $6,655 $ (7,617)
======= ====== ====== ========
</TABLE>

F-21
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

23. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):

The following table sets forth certain items included in the Company's
unaudited consolidated financial statements for each quarter of the year ended
December 31, 1999 and the June 1998 and December 1998 periods:

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
<S> <C> <C> <C> <C>
1999:
Total revenues..................................... $54,144 $63,541 $65,561 $57,108
Operating loss..................................... (4,455) (822) (2,489) (19,451)
Net (loss) income.................................. (2,438) 375 (565) (4,989)
Basic earnings per common share.................... -- -- (.09) (.82)
Diluted earnings per common share.................. -- -- (.09) (.82)
JUNE 1998 PERIOD:
Total revenues..................................... $59,760 $47,003 $ -- $ --
Operating income................................... 6,093 7,072 -- --
Net income......................................... 3,903 4,388 -- --
DECEMBER 1998 PERIOD:
Total revenues..................................... $ -- $23,837 $68,970 $55,587
Operating income................................... -- 3,011 4,140 2,368
Net income......................................... -- 1,886 2,867 1,902
</TABLE>

24. SUBSEQUENT EVENTS:

In February 2000, a subsidiary of the Company entered into a
limited-recourse mortgage note with a bank. The proceeds from the note, which
has a two-year term with a one-year extension, amounted to $7,560. Monthly
payments are due based on a 25-year amortization schedule for principal, with
interest based on variable rate options using the prime rate or the LIBOR rate.
The note is collateralized by the Pittsburgh Airport Residence Inn by Marriott,
which was acquired by the Company on November 1, 1999, and provides for a
guarantee by the Company of up to $3,000. The outstanding principal balance on
the note is due and payable at maturity.

F-22

<PAGE> 1
Exhibit 21.1

Subsidiaries of Interstate Hotels Corporation (a Maryland corporation)
(as of March 17, 2000)

- - ------------------------------------------------------------------
CHR Consulting Company, L.L.C.
- - ------------------------------------------------------------------
CHR Services Company, L.L.C.
- - ------------------------------------------------------------------
CRS/Burlington Corporation
- - ------------------------------------------------------------------
Cambridge Hotel Associates
- - ------------------------------------------------------------------
Colony Hotels and Resorts Company
- - ------------------------------------------------------------------
Colony International Management Company, L.L.C.
- - ------------------------------------------------------------------
Colony de Mexico, S.A. de C.V.
- - ------------------------------------------------------------------
Continental Design and Supplies Company, L.L.C.
- - ------------------------------------------------------------------
Crossroads Future Company, L.L.C.
- - ------------------------------------------------------------------
Crossroads Future Financing Company, L.L.C.
- - ------------------------------------------------------------------
Crossroads Hospitality Company, L.L.C.
- - ------------------------------------------------------------------
Crossroads Hospitality Management Company
- - ------------------------------------------------------------------
Crossroads Hospitality Tenant Company, L.L.C.
- - ------------------------------------------------------------------
Crossroads/Memphis Company, L.L.C.
- - ------------------------------------------------------------------
Crossroads/Memphis Financing Company, L.L.C.
- - ------------------------------------------------------------------
Crossroads/Memphis Financing II Company, L.L.C.
- - ------------------------------------------------------------------
Crossroads Memphis Financing Corporation
- - ------------------------------------------------------------------
Crossroads Memphis Financing II Corporation
- - ------------------------------------------------------------------
Crossroads/Memphis Partnership, L.P.
- - ------------------------------------------------------------------
Equity Bluefield, Inc.
- - ------------------------------------------------------------------
Future Financing Member Corporation
- - ------------------------------------------------------------------
Hilltop Equipment Leasing Company, L.P.
- - ------------------------------------------------------------------
IHC II, LLC
- - ------------------------------------------------------------------
IHC Holdings, Inc.
- - ------------------------------------------------------------------
IHC International Development (U.K.), L.L.C.
- - ------------------------------------------------------------------
IHC/Moscow Corporation
- - ------------------------------------------------------------------
IHC Moscow Services, L.L.C.
- - ------------------------------------------------------------------
IHC Services Company, L.L.C.
- - ------------------------------------------------------------------
Interstate Hotels, LLC
- - ------------------------------------------------------------------
Interstate Hotels Company
- - ------------------------------------------------------------------
Interstate Member, Inc.
- - ------------------------------------------------------------------
Interstate Partner Corporation
- - ------------------------------------------------------------------
Interstate Pittsburgh Hotel Holdings, L.L.C.
- - ------------------------------------------------------------------
Interstate Property Corporation
- - ------------------------------------------------------------------
Interstate Property Partnership, L.P.
- - ------------------------------------------------------------------
Northridge Holdings, Inc.
- - ------------------------------------------------------------------
Northridge Insurance Company
- - ------------------------------------------------------------------
PAH-Hilltop GP, LLC
- - ------------------------------------------------------------------
PAH-Cambridge Holdings, LLC
- - ------------------------------------------------------------------
Oak Hill Catering Company, Inc.
- - ------------------------------------------------------------------
State College BBQ/Concord Joint Venture
- - ------------------------------------------------------------------

<PAGE> 1
Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 333-88093 and No. 333-86133) of Interstate
Hotels Corporation and its subsidiaries of our report dated February 16, 2000
relating to the financial statements, which appears in the Annual Report to
Shareholders, which is incorporated in this Annual Report on Form 10-K/A.

April 28, 2000
Pittsburgh, Pennsylvania

<PAGE> 1
Exhibit 24.1

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Thomas F. Hewitt, Timothy Q. Hudak, Patricia Shearer, and each of
them, the true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, to
sign on his behalf, as a director of Interstate Hotels Corporation, a Maryland
corporation (the "Company"), an Annual Report on Form 10-K for the year ended
December 31, 1999, and to sign any and all amendments to such Form 10-K and file
the same, with all exhibits thereto and 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 thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact or agents, or any of them, and their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

/s/ J. William Richardson
------------------------------------
J. William Richardson

Dated: March 24, 2000

<PAGE> 2

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints J. William Richardson, Timothy Q. Hudak, Patricia Shearer, and each
of them, the true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, to
sign on his behalf, as a director of Interstate Hotels Corporation, a Maryland
corporation (the "Company"), an Annual Report on Form 10-K for the year ended
December 31, 1999, and to sign any and all amendments to such Form 10-K and file
the same, with all exhibits thereto and 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 thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact or agents, or any of them, and their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

/s/ Thomas F. Hewitt
------------------------------------
Thomas F. Hewitt

Dated: March 24, 2000

<PAGE> 3

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Thomas F. Hewitt, J. William Richardson, Timothy Q. Hudak, Patricia
Shearer, and each of them, the true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, to sign on his behalf, as a director of Interstate Hotels
Corporation, a Maryland corporation (the "Company"), an Annual Report on Form
10-K for the year ended December 31, 1999, and to sign any and all amendments to
such Form 10-K and file the same, with all exhibits thereto and 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 thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact or agents, or any of them, and their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

/s/ Michael L. Ashner
------------------------------------
Michael L. Ashner

Dated: March 24, 2000

<PAGE> 4

POWER OF ATTORNEY

/s/ Benjamin D. Holloway
------------------------------------
Benjamin D. Holloway

Dated: March 24, 2000

<PAGE> 5

POWER OF ATTORNEY

/s/ Stephen P. Joyce
------------------------------------
Stephen P. Joyce

Dated: March 24, 2000

<PAGE> 6

POWER OF ATTORNEY

/s/ Phillip H. McNeill, Sr.
------------------------------------
Phillip H. McNeill, Sr.

Dated: March 24, 2000

<PAGE> 7

POWER OF ATTORNEY

/s/ Anne L. Raymond
------------------------------------
Anne L. Raymond

Dated: March 24, 2000

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 22,440
<SECURITIES> 0
<RECEIVABLES> 17,688
<ALLOWANCES> (486)
<INVENTORY> 0
<CURRENT-ASSETS> 42,426
<PP&E> 17,288
<DEPRECIATION> (1,239)
<TOTAL-ASSETS> 142,459
<CURRENT-LIABILITIES> 36,865
<BONDS> 0
0
0
<COMMON> 64
<OTHER-SE> 59,942
<TOTAL-LIABILITY-AND-EQUITY> 142,459
<SALES> 0
<TOTAL-REVENUES> 240,354
<CGS> 0
<TOTAL-COSTS> 267,571
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (25,209)
<INCOME-TAX> (5,078)
<INCOME-CONTINUING> (20,131)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,617)
<EPS-BASIC> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>THE COMPANY DOES NOT BELIEVE THAT A HISTORICAL EARNINGS PER SHARE CALCULATION
FOR THE PARTIAL PERIOD BETWEEN THE SPIN-OFF DATE OF JUNE 18, 1999 THROUGH
DECEMBER 31, 1999 IS MEANINGFUL.
</FN>

</TABLE>