You should read the discussion below in conjunction with the consolidated financial statements and accompanying notes. Also, the discussion which follows contains forward-looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed above under the caption "Risk Factors."

Executive Summary

We are one of the largest independent owners and operators of full-service hotels in the United States in terms of our number of guest rooms according to Hotel Business. We are considered an independent owner and operator because we do not operate our hotels under our own name. We operate substantially all of our hotels under nationally recognized brands, such as "Crowne Plaza,", "Four Points by Sheraton", "Hilton," "Holiday Inn," "Marriott," and "Wyndham".

As of March 1, 2009, we operated 41 hotels with an aggregate of 7,578 rooms, located in 23 states and Canada. Of the 41 hotels, 35 hotels, with an aggregate of 6,655 rooms, are held for use and the results of operations are classified in continuing operations, while 6 hotels, with an aggregate of 923 rooms, are held for sale and the results of operations are classified in discontinued operations.

As of December 31, 2008, we had $332.6 million of total mortgage obligations outstanding, including the current portion. This mortgage indebtedness is secured by interests in certain of our hotel properties. Approximately $128 million of this mortgage debt is scheduled to mature in July 2009 and cannot be extended without the approval of the loan servicers, which extension has been requested but not yet granted. To address the pending maturities, we are also pursuing opportunities to refinance the maturing mortgage debt or to acquire new mortgage debt using currently unencumbered properties. To date, we have been unable to secure financing and, in light of the current credit markets generally and the real estate credit markets specifically, we expect it will remain difficult to refinance the mortgage debt prior to the July 2009 maturity date. We cannot currently predict whether our efforts to refinance or extend the maturing debt will be successful. See "Item 1A. Risk Factors" for additional information.

Total assets decreased from $624.7 million at December 31, 2007 to $555.4 million at December 31, 2008. The reduction was primarily due to lower cash balances (approximately $34 million) and lower book value of property and equipment due to hotels sold during 2008.

Long-term liabilities decreased from $355.7 million at December 31, 2007 to $194.8 million at December 31, 2008, mainly as a result of the reclassification of the maturing debt from long-term liabilities to current liabilities. In addition, the long-term liabilities associated with the assets that were reclassified to held for sale during 2008 were reclassified to Liabilities related to assets held for sale.

Overview of Continuing Operations

Below is a summary of our results of continuing operations, presented in more detail in "Results of Operations-Continuing Operations":

• Revenues decreased $2.1 million, or 0.9%. Rooms revenues decreased $1.1 million, or 0.6%, as ADR fell 1.2% and occupancy remained relatively flat, increasing 0.3%. Food and beverage revenues decreased $1.5 million, or 2.8%, driven largely by lower banquet revenues.

• Operating income declined $12.1 million primarily as a result of impairment charges, casualty losses and margin erosion driven by the weakened economy.

Overview of Discontinued Operations

In December 2007, we announced a strategic initiative to reconfigure our hotel portfolio. We redefined our held for use portfolio, which contains 35 hotels. In accordance with this strategy and our previously announced disposition program, we sold 5 hotels in 2008. For the 5 hotels sold in 2008, total revenues were $7.3 million, direct operating expenses were $2.9 million, and other hotel operating expenses were $3.1 million for the year ended December 31, 2008, respectively.

The consolidated statements of operations for discontinued operations for the years ended 2008, 2007 and 2006 include the results of operations for the 6 hotels that were held for sale at December 31, 2008, as well as all properties that have been sold in accordance with SFAS No. 144.

The assets held for sale at December 31, 2008 and December 31, 2007 and the liabilities related to these assets are separately disclosed in the Consolidated Balance Sheets. Among other criteria, we classify an asset as held for sale if we expect to dispose of it within one year, we have initiated an active marketing plan to sell the asset at a reasonable price and it is unlikely that significant changes to the plan to sell the asset will be made. While we believe that the completion of these dispositions is probable, the sale of these assets is subject to market conditions and we cannot provide assurance that we will finalize the sale of all or any of these assets on favorable terms or at all. We believe that all of our held for sale assets as of December 31, 2008 remain properly classified in accordance with SFAS No. 144.

Where the carrying values of the assets held for sale exceeded the estimated fair values, net of selling costs, we reduced the carrying values and recorded impairment charges. During the year ended December 31, 2008, we recorded impairment charges of $10.8 million on assets held for sale.

Our continuing operations reflect the results of operations of those hotels which we are likely to retain in our portfolio for the foreseeable future as well as those assets which do not currently meet the held for sale criteria of SFAS No. 144. We periodically evaluate the assets in our portfolio to ensure they continue to meet our performance objectives. Accordingly, from time to time, we could identify other assets for disposition.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with generally accepted accounting principles ("GAAP"). As we prepare our financial statements, we make estimates and assumptions which affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from our estimates.

These financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, as discussed in "Item 1A. Risk Factors", approximately $128 million of outstanding mortgage debt is scheduled to mature in July 2009 and the current severe economic recession has negatively impacted our operating results, which affects operating cash flows as well as our ability to refinance the maturing indebtedness. In the absence of an extension, refinancing or repayment of the July 2009 debt, these factors raise substantial doubt as to our ability to continue as a going concern. We have engaged mortgage bankers to facilitate the refinancing process and to assist in negotiations with prospective lenders. Management is also negotiating to extend the maturing mortgage debt. However, management can provide no assurance that we will be able to refinance or extend the debt. The financial statements do not include any adjustments relating to the recoverability and classifications of recorded asset amounts or the amounts and classifications of liabilities or any other adjustments that may be necessary if we are unable to continue as a going concern.

A summary of our significant accounting policies is included in Note 1 of the notes to our consolidated financial statements. We consider the following to be our critical accounting policies and estimates:

Consolidation policy - All of our hotels are owned by operating subsidiaries. We consolidate the assets, liabilities and results of operations of those hotels where we own at least 50% of the voting equity interest and we exercise significant control. All of the subsidiaries are wholly-owned except for one joint venture, which meets the criteria for consolidation.

When we consolidate a hotel in which we own less than 100% of the voting equity interest, we include the assets and liabilities of the hotel in our consolidated balance sheet. The third party interest in the net assets of the hotel is reported as minority interest on our consolidated balance sheet. In addition, our consolidated statement of operations reflects the full revenues and expenses of the hotel and the third party portion of the net income or loss is reported as minority interest in our consolidated statements of operations. If the loss applicable to the minority interest exceeds the minority's equity, we report the entire loss in our consolidated statement of operations.

Deferral policy - We defer franchise application fees on the acquisition or renewal of a franchise as well as loan origination costs related to new or renewed loan financing arrangements. Deferrals relating to the acquisition or renewal of a franchise are amortized on a straight-line basis over the period of the franchise agreement. We amortize deferred financing costs over the term of the loan using the effective interest method. The effective interest method incorporates the present values of future cash outflows and the effective yield on the debt in determining the amortization of loan fees. At December 31, 2008, these deferrals totaled $2.7 million for our held for use hotels. If we were to write-off these expenses in the year of payment, our operating expenses in those years would be significantly higher and lower in other years covered in the related agreement.

Asset impairment - We invest significantly in real estate assets. Property and equipment for our held for use assets represented 80.5% of the total assets on our consolidated balance sheet at December 31, 2008. Accordingly, our policy on asset impairment is considered a critical accounting estimate. Management periodically evaluates our property and equipment to determine whether events or changes in circumstances indicate that a possible impairment in the carrying values of the assets has occurred. As part of this evaluation, and in accordance with SFAS No. 144, we classify our properties into two categories: "assets held for sale" and "assets held for use".

We consider an asset held for sale when the following criteria per SFAS No. 144 are met:

1. Management commits to a plan to sell the asset;

2. The asset is available for immediate sale in its present condition;

3. An active marketing plan to sell the asset has been initiated at a reasonable price;

4. The sale of the asset is probable within one year; and

5. It is unlikely that significant changes to the plan to sell the asset will be made.

Upon designation of an asset as held for sale, we record the carrying value of the asset at the lower of its carrying value or its estimated fair value less estimated selling costs, and we cease depreciation of the asset. Management's estimate of the fair value of an asset is generally based on a number of factors, including letters of intent or other indications of value from prospective buyers, or, in the absence of such, the opinions of third-party brokers or appraisers. While management may consider one or more opinions or appraisals in arriving at an asset's estimated fair value, our estimate is ultimately based on management's determination and we remain responsible for the impact of the estimate on the financial statements. The estimated selling costs are generally based on our experience with similar asset sales. We record impairment charges and write down respective hotel assets if their carrying values exceed the estimated selling prices less costs to sell.

With respect to assets held for use, we estimate the undiscounted cash flows to be generated by these assets. We then compare the estimated undiscounted cash flows for each hotel with their respective carrying values to determine if there are indicators of impairment. The carrying value of a long-lived asset is considered for impairment when the estimated undiscounted cash flows to be generated by the asset over its estimated useful life are less than the asset's carrying value. For those assets where there are indicators of impairment, we determine the estimated fair values of these assets by taking into consideration indicators of value including broker valuations or appraisals. While management may consider one or more opinions or appraisals in arriving at an asset's estimated fair value, our estimate is ultimately based on management's determination and we remain responsible for the impact of the estimate on the financial statements. The broker valuations of fair value normally use the "cap rate" approach of estimated cash flows, a "per key" approach or a "room revenue multiplier" approach for determining fair value. If the estimated fair value exceeds the asset's carrying value, no adjustment is generally recorded. Additionally, if an asset is replaced prior to the end of its useful life, the remaining net book value is recorded as an impairment loss.

Accrual of self-insured obligations - We are self-insured up to certain amounts for employee medical, employee dental, property insurance, general liability insurance, personal injury claims, workers' compensation, automobile liability and other coverages. We establish reserves for our estimates of the loss that we will ultimately incur on reported claims as well as estimates for claims that have been incurred but not yet reported. Our reserves, which are reflected in other accrued liabilities on our consolidated balance sheet, are based on actuarial valuations and our history of claims. Our actuaries incorporate historical loss experience and judgments about the present and

expected levels of costs per claim. Trends in actual experience are an important factor in the determination of these estimates. We believe that our estimated reserves for such claims are adequate; however, actual experience in claim frequency and amount could materially differ from our estimates and adversely affect our results of operations, cash flow, liquidity and financial condition. As of December 31, 2008, our reserve balance related to these self-insured obligations was $10.4 million.

Income Statement Overview

The discussion below focuses primarily on our continuing operations. In the continuing operations discussions, we compare the results of operations for the last three years for the 35 consolidated hotels that, as of December 31, 2008, are classified as assets held for use.

Revenues

We categorize our revenues into the following three categories:

• Rooms revenues - derived from guest room rentals;

• Food and beverage revenues - derived from hotel restaurants, room service, hotel catering and meeting room rentals; and

• Other revenues - derived from guests' long-distance telephone usage, laundry services, parking services, in-room movie services, vending machine commissions, leasing of hotel space and other miscellaneous revenues.

Transient revenues, which accounted for approximately 69% of our 2008 room revenues, are revenues derived from individual guests who stay only for brief periods of time without a long-term contract. Demand from groups made up approximately 24% of our 2008 room revenues while our contract revenues (such as contracts with airlines for crew rooms) accounted for the remaining 7%.

We believe revenues in the hotel industry are best explained by the following key performance indicators:

• Occupancy - computed by dividing total room nights sold by the total available room nights. To obtain available room nights for a particular period, we multiply the number of rooms in each hotel by the number of days the hotel was open;

• Average Daily Rate (ADR) - computed by dividing total room revenues by total room nights sold; and

• Revenue per available room (RevPAR) - computed by dividing total room revenues for a particular period by the total available room nights over the same period. Our calculation of total room revenues and the number of available rooms is adjusted, as appropriate, for the opening and closing of hotels in our portfolio. Our RevPAR can also be calculated by multiplying our occupancy for a particular period by our average daily rate over the same period.

These measures are influenced by a variety of factors including national, regional and local economic conditions, the degree of competition with other hotels in the area and changes in travel patterns. The demand for accommodations is also affected by normally recurring seasonal patterns and most of our hotels experience lower occupancy levels in the fall and winter months, November through February, which generally results in lower revenues, lower net income and less cash flow during these months.

Operating expenses

Operating expenses fall into the following categories:

• Direct operating expenses - these expenses tend to vary with available rooms and occupancy. However, hotel level expenses contain significant elements of fixed costs and, therefore, do not decline proportionately with revenues. Direct expenses are further categorized as follows:

• Rooms expenses - expenses incurred in generating room revenues;

• Food and beverage expenses - expenses incurred in generating food and beverage revenues; and

• Other direct expenses - expenses incurred in generating the revenue activities classified in "other revenues."

We use certain "non-GAAP financial measures," which are measures of our historical financial performance that are not calculated and presented in accordance with GAAP, within the meaning of applicable SEC rules. For instance, we use the term direct operating contribution to mean revenues less direct operating expenses as presented in the consolidated statement of operations. We assess profitability by measuring changes in our direct operating contribution and direct operating contribution percentage, which is direct operating contribution as a percentage of the applicable revenue source. These measures assist management in distinguishing whether increases or decreases in revenues and/or expenses are due to growth or decline of operations or from other factors. We believe that direct operating contribution, when combined with the presentation of GAAP operating income, revenues and expenses, provide useful information to management.

• Other hotel operating expenses - these expenses include salaries for hotel management, advertising and promotion, franchise fees, repairs and maintenance and utilities;

• Property and other taxes, insurance and leases - these expenses include equipment, ground and building rentals, insurance, and property, franchise and other taxes;

• Corporate and other - these expenses include corporate salaries and benefits, legal, accounting and other professional fees, directors' fees, costs for office space and information technology costs. Also included are costs related to compliance with Sarbanes-Oxley legislation;

• Casualty (gains) losses, net - these expenses include hurricane and other repair costs and charges related to the assets written off that were damaged, netted against any gains realized on the final settlement of property damage claims;

• Depreciation and amortization - depreciation of fixed assets (primarily hotel assets) and amortization of deferred franchise fees; and

• Impairment of long-lived assets - charges required to write down the carrying values of long-lived assets to the fair values of assets where the estimated undiscounted cash flows over the life of the asset were less than the carrying value of the asset.

Non-operating items

Non-operating items include:

• Business interruption insurance proceeds represent insurance proceeds for lost profits as a result of a business shutdown. Our 2008 business interruption proceeds relate primarily to the recovery of lost profits and reimbursement for additional expenses incurred at the Holiday Inn Hotel & Suites Marietta, which was closed as a result of the fire in January 2006.

• Interest expense and other financing costs represent interest expense, which includes amortization of deferred loan costs and changes in the fair value of interest rate caps;

• Interest income; and

• Minority interests - our equity partner's share of the income or loss of the hotel owned by joint venture that we consolidate.

Results of Operations - Continuing Operations

Results of operations for the years ended December 31, 2008 and December 31, 2007

Revenues - Continuing Operations


                                2008          2007          Increase (decrease)
                                          ($ in thousands)

          Revenues:
          Rooms               $ 178,623     $ 179,716     $     (1,093 )      (0.6 )%
          Food and beverage      53,543        55,089           (1,546 )      (2.8 )%
          Other                   8,262         7,753              509         6.6 %

          Total revenues      $ 240,428     $ 242,558     $     (2,130 )      (0.9 )%

          Occupancy                69.2 %        69.0 %                        0.3 %
          ADR                 $  105.95     $  107.21            (1.26 )      (1.2 )%
          RevPAR              $   73.32     $   73.97            (0.65 )      (0.9 )%

Rooms revenues decreased $1.1 million, or 0.6%, driven by a 1.2% decrease in ADR, partly offset by a 0.3% rise in occupancy. The decline in rooms revenues was the result of deteriorating economic conditions. In spite of the challenging economic environment, we outperformed the U.S. lodging industry as a whole in 2008 as our RevPAR decreased 0.9%, compared to a decrease of 1.9% for the U.S. lodging industry, according to Smith Travel Research. This was achieved largely because of our planned strategic shift toward the contract segment of business in order to react to market conditions.

Food and beverage revenues decreased $1.5 million, or 2.8%, driven by a decrease in our banquet revenues as businesses reduced their spending on conferences and other events. Other revenues grew $0.5 million, or 6.6%, due largely to fees for canceled events.

Revenue growth was negatively impacted by displacement. Displacement refers to lost revenues and profits due to rooms being out of service as a result of renovation. Revenue considered "displaced" only when a hotel has sold all available rooms and denies additional reservations due to rooms out of service. We feel this method is conservative, as it does not include estimated "soft" displacement costs associated with a renovation. During a renovation, there is significant disruption of normal business operations. In many cases, renovations result in the relocation of front desk operations, restaurant and bar services, and meeting rooms. In addition, the construction activity itself can be disruptive to our guests. As a result, guests may depart earlier than planned due to the disruption caused by the renovation work, local customers or frequent guests may choose an alternative hotel during the renovation, and local groups may not solicit the hotel to house their groups during renovations. These "soft" displacement costs are difficult to quantify and are excluded from our displacement calculation. Total revenue displacement during the year ended December 31, 2008 for the eleven hotels under renovation was $2.1 million. The largest amount of this displacement occurred at our former Holiday Inn Select DFW Airport hotel, which was converted to a Wyndham hotel and recently completed an extensive renovation. Total revenue displacement for the seven hotels under renovation during the year ended December 31, 2007 was $1.9 million.

Direct operating expenses - Continuing Operations

                                                                                                        % of Total Revenues
                                          2008           2007            Increase (decrease)             2008           2007
                                                                           ($ in thousands)

Direct operating expenses:
Rooms                                   $  46,588      $  44,833      $      1,755          3.9 %           19.4 %        18.5 %
Food and beverage                          36,755         37,239              (484 )       (1.3 )%          15.3 %        15.4 %
Other                                       5,806          5,503               303          5.5 %            2.4 %         2.3 %

Total direct operating expenses         $  89,149      $  87,575      $      1,574          1.8 %           37.1 %        36.1 %

Direct operating contribution (by
revenue source):
Rooms                                   $ 132,035      $ 134,883      $     (2,848 )       (2.1 )%
Food and beverage                          16,788         17,850            (1,062 )       (5.9 )%
Other                                       2,456          2,250               206          9.2 %

Total direct operating contribution     $ 151,279      $ 154,983      $     (3,704 )       (2.4 )%

Direct operating contribution % (by
revenue source):
Rooms                                        73.9 %         75.1 %
Food and beverage                            31.4 %         32.4 %
Other                                        29.7 %         29.0 %

Total direct operating contribution          62.9 %         63.9 %

Rooms expenses increased $1.8 million, or 3.9%. Room expenses on a cost per occupied room ("POR") basis increased from $26.64 in 2007 to $27.41 in 2008, an increase of 2.9%, primarily as a result of a $0.6 million increase in employee medical costs and increased seasonal labor as the hotels reduced full-time employees and increased contractors to allow greater flexibility in managing labor costs.

Food and beverage expenses decreased $0.5 million, or 1.3%, driven primarily by lower food and beverage revenues, partially offset by higher employee medical costs which increased $0.5 million in 2008. Food and beverage direct operating contribution decreased $1.1 million, or 5.9%.

Other expenses grew $0.3 million, or 5.5%, while the related direct operating contribution rose $0.2 million, an increase of 9.2%. In total, direct operating contribution decreased $3.7 million, or 2.4%.

Other operating expenses - Continuing Operations

                                                                                                          % of Total Revenues
. . .