The U.S. lodging industry is in the early phases of a recovery from the dramatic negative effects of an economic slowdown and travel disruptions relating to the terrorist attacks of September 11, 2001. The overall decline in both business and leisure travel led to decreased demand for hotel rooms, which, together with an increase in hotel supply, led to declines in room rates as hotels competed more aggressively for guests. These events had a significant adverse effect on lodging industry RevPAR and operating performance in 2001 through 2003.

Fluctuations in lodging demand and, therefore, operating performance, are caused largely by general economic and local market conditions, which in turn affect levels of business and leisure travel.

From 1988 to 2000, demand for hotel rooms grew at an average annual rate of approximately 2.6%, corresponding to the 3.3% average annual growth rate in GDP. This period of growth was interrupted by disruptions in travel activities in 2001 and a weakening economy. Beginning in 2002, lodging demand and GDP began to show signs of recovery. In 2002 and 2003, lodging demand increased by 0.3% and 1.5%, while GDP increased by 2.2% and 3.1%. Smith Travel Research projects GDP growth of 4.6% and an increase in lodging demand of 4.0% in 2004 and GDP growth of 3.8% and an increase in lodging demand of 3.0% in 2005.

Historically, periods of weak lodging performance have been followed by a decrease in the growth of new lodging supply as the availability of new development capital declines. Although improving operating fundamentals encourage new construction, development may require up to several years to complete. As a result, supply growth typically lags behind a lodging industry recovery. From 1988 to 2000 new supply growth averaged 2.7% annually; however, subsequent to the downturn beginning in 2001, new lodging supply for the U.S. lodging industry increased by only 1.6% in 2002 and 1.2% in 2003 and is projected to grow by 1.2% in 2004 and 1.3% in 2005, approximately one-half of its 15-year historical average of 2.3%.

The Company owns a geographically diverse portfolio of hotels located in 17 states with a concentration of hotels in the western United States.

The Company’s hotels enjoy competitive advantages associated with their operations under well known brands. The national marketing programs and reservation systems of these brands combined with the strong management systems and expertise the franchisors provide should enable the Company’s hotels to continue to perform favorably relative to the Company’s competitors in terms of both occupancy and room rates. The Company’s primary hotel operator, the Management Company, and the Company’s other third party hotel managers maintain reservation systems that monitor the current status of the rooms available and rates for the hotels. In addition, repeat guest business is enhanced by guest rewards programs offered by most of the Company’s brands, including Marriott and Hilton.

Net loss increased $14.8 million for the six months ended June 30, 2004, compared to the same period in 2003.

Total operating expenses increased $20.1 million for the six months ended June 30, 2004, compared to the same period in 2003.