##### 






Exhibit 13

PART I.          FINANCIAL
INFORMATION




ITEM
1.          FINANCIAL
STATEMENTS



MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED BALANCE SHEETS


(Dollars and shares in thousands, except per
share amounts)


|                                                                                     |                                                                                                               |             |           |              |   |   |           |           |  
|------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------- | ----------- | --------- | ------------ | - | - | --------- | --------- | -
|                                                                                     |                                                                                                               | June 30,    |           |             
|                                                                                     |                                                                                                               | 2004        |           | December 31,
|                                                                                     |                                                                                                               | (Unaudited) |           | 2003        
|                                                                                     |                                                                                                               |             |           |             
|ASSETS                                                                               |                                                                                                               |             |           |              |   |   |           |          
|Property and equipment                                                               |                                                                                                               | $           | 2,633,167 |              |   | $ | 2,481,752 |          
|Accumulated depreciation                                                             |                                                                                                               |             | (488,371  | )            |   |   | (446,032  | )        
|                                                                                     |                                                                                                               |             |           |              |   |   |           |          
|                                                                                     |                                                                                                               |             | 2,144,796 |              |   |   | 2,035,720 |          
|Assets held for sale                                                                 |                                                                                                               |             | 21,826    |              |   |   | 51,169    |          
|Investment in affiliate                                                              |                                                                                                               |             | 15,000    |              |   |   | 15,000    |          
|Prepaid expenses and other assets                                                    |                                                                                                               |             | 41,113    |              |   |   | 47,934    |          
|Accounts receivable, net of allowance for
    doubtful accounts of $3,728 and $2,040 |                                                                                                               |             | 72,173    |              |   |   | 64,709    |          
|Restricted cash                                                                      |                                                                                                               |             | 72,478    |              |   |   | 42,523    |          
|Cash and cash equivalents  unrestricted                                             |                                                                                                               |             | 148,819   |              |   |   | 230,884   |          
|                                                                                     |                                                                                                               |             |           |              |   |   |           |          
|                                                                                     |                                                                                                               | $           | 2,516,205 |              |   | $ | 2,487,939 |          
|                                                                                     |                                                                                                               |             |           |              |   |   |           |          
|                                                                                    
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                             |                                                                                                               |             |           |              |   |   |           |          
|                                                                                    
|Long-term debt                                                                       |                                                                                                               | $           | 1,587,404 |              |   | $ | 1,638,028 |          
|Accounts payable and accrued expenses                                                |                                                                                                               |             | 91,450    |              |   |   | 83,458    |          
|Accrued interest                                                                     |                                                                                                               |             | 41,121    |              |   |   | 46,813    |          
|Due to Interstate Hotels & Resorts                                                   |                                                                                                               |             | 21,887    |              |   |   | 16,411    |          
|Other liabilities                                                                    |                                                                                                               |             | 19,703    |              |   |   | 11,831    |          
|                                                                                     |                                                                                                               |             |           |              |   |   |           |          
|Total liabilities                                                                    |                                                                                                               |             | 1,761,565 |              |   |   | 1,796,541 |          
|                                                                                     |                                                                                                               |             |           |              |   |   |           |          
|Minority interests                                                                   |                                                                                                               |             | 26,880    |              |   |   | 37,785    |          
|Stockholders equity:                                                                |                                                                                                               |             |           |              |   |   |           |          
|                                                                                     | Common stock, par value $0.01 per share
    Authorized  100,000 shares
    Issued  89,307 and 69,135 shares |             |           | 893          |   |   |           | 691       |  
|                                                                                     | Additional paid-in capital                                                                                    |             |           | 1,463,886    |   |   |           | 1,338,959 |  
|                                                                                     | Accumulated deficit                                                                                           |             |           | (693,893     | ) |   |           | (642,094  | )
|                                                                                     | Accumulated other comprehensive loss                                                                          |             |           |             |   |   |           | (977      | )
|                                                                                     | Common stock held in treasury  2,371
    and 2,345 shares                                                    |             |           | (43,126      | ) |   |           | (42,966   | )
|                                                                                     |                                                                                                               |             |           |              |   |   |           |          
|Total stockholders equity                                                           |                                                                                                               |             | 727,760   |              |   |   | 653,613   |          
|                                                                                     |                                                                                                               |             |           |              |   |   |           |          
|                                                                                     |                                                                                                               | $           | 2,516,205 |              |   | $ | 2,487,939 |          
|                                                                                     |                                                                                                               |             |           |              |   |   |           |          

See accompanying notes to the unaudited
consolidated financial statements.

2



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##### 



MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS


UNAUDITED


(Dollars in thousands, except per share
amounts)


|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |          |         | 
|-------------------------------------------------------- | ------------------------------------------------------- | ------------------------------------- | ------- | ---------------- | ------- | ---- | -------- | -------- | ------- | - | ------- | ------- | ------- | - | -------- | -------- | ------- | 
|                                                         |                                                         |                                       |         |                 
|                                                         |                                                         | Three Months Ended                    |         | Six Months Ended
|                                                         |                                                         | June 30,                              |         | June 30,        
|                                                         |                                                         |                                       |         |                 
|                                                         |                                                         | 2004                                  |         | 2003             |         | 2004 |          | 2003    
|                                                         |                                                         |                                       |         |                  |         |      |          |         
|Revenue:                                                 |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|                                                         | Hotel operations:                                       |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |          |        
|                                                         |                                                         | Rooms                                 |         | $                | 143,156 |      |          | $        | 136,911 |   |         | $       | 277,284 |   |          | $        | 266,706 | 
|                                                         |                                                         | Food and beverage                     |         |                  | 59,442  |      |          |          | 56,404  |   |         |         | 110,450 |   |          |          | 107,520 | 
|                                                         |                                                         | Other hotel operations                |         |                  | 17,362  |      |          |          | 19,201  |   |         |         | 34,397  |   |          |          | 35,754  | 
|                                                         | Office rental, parking and other revenue                |                                       |         | 2,929            |         |      |          | 3,453    |         |   |         | 5,828   |         |   |          | 6,716    |        
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Total revenue                                            |                                                         |                                       | 222,889 |                  |         |      | 215,969  |          |         |   | 427,959 |         |         |   | 416,696  |         
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Hotel operating expenses:                                |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|                                                         |                                                         | Rooms                                 |         |                  | 35,046  |      |          |          | 32,467  |   |         |         | 67,795  |   |          |          | 63,163  | 
|                                                         |                                                         | Food and beverage                     |         |                  | 41,739  |      |          |          | 38,789  |   |         |         | 79,923  |   |          |          | 75,646  | 
|                                                         |                                                         | Other hotel operating expenses        |         |                  | 10,864  |      |          |          | 10,936  |   |         |         | 21,162  |   |          |          | 20,392  | 
|Office rental, parking and other expenses                |                                                         |                                       | 670     |                  |         |      | 583      |          |         |   | 1,255   |         |         |   | 1,213    |         
|Other operating expenses:                                |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|                                                         |                                                         | General and administrative, hotel     |         |                  | 32,010  |      |          |          | 31,864  |   |         |         | 65,774  |   |          |          | 62,906  | 
|                                                         |                                                         | General and administrative, corporate |         |                  | 3,473   |      |          |          | 3,132   |   |         |         | 7,106   |   |          |          | 6,105   | 
|                                                         |                                                         | Property operating costs              |         |                  | 31,909  |      |          |          | 30,620  |   |         |         | 62,941  |   |          |          | 59,609  | 
|                                                         |                                                         | Depreciation and amortization         |         |                  | 25,289  |      |          |          | 25,242  |   |         |         | 51,333  |   |          |          | 49,190  | 
|                                                         |                                                         | Property taxes, insurance and other   |         |                  | 16,006  |      |          |          | 17,548  |   |         |         | 32,860  |   |          |          | 34,547  | 
|                                                         |                                                         | Loss on asset impairments             |         |                  | 1,291   |      |          |          | 65,123  |   |         |         | 1,536   |   |          |          | 65,123  | 
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Operating expenses                                       |                                                         |                                       | 198,297 |                  |         |      | 256,304  |          |         |   | 391,685 |         |         |   | 437,894  |         
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Operating income (loss)                                  |                                                         |                                       | 24,592  |                  |         |      | (40,335  | )        |         |   | 36,274  |         |         |   | (21,198  | )       
|Minority interest                                        |                                                         |                                       | 671     |                  |         |      | 10,598   |          |         |   | 1,617   |         |         |   | 14,275   |         
|Interest expense, net                                    |                                                         |                                       | (29,724 | )                |         |      | (34,583  | )        |         |   | (64,103 | )       |         |   | (69,301  | )       
|Loss on early extinguishments of debt                    |                                                         |                                       | (1,980  | )                |         |      |         |          |         |   | (7,903  | )       |         |   |         |         
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Loss before income taxes and discontinued
    operations |                                                         |                                       | (6,441  | )                |         |      | (64,320  | )        |         |   | (34,115 | )       |         |   | (76,224  | )       
|Income tax (expense) benefit                             |                                                         |                                       | (45     | )                |         |      | (12      | )        |         |   | 410     |         |         |   | 164      |         
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Loss from continuing operations                          |                                                         |                                       | (6,486  | )                |         |      | (64,332  | )        |         |   | (33,705 | )       |         |   | (76,060  | )       
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Discontinued operations:                                 |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|                                                         | Loss from discontinued operations before income
    tax |                                       |         | (5,131           | )       |      |          | (142,016 | )       |   |         | (18,314 | )       |   |          | (200,054 | )      
|                                                         | Income tax (expense) benefit                            |                                       |         | 62               |         |      |          | (13      | )       |   |         | 220     |         |   |          | 8        |        
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Loss from discontinued operations                        |                                                         |                                       | (5,069  | )                |         |      | (142,029 | )        |         |   | (18,094 | )       |         |   | (200,046 | )       
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Net loss                                                 |                                                         | $                                     | (11,555 | )                |         | $    | (206,361 | )        |         | $ | (51,799 | )       |         | $ | (276,106 | )       
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Basic loss per share:                                    |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|                                                         | Loss from continuing operations                         |                                       | $       | (0.08            | )       |      | $        | (1.40    | )       |   | $       | (0.45   | )       |   | $        | (1.66    | )      
|                                                         | Loss from discontinued operations                       |                                       |         | (0.06            | )       |      |          | (3.08    | )       |   |         | (0.24   | )       |   |          | (4.37    | )      
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Net loss per basic share                                 |                                                         | $                                     | (0.14   | )                |         | $    | (4.48    | )        |         | $ | (0.69   | )       |         | $ | (6.03    | )       
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Diluted loss per share:                                  |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|                                                         | Loss from continuing operations                         |                                       | $       | (.08             | )       |      | $        | (1.55    | )       |   | $       | (0.45   | )       |   | $        | (1.87    | )      
|                                                         | Loss from discontinued operations                       |                                       |         | (.06             | )       |      |          | (2.92    | )       |   |         | (0.23   | )       |   |          | (4.12    | )      
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Net loss per diluted share                               |                                                         | $                                     | (0.14   | )                |         | $    | (4.47    | )        |         | $ | (0.68   | )       |         | $ | (5.99    | )       
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         

See accompanying notes to the unaudited
consolidated financial statements.


3



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##### 



MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS


UNAUDITED


(Dollars in thousands)


|                                                                 |                                                                                               |                                                   |                                                                                |          |        |        |        |          |         |         |  
|---------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------- | ------------------------------------------------------------------------------ | -------- | ------ | ------ | ------ | -------- | ------- | ------- | -
|                                                                 |                                                                                               |                                                  
|                                                                 |                                                                                               | Six Months Ended                                 
|                                                                 |                                                                                               | June 30,                                         
|                                                                 |                                                                                               |                                                  
|                                                                 |                                                                                               | 2004                                              |                                                                                | 2003    
|                                                                 |                                                                                               |                                                   |                                                                                |         
|Operating activities:                                            |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|                                                                 | Net loss                                                                                      |                                                   | $                                                                              | (51,799  | )      |        | $      | (276,106 | )      
|                                                                 | Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities: |                                                   |                                                                                |          |        |        |        |          |        
|                                                                 |                                                                                               | Depreciation and amortization                     |                                                                                |          | 52,585 |        |        |          | 59,055  |        
|                                                                 |                                                                                               | Loss on asset impairments                         |                                                                                |          | 7,441  |        |        |          | 264,677 |        
|                                                                 |                                                                                               | Loss on sale of assets, before tax effect         |                                                                                |          | 11,530 |        |        |          |        |        
|                                                                 |                                                                                               | Loss on early extinguishments of debt             |                                                                                |          | 7,903  |        |        |          |        |        
|                                                                 |                                                                                               | Minority interests                                |                                                                                |          | (1,617 | )      |        |          | (14,275 | )      
|                                                                 |                                                                                               | Amortization of unearned stock-based compensation |                                                                                |          | 1,090  |        |        |          | 1,443   |        
|                                                                 |                                                                                               | Change in value of interest rate swaps            |                                                                                |          |       |        |        |          | (3,395  | )      
|                                                                 |                                                                                               | Deferred income taxes                             |                                                                                |          | (890   | )      |        |          | (2,094  | )      
|                                                                 |                                                                                               | Changes in operating assets and liabilities:      |                                                                                |          |        |        |        |          |         |        
|                                                                 |                                                                                               |                                                   | Accounts receivable                                                            |          |        | (4,227 | )      |          |         | (12,168 | )
|                                                                 |                                                                                               |                                                   | Prepaid expenses and other assets                                              |          |        | 4,864  |        |          |         | 4,225   |  
|                                                                 |                                                                                               |                                                   | Due from/to Interstate Hotels & Resorts                                        |          |        | (3,241 | )      |          |         | (4,575  | )
|                                                                 |                                                                                               |                                                   | Accounts payable, accrued expenses, accrued
    interest and other liabilities |          |        | (5,949 | )      |          |         | (4,977  | )
|                                                                 |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|Net cash provided by operating activities                        |                                                                                               |                                                   | 17,690                                                                         |          |        |        | 11,810 |         
|                                                                 |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|Investing activities:                                            |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|                                                                 | Acquisition of hotels, net of cash acquired of
    $3.5 million                               |                                                   |                                                                                | (182,790 | )      |        |        |         |        
|                                                                 | Capital expenditures for property and equipment                                               |                                                   |                                                                                | (49,898  | )      |        |        | (14,547  | )      
|                                                                 | Proceeds from sales of assets                                                                 |                                                   |                                                                                | 104,873  |        |        |        | 15,720   |        
|                                                                 | Purchases of marketable securities                                                            |                                                   |                                                                                |         |        |        |        | (18,056  | )      
|                                                                 | Payments from Interstate Hotels & Resorts                                                     |                                                   |                                                                                |         |        |        |        | 42,052   |        
|                                                                 | Increase in restricted cash                                                                   |                                                   |                                                                                | (29,955  | )      |        |        | (9,740   | )      
|                                                                 | Costs associated with disposition program and
    other, net                                  |                                                   |                                                                                | (5,081   | )      |        |        | (299     | )      
|                                                                 |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|Net cash (used in) provided by investing
    activities          |                                                                                               |                                                   | (162,851                                                                       | )        |        |        | 15,130 |         
|                                                                 |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|Financing activities:                                            |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|                                                                 | Prepayments on long-term debt                                                                 |                                                   |                                                                                | (105,857 | )      |        |        |         |        
|                                                                 | Proceeds from debt issuance, net of issuance costs                                            |                                                   |                                                                                | 109,687  |        |        |        |         |        
|                                                                 | Scheduled payments on long-term debt                                                          |                                                   |                                                                                | (3,691   | )      |        |        | (4,208   | )      
|                                                                 | Distributions to minority investors                                                           |                                                   |                                                                                | (141     | )      |        |        | (141     | )      
|                                                                 | Proceeds from common stock issuance                                                           |                                                   |                                                                                | 72,340   |        |        |        |         |        
|                                                                 | Purchase of subsidiary partnership interests                                                  |                                                   |                                                                                | (8,690   | )      |        |        | (65      | )      
|                                                                 | Other                                                                                         |                                                   |                                                                                | (325     | )      |        |        |         |        
|                                                                 |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|Net cash provided by (used in) financing
    activities          |                                                                                               |                                                   | 63,323                                                                         |          |        |        | (4,414 | )       
|                                                                 |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|Effect of exchange rate changes on cash and cash
    equivalents |                                                                                               |                                                   | (227                                                                           | )        |        |        | (115   | )       
|                                                                 |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|Net (decrease) increase in cash and cash
    equivalents         |                                                                                               |                                                   | (82,065                                                                        | )        |        |        | 22,411 |         
|Cash and cash equivalents, beginning of period                   |                                                                                               |                                                   | 230,884                                                                        |          |        |        | 33,896 |         
|                                                                 |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|Cash and cash equivalents, end of period                         |                                                                                               | $                                                 | 148,819                                                                        |          |        | $      | 56,307 |         
|                                                                 |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|Supplemental Cash Flow Information                               |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|Cash paid for interest and income taxes:                         |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|                                                                 | Interest, net of capitalized interest                                                         |                                                   | $                                                                              | 69,804   |        |        | $      | 70,399   |        
|                                                                 | Income taxes                                                                                  |                                                   | $                                                                              | 495      |        |        | $      | 1,902    |        
|Non-cash investing and financing activities:                     |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|                                                                 | Senior subordinated debt redeemed in exchange for
    common stock                            |                                                   | $                                                                              | 49,213   |        |        | $      |         |        
|                                                                 | Redemption of OP units                                                                        |                                                   | $                                                                              | 123      |        |        | $      | 20,100   |        

See accompanying notes to the unaudited
consolidated financial statements.

4



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##### 



MERISTAR HOSPITALITY CORPORATION




NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


JUNE 30, 2004


1.          Organization

MeriStar Hospitality Corporation is a real estate
investment trust, or REIT. We own a portfolio of primarily upper
upscale, full-service hotels and resorts in the United States.
Our portfolio is diversified geographically as well as by
franchise and brand affiliations. As of June 30, 2004, we
owned 79 hotels with 22,187 rooms, all of which were leased by
our taxable subsidiaries. As of June 30, 2004, 77 hotels
were managed by Interstate Hotels & Resorts, Inc.
(Interstate Hotels), one hotel was managed by The
Ritz-Carlton Hotel Company, LLC (Ritz-Carlton), a
subsidiary of Marriott International, Inc., and one hotel was
managed by another subsidiary of Marriott International, Inc.
(Marriott) (collectively with Interstate Hotels, the
Managers). Of our 79 hotels at June 30, 2004,
seven were included in our non-core disposition program. Two of
these assets with 568 rooms have been sold during the third
quarter of 2004.

The Managers operate our 79 hotels pursuant to
management agreements with our taxable subsidiaries. Under these
management agreements, the taxable subsidiaries pay a management
fee for each property to the Manager of their hotels. The
taxable subsidiaries in turn make rental payments to our
subsidiary operating partnership under the participating leases.

Under the Interstate Hotels management
agreements, the base management fee is 2.5% of total hotel
revenue, plus incentive payments based on meeting performance
thresholds that could total up to an additional 1.5% of total
hotel revenue. The agreements have initial terms expiring on
January 1, 2011 with three renewal periods of five years
each at the option of Interstate Hotels, subject to some
exceptions.

Under the Ritz-Carlton and Marriott management
agreements, the base management fee is 3.0% and 2.5% of total
hotel revenue, respectively, through 2005 and 3.0% under both
thereafter, plus incentive payments based on meeting performance
thresholds that could total up to an additional 2.0% of total
revenue and 20% of available cash flow (as defined),
respectively. The agreements have initial terms expiring in 2015
and 2024, respectively, with four and three renewal periods of
10 and five years each, respectively, at the option of
Ritz-Carlton and Marriott. The Ritz-Carlton and Marriott
management agreements include certain limited performance
guarantees by Ritz-Carlton and Marriott which are designed
primarily to provide downside performance protection and run
through 2005 and up to 2008, respectively. Management expects
funding under these guarantees to be minimal.

2.          Summary
of Significant Accounting Policies

Interim Financial
Statements.We have prepared these
unaudited interim financial statements according to the rules
and regulations of the United States Securities and Exchange
Commission. We have omitted certain information and footnote
disclosures that are normally included in financial statements
prepared in accordance with accounting principles generally
accepted in the United States. These interim financial
statements should be read in conjunction with the financial
statements, accompanying notes and other information included in
our Annual Report on Form 10-K for the year ended
December 31, 2003.

In our opinion, the accompanying unaudited
consolidated interim financial statements reflect all
adjustments, which are of a normal and recurring nature,
necessary for a fair presentation of the financial condition and
results of operations and cash flows for the periods presented.
The results of operations for the interim periods are not
necessarily indicative of the results for the entire year.

Principles of
Consolidation.Our consolidated
financial statements include the accounts of all wholly-owned
and majority-owned subsidiaries. Intercompany balances and
transactions have been eliminated in consolidation.

5



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Held for Sale
Properties.We classify the properties
we are actively marketing as held for sale once all of the
following conditions are met:



| |   |                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our board has approved the sale,                                                                                                                                           
|
| |  | We have a fully executed agreement with a
    qualified buyer which provides for no significant outstanding or
    continuing obligations with the property after sale, and
|
| |  | We have a significant non-refundable deposit.                                                                                                                              

We carry properties held for sale at the lower of
their carrying values or estimated fair values less costs to
sell. We cease depreciation at the time the asset is classified
as held for sale.

Cash and Cash
Equivalents.We classify investments
with original maturities of three months or less as cash
equivalents. Our cash equivalents include investments in debt
securities, including commercial paper, overnight repurchase
agreements and money market funds.

Impairment or Disposal of Long-Lived
Assets.We apply the provisions of
Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which require the current
and prior period operating results of any asset that has been
classified as held for sale or has been disposed of on or after
January 1, 2002 and where we have no continuing involvement
to be recorded as discontinued operations. Any gains or losses
on final disposition are also included in discontinued
operations.

The provisions of SFAS No. 144 also
require that whenever events or changes in circumstances
indicate that the carrying value of a long-lived asset may be
impaired that an analysis be performed to determine the
recoverability of the assets carrying value. We make
estimates of the undiscounted cash flows from the expected
future operations or potential sale of the asset. If the
analysis indicates that the carrying value is not recoverable
from these estimates of cash flows, we write down the asset to
estimated fair value and recognize an impairment loss. Any
impairment losses we recognize on assets held for use are
recorded as operating expenses. We record any impairment losses
on assets held for sale as a component of discontinued
operations.

Accounting for Costs Associated with Exit or
Disposal Activities.We apply the
provisions of SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which require
that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value only
when the liability is incurred. Our strategy includes the
disposition of certain hotel assets, all of which are managed
under agreements that typically require payments to Interstate
Hotels as a result of termination. Any such liability will be
recognized at the time the asset disposition is complete and a
termination notice is provided to Interstate Hotels. At that
time, the recognition of the termination obligation will be
included in the calculation of the final gain or loss on sale.
For further discussion of potential termination obligations, see
Asset Dispositions included in Item 2 of this
Quarterly Report on Form 10-Q.

Stock-Based
Compensation.We adopted the
recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, as amended
by SFAS No. 148, on January 1, 2003 for new stock
options issued under our compensation programs. As permitted by
SFAS No. 148, we elected to apply the provisions
prospectively, which includes recognizing compensation expense
for only those stock options issued in 2003 and after. We apply
the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees, in accounting for our stock options issued
under our compensation programs prior to January 1, 2003.
As we granted these stock options at fair market value, no
compensation cost has been recognized. For our other
equity-based compensation awards, we recognize compensation
expense over the vesting period based on the fair market value
of the award at the date of grant.

6



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##### 



Had compensation cost been determined based on
fair value at the grant date for awards granted prior to our
adoption of the fair value method, our net loss and per share
amounts would have been adjusted to the pro forma amounts
indicated as follows (in thousands, except per share amounts):

|                      |                                                                                                                                                    |                    |         |                  |   |      |          |       |   |   |         |        |   |   |          |        |  
|--------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | ------- | ---------------- | - | ---- | -------- | ----- | - | - | ------- | ------ | - | - | -------- | ------ | -
|                      |                                                                                                                                                    |                    |         |                 
|                      |                                                                                                                                                    | Three Months Ended |         | Six Months Ended
|                      |                                                                                                                                                    | June 30,           |         | June 30,        
|                      |                                                                                                                                                    |                    |         |                 
|                      |                                                                                                                                                    | 2004               |         | 2003             |   | 2004 |          | 2003 
|                      |                                                                                                                                                    |                    |         |                  |   |      |          |      
|Net loss, as reported |                                                                                                                                                    | $                  | (11,555 | )                |   | $    | (206,361 | )     |   | $ | (51,799 | )      |   | $ | (276,106 | )     
|                      | Add: Stock-based employee compensation expense
    included in reported net loss, net of related tax effect                                        |                    |         | 395              |   |      |          | 677   |   |   |         | 975    |   |   |          | 1,606  |  
|                      | Deduct: Total stock-based employee compensation
    expense determined under fair value-based method for all awards,
    net of related tax effect |                    |         | (442             | ) |      |          | (816  | ) |   |         | (1,077 | ) |   |          | (1,900 | )
|                      |                                                                                                                                                    |                    |         |                  |   |      |          |       |   |   |         |        |   |   |          |       
|Net loss, pro forma   |                                                                                                                                                    | $                  | (11,602 | )                |   | $    | (206,500 | )     |   | $ | (51,901 | )      |   | $ | (276,400 | )     
|                      |                                                                                                                                                    |                    |         |                  |   |      |          |       |   |   |         |        |   |   |          |       
|Loss per share:       |                                                                                                                                                    |                    |         |                  |   |      |          |       |   |   |         |        |   |   |          |       
|                      | Basic, as reported                                                                                                                                 |                    | $       | (0.14            | ) |      | $        | (4.48 | ) |   | $       | (0.69  | ) |   | $        | (6.03  | )
|                      | Diluted, as reported                                                                                                                               |                    |         | (0.14            | ) |      |          | (4.47 | ) |   |         | (0.68  | ) |   |          | (5.99  | )
|                      | Basic, pro forma                                                                                                                                   |                    |         | (0.14            | ) |      |          | (4.48 | ) |   |         | (0.69  | ) |   |          | (6.03  | )
|                      | Diluted, pro forma                                                                                                                                 |                    |         | (0.14            | ) |      |          | (4.47 | ) |   |         | (0.69  | ) |   |          | (5.99  | )

These pro forma compensation costs may not be
representative of the actual effects on reported net loss and
loss per share in future periods.

Derivative Instruments and Hedging
Activities.Our interest rate risk
management objective is to manage the effect of interest rate
changes on earnings and cash flows. We look to manage interest
rates through the use of a combination of fixed and variable
rate debt. We only enter into derivative or interest rate
transactions for hedging purposes. We recognize all derivatives
as either assets or liabilities on the balance sheet and measure
those instruments at fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or
other comprehensive income based on the derivatives
effectiveness and whether the derivative has been designated as
a cash flow or fair value hedge.

Acquisition of
Hotels.Our hotel acquisitions consist
almost exclusively of land, building, furniture, fixtures and
equipment. We allocate the purchase price among these asset
classes and any acquired intangible assets based upon their
respective fair values as required by Statement of Financial
Accounting Standards, or SFAS 141, Business
Combinations.

3.          Comprehensive
Loss

Comprehensive loss was $10.3 million and
$202.5 million for the three months ended June 30,
2004 and 2003, respectively. Comprehensive loss consisted of net
loss ($11.6 million and $206.4 million for the three
months ended June 30, 2004 and 2003, respectively) and
foreign currency translation adjustments.

Comprehensive loss was $50.8 million and
$271.2 million for the six months ended June 30, 2004
and 2003, respectively. Comprehensive loss consisted of net loss
($51.8 million and $276.1 million for the six months
ended June 30, 2004 and 2003, respectively) and foreign
currency translation adjustments.

4.          Acquisitions

On May 10, 2004 and June 25, 2004, we
acquired the 366-room Ritz-Carlton, Pentagon City in Arlington,
Virginia and the 485-room Marriott Irvine in Orange County,
California, respectively, for a total purchase price of
$185.5 million, plus net acquisition costs and adjustments
of $0.7 million.

The Ritz-Carlton, Pentagon City luxury hotel is
operated by The Ritz-Carlton Hotel Company, LLC under a
long-term contract. On June 30, 2004, we partially financed
the acquisition through the placement of a

7



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$55.8 million fixed-rate mortgage loan which
is secured by this property, matures on June 1, 2011 and
bears interest at an annual rate of 5.80%.


The Marriott Irvine is operated by a subsidiary
of Marriott International, Inc. under a long-term contract. We
expect to invest approximately $7.5 million in property
improvements over the next 12 months, primarily in the
hotels guest rooms. We financed a portion of the
acquisition with a $55.5 million fixed-rate mortgage loan
which is secured by this property, matures on July 1, 2011
and bears interest at an annual rate of 5.69%. Because Marriott
International, Inc. reports results in 13 four week periods
during the year rather than the 12 monthly periods that we
employ, we will include 12 weeks of results in each of
quarters one through three and 16 weeks of results in
quarter four.

The acquisitions were accounted for under the
purchase method of accounting, and the assets and liabilities
and results of operations of the hotels have been consolidated
in our financial statements since the date of purchase. On an
unaudited pro forma basis, revenues, net income and basic and
diluted loss per share for the three and six months ended
June 30, 2004 and 2003 would have been reported as follows
if the acquisitions had occurred at the beginning of each of the
respective periods (in thousands):

|                    |         |                |         |                  |   |      |          |       |   |   |         |       |   |   |          |       |  
|------------------- | ------- | -------------- | ------- | ---------------- | - | ---- | -------- | ----- | - | - | ------- | ----- | - | - | -------- | ----- | -
|                    |         |                |         |                 
|                    |         | Three Months   |         | Six Months Ended
|                    |         | Ended June 30, |         | June 30,        
|                    |         |                |         |                 
|                    |         | 2004           |         | 2003             |   | 2004 |          | 2003 
|                    |         |                |         |                  |   |      |          |      
|Total revenue       |         | $              | 238,655 |                  |   | $    | 231,535  |       |   | $ | 455,136 |       |   | $ | 446,324  |      
|Net loss            |         |                | (10,213 | )                |   |      | (204,660 | )     |   |   | (49,634 | )     |   |   | (273,975 | )    
|Net loss per share: |         |                |         |                  |   |      |          |       |   |   |         |       |   |   |          |      
|                    | Basic   |                | $       | (0.12            | ) |      | $        | (4.44 | ) |   | $       | (0.66 | ) |   | $        | (5.98 | )
|                    | Diluted |                |         | (0.13            | ) |      |          | (4.44 | ) |   |         | (0.66 | ) |   |          | (5.94 | )

The following is a summary of the combined
preliminary allocation of the purchase price (thousands), which
may be revised upon completion of our valuation procedures:

|                                  |                      |   |         |         | 
|--------------------------------- | -------------------- | - | ------- | ------- | 
|Land                              |                      | $ | 15,000  |        
|Buildings and improvements        |                      |   | 151,592 |        
|Furniture, fixtures and equipment |                      |   | 18,220  |        
|Net working capital               |                      |   | 1,435   |        
|                                  |                      |   |         |        
|                                  | Total purchase price |   | $       | 186,247 | 
|                                  |                      |   |         |        

5.          Property
and Equipment

Property and equipment consisted of the following
(in thousands):

|                                  |  |          |           |              |  |   |           | 
|--------------------------------- |  | -------- | --------- | ------------ |  | - | --------- | 
|                                  |  | June 30, |           | December 31,
|                                  |  | 2004     |           | 2003        
|                                  |  |          |           |             
|Land                              |  | $        | 247,479   |              |  | $ | 238,772   | 
|Buildings and improvements        |  |          | 2,016,233 |              |  |   | 1,930,155 | 
|Furniture, fixtures and equipment |  |          | 301,502   |              |  |   | 284,602   | 
|Construction-in-progress          |  |          | 67,953    |              |  |   | 28,223    | 
|                                  |  |          |           |              |  |   |           | 
|                                  |  | $        | 2,633,167 |              |  | $ | 2,481,752 | 
|                                  |  |          |           |              |  |   |           | 

For the six months ended June 30, 2004 and
2003, we capitalized interest of $2.0 million and
$1.6 million, respectively.

During the first and second quarters of 2004, we
recognized impairment losses of $5.0 million and
$2.4 million, respectively, of which $4.8 million and
$1.1 million, respectively, are recorded in discontinued
operations (see Note 12). As of June 30, 2004, we had
seven hotels remaining in our disposition program, three of
which are classified as held for sale as of June 30, 2004
(see Note 6).

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During the first and second quarters of 2003, we
recognized impairment losses of $56.7 million and
$208.0 million, respectively, of which $56.7 million
and $142.9 million, respectively, are recorded in
discontinued operations as of June 30, 2004 (see
Note 12).

The impairment charges are based on our estimates
of the fair value of the properties we are actively marketing.
These estimates require us to make assumptions about the sales
prices that we expect to realize for each property as well as
the timing of a potential sale. In making these estimates, we
consider the operating results of the assets, the market for
comparable properties, and quotes from brokers, among other
information. In nearly all cases, our estimates have reflected
the results of an extensive marketing effort and negotiations
with prospective buyers. Actual results could differ materially
from these estimates.

6.          Assets
Held for Sale

At December 31, 2003, seven assets were
classified as held for sale. All seven of these assets were sold
during the six months ended June 30, 2004. At June 30,
2004, three of the seven remaining properties in our non-core
disposition program met our criteria for classification as held
for sale. The four other assets included in our asset
disposition program did not meet the probability criteria as
prescribed by SFAS No. 144 to classify them as held
for sale. Assets held for sale consisted of the following (in
thousands):

|                                  |  |          |        |              |  |   |        |  
|--------------------------------- |  | -------- | ------ | ------------ |  | - | ------ | -
|                                  |  | June 30, |        | December 31,
|                                  |  | 2004     |        | 2003        
|                                  |  |          |        |             
|Land                              |  | $        | 598    |              |  | $ | 5,061  |  
|Buildings and improvements        |  |          | 20,082 |              |  |   | 43,391 |  
|Furniture, fixtures and equipment |  |          | 765    |              |  |   | 2,759  |  
|Construction-in-progress          |  |          | 381    |              |  |   | 1,114  |  
|                                  |  |          |        |              |  |   |        |  
|                                  |  |          | 21,826 |              |  |   | 52,325 |  
|Accumulated depreciation          |  |          |       |              |  |   | (1,156 | )
|                                  |  |          |        |              |  |   |        |  
|                                  |  | $        | 21,826 |              |  | $ | 51,169 |  
|                                  |  |          |        |              |  |   |        |  

7.          Investment
in Affiliate

In 1999, we, through MeriStar Hospitality
Operating Partnership, L.P. (MHOP), our principal
operating subsidiary, invested $40 million in MeriStar
Investment Partners, L.P. (MIP), a joint venture
established to acquire upscale, full-service hotels. Our
cost-basis investment is in the form of a partnership interest,
in which we earn a 16% cumulative preferred return with
outstanding balances compounded quarterly. While the return on
this investment is preferred and cumulative, the underlying
investment ranks equally with the investments of the other
investors in MIP. We recognize the return quarterly as it
becomes due to us. For the six months ended June 30, 2004
and 2003, we recognized a preferred return of $3.2 million
and $4.2 million, respectively, from this investment. As of
June 30, 2004 and December 31, 2003, cumulative
preferred returns of $24.5 million and $19.6 million,
respectively, were due from MIP. We have reserved a portion of
this balance and have included the net $21.4 million and
$18.2 million in accounts receivable on the accompanying
consolidated balance sheets as of June 30, 2004 and
December 31, 2003, respectively. We expect that any
cumulative unpaid preferred returns will be paid in the future
from excess cash flow above our current return and from
potential partnership hotel disposition proceeds in excess of
debt allocated to individual assets. Given the current economic
environment, we do not expect MIPs operations to provide
adequate cash flow in the near term for significant payment of
our current returns or repayments of our cumulative unpaid
preferred returns; however we expect to receive payments from
MIP during 2004 resulting from planned dispositions of certain
assets combined with cash flow improvements on other assets. We
evaluate the collectibility of our preferred return based on our
preference to distributions and the underlying value of the
hotel properties.

While we believe that our current and cumulative
returns continue to be fully collectible, during 2003, the value
of our underlying investment declined due to the decline in
MIPs cash flow, particularly driven by

9



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results in four of its hotel markets. While we
believe that the cash flow, and thus the value of our investment
in MIP, will be recoverable over time, we expect that any such
recovery will take a number of years to achieve. The accounting
rules for cost basis investments require that declines in value
that are other than temporary be recognized currently. Since the
decline in the value of our underlying investment in MIP was
other than temporary, we recognized a $25.0 million
impairment loss on this investment during the fourth quarter of
2003.


8.          Long-Term
Debt

Long-term debt consisted of the following (in
thousands):

|                                             |  |          |           |              |  |   |           |  
|-------------------------------------------- |  | -------- | --------- | ------------ |  | - | --------- | -
|                                             |  | June 30, |           | December 31,
|                                             |  | 2004     |           | 2003        
|                                             |  |          |           |             
|Senior unsecured notes due 2011  9.125%     |  | $        | 355,665   |              |  | $ | 400,000   |  
|Senior unsecured notes due 2008  9.0%       |  |          | 270,500   |              |  |   | 300,000   |  
|Senior unsecured notes due 2009  10.5%      |  |          | 224,187   |              |  |   | 250,000   |  
|Secured facility, due 2009                   |  |          | 306,067   |              |  |   | 309,035   |  
|Secured facility, due 2013                   |  |          | 100,041   |              |  |   | 100,765   |  
|Convertible subordinated notes               |  |          | 173,705   |              |  |   | 173,705   |  
|Senior subordinated notes                    |  |          | 34,225    |              |  |   | 83,438    |  
|Mortgage debt                                |  |          | 137,505   |              |  |   | 27,011    |  
|Unamortized issue discount                   |  |          | (4,417    | )            |  |   | (5,926    | )
|                                             |  |          |           |              |  |   |           |  
|                                             |  |          | 1,597,478 |              |  |   | 1,638,028 |  
|Fair value adjustment for interest rate swap |  |          | (10,074   | )            |  |   |          |  
|                                             |  |          |           |              |  |   |           |  
|                                             |  | $        | 1,587,404 |              |  | $ | 1,638,028 |  
|                                             |  |          |           |              |  |   |           |  

Aggregate future maturities as of June 30,
2004 were as follows (in thousands):

|                                             |  |   |           |  
|-------------------------------------------- |  | - | --------- | -
|2004 (six months)                            |  | $ | 9,373     |  
|2005                                         |  |   | 11,743    |  
|2006                                         |  |   | 12,687    |  
|2007                                         |  |   | 47,578    |  
|2008                                         |  |   | 282,318   |  
|Thereafter                                   |  |   | 1,233,779 |  
|                                             |  |   |           |  
|                                             |  |   | 1,597,478 |  
|Fair value adjustment for interest rate swap |  |   | (10,074   | )
|                                             |  |   |           |  
|                                             |  | $ | 1,587,404 |  
|                                             |  |   |           |  

As of June 30, 2004, 81% of our debt bore
fixed rates of interest, and the remaining 19% bore interest at
fixed rates that have been, since April 2, 2004,
effectively swapped to a floating rate. Our overall weighted
average interest rate was 8.30% after giving effect to the
interest rate swap. Based on market prices at June 30,
2004, the fair value of our long-term debt was
$1.62 billion.

Credit facility.On
December 23, 2003, we entered into a new three-year
$50 million senior credit facility, secured by six of our
hotels, and terminated our previous credit facility. The
facility bears interest at an annual rate of the London
Interbank Offered Rate, or LIBOR, plus 450 basis points. As
of June 30, 2004, we had no outstanding borrowings under
this facility.

The facility contains financial and other
restrictive covenants. Our ability to borrow under this facility
is subject to compliance with financial covenants, including
leverage, fixed charge coverage and interest coverage ratios and
minimum net worth requirements. Our compliance with these
covenants in future periods will

10



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depend substantially upon the financial results
of our hotels. The agreement governing our new senior credit
facility limits our ability to effect mergers, asset sales and
change of control events and limits the payments of dividends
other than those required for us to maintain our status as a
REIT and our ability to incur additional secured and total
indebtedness.


Senior unsecured
notes.During the six months ended
June 30, 2004, we repurchased from available cash
$99.6 million of our senior unsecured notes, including
$29.5 million of the 9.0% notes due 2008,
$44.3 million of the 9.125% notes due 2011, and
$25.8 million of the 10.5% notes due 2009. We recorded
a loss on early extinguishment of debt of $6.2 million and
wrote off deferred financing costs of $1.2 million related
to these repurchases which is included in depreciation and
amortization expense on the accompanying consolidated statements
of operations.

These senior unsecured notes are unsecured
obligations of MHOP, our principal operating subsidiary, and we
guarantee payment of principal and interest on the notes. These
notes contain various restrictive covenants, limiting our
ability to initiate or transact certain business activities if
specific financial thresholds are not achieved. One of those
thresholds is having a 2 to 1 fixed charge
coverage ratio (as defined in the indentures, fixed charges only
include interest on debt obligations and preferred equity) in
order to enter into certain types of transactions, including the
repurchase of our stock, the issuance of any preferred stock,
the payment of certain dividends, the incurrence of any
additional debt, or the repayment of certain outstanding debt
before it comes due. As of June 30, 2004, our fixed charge
coverage ratio was significantly below 2 to 1, and
therefore we were not permitted generally to enter into those
transactions, except as noted below.

There are certain exceptions with respect to the
incurrence of additional debt and early repayment of debt
features in the indentures. We have the ability to incur up to
$300 million of secured financing within restricted
subsidiaries, subject to meeting other maintenance tests under
the indentures, of which $194 million was available at
June 30, 2004. We also have a general carve-out to incur
$50 million of unspecified borrowings within a restricted
subsidiary, of which the full amount was available at
June 30, 2004. We have the ability to lever assets within
an unrestricted subsidiary, such as the mortgage financing
related to the acquisition of Marriott Irvine. Additionally, we
are permitted to repay subordinated debt prior to its maturity
from the proceeds of an equal or junior financing with a longer
term than the debt refinanced, an equity offering, or a
financing within an unrestricted subsidiary.

Secured facilities.We completed a $330 million non-recourse financing secured
by a portfolio of 19 hotels in 1999. The loan bears a fixed
annual interest rate of 8.01% and matures in 2009. The secured
facility contains standard provisions that require the servicer
to maintain in escrow cash balances for certain items such as
property taxes and insurance. In addition, the facility contains
a provision that requires our mortgage servicer to retain in
escrow the excess cash from the encumbered hotels after payment
of debt service (Excess Cash), if net hotel
operating income (NOI) for the trailing twelve
months declines below $57 million. This provision was
triggered in October 2002 and will be effective until the hotels
generate the minimum cash flow required for two consecutive
quarters, at which time the cash being held in escrow will be
released to us. As of June 30, 2004 and December 31,
2003, $39.2 million and $27.2 million, respectively,
of cash was held in escrow under this provision. In July 2003,
we signed an amendment to the loan agreement that permits the
release of cash placed in escrow for all capital expenditures
incurred on the 19 encumbered properties on or after
April 1, 2003. Although the servicer will continue to
retain in escrow any excess cash from the encumbered hotels,
they will release cash for all capital expenditures we have
incurred from April 1, 2003 through the date of the
amendment and future capital expenditures we incur on the
19 properties. Escrowed funds totaling $30.3 million
were available to fund capital expenditures under this provision
as of June 30, 2004. In July 2004, we received a cash
reimbursement of $12.2 million from the servicer related to
capital expenditures incurred on the 19 encumbered
properties.

The fair value adjustments for the interest rate
swap agreement of $(10.1) million that are discussed in
further detail below are related to the outstanding secured
facility balance of $306.1 million as of June 30, 2004.

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On September 26, 2003, as permitted by the
indentures governing our senior unsecured notes and senior
subordinated notes, we completed a $101 million commercial
mortgage-backed securities financing, secured by a portfolio of
four hotels. The loan carries a fixed annual interest rate of
6.88% and matures in 2013.

Convertible subordinated
notes.On July 1, 2003, we
completed an offering of $170 million aggregate principal
amount of 9.5% convertible subordinated notes due 2010.
These notes are convertible into our common stock at any time
prior to or at maturity, April 1, 2010, at a conversion
price of $10.18 per share (equal to a conversion rate of
98.2318 shares per $1,000 principal amount of notes).

The proceeds from the new issuance were used to
repurchase $150.6 million of our $154.3 million
4.75% convertible notes due 2004, at varying prices,
resulting in an aggregate discount of approximately
$1.4 million. These convertible notes are convertible into
our common stock at a rate of 23.2558 shares per $1,000 in
principal amount, which equals approximately $43.00 per
share.

Senior subordinated
notes.The senior subordinated notes
are unsecured obligations due in 2007 and provide for
semi-annual payments of interest each February 15 and
August 15 at an annual rate of 8.75%. The related indenture
contains various restrictive covenants, which are similar to
those in our senior unsecured notes.

During the six months ended June 30, 2004,
we retired $49.2 million of our senior subordinated notes
(plus $0.9 million of accrued interest) through the
issuance of 8,138,728 shares of common stock. We recorded a
loss on early extinguishment of debt of $1.7 million and
wrote off deferred financing costs of $0.5 million related
to this activity. The write off of deferred financing costs is
included in depreciation and amortization expense on the
accompanying consolidated statements of operations.

Mortgage debt.As of
June 30, 2004, we had four mortgage loans, two of which
were placed during the second quarter of 2004 and one of which
is in foreclosure.

We financed a portion of the Marriott Irvine
acquisition (see Note 4) with a $55.5 million
fixed-rate mortgage effective June 25, 2004, collateralized
by the hotel, which matures on July 1, 2011 and bears
interest at an annual rate of 5.69%. On June 30, 2004, in
connection with The Ritz-Carlton, Pentagon City acquisition (see
Note 4), we entered into a $55.8 million fixed-rate
mortgage loan, collateralized by the hotel, which matures on
June 1, 2011 and bears interest at an annual rate of 5.80%.

We have a mortgage that matures in 2011 and
carries an interest rate of 8.8%; however, the lender, with our
acquiescence, initiated foreclosure proceedings which are
expected to be completed in the third quarter of 2004. This
mortgage loan is collateralized by one of our properties, which
we will relinquish to the bank upon completion of foreclosure,
which we expect to occur in the third quarter of 2004. The
carrying value of the mortgage loan and the fair value of the
building both approximate $11 million. This property is
included in the seven properties remaining in our disposition
program.

Our only other individual mortgage matures in
2011 and carries an interest rate of 9.0%.

Derivatives.On
April 2, 2004, we entered into an interest rate swap
arrangement with a third party to manage our interest rate risk
related to our secured facility due 2009, effectively converting
the interest the facility bears from a fixed rate to a floating
rate. Under the swap, we receive fixed-rate payments of 8.01%
and pay floating rate payments based on a one month LIBOR plus
444 basis points on a $307 million notional amount. We
do not use derivative instruments for speculative purposes. Due
to the fact that the notional amount of the swap matches the
principal amount of the underlying debt and other hedge
accounting criteria were met, the swap was designated as highly
effective at the inception of the swap arrangement and
designated as a fair value hedge. We continue to evaluate the
effectiveness of the hedge and believe that the hedge continues
to be highly effective.

For a derivative qualifying as a fair value
hedge, the change in net unrealized gain or loss upon measuring
the fair value hedge and the fair value of the debt instrument
is recorded on our consolidated statements of operations. These
amounts offset each other as there is no ineffectiveness, and
therefore had no impact on our net loss for the three and six
months ended June 30, 2004. The fair value of the swap is
recorded as either an asset or liability, with a corresponding
increase or decrease to the carrying value of the debt
instrument being

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##### 



hedged on our consolidated balance sheets. The
fair value of our hedge was approximately a $10.1 million
liability as of June 30, 2004. This amount is included in
the consolidated balance sheet in the other liabilities line
item. During the three and six months ended June 30, 2004,
we earned cash payments of $1.7 million under the swap,
which were recorded as a reduction in interest expense.


During 2003, our only derivative instruments
consisted of two swap agreements that did not qualify for
treatment as hedges under SFAS No. 133, of which one
expired in April 2003 and one in July 2003. During the three and
six months ended June 30, 2003, we recognized
$1.3 million and $3.4 million, respectively, of income
related to the decrease in fair value of the liability recorded
for the interest rate swaps in place in those time periods. For
the three and six months ended June 30, 2003, we made cash
payments on those swaps of $1.3 and $3.4 million,
respectively. The change in fair value and the swap payments are
netted together on our consolidated statement of operations,
thus resulting in no impact on net income.

9.          Stockholders
Equity and Minority Interests

Common Stock
Transactions.On April 23, 2004,
we issued and sold 12.0 million shares of common stock at a
price to the public of $6.25 per share pursuant to our
effective shelf registration statement filed under the
Securities Act of 1933. The offering closed on April 28,
2004 with net proceeds of $72.3 million.

During the six months ended June 30, 2004,
we retired $49.2 million of our senior subordinated notes
(plus $0.9 million of accrued interest) through the
issuance of 8,138,728 shares of common stock (see
Note 8).

During the six months ended June 30, 2004,
we issued 8,570 shares of common stock with a value of
$.05 million, related to shares issued under our employee
stock purchase plan.

OP Units.Substantially all of our assets are held indirectly by and
operated through MHOP, our subsidiary operating partnership,
(Commission file number 333-63768). Our operating
partnerships partnership agreement provides for five
classes of partnership interests: Common OP Units,
Class B OP Units, Class C OP Units,
Class D OP Units and Profits-Only OP Units, or
POPs.

Common OP Unit holders converted 25,141 and
878,000 of their OP Units, with a value of
$0.1 million and $20.1 million, respectively, into
common stock during the six months ended June 30, 2004 and
2003, respectively. A POPs unit holder converted 25,000 POPs for
cash during the six months ended June 30, 2004.

On April 9, 2004, in accordance with the
terms of the certificate of designation for the outstanding
Class D OP Units of our operating partnership, we
redeemed all outstanding Class D OP Units plus accrued
and unpaid preferential distributions on those units, for an
aggregate consideration of approximately $8.8 million. The
Class D OP Units had become redeemable at the option
of the holder on April 1, 2004.

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10.          Loss
Per Share

The following table presents the computation of
basic and diluted loss per share (in thousands, except per share
amounts):

|                        |                                                                                 |                             |   |                  |       |      |   |         |       |  |   |         |       |  |   |         |       | 
|----------------------- | ------------------------------------------------------------------------------- | --------------------------- | - | ---------------- | ----- | ---- | - | ------- | ----- |  | - | ------- | ----- |  | - | ------- | ----- | 
|                        |                                                                                 |                             |   |                 
|                        |                                                                                 | Three Months Ended          |   | Six Months Ended
|                        |                                                                                 | June 30,                    |   | June 30,        
|                        |                                                                                 |                             |   |                 
|                        |                                                                                 | 2004                        |   | 2003             |       | 2004 |   | 2003   
|                        |                                                                                 |                             |   |                  |       |      |   |        
|Basic Loss Per Share:   |                                                                                 |                             |   |                  |       |      |   |         |       |  |   |         |       |  |   |        
|                        | Loss from continuing operations                                                 |                             | $ | (6,486           | )     |      | $ | (64,332 | )     |  | $ | (33,705 | )     |  | $ | (76,060 | )    
|                        |                                                                                 |                             |   |                  |       |      |   |         |       |  |   |         |       |  |   |        
|                        | Weighted average number of basic shares of common
    stock outstanding         |                             |   | 82,855           |       |      |   | 46,078  |       |  |   | 75,748  |       |  |   | 45,813  |      
|                        |                                                                                 |                             |   |                  |       |      |   |         |       |  |   |         |       |  |   |        
|                        | Basic loss per share from continuing operations                                 |                             | $ | (0.08            | )     |      | $ | (1.40   | )     |  | $ | (0.45   | )     |  | $ | (1.66   | )    
|                        |                                                                                 |                             |   |                  |       |      |   |         |       |  |   |         |       |  |   |        
|Diluted Loss Per Share: |                                                                                 |                             |   |                  |       |      |   |         |       |  |   |         |       |  |   |        
|                        | Loss from continuing operations                                                 |                             | $ | (6,486           | )     |      | $ | (64,332 | )     |  | $ | (33,705 | )     |  | $ | (76,060 | )    
|                        | Minority interest, net of tax                                                   |                             |   | (650             | )     |      |   | (10,733 | )     |  |   | (1,735  | )     |  |   | (14,563 | )    
|                        |                                                                                 |                             |   |                  |       |      |   |         |       |  |   |         |       |  |   |        
|                        | Adjusted net loss                                                               |                             | $ | (7,136           | )     |      | $ | (75,065 | )     |  | $ | (35,440 | )     |  | $ | (90,623 | )    
|                        |                                                                                 |                             |   |                  |       |      |   |         |       |  |   |         |       |  |   |        
|                        | Weighted average number of basic shares of common
    stock outstanding         |                             |   | 82,855           |       |      |   | 46,078  |       |  |   | 75,748  |       |  |   | 45,813  |      
|                        | Common stock equivalents:                                                       |                             |   |                  |       |      |   |         |       |  |   |         |       |  |   |         |      
|                        |                                                                                 | Operating partnership units |   |                  | 2,415 |      |   |         | 2,486 |  |   |         | 2,421 |  |   |         | 2,767 | 
|                        |                                                                                 |                             |   |                  |       |      |   |         |       |  |   |         |       |  |   |        
|                        | Total weighted average number of diluted shares
    of common stock outstanding |                             |   | 85,270           |       |      |   | 48,564  |       |  |   | 78,169  |       |  |   | 48,580  |      
|                        |                                                                                 |                             |   |                  |       |      |   |         |       |  |   |         |       |  |   |        
|                        | Diluted loss per share from continuing operations                               |                             | $ | (0.08            | )     |      | $ | (1.55   | )     |  | $ | (0.45   | )     |  | $ | (1.87   | )    
|                        |                                                                                 |                             |   |                  |       |      |   |         |       |  |   |         |       |  |   |        

For the three months ended June 30, 2004 and
2003, 17,534,088 shares and 6,701,075 shares,
respectively, consisting of shares issuable upon conversion,
exchange or exercise of stock options, certain operating
partnership units, POPs of MeriStar Hospitality Operating
Partnership, L.P., and shares from our outstanding convertible
notes, were excluded from the calculation of diluted loss per
share as their inclusion would be anti-dilutive.

For the six months ended June 30, 2004 and
2003, 17,546,153 shares and 6,689,304 shares,
respectively, consisting of shares issuable upon conversion,
exchange or exercise of stock options, certain operating
partnership units, POPs of MeriStar Hospitality Operating
Partnership, L.P., and shares from our outstanding convertible
notes, were excluded from the calculation of diluted loss per
share as their inclusion would be anti-dilutive.

11.          Commitments
and Contingencies

Litigation.In the
course of our normal business activities, various lawsuits,
claims and proceedings have been or may be instituted or
asserted against us. Based on currently available facts, we
believe that the disposition of matters that are pending or
asserted will not have a material adverse effect on our
financial position, results of operations or liquidity.

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Minimum Lease
Payments.We lease the land at certain
of our hotels and office space of our corporate headquarters
under long-term arrangements from third parties. Certain leases
contain contingent rent features based on gross revenues at the
respective property. Future minimum lease payments required
under these operating leases as of June 30, 2004 were as
follows (in thousands):

|                  |  |   |        | 
|----------------- |  | - | ------ | 
|2004 (six months) |  | $ | 1,206  | 
|2005              |  |   | 2,373  | 
|2006              |  |   | 2,289  | 
|2007              |  |   | 2,313  | 
|2008              |  |   | 2,313  | 
|Thereafter        |  |   | 72,351 | 
|                  |  |   |        | 
|                  |  | $ | 82,845 | 
|                  |  |   |        | 

Our obligations under other operating lease
commitments, primarily for equipment, are not significant.

We lease certain office, retail and parking space
to outside parties under non-cancelable operating leases with
initial or remaining terms in excess of one year. Future minimum
rental receipts under these leases as of June 30, 2004 were
as follows (in thousands):

|                   |  |   |        | 
|------------------ |  | - | ------ | 
|2004 ( six months) |  | $ | 2,143  | 
|2005               |  |   | 3,444  | 
|2006               |  |   | 2,704  | 
|2007               |  |   | 2,542  | 
|2008               |  |   | 1,786  | 
|Thereafter         |  |   | 3,089  | 
|                   |  |   |        | 
|                   |  | $ | 15,708 | 
|                   |  |   |        | 

We may be obligated to pay Interstate Hotels
termination fees of up to a maximum of approximately
$12.0 million with respect to the 32 properties we
have sold between January 1, 2003 and August 3, 2004.
In addition, as we dispose of the five remaining assets in our
disposition program, we may incur termination obligations due to
Interstate Hotels of up to a maximum of approximately
$1.7 million,assuming the disposition of all five
of the properties in 2004 and assuming buyers of our hotel
properties elect to have the properties managed by parties other
than Interstate Hotels or do not assume the obligation as part
of the disposition transaction and no new management agreements
are substituted. Any obligation due under the termination
provisions of the contract is payable over a period of
48 months after termination. Termination fees payable to
Interstate Hotels may be reduced by amounts paid under
replacement management contracts.

During July 2004, we concluded negotiations with
Interstate Hotels to terminate the intercompany agreement. In
exchange for terminating the intercompany agreement, we will
receive, among other things, the following: the right to
terminate up to 600 rooms per year upon the payment of a
termination fee equal to 1.5 times the fees earned during
the preceding 12 months, with the ability to carryover up
to 600 rooms for termination in a succeeding year; the
right to terminate the management contract of a hotel, where
Interstate Hotels invests in a competing hotel, with no
termination fee; and an extension of the termination fee payment
period for terminations related to hotel sales, from
30 months to 48 months.

Separately, we reached an agreement with
Interstate Hotels regarding the calculation of termination fees
payable upon a sale. Although termination fees for the
properties that have been sold or were included in our
previously announced disposition program (which includes four
assets in our current disposition program) will be unchanged, we
will receive a $2.5 million credit, which will be
applicable to fees payable with respect to future dispositions.
Of the $2.5 million credit, $0.6 million has been
applied to terminations that have occurred in the third quarter
of 2004, and an additional $1.7 million will be applied to
terminations resulting from the sale of two of our remaining
assets in our current disposition program.

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##### 



12.          Dispositions

Between January 1, 2003 and June 30,
2004, we have sold 30 hotels with 6,241 rooms for
total gross proceeds of $232.8 million. Of these
30 hotels, 15 hotels were sold in 2003, 11 hotels
were sold in the first quarter of 2004, and four hotels were
sold in the second quarter of 2004. As of June 30, 2004, we
had seven hotels remaining in our non-core disposition program.
Three of these hotels met our criteria for held-for-sale
classification as of June 30, 2004 (see Note 6).
Operating results for the sold hotels, and where applicable, the
gain or loss on final disposition, and the three classified as
held-for-sale are included in discontinued operations. Two of
the seven hotels in our disposition program have been sold in
the third quarter of 2004 for approximately $14.5 million.

Summary financial information included in
discontinued operations for these hotels is as follows (in
thousands):

|                                   |  |                    |        |                  |  |      |          |      |  |   |         |   |  |   |          |  
|---------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | -------- | ---- |  | - | ------- | - |  | - | -------- | -
|                                   |  |                    |        |                 
|                                   |  | Three Months Ended |        | Six Months Ended
|                                   |  | June 30,           |        | June 30,        
|                                   |  |                    |        |                 
|                                   |  | 2004               |        | 2003             |  | 2004 |          | 2003
|                                   |  |                    |        |                  |  |      |          |     
|Revenue                            |  | $                  | 7,296  |                  |  | $    | 44,638   |      |  | $ | 22,006  |   |  | $ | 87,076   |  
|Loss on asset impairments          |  |                    | (1,139 | )                |  |      | (142,876 | )    |  |   | (5,905  | ) |  |   | (199,553 | )
|Pretax gain (loss) from operations |  |                    | 592    |                  |  |      | 860      |      |  |   | (879    | ) |  |   | (501     | )
|Loss on disposal                   |  |                    | (4,584 | )                |  |      |         |      |  |   | (11,530 | ) |  |   |         |  

Loss on disposal resulted primarily from the
recognition of termination fees payable to Interstate Hotels
with respect to these hotels management contracts.

13.          Consolidating
Financial Statements

We and certain subsidiaries of MHOP, our
subsidiary operating partnership, are guarantors of senior
unsecured notes issued by MHOP. MHOP and certain of its
subsidiaries are guarantors of our unsecured senior subordinated
notes. We own a one percent general partner interest in MHOP,
and MeriStar LP, Inc., our wholly-owned subsidiary, owns
approximately a 96 percent limited partner interest in
MHOP. All guarantees are full and unconditional, and joint and
several. Exhibit 99.1 to this Quarterly Report on
Form 10-Q presents supplementary consolidating financial
statements for MHOP, including each of the guarantor
subsidiaries. This exhibit presents MHOPs consolidating
balance sheets as of June 30, 2004 and December 31,
2003, consolidating statements of operations for the three and
six months ended June 30, 2004 and 2003, and consolidating
statements of cash flows for the six months ended June 30,
2004 and 2003.

16