##### 



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)


|                                                                                   |                                                            |                                   |           |              |     |   |           |           |     | 
|---------------------------------------------------------------------------------- | ---------------------------------------------------------- | --------------------------------- | --------- | ------------ | --- | - | --------- | --------- | --- | 
|                                                                                   |                                                            | September 30,                     |           |             
|                                                                                   |                                                            | 2003                              |           | December 31,
|                                                                                   |                                                            | (Unaudited)                       |           | 2002        
|                                                                                   |                                                            |                                   |           |             
|ASSETS                                                                             |                                                            |                                   |           |              |     |   |           |          
|Property and equipment                                                             |                                                            | $                                 | 2,577,640 |              |     | $ | 3,020,909 |          
|Accumulated depreciation                                                           |                                                            |                                   | (426,576  | )            |     |   | (460,972  | )        
|                                                                                   |                                                            |                                   |           |              |     |   |           |          
|                                                                                   |                                                            |                                   | 2,151,064 |              |     |   | 2,559,937 |          
|Restricted cash                                                                    |                                                            |                                   | 38,403    |              |     |   | 20,365    |          
|Investment in affiliate                                                            |                                                            |                                   | 40,000    |              |     |   | 40,000    |          
|Note receivable from Interstate Hotels &
    Resorts                               |                                                            |                                   |          |              |     |   | 42,052    |          
|Prepaid expenses and other assets                                                  |                                                            |                                   | 44,409    |              |     |   | 44,942    |          
|Accounts receivable, net of allowance for
    doubtful accounts of $1,709 and $848 |                                                            |                                   | 64,469    |              |     |   | 56,828    |          
|Marketable securities (Note 2)                                                     |                                                            |                                   | 1,000     |              |     |   |          |          
|Cash and cash equivalents (Note 2)                                                 |                                                            |                                   | 270,282   |              |     |   | 33,896    |          
|                                                                                   |                                                            |                                   |           |              |     |   |           |          
|                                                                                   |                                                            | $                                 | 2,609,627 |              |     | $ | 2,798,020 |          
|                                                                                   |                                                            |                                   |           |              |     |   |           |          
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                           |                                                            |                                   |           |              |     |   |           |          
|Long-term debt                                                                     |                                                            | $                                 | 1,729,125 |              |     | $ | 1,654,102 |          
|Accounts payable and accrued expenses                                              |                                                            |                                   | 103,261   |              |     |   | 109,790   |          
|Accrued interest                                                                   |                                                            |                                   | 40,185    |              |     |   | 52,907    |          
|Due to Interstate Hotels & Resorts                                                 |                                                            |                                   | 5,969     |              |     |   | 10,500    |          
|Other liabilities                                                                  |                                                            |                                   | 14,025    |              |     |   | 18,013    |          
|                                                                                   |                                                            |                                   |           |              |     |   |           |          
|Total liabilities                                                                  |                                                            |                                   | 1,892,565 |              |     |   | 1,845,312 |          
|                                                                                   |                                                            |                                   |           |              |     |   |           |          
|Minority interests                                                                 |                                                            |                                   | 37,857    |              |     |   | 74,422    |          
|Stockholders equity:                                                              |                                                            |                                   |           |              |     |   |           |          
|                                                                                   | Common stock, par value $0.01 per share                    |                                   |           |              |     |   |           |           |    
|                                                                                   |                                                            | Authorized  100,000 shares       |           |              |     |   |           |           |     | 
|                                                                                   |                                                            | Issued  63,437 and 49,555 shares |           |              | 634 |   |           |           | 495 | 
|                                                                                   | Additional paid-in capital                                 |                                   |           | 1,303,061    |     |   |           | 1,192,387 |    
|                                                                                   | Accumulated deficit                                        |                                   |           | (580,029     | )   |   |           | (230,870  | )  
|                                                                                   | Accumulated other comprehensive loss                       |                                   |           | (1,659       | )   |   |           | (7,052    | )  
|                                                                                   | Common stock held in
    treasury  2,318 and 4,324 shares |                                   |           | (42,802      | )   |   |           | (76,674   | )  
|                                                                                   |                                                            |                                   |           |              |     |   |           |          
|Total stockholders equity                                                         |                                                            |                                   | 679,205   |              |     |   | 878,286   |          
|                                                                                   |                                                            |                                   |           |              |     |   |           |          
|                                                                                   |                                                            | $                                 | 2,609,627 |              |     | $ | 2,798,020 |          
|                                                                                   |                                                            |                                   |           |              |     |   |           |          

See accompanying notes to 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                  |                                      | Nine Months Ended
|                                                                          |                                                                           | September 30,                       |                                      | September 30,    
|                                                                          |                                                                           |                                     |                                      |                  
|                                                                          |                                                                           | 2003                                |                                      | 2002              |         | 2003  |         | 2002  
|                                                                          |                                                                           |                                     |                                      |                   |         |       |         |       
|Revenue:                                                                  |                                                                           |                                     |                                      |                   |         |       |         |        |         |       |          |         |         |       |          |       
|                                                                          | Hotel operations:                                                         |                                     |                                      |                   |         |       |         |        |         |       |          |         |         |       |          |        |        
|                                                                          |                                                                           | Rooms                               |                                      | $                 | 146,057 |       |         | $      | 147,548 |       |          | $       | 455,590 |       |          | $      | 474,540 |      
|                                                                          |                                                                           | Food and beverage                   |                                      |                   | 53,660  |       |         |        | 54,089  |       |          |         | 181,230 |       |          |        | 181,174 |      
|                                                                          |                                                                           | Other hotel operations              |                                      |                   | 17,570  |       |         |        | 17,469  |       |          |         | 56,736  |       |          |        | 55,174  |      
|                                                                          | Office rental, parking and other revenue                                  |                                     |                                      | 3,579             |         |       |         | 3,309  |         |       |          | 10,337  |         |       |          | 12,331 |        
|                                                                          |                                                                           |                                     |                                      |                   |         |       |         |        |         |       |          |         |         |       |          |       
|Total revenue                                                             |                                                                           |                                     | 220,866                              |                   |         |       | 222,415 |        |         |       | 703,893  |         |         |       | 723,219  |       
|                                                                          |                                                                           |                                     |                                      |                   |         |       |         |        |         |       |          |         |         |       |          |       
|Hotel operating expenses:                                                 |                                                                           |                                     |                                      |                   |         |       |         |        |         |       |          |         |         |       |          |       
|                                                                          |                                                                           | Rooms                               |                                      |                   | 40,360  |       |         |        | 38,259  |       |          |         | 116,040 |       |          |        | 114,197 |      
|                                                                          |                                                                           | Food and beverage                   |                                      |                   | 43,268  |       |         |        | 41,998  |       |          |         | 134,257 |       |          |        | 131,551 |      
|                                                                          |                                                                           | Other hotel operating expenses      |                                      |                   | 11,080  |       |         |        | 10,424  |       |          |         | 34,119  |       |          |        | 31,621  |      
|Office rental, parking and other expenses                                 |                                                                           |                                     | 933                                  |                   |         |       | 740     |        |         |       | 2,147    |         |         |       | 2,237    |       
|Other operating expenses:                                                 |                                                                           |                                     |                                      |                   |         |       |         |        |         |       |          |         |         |       |          |       
|                                                                          |                                                                           | General and administrative          |                                      |                   | 39,426  |       |         |        | 39,781  |       |          |         | 121,679 |       |          |        | 121,936 |      
|                                                                          |                                                                           | Property operating costs            |                                      |                   | 37,730  |       |         |        | 37,287  |       |          |         | 109,844 |       |          |        | 109,275 |      
|                                                                          |                                                                           | Depreciation and amortization       |                                      |                   | 27,451  |       |         |        | 28,544  |       |          |         | 84,845  |       |          |        | 88,308  |      
|                                                                          |                                                                           | Loss on asset impairments           |                                      |                   | 21,000  |       |         |        |        |       |          |         | 263,377 |       |          |        |        |      
|                                                                          |                                                                           | Property taxes, insurance and other |                                      |                   | 17,816  |       |         |        | 15,478  |       |          |         | 57,292  |       |          |        | 50,268  |      
|                                                                          |                                                                           |                                     |                                      |                   |         |       |         |        |         |       |          |         |         |       |          |       
|Operating expenses                                                        |                                                                           |                                     | 239,064                              |                   |         |       | 212,511 |        |         |       | 923,600  |         |         |       | 649,393  |       
|                                                                          |                                                                           |                                     |                                      |                   |         |       |         |        |         |       |          |         |         |       |          |       
|Operating (loss) income                                                   |                                                                           |                                     | (18,198                              | )                 |         |       | 9,904   |        |         |       | (219,707 | )       |         |       | 73,826   |       
|Gain on early extinguishments of debt                                     |                                                                           |                                     | 4,574                                |                   |         |       |        |        |         |       | 4,574    |         |         |       |         |       
|Change in fair value of non-hedging derivatives,
    net of swap payments |                                                                           |                                     |                                     |                   |         |       | (1,132  | )      |         |       |         |         |         |       | (4,211   | )     
|Loss on fair value of non-hedging derivatives                             |                                                                           |                                     |                                     |                   |         |       |        |        |         |       |         |         |         |       | (4,735   | )     
|Minority interest income                                                  |                                                                           |                                     | 1,662                                |                   |         |       | 1,584   |        |         |       | 15,937   |         |         |       | 1,965    |       
|Interest expense, net                                                     |                                                                           |                                     | (36,404                              | )                 |         |       | (33,949 | )      |         |       | (106,017 | )       |         |       | (102,786 | )     
|                                                                          |                                                                           |                                     |                                      |                   |         |       |         |        |         |       |          |         |         |       |          |       
|Loss from continuing operations before income
    taxes                   |                                                                           |                                     | (48,366                              | )                 |         |       | (23,593 | )      |         |       | (305,213 | )       |         |       | (35,941  | )     
|Income tax benefit                                                        |                                                                           |                                     | 410                                  |                   |         |       | 649     |        |         |       | 625      |         |         |       | 989      |       
|                                                                          |                                                                           |                                     |                                      |                   |         |       |         |        |         |       |          |         |         |       |          |       
|Loss from continuing operations                                           |                                                                           |                                     | (47,956                              | )                 |         |       | (22,944 | )      |         |       | (304,588 | )       |         |       | (34,952  | )     
|Discontinued operations:                                                  |                                                                           |                                     |                                      |                   |         |       |         |        |         |       |          |         |         |       |          |       
|                                                                          | Loss from discontinued operations before income
    tax (expense) benefit |                                     |                                      | (2,737            | )       |       |         | (6,591 | )       |       |          | (22,168 | )       |       |          | (1,410 | )      
|                                                                          | Income tax (expense) benefit                                              |                                     |                                      | (1                | )       |       |         | 133    |         |       |          | (44     | )       |       |          | (10    | )      
|                                                                          |                                                                           |                                     |                                      |                   |         |       |         |        |         |       |          |         |         |       |          |       
|Loss from discontinued operations                                         |                                                                           |                                     | (2,738                               | )                 |         |       | (6,458  | )      |         |       | (22,212  | )       |         |       | (1,420   | )     
|                                                                          |                                                                           |                                     |                                      |                   |         |       |         |        |         |       |          |         |         |       |          |       
|Net loss                                                                  |                                                                           | $                                   | (50,694                              | )                 |         | $     | (29,402 | )      |         | $     | (326,800 | )       |         | $     | (36,372  | )     
|                                                                          |                                                                           |                                     |                                      |                   |         |       |         |        |         |       |          |         |         |       |          |       
|Loss per share:                                                           |                                                                           |                                     |                                      |                   |         |       |         |        |         |       |          |         |         |       |          |       
|                                                                          | Basic and Diluted:                                                        |                                     |                                      |                   |         |       |         |        |         |       |          |         |         |       |          |        |        
|                                                                          |                                                                           | Loss from continuing operations     |                                      | $                 | (1.00   | )     |         | $      | (0.51   | )     |          | $       | (6.56   | )     |          | $      | (0.78   | )    
|                                                                          |                                                                           | Loss from discontinued operations   |                                      |                   | (0.06   | )     |         |        | (0.14   | )     |          |         | (0.48   | )     |          |        | (0.03   | )    
|                                                                          |                                                                           |                                     |                                      |                   |         |       |         |        |         |       |          |         |         |       |          |       
|                                                                          |                                                                           |                                     | Net loss per basic and diluted share |                   | $       | (1.06 | )       |        | $       | (0.65 | )        |         | $       | (7.04 | )        |        | $       | (0.81 | )
|                                                                          |                                                                           |                                     |                                      |                   |         |       |         |        |         |       |          |         |         |       |          |       

See accompanying notes to unaudited consolidated
financial statements.

3



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##### 



MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS


UNAUDITED


(Dollars in thousands)


|                                                                 |                                                                                               |                                                   |                                                                                |          |         |         |         |          |        |         |  
|---------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------- | ------------------------------------------------------------------------------ | -------- | ------- | ------- | ------- | -------- | ------ | ------- | -
|                                                                 |                                                                                               |                                                  
|                                                                 |                                                                                               | Nine Months Ended                                
|                                                                 |                                                                                               | September 30,                                    
|                                                                 |                                                                                               |                                                  
|                                                                 |                                                                                               | 2003                                              |                                                                                | 2002    
|                                                                 |                                                                                               |                                                   |                                                                                |         
|Operating activities:                                            |                                                                                               |                                                   |                                                                                |          |         |         |         |         
|                                                                 | Net loss                                                                                      |                                                   | $                                                                              | (326,800 | )       |         | $       | (36,372  | )     
|                                                                 | Adjustments to reconcile net loss to net cash
    (used in) provided by operating activities: |                                                   |                                                                                |          |         |         |         |          |       
|                                                                 |                                                                                               | Depreciation and amortization                     |                                                                                |          | 86,752  |         |         |          | 94,227 |        
|                                                                 |                                                                                               | Loss on asset impairments                         |                                                                                |          | 285,677 |         |         |          |       |        
|                                                                 |                                                                                               | Loss on sale of assets, before tax effect         |                                                                                |          | 2,772   |         |         |          | 6,403  |        
|                                                                 |                                                                                               | Gain on early extinguishments of debt             |                                                                                |          | (4,574  | )       |         |          |       |        
|                                                                 |                                                                                               | Loss on fair value of non-hedging derivatives     |                                                                                |          |        |         |         |          | 4,735  |        
|                                                                 |                                                                                               | Minority interests                                |                                                                                |          | (15,937 | )       |         |          | (1,965 | )      
|                                                                 |                                                                                               | Amortization of unearned stock-based compensation |                                                                                |          | 2,380   |         |         |          | 3,538  |        
|                                                                 |                                                                                               | Change in value of interest rate swaps            |                                                                                |          | (3,977  | )       |         |          | (4,787 | )      
|                                                                 |                                                                                               | Deferred income taxes                             |                                                                                |          | (2,523  | )       |         |          | (871   | )      
|                                                                 |                                                                                               | Changes in operating assets and liabilities:      |                                                                                |          |         |         |         |          |        |        
|                                                                 |                                                                                               |                                                   | Accounts receivable                                                            |          |         | (7,641  | )       |          |        | (5,613  | )
|                                                                 |                                                                                               |                                                   | Prepaid expenses and other assets                                              |          |         | 2,763   |         |          |        | (5,051  | )
|                                                                 |                                                                                               |                                                   | Due from/to Interstate Hotels & Resorts                                        |          |         | (4,531  | )       |          |        | 5,762   |  
|                                                                 |                                                                                               |                                                   | Accounts payable, accrued expenses, accrued
    interest and other liabilities |          |         | (19,639 | )       |          |        | (12,690 | )
|                                                                 |                                                                                               |                                                   |                                                                                |          |         |         |         |         
|Net cash (used in) provided by operating
    activities          |                                                                                               |                                                   | (5,278                                                                         | )        |         |         | 47,316  |         
|                                                                 |                                                                                               |                                                   |                                                                                |          |         |         |         |         
|Investing activities:                                            |                                                                                               |                                                   |                                                                                |          |         |         |         |         
|                                                                 | Capital expenditures for property and equipment                                               |                                                   |                                                                                | (21,826  | )       |         |         | (35,824  | )     
|                                                                 | Proceeds from sales of assets                                                                 |                                                   |                                                                                | 74,470   |         |         |         | 25,150   |       
|                                                                 | Purchases of marketable securities                                                            |                                                   |                                                                                | (18,040  | )       |         |         |         |       
|                                                                 | Sales of marketable securities                                                                |                                                   |                                                                                | 17,040   |         |         |         |         |       
|                                                                 | Net payments from (advances to) Interstate Hotels
    & Resorts                               |                                                   |                                                                                | 42,052   |         |         |         | (7,000   | )     
|                                                                 | (Increase) decrease in restricted cash                                                        |                                                   |                                                                                | (18,038  | )       |         |         | 4,861    |       
|                                                                 | Other, net                                                                                    |                                                   |                                                                                | (299     | )       |         |         |         |       
|                                                                 |                                                                                               |                                                   |                                                                                |          |         |         |         |         
|Net cash provided by (used in) investing
    activities          |                                                                                               |                                                   | 75,359                                                                         |          |         |         | (12,813 | )       
|                                                                 |                                                                                               |                                                   |                                                                                |          |         |         |         |         
|Financing activities:                                            |                                                                                               |                                                   |                                                                                |          |         |         |         |         
|                                                                 | Principal payments on long-term debt                                                          |                                                   |                                                                                | (179,309 | )       |         |         | (313,618 | )     
|                                                                 | Proceeds from issuance of long-term debt                                                      |                                                   |                                                                                | 271,000  |         |         |         | 283,138  |       
|                                                                 | Deferred financing fees                                                                       |                                                   |                                                                                | (7,513   | )       |         |         | (3,416   | )     
|                                                                 | Proceeds from common stock issuance                                                           |                                                   |                                                                                | 82,920   |         |         |         |         |       
|                                                                 | Proceeds from option exercises                                                                |                                                   |                                                                                |         |         |         |         | 3,156    |       
|                                                                 | Dividends paid to stockholders                                                                |                                                   |                                                                                |         |         |         |         | (1,395   | )     
|                                                                 | Distributions to minority investors                                                           |                                                   |                                                                                | (424     | )       |         |         | (1,072   | )     
|                                                                 | Purchase of limited partnership unit                                                          |                                                   |                                                                                | (65      | )       |         |         |         |       
|                                                                 |                                                                                               |                                                   |                                                                                |          |         |         |         |         
|Net cash provided by (used in) financing
    activities          |                                                                                               |                                                   | 166,609                                                                        |          |         |         | (33,207 | )       
|Effect of exchange rate changes on cash and cash
    equivalents |                                                                                               |                                                   | (304                                                                           | )        |         |         | (9      | )       
|                                                                 |                                                                                               |                                                   |                                                                                |          |         |         |         |         
|Net increase in cash and cash equivalents                        |                                                                                               |                                                   | 236,386                                                                        |          |         |         | 1,287   |         
|Cash and cash equivalents, beginning of period                   |                                                                                               |                                                   | 33,896                                                                         |          |         |         | 23,448  |         
|                                                                 |                                                                                               |                                                   |                                                                                |          |         |         |         |         
|Cash and cash equivalents, end of period                         |                                                                                               | $                                                 | 270,282                                                                        |          |         | $       | 24,735  |         
|                                                                 |                                                                                               |                                                   |                                                                                |          |         |         |         |         
|Supplemental Cash Flow Information                               |                                                                                               |                                                   |                                                                                |          |         |         |         |         
|Cash paid for interest and income taxes:                         |                                                                                               |                                                   |                                                                                |          |         |         |         |         
|                                                                 | Interest, net of capitalized interest                                                         |                                                   | $                                                                              | 118,739  |         |         | $       | 110,619  |       
|                                                                 |                                                                                               |                                                   |                                                                                |          |         |         |         |         
|                                                                 | Income taxes                                                                                  |                                                   | $                                                                              | 1,920    |         |         | $       | 726      |       
|                                                                 |                                                                                               |                                                   |                                                                                |          |         |         |         |         

See accompanying notes to unaudited consolidated
financial statements.

4



---



##### 



MERISTAR HOSPITALITY CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


SEPTEMBER 30, 2003


1.          Organization

MeriStar Hospitality Corporation is a real estate
investment trust, or REIT. We own a portfolio of upscale,
full-service hotels and resorts in the United States and Canada.
Our portfolio is diversified geographically as well as by
franchise and brand affiliations. As of September 30, 2003,
we owned 101 hotels, with 26,290 rooms, all of which were leased
by our taxable subsidiaries and managed by Interstate Hotels
& Resorts, Inc. (Interstate Hotels). In October
2003, we sold one hotel with 71 rooms.

Our taxable subsidiaries are parties to
management agreements with a subsidiary of Interstate Hotels to
manage all of our hotels. Under these management agreements, the
taxable subsidiaries pay a management fee for each property to a
subsidiary of Interstate Hotels. The taxable subsidiaries in
turn make rental payments to our operating partnership under the
participating leases. Under the 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. All of
the agreements expire in 2010 and have three renewal periods of
five years each at the option of Interstate Hotels, subject to
some exceptions.

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 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, 2002.
Certain 2002 amounts have been reclassified to conform to the
2003 presentation.

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,
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. In January 2003, the Financial
Accounting Standards Board (FASB) issued Interpretation No.
(FIN) 46, Consolidation of Variable Interest
Entities, an interpretation of Accounting Research
Bulletin No. 51, Consolidated Financial
Statements. The interpretation addresses how to identify
variable interest entities and when to consolidate those
entities. Consolidation of variable interest entities is
required by the primary beneficiary. The interpretation applied
immediately to variable interest entities created after
January 31, 2003. The initial application of the
interpretation did not affect our results of operations or
financial condition as we have not obtained an interest in any
qualifying entity on or after January 31, 2003. On
October 9, 2003, the FASB issued FIN 46-6 which deferred to
December 31, 2003 the effective date for applying the
interpretation to variable interest entities created before
February 1, 2003. We do not expect the application of the
second phase of the interpretation to have a material effect on
our results of operations or financial condition.

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

5



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| |   |                                              
| | - | ---------------------------------------------
| |  | 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. If material to our total portfolio, we
segregate the held for sale properties on our consolidated
balance sheet.

Marketable Securities.We classify investments in equity
securities and debt securities with original maturities greater
than three months as marketable securities. We record debt
securities at amortized cost and equity securities at market
value based on quoted market prices. As of September 30,
2003, our marketable securities consisted of investments in debt
securities, including commercial paper and agency discount
notes. As of September 30, 2003, the securities had a fair
value of $1 million.

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 adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, on January 1, 2002. SFAS No. 144
requires 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, including any gain or loss
recognized, to be recorded as 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.

We adopted the provisions of SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, on January 1, 2003. SFAS No. 146
requires 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 upon termination. As a result, we may incur
termination obligations related to our asset dispositions. 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 and will be included in
discontinued operations. For further discussion of potential
termination obligations, see Asset Dispositions
included in Item 2 of this Quarterly Report on
Form 10-Q.

Gains and Losses From Extinguishments of Debt.We adopted the provisions of SFAS
No. 145, Rescission of FASB Statements No. 4,
No. 44 and No. 64, Amendment of SFAS No. 13, and
Technical Corrections, on January 1, 2003. The
rescission of SFAS No. 4 and No. 64 requires that all
gains and losses from extinguishments of debt be classified as
extraordinary only if the gains and losses are from unusual or
infrequent transactions. It also requires prior period gains or
losses that are not from unusual and infrequent transactions to
be reclassified. See Note 6 for details on the early
extinguishment of substantially all of our 4.75% convertible
notes and a portion of our 8.75% senior subordinated notes
during the third quarter of 2003.

Stock-Based Compensation.We adopted the recognition provisions
of SFAS No. 123, Accounting for Stock-Based
Compensation, as amended in December 2002 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. During the nine months
ended September 30, 2003, we granted 207,500 stock options
to employees which vest ratably over three years. Compensation
costs related to these stock options were not material to our
results of operations for the nine months ended
September 30, 2003. We apply the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, in accounting

6



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##### 



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
plans, we recognize compensation expense over the vesting period
based on the fair market value of the award at the date of grant.


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 prescribed in SFAS
No. 123, as amended by SFAS No. 148, our net loss and
per share amounts would have been adjusted to the pro forma
amounts indicated as follows (dollars in thousands, except per
share amounts):

|                      |                                                                                                                                                    |                    |         |                   |   |      |         |        |   |   |          |        |   |   |         |        |  
|--------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | ------- | ----------------- | - | ---- | ------- | ------ | - | - | -------- | ------ | - | - | ------- | ------ | -
|                      |                                                                                                                                                    |                    |         |                  
|                      |                                                                                                                                                    | Three Months Ended |         | Nine Months Ended
|                      |                                                                                                                                                    | September 30,      |         | September 30,    
|                      |                                                                                                                                                    |                    |         |                  
|                      |                                                                                                                                                    | 2003               |         | 2002              |   | 2003 |         | 2002  
|                      |                                                                                                                                                    |                    |         |                   |   |      |         |       
|Net loss, as reported |                                                                                                                                                    | $                  | (50,694 | )                 |   | $    | (29,402 | )      |   | $ | (326,800 | )      |   | $ | (36,372 | )     
|                      | Add: Stock-based employee compensation expense
    included in reported net loss, net of related tax effect                                        |                    |         | 762               |   |      |         | 1,251  |   |   |          | 2,344  |   |   |         | 3,441  |  
|                      | Deduct: Total stock-based employee compensation
    expense determined under fair value-based method for all awards,
    net of related tax effect |                    |         | (890              | ) |      |         | (1,478 | ) |   |          | (2,790 | ) |   |         | (4,182 | )
|                      |                                                                                                                                                    |                    |         |                   |   |      |         |        |   |   |          |        |   |   |         |       
|Net loss, pro forma   |                                                                                                                                                    | $                  | (50,822 | )                 |   | ($   | 29,629  | )      |   | $ | (327,246 | )      |   | $ | (37,113 | )     
|                      |                                                                                                                                                    |                    |         |                   |   |      |         |        |   |   |          |        |   |   |         |       
|Loss per share:       |                                                                                                                                                    |                    |         |                   |   |      |         |        |   |   |          |        |   |   |         |       
|                      | Basic and diluted, as reported                                                                                                                     |                    | $       | (1.06             | ) |      | $       | (0.65  | ) |   | $        | (7.04  | ) |   | $       | (0.81  | )
|                      | Basic and diluted, pro forma                                                                                                                       |                    | $       | (1.06             | ) |      | $       | (0.66  | ) |   | $        | (7.05  | ) |   | $       | (0.83  | )

The effects of applying SFAS No. 123 for
disclosing pro forma compensation costs may not be
representative of the actual effects on reported net income and
earnings per share in future periods.

Accounting for Guarantees.FASB FIN 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an
interpretation of FASB Statements No. 5, 57, and 107 and
rescission of FASB Interpretation No. 34, became effective
on January 1, 2003. The interpretation requires recognition of
liabilities at their fair value for newly-issued guarantees. We
have no guarantees which require recognition under the
provisions of this interpretation.

Derivative Instruments and Hedging Activities.SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities became effective on July 1, 2003. The
statement clarifies under what circumstances a contract with an
initial net investment meets the characteristics of a
derivative, clarifies when a derivative contains a financing
component, amends the definition of an underlying derivative,
and amends certain other provisions. This statement applies to
any freestanding financial derivative instruments entered into
or modified after June 30, 2003. This standard did not
affect our results of operations or financial condition as we
have not entered into any freestanding financial derivative
instruments since June 30, 2003.

Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity.The FASB issued SFAS No. 150
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity in May
2003. The provisions of the statement require many instruments
which were previously classified as equity to now be classified
as a liability (or an asset in some circumstances), including:
mandatorily redeemable instruments, instruments with repurchase
obligations and instruments with obligations to issue a variable
number of shares. The statement applied immediately to any such
financial instrument entered into or modified after May 31,
2003, and to all other instruments on July 1, 2003. We have
not entered into or modified any financial instruments within
the scope of this standard subsequent to May 31, 2003, nor do we
have any existing financial instruments that fall within the
scope of SFAS No. 150.

7



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##### 



3.          Comprehensive
Loss

Comprehensive loss was $50.2 million and
$30.1 million for the three months ended September 30,
2003 and 2002, respectively. Comprehensive loss consisted of net
loss of $50.7 million and $29.4 million for the three
months ended September 30, 2003 and 2002, respectively, and
foreign currency translation adjustments.

Comprehensive loss was $321.4 million and
$35.8 million for the nine months ended September 30,
2003 and 2002, respectively. Comprehensive loss consisted of net
loss of $326.8 million and $36.4 million for the nine
months ended September 30, 2003 and 2002, respectively,
foreign currency translation adjustments, and in 2002 a
$0.5 million fair value gain adjustment for derivatives.

4.          Property
and Equipment

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

|                                  |  |               |           |              |  |   |           | 
|--------------------------------- |  | ------------- | --------- | ------------ |  | - | --------- | 
|                                  |  | September 30, |           | December 31,
|                                  |  | 2003          |           | 2002        
|                                  |  |               |           |             
|Land                              |  | $             | 251,933   |              |  | $ | 288,611   | 
|Buildings and improvements        |  |               | 2,005,884 |              |  |   | 2,351,769 | 
|Furniture, fixtures and equipment |  |               | 286,007   |              |  |   | 344,541   | 
|Construction-in-progress          |  |               | 33,816    |              |  |   | 35,988    | 
|                                  |  |               |           |              |  |   |           | 
|                                  |  | $             | 2,577,640 |              |  | $ | 3,020,909 | 
|                                  |  |               |           |              |  |   |           | 

For the nine months ended September 30, 2003
and 2002, we capitalized interest of $2.4 million and
$3.1 million, respectively.

In late 2002, due to the decision to market
non-core assets as a part of our program to dispose of assets
that do not fit our long-term strategy and changes in economic
conditions, we performed an analysis to determine the
recoverability of each of our hotel properties. Assets we have
identified as non-core typically have one or more of
the following characteristics: secondary market locations,
secondary brand affiliations, higher than average future capital
expenditure requirements, limited future growth potential, or an
over-weighted market location.

We recognized an impairment loss in 2002 on
certain non-core assets we were then actively marketing. Late in
the first quarter of 2003, we expanded our asset disposition
program to include a total of 16 non-core assets and recognized
an impairment loss of $56.7 million as a result of the
change in our expected holding period for these assets.

During the second quarter of 2003, we made the
determination to dispose of an additional 19 non-core assets,
for a total of 35 non-core assets included in our disposition
program. Also during the second quarter, due to the market
interest in certain of our other hotel assets, we decided to add
an additional six assets to our disposition program. Due to this
change in our expected holding period for these assets, we
recognized an additional impairment loss of $208 million
related to the contemplated disposition of these 41 assets
during the second quarter of 2003.

During the third quarter of 2003, we made the
determination to dispose of one additional asset and retain one
of our assets previously included in our disposition program. We
also changed our expected holding period for another asset and
revised our estimated sales prices on certain other assets
included in our disposition program. As a result, we recognized
an additional impairment loss of $21 million during the
three months ended September 30, 2003. Including one asset
sale in October, we have sold seven hotels included in our asset
disposition program since January 1, 2003.

The impairment charges are based on our estimates
of the fair value of the properties to be disposed of. 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

8



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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.


As of September 30, 2003, our property and
equipment included $8.6 million for one asset (sold in
October 2003 for a gain of approximately $7 million), which
met our criteria for held-for-sale classification. The remaining
hotels included in our asset disposition program do not meet the
probability criteria as prescribed by SFAS No. 144 to
classify as held-for-sale.

5.          Investment
in Affiliate

In 1999, we 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. We recognize
the return quarterly as it becomes due to us. As of
September 30, 2003, cumulative preferred returns of
$16.6 million were due from MIP and included in accounts
receivable on the accompanying consolidated balance sheet. 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. We evaluate the collectibility of our
preferred return based on our preference to distributions and
the underlying value of the hotel properties. Should the current
economic environment continue and the performance of the MIP
properties not improve, the value of our original investment may
also decline.

6.          Long-Term
Debt

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

|                               |  |               |           |              |  |   |           |  
|------------------------------ |  | ------------- | --------- | ------------ |  | - | --------- | -
|                               |  | September 30, |           | December 31,
|                               |  | 2003          |           | 2002        
|                               |  |               |           |             
|Senior unsecured notes         |  | $             | 950,000   |              |  | $ | 950,000   |  
|Secured facility, due 2009     |  |               | 310,475   |              |  |   | 314,626   |  
|Secured facility, due 2013     |  |               | 101,000   |              |  |   |          |  
|Convertible subordinated notes |  |               | 173,705   |              |  |   | 154,300   |  
|Senior subordinated notes      |  |               | 164,400   |              |  |   | 205,000   |  
|Mortgage and other debt        |  |               | 36,018    |              |  |   | 38,030    |  
|Unamortized issue discount     |  |               | (6,473    | )            |  |   | (7,854    | )
|                               |  |               |           |              |  |   |           |  
|                               |  | $             | 1,729,125 |              |  | $ | 1,654,102 |  
|                               |  |               |           |              |  |   |           |  

Aggregate future maturities as of
September 30, 2003 were as follows (dollars in thousands):

|                    |  |   |           | 
|------------------- |  | - | --------- | 
|2003 (three months) |  | $ | 2,255     | 
|2004                |  |   | 21,717    | 
|2005                |  |   | 10,375    | 
|2006                |  |   | 11,238    | 
|2007                |  |   | 175,560   | 
|Thereafter          |  |   | 1,507,980 | 
|                    |  |   |           | 
|                    |  | $ | 1,729,125 | 
|                    |  |   |           | 

As of September 30, 2003, all of our debt
bore fixed rates of interest. Our overall weighted average
interest rate was 8.91%. Based on market prices at
September 30, 2003, the fair value of our long-term debt
was $1.81 billion.

9



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Senior unsecured notes.These notes are unsecured obligations
of certain subsidiaries of ours, and we guarantee payment of
principal and interest on the notes. These notes contain various
restrictive incurrence covenants, limiting our ability to
initiate or transact certain business activities if specific
financial thresholds are not achieved. One of those thresholds
is maintaining a 2 to 1 fixed charge coverage ratio (as defined
in the indentures, fixed charges only include interest on debt
obligations and preferred equity). As of September 30,
2003, our fixed charge coverage ratio was below 2 to 1, and
therefore we were not permitted generally to enter into certain
transactions, including the repurchase of our stock, the
issuance of any preferred stock, the payment of dividends, the
incurrence of any additional debt, or the repayment of
outstanding debt before it comes due, 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 currently have the ability to
incur $300 million of secured financing within restricted
subsidiaries. We also have a general carve-out to incur
$50 million of unspecified borrowings within a restricted
subsidiary. Additionally, we are permitted to repay subordinated
debt prior to its maturity from the proceeds of a pari passuor junior financing with a longer term than the debt
refinanced, an equity offering, or a financing within an
unrestricted subsidiary. We are also permitted to invest five
percent of consolidated net tangible assets (as defined in the
indentures) in unrestricted subsidiaries and mortgage the
properties contributed to the unrestricted subsidiaries. We
completed a qualifying transaction under this exception during
the third quarter of 2003 through a new secured facility
financing (see discussion below).

Secured facilities.On September 26, 2003, we
completed a $101 million, 10-year, commercial
mortgage-backed securities financing, secured by a portfolio of
four hotels, as permitted by the indentures to our senior
unsecured notes and senior subordinated notes. The loan carries
a fixed annual interest rate of 6.88% and matures in 2013. We
incurred approximately $0.9 million in debt issuance costs
related to the facility. The proceeds will be used to repay debt
carrying higher interest rates or to fund capital expenditures
or acquisitions to the extent that higher interest rate debt
cannot be acquired at attractive prices.

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. Approximately $19.9 million
of cash was held in escrow under this provision as of
September 30, 2003. 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
approximately $11 million were available to fund capital
expenditures under this provision as of September 30, 2003.

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). These convertible notes are
unsecured obligations and provide for semi-annual payments of
interest each on October 1 and April 1. We incurred
approximately $6.5 million in debt issuance costs related
to the issuance.

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 also unsecured obligations that pay
interest semi-annually, on each April 15 and
October 15. 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.
During the third quarter, we

10



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recognized this gain and wrote off approximately
$0.6 million of deferred financing costs related to the
repurchase, which write off is classified as amortization
expense on our consolidated statements of operations. The
remaining proceeds from the issuance were also used to
repurchase a portion of our senior subordinated notes (see
discussion below).


Senior subordinated notes.The 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.

A portion of the proceeds from the July 2003
issuance of 9.5% convertible notes discussed above were used to
repurchase $22.6 million principal amount of our senior
subordinated notes, at varying prices, resulting in an aggregate
discount of approximately $1.5 million. We recognized this
gain during the third quarter of 2003. Also during the third
quarter, we redeemed $18 million of these notes in exchange
for 2,792,880 shares of our common stock, resulting in a gain of
$1.7 million. In connection with the repurchases of these
notes, we wrote off deferred financing costs totaling
approximately $0.5 million, which write off is classified
as amortization expense on our consolidated statements of
operations.

In October 2003, we repurchased
$59.3 million face amount of these notes, at varying
prices. During the fourth quarter, we expect to recognize a loss
of approximately $1.2 million, including the write off of
deferred financing costs related to the repurchases. As of
November 1, 2003, we had approximately $105 million of
senior subordinated notes outstanding.

Credit facility.In
May 2003, we reduced our borrowing capacity on our senior credit
facility from $100 million to $50 million and wrote
off approximately $0.7 million in related deferred
financing costs. As of September 30, 2003, we had no
outstanding borrowings under this facility.

This facility contains customary financial
compliance measures, which became more stringent on a quarterly
basis beginning in the first quarter of 2003. The sale of two
hotels during the fourth quarter of 2002, two in the first half
of 2003, as well as the settlement of our note receivable with
Interstate Hotels, negatively affected our leverage covenant due
to the loss of trailing 12-month EBITDA (as defined in the
credit agreement) on a pro forma basis. If we are not in
compliance with the leverage covenant or any other financial
covenants at the end of a quarterly measuring period, we will be
in default under the credit facility and will not be permitted
to borrow under the credit facility. We have obtained a waiver
of compliance with this leverage covenant from our lending
group, which was extended through November 19, 2003.
Because we do not anticipate needing to draw under the bank line
or having borrowing capacity to do so in the near term, we
expect to terminate the facility in late 2003. We have
approximately $0.6 million of unamortized capitalized
financing costs related to this facility as of
September 30, 2003, which would be written off should we
decide to terminate the facility.

Derivatives.We had
three swap agreements that did not qualify for treatment as
cash-flow hedges under SFAS No. 133 expire since
September 30, 2002, one in December 2002, one in April 2003
and one in July 2003. As of September 30, 2003, we had no
outstanding derivative instruments.

During the three and nine months ended
September 30, 2003, we recognized $0.6 million and
$4.0 million, respectively, of income related to the
decrease in fair value of the liability recorded for the
interest rate swap in place in those time periods. For the three
and nine months ended September 30, 2003, we made cash
payments on this swap of $0.6 million and $4.0 million,
respectively. The change in fair value and the swap payments are
netted together on our statement of operations, resulting in no
effect on net income.

During the three and nine months ended
September 30, 2002, we recognized $1.9 million and
$4.8 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 nine months ended September 30, 2002, we made
cash payments on those swaps of $3 million and
$9 million, respectively. The change in fair value and the
swap payments are netted together on our statement of
operations. During the nine months ended September 30,
2002, we also recognized a $4.7 million loss on the fair
value of derivatives no longer classified as cash-flow hedges
due to the repayment of the related hedged debt.

11



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7.          Stockholders
Equity and Minority Interests

Common Stock Transactions.On September 24, 2003, we issued
12,000,000 shares of common stock at a price of $7.20 per share
($82.9 million of net proceeds) pursuant to our effective
shelf registration statement filed under the Securities Act of
1933. In October 2003, we issued 1,800,000 shares of common
stock at a price of $7.20 per share ($12.4 million of net
proceeds) under the over-allotment option that we granted to the
underwriter in connection with the September 24, 2003
issuance.

During the third quarter of 2003, we issued
2,792,880 shares of common stock in exchange for
$18 million of our senior subordinated notes (see Note 6).
We reissued 2,056,210 shares held in treasury in connection with
this transaction.

We issued 50,000 shares of common stock to a
former executive officer and director in connection with the
formal separation of management functions with Interstate Hotels
during the first quarter of 2003. This former executive officer
and director also relinquished 50,000 Profits-Only OP Units
(POPs) in the first quarter in connection with the separation.

Restricted Stock Transactions.In 2003, we issued 211,721 shares of
restricted stock to employees pursuant to employment agreements,
with an aggregate value of $0.7 million.

OP Units.Substantially all of our assets are held indirectly by and
operated through MeriStar Hospitality Operating Partnership,
L.P., 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 POPs.

Common OP Unit holders converted 883,000 and
400,000 of their OP Units, with a value of $20.1 million
and $6.1 million, respectively, into common stock during
the nine months ended September 30, 2003 and 2002,
respectively. There were no material conversions for cash during
the nine months ended September 30, 2003 and 2002.

In May 2002, we issued 162,500 POPs to an
executive officer pursuant to an employment agreement. If all of
the vesting criteria for the POPs were met, then each POP would
have a value equivalent to the value of one share of our stock,
which for this issuance totaled $2.9 million.

8.          Loss
Per Share

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

|                                  |                                                                                     |                    |   |                   |   |      |   |         |   |  |   |          |   |  |   |         |  
|--------------------------------- | ----------------------------------------------------------------------------------- | ------------------ | - | ----------------- | - | ---- | - | ------- | - |  | - | -------- | - |  | - | ------- | -
|                                  |                                                                                     |                    |   |                  
|                                  |                                                                                     | Three Months Ended |   | Nine Months Ended
|                                  |                                                                                     | September 30,      |   | September 30,    
|                                  |                                                                                     |                    |   |                  
|                                  |                                                                                     | 2003               |   | 2002              |   | 2003 |   | 2002   
|                                  |                                                                                     |                    |   |                   |   |      |   |        
|Basic and Diluted Loss Per Share: |                                                                                     |                    |   |                   |   |      |   |         |   |  |   |          |   |  |   |        
|                                  | Loss from continuing operations                                                     |                    | $ | (47,956           | ) |      | $ | (22,944 | ) |  | $ | (304,588 | ) |  | $ | (34,952 | )
|                                  | Dividends declared on unvested restricted stock                                     |                    |   |                  |   |      |   | (2      | ) |  |   |         |   |  |   | (5      | )
|                                  |                                                                                     |                    |   |                   |   |      |   |         |   |  |   |          |   |  |   |        
|                                  | Loss available to common stockholders                                               |                    | $ | (47,956           | ) |      | $ | (22,946 | ) |  | $ | (304,588 | ) |  | $ | (34,957 | )
|                                  |                                                                                     |                    |   |                   |   |      |   |         |   |  |   |          |   |  |   |        
|                                  | Weighted average number of basic and diluted
    shares of common stock outstanding |                    |   | 47,709            |   |      |   | 45,045  |   |  |   | 46,445   |   |  |   | 44,851  |  
|                                  |                                                                                     |                    |   |                   |   |      |   |         |   |  |   |          |   |  |   |        
|                                  | Basic and diluted loss per share from continuing
    operations                     |                    | $ | (1.00             | ) |      | $ | (0.51   | ) |  | $ | (6.56    | ) |  | $ | (0.78   | )
|                                  |                                                                                     |                    |   |                   |   |      |   |         |   |  |   |          |   |  |   |        

For the three months ended September 30,
2003 and 2002, 20,989,775 and 9,135,672 shares, respectively,
consisting of shares issuable upon exercise, redemption or
conversion of outstanding stock options, operating partnership
units and convertible notes, were excluded from the calculation
of diluted loss per share as the effect of their inclusion would
be anti-dilutive. For the nine months ended September 30,
2003 and 2002,

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##### 



12,986,759 and 9,347,966 shares, respectively,
underlying these instruments were excluded from the calculation
of diluted loss per share as the effect of their inclusion would
be anti-dilutive.


9.          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.

Minimum Lease Payments.We lease the land at certain of our
hotels 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 September 30, 2003
were as follows (dollars in thousands):

|                    |  |   |        | 
|------------------- |  | - | ------ | 
|2003 (three months) |  | $ | 360    | 
|2004                |  |   | 1,437  | 
|2005                |  |   | 1,440  | 
|2006                |  |   | 1,427  | 
|2007                |  |   | 1,427  | 
|Thereafter          |  |   | 56,368 | 
|                    |  |   |        | 
|                    |  | $ | 62,459 | 
|                    |  |   |        | 

Our obligations under other operating lease
commitments, primarily for equipment and office space, 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 September 30, 2003 were
as follows (dollars in thousands):

|                    |  |   |        | 
|------------------- |  | - | ------ | 
|2003 (three months) |  | $ | 1,175  | 
|2004                |  |   | 4,428  | 
|2005                |  |   | 2,896  | 
|2006                |  |   | 2,027  | 
|2007                |  |   | 1,456  | 
|Thereafter          |  |   | 1,929  | 
|                    |  |   |        | 
|                    |  | $ | 13,911 | 
|                    |  |   |        | 

10.          Asset
Dispositions

We sold three hotels during the third quarter of
2002, two hotels in the fourth quarter of 2002, one in the first
quarter of 2003, one in the second quarter of 2003, and four
hotels in the third quarter of 2003. In October 2003, we sold
one hotel that met our criteria for held-for-sale classification
as of September 30, 2003 (see Note 4). Operating results
for these hotels, and where applicable the gain or loss on final
disposition, are included in discontinued operations.

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##### 



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

|                                     |  |               |        |               |  |      |        |      |  |   |         |   |  |   |        |  
|------------------------------------ |  | ------------- | ------ | ------------- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                     |  |               |        |              
|                                     |  | Three Months  |        | Nine Months  
|                                     |  | Ended         |        | Ended        
|                                     |  | September 30, |        | September 30,
|                                     |  |               |        |              
|                                     |  | 2003          |        | 2002          |  | 2003 |        | 2002
|                                     |  |               |        |               |  |      |        |     
|Revenue                              |  | $             | 4,844  |               |  | $    | 13,973 |      |  | $ | 25,589  |   |  | $ | 50,195 |  
|Loss on asset impairments            |  |               |       |               |  |      |       |      |  |   | (22,300 | ) |  |   |       |  
|Pretax income (loss) from operations |  |               | 35     |               |  |      | (188   | )    |  |   | (19,396 | ) |  |   | 4,993  |  
|Loss on disposal                     |  |               | (2,772 | )             |  |      | (6,403 | )    |  |   | (2,772  | ) |  |   | (6,403 | )

The properties we intend to dispose of represent
approximately one-third of our total properties. For the nine
months ended September 30, 2003, the 35 disposition assets
accounted for approximately 20% of our consolidated revenue and
approximately 13% of consolidated operating income. For purposes
of this calculation, we exclude depreciation and amortization
and loss on asset impairments from operating income.

11.          Consolidating
Financial Statements

We and certain subsidiaries of MeriStar
Hospitality Operating Partnership, L.P. (MHOP) are
guarantors of senior unsecured notes issued by MHOP. MHOP and
certain of its subsidiaries are guarantors of our senior
subordinated notes. We own a one percent general partner
interest in MHOP, and MeriStar LP, Inc., our wholly-owned
subsidiary, owns approximately a 93 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 September 30, 2003 and
December 31, 2002, consolidating statements of operations
for the three and nine months ended September 30, 2003 and
2002, and consolidating statements of cash flows for the nine
months ended September 30, 2003 and 2002. In connection
with the $101 million secured financing completed at the
end of September 2003 (see Note 6), certain of MHOPs
guarantor subsidiaries became non-guarantor subsidiaries.

14