##### 



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)


|                                                                                     |                                                  |                                   |           |              |     |   |           |           |     | 
|------------------------------------------------------------------------------------ | ------------------------------------------------ | --------------------------------- | --------- | ------------ | --- | - | --------- | --------- | --- | 
|                                                                                     |                                                  | March 31,                         |           |             
|                                                                                     |                                                  | 2004                              |           | December 31,
|                                                                                     |                                                  | (Unaudited)                       |           | 2003        
|                                                                                     |                                                  |                                   |           |             
|ASSETS                                                                               |                                                  |                                   |           |              |     |   |           |          
|Property and equipment                                                               |                                                  | $                                 | 2,437,395 |              |     | $ | 2,481,752 |          
|Accumulated depreciation                                                             |                                                  |                                   | (465,360  | )            |     |   | (446,032  | )        
|                                                                                     |                                                  |                                   |           |              |     |   |           |          
|                                                                                     |                                                  |                                   | 1,972,035 |              |     |   | 2,035,720 |          
|Assets held for sale                                                                 |                                                  |                                   | 39,274    |              |     |   | 51,169    |          
|Investment in affiliate                                                              |                                                  |                                   | 15,000    |              |     |   | 15,000    |          
|Prepaid expenses and other assets                                                    |                                                  |                                   | 41,007    |              |     |   | 47,934    |          
|Accounts receivable, net of allowance for
    doubtful accounts of $2,751 and $2,040 |                                                  |                                   | 69,076    |              |     |   | 64,709    |          
|Restricted cash                                                                      |                                                  |                                   | 44,656    |              |     |   | 42,523    |          
|Cash and cash equivalents  unrestricted                                             |                                                  |                                   | 194,977   |              |     |   | 230,884   |          
|                                                                                     |                                                  |                                   |           |              |     |   |           |          
|                                                                                     |                                                  | $                                 | 2,376,025 |              |     | $ | 2,487,939 |          
|                                                                                     |                                                  |                                   |           |              |     |   |           |          
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                             |                                                  |                                   |           |              |     |   |           |          
|Long-term debt                                                                       |                                                  | $                                 | 1,527,278 |              |     | $ | 1,638,028 |          
|Accounts payable and accrued expenses                                                |                                                  |                                   | 91,835    |              |     |   | 83,458    |          
|Accrued interest                                                                     |                                                  |                                   | 37,449    |              |     |   | 46,813    |          
|Due to Interstate Hotels & Resorts                                                   |                                                  |                                   | 17,133    |              |     |   | 16,411    |          
|Other liabilities                                                                    |                                                  |                                   | 12,213    |              |     |   | 11,831    |          
|                                                                                     |                                                  |                                   |           |              |     |   |           |          
|Total liabilities                                                                    |                                                  |                                   | 1,685,908 |              |     |   | 1,796,541 |          
|                                                                                     |                                                  |                                   |           |              |     |   |           |          
|Minority interests                                                                   |                                                  |                                   | 36,477    |              |     |   | 37,785    |          
|Stockholders equity:                                                                |                                                  |                                   |           |              |     |   |           |          
|                                                                                     | Common stock, par value $0.01 per share          |                                   |           |              |     |   |           |           |    
|                                                                                     |                                                  | Authorized  100,000 shares       |           |              |     |   |           |           |     | 
|                                                                                     |                                                  | Issued  75,446 and 69,135 shares |           |              | 754 |   |           |           | 691 | 
|                                                                                     | Additional paid-in capital                       |                                   |           | 1,379,430    |     |   |           | 1,338,959 |    
|                                                                                     | Accumulated deficit                              |                                   |           | (682,339     | )   |   |           | (642,094  | )  
|                                                                                     | Accumulated other comprehensive loss             |                                   |           | (1,239       | )   |   |           | (977      | )  
|                                                                                     | Common stock held in treasury  2,345
    shares |                                   |           | (42,966      | )   |   |           | (42,966   | )  
|                                                                                     |                                                  |                                   |           |              |     |   |           |          
|Total stockholders equity                                                           |                                                  |                                   | 653,640   |              |     |   | 653,613   |          
|                                                                                     |                                                  |                                   |           |              |     |   |           |          
|                                                                                     |                                                  | $                                 | 2,376,025 |              |     | $ | 2,487,939 |          
|                                                                                     |                                                  |                                   |           |              |     |   |           |          

See accompanying notes to the unaudited
consolidated financial statements.

2



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##### 



MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS


UNAUDITED


(Dollars in thousands, except per share
amounts)


|                                                         |                                                                 |                                     |                                      |         |         |       |         |         |         |       |  
|-------------------------------------------------------- | --------------------------------------------------------------- | ----------------------------------- | ------------------------------------ | ------- | ------- | ----- | ------- | ------- | ------- | ----- | -
|                                                         |                                                                 |                                    
|                                                         |                                                                 | Three Months                       
|                                                         |                                                                 | Ended March 31,                    
|                                                         |                                                                 |                                    
|                                                         |                                                                 | 2004                                |                                      | 2003   
|                                                         |                                                                 |                                     |                                      |        
|Revenue:                                                 |                                                                 |                                     |                                      |         |         |       |         |        
|                                                         | Hotel operations:                                               |                                     |                                      |         |         |       |         |         |        
|                                                         |                                                                 | Rooms                               |                                      | $       | 135,666 |       |         | $       | 131,567 |      
|                                                         |                                                                 | Food and beverage                   |                                      |         | 51,879  |       |         |         | 52,176  |      
|                                                         |                                                                 | Other hotel operations              |                                      |         | 17,043  |       |         |         | 16,647  |      
|                                                         | Office rental, parking and other revenue                        |                                     |                                      | 2,970   |         |       |         | 3,263   |        
|                                                         |                                                                 |                                     |                                      |         |         |       |         |        
|Total revenue                                            |                                                                 |                                     | 207,558                              |         |         |       | 203,653 |        
|                                                         |                                                                 |                                     |                                      |         |         |       |         |        
|Hotel operating expenses:                                |                                                                 |                                     |                                      |         |         |       |         |        
|                                                         |                                                                 | Rooms                               |                                      |         | 33,224  |       |         |         | 31,209  |      
|                                                         |                                                                 | Food and beverage                   |                                      |         | 38,881  |       |         |         | 37,566  |      
|                                                         |                                                                 | Other hotel operating expenses      |                                      |         | 10,363  |       |         |         | 9,505   |      
|Office rental, parking and other expenses                |                                                                 |                                     | 585                                  |         |         |       | 630     |        
|Other operating expenses:                                |                                                                 |                                     |                                      |         |         |       |         |        
|                                                         |                                                                 | General and administrative          |                                      |         | 38,021  |       |         |         | 34,681  |      
|                                                         |                                                                 | Property operating costs            |                                      |         | 31,488  |       |         |         | 29,505  |      
|                                                         |                                                                 | Depreciation and amortization       |                                      |         | 26,218  |       |         |         | 24,169  |      
|                                                         |                                                                 | Property taxes, insurance and other |                                      |         | 17,061  |       |         |         | 17,193  |      
|                                                         |                                                                 | Loss on asset impairments           |                                      |         | 1,238   |       |         |         |        |      
|                                                         |                                                                 |                                     |                                      |         |         |       |         |        
|Operating expenses                                       |                                                                 |                                     | 197,079                              |         |         |       | 184,458 |        
|                                                         |                                                                 |                                     |                                      |         |         |       |         |        
|Operating income                                         |                                                                 |                                     | 10,479                               |         |         |       | 19,195  |        
|Minority interest                                        |                                                                 |                                     | 946                                  |         |         |       | 3,677   |        
|Interest expense, net                                    |                                                                 |                                     | (34,380                              | )       |         |       | (34,718 | )      
|Loss on early extinguishments of debt                    |                                                                 |                                     | (5,923                               | )       |         |       |        |        
|                                                         |                                                                 |                                     |                                      |         |         |       |         |        
|Loss before income taxes and discontinued
    operations |                                                                 |                                     | (28,878                              | )       |         |       | (11,846 | )      
|Income tax benefit                                       |                                                                 |                                     | 433                                  |         |         |       | 175     |        
|                                                         |                                                                 |                                     |                                      |         |         |       |         |        
|Loss from continuing operations                          |                                                                 |                                     | (28,445                              | )       |         |       | (11,671 | )      
|                                                         |                                                                 |                                     |                                      |         |         |       |         |        
|Discontinued operations:                                 |                                                                 |                                     |                                      |         |         |       |         |        
|                                                         | Loss from discontinued operations before income
    tax benefit |                                     |                                      | (11,980 | )       |       |         | (58,096 | )      
|                                                         | Income tax benefit                                              |                                     |                                      | 180     |         |       |         | 21      |        
|                                                         |                                                                 |                                     |                                      |         |         |       |         |        
|Loss from discontinued operations                        |                                                                 |                                     | (11,800                              | )       |         |       | (58,075 | )      
|                                                         |                                                                 |                                     |                                      |         |         |       |         |        
|Net loss                                                 |                                                                 | $                                   | (40,245                              | )       |         | $     | (69,746 | )      
|                                                         |                                                                 |                                     |                                      |         |         |       |         |        
|Basic and diluted loss per share:                        |                                                                 |                                     |                                      |         |         |       |         |        
|                                                         | Loss from continuing operations                                 |                                     | $                                    | (0.42   | )       |       | $       | (0.26   | )      
|                                                         | Loss from discontinued operations                               |                                     |                                      | (0.17   | )       |       |         | (1.27   | )      
|                                                         |                                                                 |                                     |                                      |         |         |       |         |        
|                                                         |                                                                 |                                     | Net loss per basic and diluted share |         | $       | (0.59 | )       |         | $       | (1.53 | )
|                                                         |                                                                 |                                     |                                      |         |         |       |         |        

See accompanying notes to the unaudited
consolidated financial statements.

3



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##### 



MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS


UNAUDITED


(Dollars in thousands)


|                                                                 |                                                                                 |                                                   |                                                                                |         |        |        |         |         |        |         |  
|---------------------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------------- | ------------------------------------------------------------------------------ | ------- | ------ | ------ | ------- | ------- | ------ | ------- | -
|                                                                 |                                                                                 |                                                  
|                                                                 |                                                                                 | Three Months                                     
|                                                                 |                                                                                 | Ended March 31,                                  
|                                                                 |                                                                                 |                                                  
|                                                                 |                                                                                 | 2004                                              |                                                                                | 2003   
|                                                                 |                                                                                 |                                                   |                                                                                |        
|Operating activities:                                            |                                                                                 |                                                   |                                                                                |         |        |        |         |        
|                                                                 | Net loss                                                                        |                                                   | $                                                                              | (40,245 | )      |        | $       | (69,746 | )     
|                                                                 | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                   |                                                                                |         |        |        |         |         |       
|                                                                 |                                                                                 | Depreciation and amortization                     |                                                                                |         | 27,160 |        |         |         | 28,994 |        
|                                                                 |                                                                                 | Loss on asset impairments                         |                                                                                |         | 5,011  |        |         |         | 56,677 |        
|                                                                 |                                                                                 | Loss on sale of assets, before tax effect         |                                                                                |         | 6,946  |        |         |         |       |        
|                                                                 |                                                                                 | Loss on early extinguishments of debt             |                                                                                |         | 5,923  |        |         |         |       |        
|                                                                 |                                                                                 | Minority interests                                |                                                                                |         | (946   | )      |         |         | (3,677 | )      
|                                                                 |                                                                                 | Amortization of unearned stock-based compensation |                                                                                |         | 587    |        |         |         | 976    |        
|                                                                 |                                                                                 | Change in value of interest rate swaps            |                                                                                |         |       |        |         |         | (2,055 | )      
|                                                                 |                                                                                 | Deferred income taxes                             |                                                                                |         | (487   | )      |         |         | (931   | )      
|                                                                 |                                                                                 | Changes in operating assets and liabilities:      |                                                                                |         |        |        |         |         |        |        
|                                                                 |                                                                                 |                                                   | Accounts receivable                                                            |         |        | (4,367 | )       |         |        | (12,937 | )
|                                                                 |                                                                                 |                                                   | Prepaid expenses and other assets                                              |         |        | 4,920  |         |         |        | 1,416   |  
|                                                                 |                                                                                 |                                                   | Due from/to Interstate Hotels & Resorts                                        |         |        | (5,461 | )       |         |        | 93      |  
|                                                                 |                                                                                 |                                                   | Accounts payable, accrued expenses, accrued
    interest and other liabilities |         |        | (1,677 | )       |         |        | (9,039  | )
|                                                                 |                                                                                 |                                                   |                                                                                |         |        |        |         |        
|Net cash used in operating activities                            |                                                                                 |                                                   | (2,636                                                                         | )       |        |        | (10,229 | )      
|                                                                 |                                                                                 |                                                   |                                                                                |         |        |        |         |        
|Investing activities:                                            |                                                                                 |                                                   |                                                                                |         |        |        |         |        
|                                                                 | Capital expenditures for property and equipment                                 |                                                   |                                                                                | (23,737 | )      |        |         | (8,622  | )     
|                                                                 | Proceeds from sales of assets                                                   |                                                   |                                                                                | 74,075  |        |        |         | 12,650  |       
|                                                                 | Payments from Interstate Hotels & Resorts                                       |                                                   |                                                                                |        |        |        |         | 42,052  |       
|                                                                 | Increase in restricted cash                                                     |                                                   |                                                                                | (2,133  | )      |        |         | (1,656  | )     
|                                                                 | Costs associated with disposition program and
    other, net                    |                                                   |                                                                                | (3,304  | )      |        |         | (299    | )     
|                                                                 |                                                                                 |                                                   |                                                                                |         |        |        |         |        
|Net cash provided by investing activities                        |                                                                                 |                                                   | 44,901                                                                         |         |        |        | 44,125  |        
|                                                                 |                                                                                 |                                                   |                                                                                |         |        |        |         |        
|Financing activities:                                            |                                                                                 |                                                   |                                                                                |         |        |        |         |        
|                                                                 | Prepayments on long-term debt                                                   |                                                   |                                                                                | (75,497 | )      |        |         |        |       
|                                                                 | Scheduled payments on long-term debt                                            |                                                   |                                                                                | (2,307  | )      |        |         | (1,889  | )     
|                                                                 | Distributions to minority investors                                             |                                                   |                                                                                | (141    | )      |        |         | (141    | )     
|                                                                 | Other                                                                           |                                                   |                                                                                | (77     | )      |        |         |        |       
|                                                                 |                                                                                 |                                                   |                                                                                |         |        |        |         |        
|Net cash used in financing activities                            |                                                                                 |                                                   | (78,022                                                                        | )       |        |        | (2,030  | )      
|                                                                 |                                                                                 |                                                   |                                                                                |         |        |        |         |        
|Effect of exchange rate changes on cash and cash
    equivalents |                                                                                 |                                                   | (150                                                                           | )       |        |        | (274    | )      
|                                                                 |                                                                                 |                                                   |                                                                                |         |        |        |         |        
|Net (decrease) increase in cash and cash
    equivalents         |                                                                                 |                                                   | (35,907                                                                        | )       |        |        | 31,592  |        
|Cash and cash equivalents, beginning of period                   |                                                                                 |                                                   | 230,884                                                                        |         |        |        | 33,896  |        
|                                                                 |                                                                                 |                                                   |                                                                                |         |        |        |         |        
|Cash and cash equivalents, end of period                         |                                                                                 | $                                                 | 194,977                                                                        |         |        | $      | 65,488  |        
|                                                                 |                                                                                 |                                                   |                                                                                |         |        |        |         |        
|Supplemental Cash Flow Information                               |                                                                                 |                                                   |                                                                                |         |        |        |         |        
|Cash paid for interest and income taxes:                         |                                                                                 |                                                   |                                                                                |         |        |        |         |        
|                                                                 | Interest, net of capitalized interest                                           |                                                   | $                                                                              | 43,755  |        |        | $       | 46,989  |       
|                                                                 | Income taxes                                                                    |                                                   | $                                                                              | 275     |        |        | $       | 207     |       
|Non-cash investing and financing activities:                     |                                                                                 |                                                   |                                                                                |         |        |        |         |        
|                                                                 | Senior subordinated debt redeemed in exchange for
    common stock              |                                                   | $                                                                              | 38,000  |        |        | $       |        |       
|                                                                 | Redemption of OP units                                                          |                                                   | $                                                                              | 20      |        |        | $       | 18,109  |       

See accompanying notes to the unaudited
consolidated financial statements.

4



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##### 



MERISTAR HOSPITALITY CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


MARCH 31, 2004


1.          Organization

MeriStar Hospitality Corporation is a real estate
investment trust, or REIT. We own a portfolio of primarily upper
upscale, full-service hotels and resorts in the United States
and one in Canada. Our portfolio is diversified geographically
as well as by franchise and brand affiliations. As of
March 31, 2004, we owned 81 hotels with 22,236 rooms, all
of which were leased by our taxable subsidiaries and managed by
Interstate Hotels & Resorts, Inc. (Interstate
Hotels). Of our 81 hotels at March 31, 2004, eight
were included in our non-core disposition program. Two of these
assets with 371 rooms were sold during the second quarter of
2004.

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 subsidiary 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. The agreements generally have initial terms of
10 years with 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, 2003.

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

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

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



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

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

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

Impairment or Disposal of Long-Lived Assets.We apply the provisions of Statement
of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets,

5



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##### 



which require the current and prior period
operating results of any asset that has been classified as held
for sale or has been disposed of on or after January 1,
2002 and where we have no continuing involvement to be recorded
as discontinued operations. Any gains or losses on final
disposition are also included in discontinued operations.


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

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

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

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

|                      |                                                                                                                                                    |                    |         |       |   |   |         |        |  
|--------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | ------- | ----- | - | - | ------- | ------ | -
|                      |                                                                                                                                                    |                   
|                      |                                                                                                                                                    | Three Months Ended
|                      |                                                                                                                                                    | March 31,         
|                      |                                                                                                                                                    |                   
|                      |                                                                                                                                                    | 2004               |         | 2003 
|                      |                                                                                                                                                    |                    |         |      
|Net loss, as reported |                                                                                                                                                    | $                  | (40,245 | )     |   | $ | (69,746 | )     
|                      | Add: Stock-based employee compensation expense
    included in reported net loss, net of related tax effect                                        |                    |         | 587   |   |   |         | 929    |  
|                      | Deduct: Total stock-based employee compensation
    expense determined under fair value-based method for all awards,
    net of related tax effect |                    |         | (651  | ) |   |         | (1,081 | )
|                      |                                                                                                                                                    |                    |         |       |   |   |         |       
|Net loss, pro forma   |                                                                                                                                                    | $                  | (40,309 | )     |   | $ | (69,898 | )     
|                      |                                                                                                                                                    |                    |         |       |   |   |         |       
|Loss per share:       |                                                                                                                                                    |                    |         |       |   |   |         |       
|                      | Basic and diluted, as reported                                                                                                                     |                    | $       | (0.59 | ) |   | $       | (1.53  | )
|                      | Basic and diluted, pro forma                                                                                                                       |                    | $       | (0.59 | ) |   | $       | (1.53  | )

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

6



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##### 



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

3.          Comprehensive
Loss

Comprehensive loss was $40.5 million and
$68.7 million for the three months ended March 31,
2004 and 2003, respectively. Comprehensive loss consisted of net
loss ($40.2 million and $69.7 million for the three
months ended March 31, 2004 and 2003, respectively) and
foreign currency translation adjustments.

4.          Property
and Equipment

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

|                                  |  |           |           |              |  |   |           | 
|--------------------------------- |  | --------- | --------- | ------------ |  | - | --------- | 
|                                  |  | March 31, |           | December 31,
|                                  |  | 2004      |           | 2003        
|                                  |  |           |           |             
|Land                              |  | $         | 233,272   |              |  | $ | 238,772   | 
|Buildings and improvements        |  |           | 1,873,018 |              |  |   | 1,930,155 | 
|Furniture, fixtures and equipment |  |           | 280,150   |              |  |   | 284,602   | 
|Construction-in-progress          |  |           | 50,955    |              |  |   | 28,223    | 
|                                  |  |           |           |              |  |   |           | 
|                                  |  | $         | 2,437,395 |              |  | $ | 2,481,752 | 
|                                  |  |           |           |              |  |   |           | 

For the three months ended March 31, 2004
and 2003, we capitalized interest of $0.75 million and
$0.78 million, respectively.

During the first quarter of 2004, we recognized
an additional impairment loss of $5.0 million, of which
$3.8 million is recorded in discontinued operations (see
Note 11). As of March 31, 2004, we had eight hotels
remaining in our disposition program, five of which are
classified as held for sale (see Note 5).

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

5.          Assets
Held for Sale

At December 31, 2003, seven assets were
classified as held for sale. Six of these assets were sold
during the first quarter of 2004. At March 31, 2004, five
of the eight properties remaining in our non-core disposition
program met our criteria for classification as held for sale.
The three other assets included in our asset

7



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disposition program did not meet the probability
criteria as prescribed by SFAS No. 144 to classify them as
held for sale. Assets held for sale consisted of the following
(in thousands):


|                                  |  |           |        |              |  |   |        |  
|--------------------------------- |  | --------- | ------ | ------------ |  | - | ------ | -
|                                  |  | March 31, |        | December 31,
|                                  |  | 2004      |        | 2003        
|                                  |  |           |        |             
|Land                              |  | $         | 3,138  |              |  | $ | 5,061  |  
|Buildings and improvements        |  |           | 34,822 |              |  |   | 43,391 |  
|Furniture, fixtures and equipment |  |           | 1,364  |              |  |   | 2,759  |  
|Construction-in-progress          |  |           | 253    |              |  |   | 1,114  |  
|                                  |  |           |        |              |  |   |        |  
|                                  |  |           | 39,577 |              |  |   | 52,325 |  
|Accumulated depreciation          |  |           | (303   | )            |  |   | (1,156 | )
|                                  |  |           |        |              |  |   |        |  
|                                  |  | $         | 39,274 |              |  | $ | 51,169 |  
|                                  |  |           |        |              |  |   |        |  

6.          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 with
outstanding balances compounded quarterly. While the return on
this investment is preferred and cumulative, the underlying
investment ranks equally with the investments of the other
investors in MIP. We recognize the return quarterly as it
becomes due to us. For the three months ended March 31,
2004 and 2003, we recognized a preferred return of
$1.6 million and $2.0 million, respectively, from this
investment. As of March 31, 2004 and December 31,
2003, cumulative preferred returns of $22.0 million and
$19.6 million, respectively, were due from MIP. We have
reserved a portion of this balance and have included the net
$19.8 million and $18.2 million in accounts receivable
on the accompanying consolidated balance sheets as of
March 31, 2004 and December 31, 2003, respectively. We
expect that any cumulative unpaid preferred returns will be paid
in the future from excess cash flow above our current return and
from potential partnership hotel disposition proceeds in excess
of debt allocated to individual assets. Given the current
economic environment, we do not expect MIPs operations to
provide adequate cash flow in the near term for significant
payment of our current returns or repayments of our cumulative
unpaid preferred returns, however we expect to receive payments
from MIP during 2004 resulting from planned dispositions of
certain assets combined with cash flow improvements on other
assets. We evaluate the collectibility of our preferred return
based on our preference to distributions and the underlying
value of the hotel properties.

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

8



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7.          Long-Term
Debt

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

|                                         |  |           |           |              |  |   |           |  
|---------------------------------------- |  | --------- | --------- | ------------ |  | - | --------- | -
|                                         |  | March 31, |           | December 31,
|                                         |  | 2004      |           | 2003        
|                                         |  |           |           |             
|Senior unsecured notes due 2011  9.125% |  | $         | 364,665   |              |  | $ | 400,000   |  
|Senior unsecured notes due 2008  9.0%   |  |           | 282,000   |              |  |   | 300,000   |  
|Senior unsecured notes due 2009  10.5%  |  |           | 231,787   |              |  |   | 250,000   |  
|Secured facility, due 2009               |  |           | 307,566   |              |  |   | 309,035   |  
|Secured facility, due 2013               |  |           | 100,397   |              |  |   | 100,765   |  
|Convertible subordinated notes           |  |           | 173,705   |              |  |   | 173,705   |  
|Senior subordinated notes                |  |           | 45,438    |              |  |   | 83,438    |  
|Mortgage debt                            |  |           | 26,546    |              |  |   | 27,011    |  
|Unamortized issue discount               |  |           | (4,826    | )            |  |   | (5,926    | )
|                                         |  |           |           |              |  |   |           |  
|                                         |  | $         | 1,527,278 |              |  | $ | 1,638,028 |  
|                                         |  |           |           |              |  |   |           |  

Aggregate future maturities as of March 31,
2004 were as follows (in thousands):

|                   |  |   |           | 
|------------------ |  | - | --------- | 
|2004 (nine months) |  | $ | 10,862    | 
|2005               |  |   | 10,269    | 
|2006               |  |   | 11,125    | 
|2007               |  |   | 57,093    | 
|2008               |  |   | 292,315   | 
|Thereafter         |  |   | 1,145,614 | 
|                   |  |   |           | 
|                   |  | $ | 1,527,278 | 
|                   |  |   |           | 

As of March 31, 2004, all of our debt bore
fixed rates of interest. Our overall weighted average interest
rate was 8.9%. Based on market prices at March 31, 2004,
the fair value of our long-term debt was $1.63 billion. On
April 2, 2004, we entered into an interest rate swap on our
secured facility due 2009, effectively converting the interest
the facility bears from a fixed rate to a floating rate. The new
floating rate is LIBOR plus 444 basis points. Our overall
weighted average interest rate is currently 8.5% after giving
effect to the interest rate swap.

Credit facility.On
December 23, 2003, we entered into a new three-year
$50 million senior credit facility, secured by six of our
hotels, and terminated our previous credit facility. The
facility carries an annual interest rate of the London Interbank
Offered Rate, or LIBOR, plus 450 basis points. As of
March 31, 2004, we had no outstanding borrowings under this
facility.

The facility contains financial and other
restrictive covenants. Our ability to borrow under this facility
is subject to financial covenants, including leverage, fixed
charge coverage and interest coverage ratios and minimum net
worth requirements. Our compliance with these covenants in
future periods will depend substantially upon the financial
results of our hotels. The agreement governing our new senior
credit facility limits our ability to effect mergers, asset
sales and change of control events and limits the payments of
dividends other than those required for us to maintain our
status as a REIT and our ability to incur additional secured and
total indebtedness.

Senior unsecured notes.During the three months ended
March 31, 2004, we repurchased from available cash
approximately $71.5 million of our senior unsecured notes,
including approximately $18.0 million of the 9.0% notes due
2008, approximately $35.3 million of the 9.125% notes due
2011 and approximately $18.2 million of the 10.5% notes due
2009. We recorded a loss on early extinguishment of debt of
$4.6 million and wrote off deferred financing costs of
$0.8 million related to these repurchases. The write-off of
deferred financing costs is included in depreciation and
amortization expense on the accompanying consolidated

9



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statements of operations. As of May 5, 2004,
we had purchased an additional $7.6 million of our 10.5%
notes due 2009, $1.5 million of our 9% notes due 2008, and
$4.5 million of our 9.125% notes due 2011.


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
covenants, limiting our ability to initiate or transact certain
business activities if specific financial thresholds are not
achieved. One of those thresholds is having a 2 to 1 fixed
charge coverage ratio (as defined in the indentures, fixed
charges only include interest on debt obligations and preferred
equity) in order to enter into certain types of transactions. As
of March 31, 2004, our fixed charge coverage ratio was
significantly 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 have the ability to incur up to
$250 million of secured financing within restricted
subsidiaries, subject to meeting other maintenance tests under
the indentures. 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 an equal or
junior financing with a longer term than the debt refinanced, an
equity offering, or a financing within an unrestricted
subsidiary.

Secured facilities.On September 26, 2003, as
permitted by the indentures governing our senior unsecured notes
and senior subordinated notes, we completed a $101 million
commercial mortgage-backed securities financing, secured by a
portfolio of four hotels. The loan carries a fixed annual
interest rate of 6.88% and matures in 2013. 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 $32.4 million
and $27.2 million of cash was held in escrow under this
provision as of March 31, 2004 and December 31, 2003,
respectively. 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 $23.6 million were available to fund capital
expenditures under this provision as of March 31, 2004.

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).

10



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

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

During the three months ended March 31,
2004, we acquired $38.0 million of our senior subordinated
notes through the issuance of 6,304,146 shares of common stock.
We recorded a loss on early extinguishment of debt of $1.3
million and wrote off deferred financing costs of
$0.4 million related to this activity. The write off of
deferred financing costs is included in depreciation and
amortization expense on the accompanying consolidated statements
of operations. In April 2004, we exchanged an additional $11.2
million aggregate principal amount of our senior subordinated
notes for 1,834,582 shares of our common stock.

Derivatives.During
the three months ended March 31, 2003, we recognized
$2.1 million of income related to the decrease in fair
value of the liability recorded for the interest rate swaps in
place in that time period. For the three months ended
March 31, 2003, we made cash payments on those swaps of
$2.1 million. The change in fair value and the swap payments are
netted together on our statement of operations. These swaps
expired during the fourth quarter of 2003.

8.          Stockholders
Equity and Minority Interests

Common Stock Transactions.During the three months ended
March 31, 2004, we issued 6,304,146 shares of common stock
in exchange for $38.0 million of our senior subordinated
notes (see Note 7).

During the three months ended March 31,
2004, we issued 3,339 shares of common stock with a value of
$0.02 million, related to shares issued under our employee
stock purchase plan.

OP Units.Substantially all of our assets are
held indirectly by and operated through 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 3,686 and
787,177 of their OP Units, with a value of $0.02 million
and $18.1 million, respectively, into common stock during
the three months ended March 31, 2004 and 2003,
respectively. A POPs unit holder converted 15,000 POPs for cash
during the three months ended March 31, 2004.

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

On April 23, 2004, we announced an agreement
with an underwriter to issue and sell 12.0 million shares of
common stock at a price to the public of $6.25 per share
pursuant to our effective shelf registration statement filed
under the Securities Act of 1933. In addition, the underwriter
was granted an over-allotment option to purchase up to an
additional 1.8 million shares which expires on May 23,
2004. The offering closed on April 28, 2004 with net
proceeds of $72.5 million. If the over-allotment were to be
exercised in full by the underwriter an additional
$10.9 million would be realized.

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9.          Loss
Per Share

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

|                                  |                                                                                     |                    |   |         |   |  |   |         |  
|--------------------------------- | ----------------------------------------------------------------------------------- | ------------------ | - | ------- | - |  | - | ------- | -
|                                  |                                                                                     |                   
|                                  |                                                                                     | Three Months Ended
|                                  |                                                                                     | March 31,         
|                                  |                                                                                     |                   
|                                  |                                                                                     | 2004               |   | 2003   
|                                  |                                                                                     |                    |   |        
|Basic and Diluted Loss Per Share: |                                                                                     |                    |   |         |   |  |   |        
|                                  | Loss from continuing operations                                                     |                    | $ | (28,445 | ) |  | $ | (11,671 | )
|                                  | Weighted average number of basic and diluted
    shares of common stock outstanding |                    |   | 68,640  |   |  |   | 45,548  |  
|                                  |                                                                                     |                    |   |         |   |  |   |        
|                                  | Basic and diluted loss per share from continuing
    operations                     |                    | $ | (0.42   | ) |  | $ | (0.26   | )
|                                  |                                                                                     |                    |   |         |   |  |   |        

For the quarter ended March 31, 2004 and
2003, 20,916,868 and 10,572,450 shares, respectively, consisting
of shares issuable upon conversion, exchange or exercise of
stock options, operating partnership units of MeriStar
Hospitality Operating Partnership, L.P., and shares from our
outstanding convertible notes, were excluded from the
calculation of diluted loss per share as their inclusion would
be anti-dilutive.

10.          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 and office space of our corporate headquarters under
long-term arrangements from third parties. Certain leases
contain contingent rent features based on gross revenues at the
respective property. Future minimum lease payments required
under these operating leases as of March 31, 2004 were as
follows (in thousands):

|                   |  |   |        | 
|------------------ |  | - | ------ | 
|2004 (nine months) |  | $ | 1,338  | 
|2005               |  |   | 1,746  | 
|2006               |  |   | 1,649  | 
|2007               |  |   | 1,672  | 
|2008               |  |   | 1,672  | 
|Thereafter         |  |   | 52,296 | 
|                   |  |   |        | 
|                   |  | $ | 60,373 | 
|                   |  |   |        | 

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

We lease certain office, retail and parking space
to outside parties under non-cancelable operating leases with
initial or remaining terms in excess of one year. Future minimum
rental receipts under these leases as of March 31, 2004
were as follows (in thousands):

|                    |  |   |        | 
|------------------- |  | - | ------ | 
|2004 ( nine months) |  | $ | 3,207  | 
|2005                |  |   | 2,838  | 
|2006                |  |   | 1,943  | 
|2007                |  |   | 1,677  | 
|2008                |  |   | 992    | 
|Thereafter          |  |   | 1,909  | 
|                    |  |   |        | 
|                    |  | $ | 12,566 | 
|                    |  |   |        | 

12



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We may be obligated to pay Interstate Hotels
termination fees of up to a maximum of approximately
$11.1 million with respect to the 28 properties we have
sold since January 1, 2003. In addition, as we dispose of
the six remaining assets in our disposition program, we may
incur termination obligations due to Interstate Hotels of up to
a maximum of approximately $4.3 million, assuming the
disposition of all six of the properties in 2004 and assuming
buyers of our hotel properties elect to have the properties
managed by parties other than Interstate Hotels or do not assume
the obligation as part of the disposition transaction. Any
obligation due under the termination provisions of the contract
is payable over a period of 30 months after termination.
Termination fees payable to Interstate Hotels may be reduced by
amounts paid under replacement management contracts.
Negotiations with Interstate Hotels are ongoing with respect to
our hotel management agreements, including the method of
calculation for the incentive fee and termination fees.

11.          Acquisitions
and Dispositions

As part of our asset acquisition strategy, in
April 2004, we announced that we had signed a definitive
agreement to acquire the four-star, four-diamond rated
Ritz-Carlton, Pentagon City in Arlington, Virginia for $93
million. The 366-room luxury hotel will be operated by The
Ritz-Carlton Hotel Company. The transaction is expected to close
during the second quarter of 2004, subject to customary closing
conditions.

Since January 1, 2003 and as of
March 31, 2004, we have sold 26 hotels with 5,345 rooms for
total gross proceeds of $202.2 million. Of these 26 hotels,
15 hotels were sold in 2003, and 11 hotels were sold in the
first quarter of 2004. As of March 31, 2004, we had eight
hotels remaining in our non-core disposition program. Five of
these hotels met our criteria for held-for-sale classification
as of March 31, 2004 (see Note 5). Operating results for
the sold hotels, and where applicable, the gain or loss on final
disposition, and the five classified as held-for-sale are
included in discontinued operations. Two of the eight hotels in
our disposition program have been sold in the second quarter of
2004 for approximately $18 million.

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

|                            |  |                 |        |      |  |   |         |  
|--------------------------- |  | --------------- | ------ | ---- |  | - | ------- | -
|                            |  |                
|                            |  | Three Months   
|                            |  | Ended March 31,
|                            |  |                
|                            |  | 2004            |        | 2003
|                            |  |                 |        |     
|Revenue                     |  | $               | 12,222 |      |  | $ | 39,513  |  
|Loss on asset impairments   |  |                 | (3,773 | )    |  |   | (56,677 | )
|Pretax loss from operations |  |                 | (1,261 | )    |  |   | (1,419  | )
|Loss on disposal            |  |                 | (6,946 | )    |  |   |        |  

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

12.          Consolidating
Financial Statements

We and certain subsidiaries of MeriStar
Hospitality Operating Partnership, L.P. (MHOP), our
subsidiary operating partnership, are guarantors of senior
unsecured notes issued by MHOP. MHOP and certain of its
subsidiaries are guarantors of our unsecured senior subordinated
notes. We own a one percent general partner interest in MHOP,
and MeriStar LP, Inc., our wholly-owned subsidiary, owns
approximately a 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 March 31, 2004 and December 31,
2003, consolidating statements of operations for the three
months ended March 31, 2004 and 2003, and consolidating
statements of cash flows for the three months ended
March 31, 2004 and 2003.

13