##### 









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549


Form 10-Q

|                                                  |  |                                                                                             
|------------------------------------------------- |  | --------------------------------------------------------------------------------------------
|þ                                                 |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the quarterly period ended March 31,
    2004
|OR                                               
|                                                 
|o                                                 |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
    from      to       
|Commission File Number: 1-11903                  

MeriStar Hospitality Corporation

(Exact name of registrant as specified in its
charter)


|                                                                                             |  |                                                   
|-------------------------------------------------------------------------------------------- |  | --------------------------------------------------
|Maryland(State or other jurisdiction of
    incorporation or organization)                   |  | 75-2648842(I.R.S. Employer
    Identification No.)
|                                                                                            
|4501 North Fairfax Drive
    Arlington, Virginia(Address of principal executive
    offices) |  | 22203(Zip Code)                                   

(703) 812-7200

(Registrants telephone number, including
area code)


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.  Yes þ     No o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange
Act).  Yes þ     No o

The number of shares of the registrants
common stock outstanding at April 30, 2004 was 86,942,710.



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INDEX

|                                      |  |                                                                                           |    |      |    | 
|------------------------------------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                      |  |                                                                                           |    | Page
|                                      |  |                                                                                           |    |     
|PART I.     FINANCIAL
    INFORMATION
|Item 1.                               |  | Financial Statements                                                                      |    |      |    | 
|                                      |  | Consolidated Balance Sheets  March 31,
    2004 and December 31, 2003                    |    |      | 2  | 
|                                      |  | Consolidated Statements of Operations 
    Three months ended March 31, 2004 and 2003    |    |      | 3  | 
|                                      |  | Consolidated Statements of Cash Flows 
    Three months ended March 31, 2004 and 2003    |    |      | 4  | 
|                                      |  | Notes to Unaudited Consolidated Financial
    Statements                                  |    |      | 5  | 
|Item 2.                               |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |    |      | 14 | 
|Item 3.                               |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |    |      | 27 | 
|Item 4.                               |  | Controls and Procedures                                                                   |    |      | 28 | 
|PART II.     OTHER
    INFORMATION   
|Item 6.                               |  | Exhibits and Reports on Form 8-K                                                          |    |      | 29 | 
|Signatures                            |  |                                                                                           | 30 |     

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##### 



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.

11



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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



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS

Managements Discussion and Analysis of
Financial Condition and Results of Operations may contain
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, and as
such may involve known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or
achievements to be materially different from future results,
performance or achievements expressed or implied by such
forward-looking statements. Forward-looking statements, which
are based on certain assumptions and describe our future plans,
strategies and expectations, are generally identified by our use
of words such as intend, plan,
may, should, will,
project, estimate,
anticipate, believe, expect,
continue, potential,
opportunity, and similar expressions, whether in the
negative or affirmative. All statements regarding our expected
financial position, business and financing plans are
forward-looking statements.

Factors which could have a material adverse
effect on our operations and future prospects include, but are
not limited to:



| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| |  | the continuing uncertainty of the national
    economy;                                                                          
|
| |  | economic conditions generally and the real estate
    market specifically;                                                       
|
| |  | the effects of threats of terrorism and increased
    security precautions on travel patterns and demand for hotels;             
|
| |  | the threatened or actual outbreak of hostilities
    and international political instability;                                    
|
| |  | governmental actions;                                                                                                            
|
| |  | legislative/regulatory changes, including changes
    to laws governing the taxation of real estate investment trusts;           
|
| |  | the level of proceeds from asset sales;                                                                                          
|
| |  | cash available for capital expenditures;                                                                                         
|
| |  | the availability of capital;                                                                                                     
|
| |  | our ability to refinance debt;                                                                                                   
|
| |  | rising interest rates;                                                                                                           
|
| |  | rising insurance premiums;                                                                                                       
|
| |  | competition;                                                                                                                     
|
| |  | supply and demand for hotel rooms in our current
    and proposed market areas;                                                  
|
| |  | other factors that may influence the travel
    industry, including health, safety and economic factors; and                     
|
| |  | changes in generally accepted accounting
    principles, policies and guidelines applicable to real estate
    investment trusts.

These risks and uncertainties should be
considered in evaluating any forward-looking statements
contained in this report or incorporated by reference herein.
All forward-looking statements speak only as of the date of this
report or, in the case of any document incorporated by
reference, the date of that document. All subsequent written and
oral forward-looking statements attributable to us or any person
acting on our behalf are qualified by the cautionary statements
in this section. We undertake no obligation to update or
publicly release any revisions to forward-looking statements to
reflect events, circumstances or changes in expectations after
the date of this report.

14



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##### 



BUSINESS SUMMARY

We are a real estate investment trust, or REIT,
and own a portfolio of primarily upper upscale, full-service
hotels and resorts. 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. Two of these assets with 371 total rooms were
disposed of during the second quarter of 2004. Our hotels are
located in major metropolitan areas, rapidly growing secondary
markets or resort locations in the United States and one in
Canada. All of our hotels are leased by our taxable subsidiaries
and all are currently managed by Interstate Hotels &
Resorts (Interstate Hotels), which was created on
July 31, 2002 through the merger of MeriStar
Hotels & Resorts, Inc. and Interstate Hotels
Corporation.

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. 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.

Since the July 2002 merger that formed Interstate
Hotels, we and Interstate Hotels have been separating the senior
management teams of the two companies in order to allow each
senior management team to devote more attention to its
respective companys matters. In December 2003, our Board
of Directors and that of Interstate Hotels each formed a special
committee of independent directors to explore further changes to
the relationship between our company and Interstate Hotels,
including possible changes to the terms, or complete
elimination, of the intercompany agreement. Discussions also
include possible changes to the provisions of the various
management agreements relating to our hotels, including the
method of calculation for the incentive fee and termination fees.

RESULTS OVERVIEW

At the beginning of 2003, we set out a strategy
to position our company to best take advantage of an expected
economic and industry recovery. Our strategy includes the
following key initiatives: reshape the portfolio through asset
sales and strategic acquisitions; enhance liquidity; reduce our
leverage and extend our debt maturities; begin an aggressive
renovation program of our core product offering; and focus on
asset performance through aggressive asset management.

We have made significant progress in reshaping
our portfolio with our asset disposition program, completing the
sale of 26 non-core assets through March 31, 2004, with two
additional hotels sold through early May. We have generated
$220 million in gross cash proceeds from the disposition of
those 28 assets, which has significantly enhanced our liquidity.
We ended the quarter with approximately $240 million in
cash and cash equivalents, $195 million of which was
unrestricted. We have no material maturities until 2007. We
expect to retire the remaining $34.2 million face amount of
our 8.75% senior subordinated notes due 2007 by the end of the
third quarter of 2004.

We have begun an aggressive renovation program
for our core assets. We expect to invest approximately
$225 million in capital expenditures during 2004 and 2005
to enhance the quality of our core product to meet or exceed the
standards of our primary brands  Hilton, Marriott,
and Starwood  to improve the competitiveness of these
assets in their markets and enable them to more fully
participate in any economic recovery. We expect the program to
dramatically reduce the time required to renovate hotels,
allowing us to improve the quality of our hotels faster to take
advantage of the rebound in the economy.

Since the beginning of 2004, we have completed
four of 10 planned brand conversions. Although the conversions
impacted our results in the first quarter, we expect the
conversions to generate positive results at these hotels going
forward.

15



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##### 



Revenues from continuing operations increased to
$207.6 million for the three months ended March 31,
2004 compared to $203.7 million for the same period in
2003. Net income for the three months ended March 31, 2004
includes operating expenses that are 6.8% higher compared to the
same period in 2003, mainly due to the impact of aggressive
cost-cutting initiatives that were implemented last year prior
to the war in Iraq, and a restoration of 2003 cost reductions,
particularly in areas having the most impact on guest
satisfaction such as concierge, lounge, restaurant and lounge
hours and front desk and bell stand staffing. Our first quarter
2004 rooms expense also includes a significant amount of
one-time marketing, training and other expense associated with
the conversions of a number of our hotels to other brands. In
addition, we realized a $5.9 million loss on early
extinguishment of debt during the three months ended
March 31, 2004.

The following discussion should be read in
conjunction with our Annual Report on Form 10-K for the
year ended December 31, 2003 as filed with the Securities
and Exchange Commission, and with the unaudited consolidated
financial statements and related notes included in Item 1
of this Quarterly Report on Form 10-Q.

RESULTS OF OPERATIONS

Our revenues are derived from the operations of
our hospitality properties, including room, food and beverage
revenues, as well as from our leases of office, retail and
parking rentals. Included in our operating results is our 16%
cumulative preferred return on our partnership interest in
MeriStar Investment Partners, L.P. (MIP). Operating
costs include direct costs to run our hotels, management fees to
Interstate Hotels for the management of our properties,
depreciation of our properties, impairment charges, property tax
and insurance, as well as sales, marketing and general and
administrative costs. Our expenses also include interest on our
debt, amortization of related debt-issuance costs and minority
interest allocations, which represent the allocation of income
and losses to outside investors for properties that are not
wholly owned.

The provisions of Statement of Financial
Accounting Standards (SFAS) No. 144 require that
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, including any gain or loss
recognized on the sale, be recorded as discontinued operations.
Accordingly, we have reclassified all prior periods presented to
conform to this requirement. See Note 11,
Acquisitions and Dispositions, included in
Item 1 of this Quarterly Report on Form 10-Q for
further information regarding the amounts reclassified.

Summary data for the quarter ended March 31
were as follows (dollars in thousands, except operating data
statistics):

|                                     |  |                 |         |         |  |        |         |   |  |  |       |   
|------------------------------------ |  | --------------- | ------- | ------- |  | ------ | ------- | - |  |  | ----- | --
|                                     |  |                 |         |        
|                                     |  | Three Months    |         |        
|                                     |  | Ended March 31, |         |        
|                                     |  |                 |         | Percent
|Summary of Operations:               |  | 2004            |         | 2003    |  | Change
|                                     |  |                 |         |         |  |       
|Total revenue                        |  | $               | 207,558 |         |  | $      | 203,653 |   |  |  | 1.9   | % 
|                                     |  |                 |         |         |  |        |         |   |  |  |       |   
|Hotel operating expenses             |  |                 | 82,468  |         |  |        | 78,280  |   |  |  | 5.4   |   
|Other operating expenses             |  |                 | 113,373 |         |  |        | 106,178 |   |  |  | 6.8   |   
|Loss on asset impairments            |  |                 | 1,238   |         |  |        |        |   |  |  | N/A   |   
|                                     |  |                 |         |         |  |        |         |   |  |  |       |   
|Total operating expenses             |  |                 | 197,079 |         |  |        | 184,458 |   |  |  | 6.8   |   
|                                     |  |                 |         |         |  |        |         |   |  |  |       |   
|Operating income                     |  |                 | 10,479  |         |  |        | 19,195  |   |  |  | (45.4 | ) 
|Minority interest                    |  |                 | 946     |         |  |        | 3,677   |   |  |  | (74.0 | ) 
|Loss on early extinguishment of debt |  |                 | (5,923  | )       |  |        |        |   |  |  | N/A   |   
|Income tax benefit                   |  |                 | 433     |         |  |        | 175     |   |  |  | 150.3 |   
|Interest expense, net                |  |                 | (34,380 | )       |  |        | (34,718 | ) |  |  | 0.1   |   
|                                     |  |                 |         |         |  |        |         |   |  |  |       |   
|Loss from continuing operations      |  |                 | (28,445 | )       |  |        | (11,671 | ) |  |  | 143.7 |   
|Loss from discontinued operations(a) |  |                 | (11,800 | )       |  |        | (58,075 | ) |  |  | (79.7 | ) 
|                                     |  |                 |         |         |  |        |         |   |  |  |       |   
|Net loss                             |  | $               | (40,245 | )       |  | $      | (69,746 | ) |  |  | (42.3 | )%
|                                     |  |                 |         |         |  |        |         |   |  |  |       |   



---



|    |                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Includes loss on asset impairments of
    $3.8 million and $56.7 million for the three months
    ended March 31, 2004 and 2003, respectively. Also includes
    loss on disposal of $6.9 million for the three months ended
    March 31, 2004.

16



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##### 



Operating Statistics of Core 73
Properties

Eight of the 81 hotels we owned as of
March 31, 2004 were planned for disposition; the remaining
73 properties represent our core properties. The following
table provides operating statistics for the 73 hotels we
have identified as core properties.

|                                    |  |                 |        |         |  |        |        |  |  |  |      |  
|----------------------------------- |  | --------------- | ------ | ------- |  | ------ | ------ |  |  |  | ---- | -
|                                    |  |                 |        |        
|                                    |  | Three Months    |        |        
|                                    |  | Ended March 31, |        |        
|                                    |  |                 |        | Percent
|                                    |  | 2004            |        | 2003    |  | Change
|                                    |  |                 |        |         |  |       
|Average Daily Rate (ADR)            |  | $               | 109.27 |         |  | $      | 107.97 |  |  |  | 1.20 | %
|Occupancy                           |  |                 | 67.4%  |         |  |        | 66.5%  |  |  |  | 1.35 | %
|Revenue Per Available Room (RevPAR) |  | $               | 73.70  |         |  | $      | 71.76  |  |  |  | 2.70 | %

As of March 31, 2004, five of the eight
assets remaining in our disposition program were classified as
held for sale. Their results of operations were included in
discontinued operations. The following discussion addresses
results for the 76 properties included in continuing
operations. For these 76 properties, ADR increased over one
percent to $107.79 for the three months ended March 31,
2004. Occupancy increased from 66% to 66.5%, and RevPAR
increased to $71.67 from $70.24 for these 76 hotels.

Three months ended March 31, 2004
compared with the three months ended March 31,
2003

Total revenue.Total
revenue increased in the first quarter of 2004 compared to the
same period of 2003, primarily due to a $4.1 million
increase in room revenue that was primarily attributable to an
increase in average daily rate. The average daily rate increased
1.28% for the three months ended March 31, 2004 when
compared with the same period in 2003 as the industry began to
benefit from an increase in travel due to a general
strengthening of the economy. Additionally, the prior year was
impacted by the build-up and start of the war in Iraq.

Hotel operating
expenses.Hotel operating expenses
increased $4.2 million or 5.4% in the first quarter of 2004
compared to same period of 2003. The increase was attributable
to a 6.5% increase in rooms expense mainly due to the
restoration of services with an emphasis on improving guest
satisfaction, as well as an increase in occupancy. Also, prior
year results reflect aggressive cost reductions in anticipation
of the war in Iraq. Food and beverage expense also increased
3.5% as rapidly increasing food costs and labor expenses
outpaced adjustments in menu pricing.

Other operating
expenses.Other operating expenses
increased 6.8% and include general and administrative expenses,
property operating costs, depreciation and amortization, and
property taxes, insurance and other. Variations in these
expenses were as follows:

General and administrative expenses increased by
approximately $3.3 million or 9.6% during the first quarter
of 2004 as compared to the first quarter in 2003 due to an
increase in sales and marketing expense at the hotel level
associated with new initiatives implemented in the first quarter
of 2004, as well as an increase in corporate headquarters
resources. Property operating costs, which consist of repairs
and maintenance, energy, franchise and management costs,
increased $2.0 million to $31.5 million during the
three months ended March 31, 2004 as compared to the same
period in 2003 mainly due to an increase in repairs and
maintenance (as a result of a strategy to improve operating
capabilities and longer term quality of our assets), and higher
energy costs (due to colder weather in January and February
2004). The energy costs increase was partially mitigated by a
strategic program implemented in late 2003 which is designed to
help us manage the increasingly volatile energy costs at our
hotels.

Depreciation and amortization expense increased
$2.0 million in the first quarter of 2004 to
$26.2 million from $24.2 million in the first quarter
of 2003. The increase is primarily due to the write-off of
deferred financing fees related to early repayments of our debt
securities.

Loss on asset
impairments.We recognized losses on
asset impairments totaling $5.0 million and
$56.7 million related to our asset disposition program
during the three months ended March 31, 2004 and

17



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##### 



2003, respectively. Of these total asset
impairment losses, $3.8 million and $56.7 million for
the three months ended 2004 and 2003, respectively, are included
in discontinued operations. The impairment losses recorded
during the three months ended March 31, 2004 primarily represent
a decrease in estimated proceeds from the sale of our remaining
assets planned for disposition. Impairments were significant
during the three months ended March 31, 2003 due to our
decision during that quarter to expand our asset disposition
program, thereby resulting in a change in our expected holding
period for these assets.


Loss on early extinguishment of
debt.During the first three months of
2004, we recorded a loss on early extinguishment of debt of
$4.6 million related to our repurchase of
$71.5 million of our senior unsecured notes, and
$1.3 million related to our redemption of
$38.0 million of our senior subordinated notes.

Loss from discontinued
operations.During the first quarter
of 2004, we completed the sale of 11 hotels in separate
transactions for an aggregate of $74.1 million in cash,
resulting in loss on disposal of $6.9 million. Loss on
disposal resulted primarily from the recognition of termination
fees payable to Interstate Hotels with respect to these
hotels management contracts. As of March 31, 2004, we
had five hotels classified as held for sale. Discontinued
operations for the three months ended March 31, 2004
included impairment charges totaling $3.8 million related to the
assets held for sale. Discontinued operations for the three
months ended March 31, 2003 included impairment charges
totaling $56.7 million.

FUNDS FROM OPERATIONS (FFO)

Substantially all of our non-current assets
consist of real estate, and in accordance with accounting
principles generally accepted in the United States, or GAAP,
those assets are subject to straight-line depreciation, which
reflects the assumption that the value of real estate assets,
other than land, will decline ratably over time. That assumption
is often not true with respect to the actual market values of
real estate assets (and, in particular, hotels), which fluctuate
based on economic, market and other conditions. As a result,
management and many industry investors believe the presentation
of GAAP operating measures for real estate companies to be more
informative and useful when other measures, adjusted for
depreciation and amortization, are also presented.

In an effort to address these concerns, the
National Association of Real Estate Investment Trusts, or
NAREIT, adopted a definition of Funds From Operations, or FFO.
NAREIT defines FFO as net income (computed in accordance with
GAAP), excluding gains (or losses) from sales of real estate,
real estate-related depreciation and amortization, and after
comparable adjustments for our portion of these items related to
unconsolidated partnerships and joint ventures. Extraordinary
items and cumulative effect of changes in accounting principle
as defined by GAAP are also excluded from the calculation of
FFO. As defined by NAREIT, FFO also does not include reductions
from asset impairment charges. The Securities and Exchange
Commission, however, recommends that FFO include the effect of
asset impairment charges, which presentation we have adopted for
all historical presentations of FFO. We believe FFO is an
indicative measure of our operating performance due to the
significance of our hotel real estate assets, and that it can be
used to measure our ability to service debt, fund capital
expenditures, and expand our business. We also use FFO in our
annual budget process.

FFO should not be considered as an alternative to
any other performance measures prescribed by GAAP. Although FFO
is considered a standard benchmark utilized by the investment
community, our FFO may not be comparable to a similarly titled
measure reported by other companies.

18



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##### 



FFO

We use FFO as a measure of our performance. The
following reconciles our GAAP net loss to FFO on a diluted basis
(amounts in thousands, except per share amounts):

|                                                                                             |                                                         |                    |        |         |   |   |         |         |  
|-------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------------------ | ------ | ------- | - | - | ------- | ------- | -
|                                                                                             |                                                         |                   
|                                                                                             |                                                         | Three Months Ended
|                                                                                             |                                                         | March 31          
|                                                                                             |                                                         |                   
|                                                                                             |                                                         | 2004               |        | 2003   
|                                                                                             |                                                         |                    |        |        
|                                                                                             | Net loss                                                |                    | $      | (40,245 | ) |   | $       | (69,746 | )
|                                                                                             | Depreciation and amortization of real estate
    assets |                    |        | 24,502  |   |   |         | 27,613  |  
|                                                                                             | Loss on disposal of assets                              |                    |        | 6,946   |   |   |         |        |  
|                                                                                             | Minority interest to common OP unit holders             |                    |        | (996    | ) |   |         | (1,412  | )
|                                                                                             |                                                         |                    |        |         |   |   |         |        
|FFO                                                                                          |                                                         | $                  | (9,793 | ) (A)   |   | $ | (43,545 | ) (B)  
|                                                                                             |                                                         |                    |        |         |   |   |         |        
|FFO per share                                                                                |                                                         | $                  | (0.14  | ) (A)   |   | $ | (0.96   | ) (B)  
|                                                                                             |                                                         |                    |        |         |   |   |         |        
|Weighted average number of shares of common stock
    outstanding for loss per share and FFO |                                                         |                    | 68,640 |         |   |   | 45,548  |        
|                                                                                             |                                                         |                    |        |         |   |   |         |        



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) | Funds from operations included the effect of
    asset impairment charges, loss on early extinguishment of debt
    and related write off of deferred financing fees and related
    minority amounts recognized during first quarter of 2004,
    totaling $(12.1) million, or $(0.17) per diluted share.
    Weighted average number of shares of common stock and common OP
    units outstanding at March 31, 2004 on a fully diluted
    basis were 71.8 million.
|   
|(B) | Funds from operations included the effect of
    asset impairment charges and related minority amounts recognized
    during the first quarter of 2003, totaling $(54.3) million or
    $(1.18) per diluted share. Weighted average number of shares of
    common stock and common OP units outstanding at March 31, 2003
    on a fully diluted basis were 49.0 million.                                                                                            

FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL
RESOURCES

Our principal sources of liquidity are cash
generated from operations, funds from borrowings, funds from the
sales of assets and existing cash on hand. Our principal uses of
cash include the funding of working capital obligations, debt
service, debt repurchases, and investments in hotels (including
capital projects and acquisitions). We do not expect to pay a
dividend on our common stock in 2004. We believe we have
sufficient cash flow currently, and we expect to have adequate
cash flow during the next twelve months in order to fund our
operations, capital commitments and debt service obligations.
Our current and future liquidity is, however, greatly dependent
upon our operating results, which are driven largely by overall
economic conditions, and since September 11, 2001 have been
heavily affected by geopolitical concerns and other factors
affecting business and leisure travel. If general economic
conditions are significantly worse than we expect for an
extended period, this will likely have a negative effect on our
projections of available cash flow and liquidity.

Factors that may influence our liquidity include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Factors that affect our results of operations,
    including general economic conditions, demand for business and
    leisure travel, public concerns about travel safety related
    primarily to terrorism and related concerns, capital investments
    required to maintain our propertys competitive position
    and other operating risks described under the caption,
    Risk Factors  Operating Risks in
    Item 1 of our Annual Report on Form 10-K for the year
    ended December 31, 2003;
|
| |  | Factors that affect our access to bank financing
    and the capital markets, including operational risks, high
    leverage, covenant compliance, interest rate fluctuations, and
    other risks described under the caption Risk
    Factors  Financing Risks in Item 1 of our
    Annual Report on Form 10-K for the year ended
    December 31, 2003; and                                                                                                                                            
|
| |  | Other factors described previously under the
    caption, Cautionary Statement Regarding Forward-Looking
    Statements in this Quarterly Report on Form 10-Q.                                                                                                                                                                                                                                                                                                                                             

19



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##### 



We generally intend to hold cash balances of
$40 million to $50 million in our operating accounts as a
hedge against economic and geopolitical uncertainties, as well
as to provide for our recurring cash requirements. We
established a new $50 million secured revolving bank line
in December 2003, maturing in December 2006, which is fully
available and will increase our flexibility in managing our
liquidity.

As part of our strategy to reduce our leverage,
during fiscal 2004, we have retired $49.2 million of our
senior subordinated notes by issuing 8,138,727 shares of common
stock through May 5, 2004. In addition, as of May 5,
2004, we have purchased from available cash $85.1 million
of our senior unsecured notes, including $25.8 million of
the 10.5% notes, $19.5 million of the 9% notes and
$39.8 million of the 9.125% notes. Following these
exchanges and the repurchases, we had as of May 5, 2004,
approximately $34.2 million of outstanding senior
subordinated notes due 2007 and $864.9 million of
outstanding senior unsecured notes. We expect to retire the
remaining senior subordinated notes due 2007 by the end of the
third quarter of 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 approximately $72.5 million. If the
over-allotment were to be exercised in full by the underwriter
an additional $10.9 million would be realized.

In April 2004, we 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, subject to customary closing conditions. The hotel
features nearly 18,000 square feet of meeting space, which can
accommodate meetings of up to 900 guests. We expect to partially
fund this acquisition through the assumption of a mortgage to
take advantage of the current low interest rate environment.

Sources and Uses of Cash

The following table shows our consolidated cash
flows, generated by (used in) our various activities, for the
quarter ended March 31 (in thousands):

|                                                            |  |      |         |      |  |              |         |   |  |   |         |  
|----------------------------------------------------------- |  | ---- | ------- | ---- |  | ------------ | ------- | - |  | - | ------- | -
|                                                            |  | 2004 |         | 2003 |  | 2004 vs 2003
|                                                            |  |      |         |      |  |             
|Operating activities                                        |  | $    | (2,636  | )    |  | $            | (10,229 | ) |  | $ | 7,593   |  
|Investing activities                                        |  |      | 44,901  |      |  |              | 44,125  |   |  |   | 776     |  
|Financing activities                                        |  |      | (78,022 | )    |  |              | (2,030  | ) |  |   | (75,992 | )
|Cash and cash equivalents, end of
    period  unrestricted |  |      | 194,977 |      |  |              | 65,488  |   |  |   | 129,489 |  

Our operating results and the amount of cash
generated by our hotel operations were adversely affected
beginning in late 2001 by a general downturn in the economy
compounded by the events of September 11, 2001 and have
continued to be negatively affected by the reduction in travel
resulting from economic conditions, geopolitical events, war,
the continued threat of domestic terrorism, and other factors
affecting business and leisure travel. Cash paid for interest
decreased $3.2 million for the three months ended
March 31, 2004 as compared to the three months ended
March 31, 2003 mainly due our to repurchases of debt,
resulting in a $125.2 million lower total debt balance at
March 31, 2004 as compared to March 31, 2003.

Our investing activities provided a net
$44.9 million of cash during the quarter ended
March 31, 2004, resulting primarily from:



| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | $74.1 million in proceeds from the sale of
    11 non-core hotel assets; partially offset by
|
| |  | $23.7 million in capital expenditures
    (including $0.75 million of capitalized interest);
|
| |  | $3.3 million in costs associated with our
    asset disposition program; and                
|
| |  | $2.1 million increase in cash restricted for
    mortgage escrows.                          

20



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Our investing activities provided a net
$44.1 million of cash during the quarter ended
March 31, 2003, resulting primarily from:



| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | $42.1 million from Interstate Hotels for the
    payment of a note receivable; and               
|
| |  | $12.7 million of proceeds from the sale of
    one hotel, partially offset by                    
|
| |  | $8.6 million of hotel capital expenditures
    (including $0.78 million of capitalized interest).

We used a net $78.0 million of cash from
financing activities during the quarter ended March 31,
2004 due mainly to repayments and repurchases of debt. We used
$2.0 million of cash in financing activities during the
quarter ended March 31, 2003 due mainly to the repayment of
our long-term debt obligations.

We must distribute to stockholders at least 90%
of our REIT taxable income, excluding net capital gains, to
preserve the favorable tax treatment accorded to REITs under the
Internal Revenue Code. Under certain circumstances, we may be
required to make distributions in excess of cash available for
distribution in order to meet the Internal Revenue Code
requirements. In that event, we would seek to borrow additional
funds or sell additional non-core assets for cash, or both, to
the extent necessary to obtain cash sufficient to make the
distributions required to retain our qualification as a REIT.
Any future distributions will be at the discretion of our board
of directors and will be determined by factors including our
operating results, restrictions imposed by our borrowing
agreements, capital expenditure requirements, the economic
outlook, the distribution requirements for REITs under the
Internal Revenue Code and such other factors as our board of
directors deems relevant. Our senior unsecured notes indenture
and our senior credit facility permit the payment of dividends
in order to maintain REIT qualification even if we fall below a
2 to 1 fixed charge coverage ratio. However, our
senior subordinated notes indenture is more restrictive in that
it permits the payment of dividends only if we exceed the
2 to 1 fixed charge coverage ratio. As of
March 31, 2004, our fixed charge coverage ratio was
significantly below 2 to 1. The timing and amount of
any future distributions is dependent upon these factors, and we
cannot provide assurance that any such distributions will be
made in the future. We do not expect to pay a dividend on our
common stock in 2004.

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 |  
|                                         |  |           |           |              |  |   |           |  

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

21



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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 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, and recorded an
additional loss on early extinguishment of debt of approximately
$1.0 million.

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 to 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

22



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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).

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 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.

The senior subordinated notes, plus accrued and
unpaid interest at the redemption date, are subject to
redemption at our option. Under the indenture governing these
notes, the redemption price for redemptions occurring through
August 15, 2004 will be 101.458% of the principal amount,
and for redemptions occurring after August 15, 2004, the
redemption price will be 100.000% of the principal amount.

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, and
recorded an additional loss on early extinguishment of debt of
approximately $0.3 million. We expect to retire the
remaining outstanding senior subordinated notes due 2007 by the
end of the third quarter of 2004.

Asset Acquisitions

One of our key strategies includes the
acquisition of high quality, upscale full-service hotels
strategically located in major urban markets or destination
resorts. Our acquisitions may involve management contracts with
hotel brand owners where our long-term investment focus makes us
a preferred owner. We intend to acquire assets with strong
existing cash flow and use moderate or no leverage in the near
term to finance these potential acquisitions, thereby enabling
us to improve our overall leverage and interest coverage levels.
In pursuing this strategy, we may be somewhat limited by the
terms of our senior note indentures, which limit our ability to
obtain financing beyond certain limited exceptions (including up
to $250 million of mortgage indebtedness, $50 million
of general indebtedness and borrowings to the extent capacity
exists within unrestricted subsidiaries) to acquire assets (as
we are below the required fixed charge coverage ratio of
2 to 1). In order to incur additional indebtedness
beyond that permitted by those limited exceptions, we would have
to comply with the 2 to 1 fixed charge coverage ratio
test on a pro forma basis after incurring the indebtedness and
applying its proceeds. As of March 31, 2004, our fixed
charge coverage ratio was significantly below 2 to 1.

As part of our asset acquisition strategy, in
April 2004, we signed a definitive agreement to acquire the
four-star, four-diamond rated Ritz-Carlton, Pentagon City in
Arlington, VA 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

23



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second quarter, subject to customary closing
conditions. The hotel features nearly 18,000 square feet of
meeting space, which can accommodate meetings of up to 900
guests. We expect to partially fund this acquisition through the
assumption of a mortgage to take advantage of the current low
interest rate environment.


We have an active pipeline of acquisition
opportunities, but we will continue to be highly selective,
focusing primarily on larger properties located in major urban
markets or high-end resort destinations with strong brand
affiliations and significant meeting space.

Asset Dispositions

During 2003, we began executing one of our key
short-term strategies, which is to dispose of selected non-core
assets in order to begin repositioning our portfolio into one
generally consisting of larger assets with significant meeting
space in urban or high-end resort locations. Many of these
non-core assets were acquired as part of portfolios of assets.

We have sold 26 hotels in our disposition
program, 11 of which were sold during the first quarter of 2004
for $74.1 million. Two additional assets have been sold in
the second quarter of 2004 for $18 million. We have six
assets remaining in our non-core disposition program with
expected gross proceeds totalling $45 million to
$50 million.

As a result of a continuing review of assets in
our disposition program, we recorded an impairment charge in the
first quarter of $1.2 million with respect to assets not
classified as held for sale and $3.8 million with respect
to assets held for sale. The impairment charge is based on our
estimates of the fair value of the disposition properties. These
estimates require us to make assumptions about the disposition
prices that we expect to realize for each property as well as
the timing of a potential disposition. 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.

We will continue to analyze certain hotels as to
whether we should recycle into higher yielding investments. Any
dispositions of additional assets may result in further
impairment charges in future periods, if and when such
transactions might be undertaken.

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 that 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 such
obligation would affect the calculation of the final gain or
loss on the disposition of a particular asset, since in
accordance with current accounting guidance, the obligation is
not recognized until such time as the asset disposition is
complete and a termination notice is provided to Interstate
Hotels. At that time, the recognition of any termination
obligation will be included in discontinued operations. 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.

Capital Expenditures

We make ongoing capital expenditures in order to
keep our hotels competitive in their markets and to comply with
franchise obligations. We fund our capital expenditures
primarily from cash generated from operations and existing cash
on hand, and intend to use a portion of the proceeds from the
sales of non-core assets to provide capital for renovation work.
We invested $23.7 million for ongoing capital expenditures
during the quarter ended March 31, 2004. We have initiated
an aggressive renovation program for our core assets and
anticipate investing a total of $125 million on capital
expenditures in 2004. The emphasis will be on completing these
projects on budget with minimal disruptions to operations. We
will focus on complete room

24



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and facility renovations, eliminating to the
degree possible, piecemeal work where the typical consumer might
not ascribe value to the improvements. We believe we are timing
this work appropriately to take full advantage of the
anticipated industry recovery. The properties we are now
marketing for sale typically have higher per room capital
expenditure requirements than our core assets. Sales of these
properties will allow us to focus our capital spending dollars
in the future on our core portfolio. We expect to continually
review our portfolio with a goal of recycling capital out of
lower yielding investments into higher yielding opportunities.


OTHER FINANCIAL INFORMATION

Critical Accounting Policies

Our consolidated financial statements include the
accounts of all wholly-owned and majority-owned subsidiaries.
Preparing financial statements in conformity with accounting
principles generally accepted in the United States requires us
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. On an ongoing basis, we evaluate our estimates
and judgments, including those related to the impairment of
long-lived assets and the recording of certain accrued
liabilities. Some of our estimates are material to the financial
statements. These estimates are therefore particularly sensitive
as future events could cause the actual results to be
significantly different from our estimates.

Our critical accounting policies include the
accounting for the impairment or disposal of long-lived assets
and the classification of properties as held for sale. Our hotel
properties generally fall into two categories, held for use and
held for sale. Our held for use properties may include those
that we are actively marketing. Until such time as our criteria
for held for sale are met, as described below in further detail,
we maintain classification as an operational asset. At the time
we determine an asset to meet the criteria noted below, we
reclassify the asset and its operations to discontinued
operations. All of our properties are subject to an impairment
analysis whenever events or changes in circumstances indicate
that the carrying value may be impaired.

Accounting for the impairment or disposal of
long-lived assets

We apply the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, which require the current and prior period
operating results of any asset that has been classified as held
for sale or had 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. Based on current economic
conditions and our continuing forecast and outlooks for future
periods, we may be required in future periods to recognize
additional impairment charges if circumstances indicate at that
time that the carrying value of the assets may be impaired.

25



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Classification of properties as held for
sale

We classify the properties we are actively
marketing as held for sale once all of these 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.

Off-Balance Sheet Arrangements and Aggregate
Contractual Obligations

We have future long-term debt and ground lease
obligations related to our consolidated entities and properties.
As of March 31, 2004, we were not involved in any other
off-balance sheet arrangements.

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 that 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 such
obligation would affect the calculation of the final gain or
loss on the disposition of a particular asset, since in
accordance with current accounting guidance, the obligation is
not recognized until such time as the asset disposition is
complete and a termination notice is provided to Interstate
Hotels. At that time, the recognition of any termination
obligation will be included in discontinued operations. 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.

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. 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.

26



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ITEM
3.     QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

In early April 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.

As a result of our interest rate swap, we are
exposed to market risks related to changes in interest rates. In
the future, we intend to manage our interest rate exposure using
a mix of fixed and floating interest rate debt. An increase of
0.5% in interest rates would result in an increase in annual
interest expense of approximately $1.5 million.

Approximately 20% of our outstanding debt is now
variable rate with the remaining 80% of debt at fixed rates of
interest.

Foreign Currency Risk

Our only foreign currency exchange rate exposure
at March 31, 2004 was the Canadian dollar. Foreign currency
risk associated with this exposure was not significant, as we
have one hotel remaining in Canada. This Canadian hotel is
included in our disposition program, and is classified as held
for sale.

27



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ITEM
4.          CONTROLS
AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures
that are designed to ensure that information required to be
disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and regulations,
and that the information is accumulated and communicated to our
management, including our chief executive officer and chief
financial and chief accounting officer, as appropriate, to allow
timely decisions regarding required disclosures based closely on
the definition of disclosure controls and procedures
in Rule 13a-1(c) of the Securities Exchange Act of 1934. In
designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no
matter how well designed and operated, can provide only
reasonable assurance of achieving the desired objectives, and
management was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
Also, we have investments in certain unconsolidated entities. As
we do not control or manage these entities, our disclosure
controls and procedures with respect to these entities are
substantially more limited than those we maintain with respect
to our consolidated subsidiaries.

As of March 31, 2004, we carried out an
evaluation, under the supervision and with the participation of
our management, including our chief executive officer, our chief
financial officer, and our chief accounting officer of the
effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, we concluded
that our disclosure controls and procedures were effective.

Internal Control Over Financial
Reporting

There has been no change in our internal control
over financial reporting in the first quarter of 2004 that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.

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PART
II.          OTHER
INFORMATION

ITEM
6.          EXHIBITS
AND REPORTS ON FORM 8-K

(a.) Exhibits

|        |    |                         |  |                                                                                                                                                                                                                                                                                                      
|------- | -- | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                        
|No.     |    | Description of Document
|        |    |                        
|        | 3  | .1                      |  | Second Articles of Amendment and Restatement of
    Incorporation of the Registrant (incorporated by reference to
    Exhibit 3.4 to our Registration Statement on Form S-11
    (No. 333-4568), and filed with the Commission on
    July 24, 1996).                                                
|        | 3  | .1.1                    |  | Articles of Amendment of Second Articles of
    Amendment and Restatement of Incorporation dated August 11,
    2000 (incorporated by reference to Exhibit 3.1.1 to our
    annual report on Form 10-K for the year ended
    December 31, 2001, and filed with the Commission on
    March 6, 2002).
|        | 3  | .1.2                    |  | Articles of Amendment of Second Articles of
    Amendment and Restatement of Incorporation dated June 30,
    2001 (incorporated by reference to Exhibit 3.1.2 to our
    annual report on Form 10-K for the year ended
    December 31, 2001, and filed with the Commission on
    March 6, 2002).  
|        | 3  | .2                      |  | Amended and Restated By-laws of the Registrant
    (incorporated by reference to Exhibit 3.2 to our
    Registration Statement No. 333-66229, and filed with the
    Commission on October 28, 1998).                                                                                                
|        | 3  | .2.1                    |  | Amended and Restated By-laws of the Registrant
    dated and effective April 22, 2003 (incorporated by
    reference to Exhibit 3.2.1 to our quarterly report on
    Form 10-Q for the quarter ended March 31, 2003, and
    filed with the Commission on May 14, 2003).                             
|        | 10 | .4.2                    |  | Second Amendment to the MeriStar Hospitality
    Corporation Incentive Plan.*                                                                                                                                                                                                                        
|        | 13 |                         |  | Financial Statements of MeriStar Hospitality
    Operating Partnership, L.P. as of and for the three months ended
    March 31, 2004.*                                                                                                                                                               
|        | 31 | .1                      |  | Sarbanes-Oxley Act Section 302 Certification
    of Chief Executive Officer.*                                                                                                                                                                                                                        
|        | 31 | .2                      |  | Sarbanes-Oxley Act Section 302 Certification
    of Chief Financial Officer.*                                                                                                                                                                                                                        
|        | 32 | .1                      |  | Sarbanes-Oxley Act Section 906 Certification
    of Chief Executive Officer.*                                                                                                                                                                                                                        
|        | 32 | .2                      |  | Sarbanes-Oxley Act Section 906 Certification
    of Chief Financial Officer.*                                                                                                                                                                                                                        
|        | 99 | .1                      |  | Consolidating Financial Information of MeriStar
    Hospitality Operating Partnership, L.P.*                                                                                                                                                                                                         



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|  |               
|- | --------------
|* | Filed herewith

(b.) Reports on Form 8-K

None.

29



---



##### 



SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.



| |                                 
| | --------------------------------
| | MERISTAR HOSPITALITY CORPORATION



| |     |                     
| | --- | --------------------
| | By: | /s/ PAUL W. WHETSELL

| |                            
| | ---------------------------
| | Paul W.
    Whetsell       
| | Chief
    Executive Officer

Dated: May 10, 2004

30