##### 









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
    September 30, 2003
|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 October 31, 2003 was 62,939,078.



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##### 



INDEX

|                                      |  |                                                                                                         |    |      |    | 
|------------------------------------- |  | ------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                      |  |                                                                                                         |    | Page
|                                      |  |                                                                                                         |    |     
|PART I.     FINANCIAL
    INFORMATION
|Item 1.                               |  | Financial Statements                                                                                    |    |      |    | 
|                                      |  | Consolidated Balance
    Sheets  September 30, 2003 and
    December 31, 2002                          |    |      | 2  | 
|                                      |  | Consolidated Statements of
    Operations  Three and Nine Months Ended
    September 30, 2003 and 2002 |    |      | 3  | 
|                                      |  | Consolidated Statements of Cash
    Flows  Nine Months Ended September 30, 2003
    and 2002           |    |      | 4  | 
|                                      |  | Notes to Unaudited Consolidated Financial
    Statements                                                |    |      | 5  | 
|Item 2.                               |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations               |    |      | 15 | 
|Item 3.                               |  | Quantitative and Qualitative Disclosures About
    Market Risk                                          |    |      | 28 | 
|Item 4.                               |  | Controls and Procedures                                                                                 |    |      | 28 | 
|PART II.     OTHER
    INFORMATION   
|Item 6.                               |  | Exhibits and Reports on Form 8-K                                                                        |    |      | 29 | 
|Signatures                            |  |                                                                                                         | 30 |     

i



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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)


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

See accompanying notes to unaudited consolidated
financial statements.

2



---



##### 



MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS


UNAUDITED


(Dollars in thousands, except per share
amounts)


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

See accompanying notes to unaudited consolidated
financial statements.

3



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##### 



MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS


UNAUDITED


(Dollars in thousands)


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

See accompanying notes to unaudited consolidated
financial statements.

4



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MERISTAR HOSPITALITY CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


SEPTEMBER 30, 2003


1.          Organization

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

Our taxable subsidiaries are parties to
management agreements with a subsidiary of Interstate Hotels to
manage all of our hotels. Under these management agreements, the
taxable subsidiaries pay a management fee for each property to a
subsidiary of Interstate Hotels. The taxable subsidiaries in
turn make rental payments to our operating partnership under the
participating leases. Under the management agreements, the base
management fee is 2.5% of total hotel revenue, plus incentive
payments based on meeting performance thresholds that could
total up to an additional 1.5% of total hotel revenue. All of
the agreements expire in 2010 and have three renewal periods of
five years each at the option of Interstate Hotels, subject to
some exceptions.

2.          Summary
of Significant Accounting Policies

Interim Financial Statements.We have prepared these unaudited
interim financial statements according to the rules and
regulations of the Securities and Exchange Commission. We have
omitted certain information and footnote disclosures that are
normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United
States. These interim financial statements should be read in
conjunction with the financial statements, accompanying notes
and other information included in our Annual Report on
Form 10-K for the year ended December 31, 2002.
Certain 2002 amounts have been reclassified to conform to the
2003 presentation.

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

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

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



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

5



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| |   |                                              
| | - | ---------------------------------------------
| |  | We have a significant non-refundable deposit.

We carry properties held for sale at the lower of
their carrying values or estimated fair values less costs to
sell. We cease depreciation at the time the asset is classified
as held for sale. If material to our total portfolio, we
segregate the held for sale properties on our consolidated
balance sheet.

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

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

Impairment or Disposal of Long-Lived Assets.We adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, on January 1, 2002. SFAS No. 144
requires the current and prior period operating results of any
asset that has been classified as held for sale or has been
disposed of on or after January 1, 2002 and where we have
no continuing involvement, including any gain or loss
recognized, to be recorded as discontinued operations.

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

We adopted the provisions of SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, on January 1, 2003. SFAS No. 146
requires that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at fair
value only when the liability is incurred. Our strategy includes
the disposition of certain hotel assets, all of which are
managed under agreements that typically require payments to
Interstate Hotels upon termination. As a result, we may incur
termination obligations related to our asset dispositions. Any
such liability will be recognized at the time the asset
disposition is complete and a termination notice is provided to
Interstate Hotels. At that time, the recognition of the
termination obligation will be included in the calculation of
the final gain or loss on sale and will be included in
discontinued operations. For further discussion of potential
termination obligations, see Asset Dispositions
included in Item 2 of this Quarterly Report on
Form 10-Q.

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

Stock-Based Compensation.We adopted the recognition provisions
of SFAS No. 123, Accounting for Stock-Based
Compensation, as amended in December 2002 by SFAS
No. 148, on January 1, 2003 for new stock options
issued under our compensation programs. As permitted by SFAS
No. 148, we elected to apply the provisions prospectively,
which includes recognizing compensation expense for only those
stock options issued in 2003 and after. During the nine months
ended September 30, 2003, we granted 207,500 stock options
to employees which vest ratably over three years. Compensation
costs related to these stock options were not material to our
results of operations for the nine months ended
September 30, 2003. We apply the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, in accounting

6



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for our stock options issued under our
compensation programs prior to January 1, 2003. As we granted
these stock options at fair market value, no compensation cost
has been recognized. For our other equity-based compensation
plans, we recognize compensation expense over the vesting period
based on the fair market value of the award at the date of grant.


Had compensation cost been determined based on
fair value at the grant date for awards granted prior to our
adoption of the fair value method prescribed in SFAS
No. 123, as amended by SFAS No. 148, our net loss and
per share amounts would have been adjusted to the pro forma
amounts indicated as follows (dollars in thousands, except per
share amounts):

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

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

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

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

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

7



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3.          Comprehensive
Loss

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

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

4.          Property
and Equipment

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

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

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

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

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

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

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

The impairment charges are based on our estimates
of the fair value of the properties to be disposed of. These
estimates require us to make assumptions about the sales prices
that we expect to realize for each property as well as the
timing of a potential sale. In making these estimates, we
consider the operating results of the assets, the market for
comparable properties, and quotes from brokers, among other
information. In

8



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nearly all cases, our estimates have reflected
the results of an extensive marketing effort and negotiations
with prospective buyers. Actual results could differ materially
from these estimates.


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

5.          Investment
in Affiliate

In 1999, we invested $40 million in MeriStar
Investment Partners, L.P. (MIP), a joint venture
established to acquire upscale, full-service hotels. Our
cost-basis investment is in the form of a partnership interest,
in which we earn a 16% cumulative preferred return. We recognize
the return quarterly as it becomes due to us. As of
September 30, 2003, cumulative preferred returns of
$16.6 million were due from MIP and included in accounts
receivable on the accompanying consolidated balance sheet. We
expect that any cumulative unpaid preferred returns will be paid
in the future from excess cash flow above our current return and
from potential partnership hotel disposition proceeds in excess
of debt allocated to individual assets. Given the current
economic environment, we do not expect MIPs operations to
provide adequate cash flow in the near term for significant
payment of our current returns or repayments of our cumulative
unpaid preferred returns. We evaluate the collectibility of our
preferred return based on our preference to distributions and
the underlying value of the hotel properties. Should the current
economic environment continue and the performance of the MIP
properties not improve, the value of our original investment may
also decline.

6.          Long-Term
Debt

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

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

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

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

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

9



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Senior unsecured notes.These notes are unsecured obligations
of certain subsidiaries of ours, and we guarantee payment of
principal and interest on the notes. These notes contain various
restrictive incurrence covenants, limiting our ability to
initiate or transact certain business activities if specific
financial thresholds are not achieved. One of those thresholds
is maintaining a 2 to 1 fixed charge coverage ratio (as defined
in the indentures, fixed charges only include interest on debt
obligations and preferred equity). As of September 30,
2003, our fixed charge coverage ratio was below 2 to 1, and
therefore we were not permitted generally to enter into certain
transactions, including the repurchase of our stock, the
issuance of any preferred stock, the payment of dividends, the
incurrence of any additional debt, or the repayment of
outstanding debt before it comes due, except as noted below.

There are certain exceptions with respect to the
incurrence of additional debt and early repayment of debt
features in the indentures. We currently have the ability to
incur $300 million of secured financing within restricted
subsidiaries. We also have a general carve-out to incur
$50 million of unspecified borrowings within a restricted
subsidiary. Additionally, we are permitted to repay subordinated
debt prior to its maturity from the proceeds of a pari passuor junior financing with a longer term than the debt
refinanced, an equity offering, or a financing within an
unrestricted subsidiary. We are also permitted to invest five
percent of consolidated net tangible assets (as defined in the
indentures) in unrestricted subsidiaries and mortgage the
properties contributed to the unrestricted subsidiaries. We
completed a qualifying transaction under this exception during
the third quarter of 2003 through a new secured facility
financing (see discussion below).

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

We completed a $330 million non-recourse
financing secured by a portfolio of 19 hotels in 1999. The loan
bears a fixed annual interest rate of 8.01% and matures in 2009.
The secured facility contains standard provisions that require
the servicer to maintain in escrow cash balances for certain
items such as property taxes and insurance. In addition, the
facility contains a provision that requires our mortgage
servicer to retain in escrow the excess cash from the encumbered
hotels after payment of debt service (Excess Cash),
if net hotel operating income (NOI) for the trailing
twelve months declines below $57 million. This provision
was triggered in October 2002 and will be effective until the
hotels generate the minimum cash flow required for two
consecutive quarters, at which time the cash being held in
escrow will be released to us. Approximately $19.9 million
of cash was held in escrow under this provision as of
September 30, 2003. In July 2003, we signed an amendment to
the loan agreement that permits the release of cash placed in
escrow for all capital expenditures incurred on the 19
encumbered properties on or after April 1, 2003. Although the
servicer will continue to retain in escrow any excess cash from
the encumbered hotels, they will release cash for all capital
expenditures we have incurred from April 1, 2003 through
the date of the amendment and future capital expenditures we
incur on the 19 properties. Escrowed funds totaling
approximately $11 million were available to fund capital
expenditures under this provision as of September 30, 2003.

Convertible subordinated notes.On July 1, 2003, we completed an
offering of $170 million aggregate principal amount of 9.5%
convertible subordinated notes due 2010. These notes are
convertible into our common stock at any time prior to or at
maturity, April 1, 2010, at a conversion price of $10.18
per share (equal to a conversion rate of 98.2318 shares per
$1,000 principal amount of notes). These convertible notes are
unsecured obligations and provide for semi-annual payments of
interest each on October 1 and April 1. We incurred
approximately $6.5 million in debt issuance costs related
to the issuance.

The proceeds from the new issuance were used to
repurchase $150.6 million of our $154.3 million 4.75%
convertible notes due 2004, at varying prices, resulting in an
aggregate discount of approximately $1.4 million. These
convertible notes are also unsecured obligations that pay
interest semi-annually, on each April 15 and
October 15. These convertible notes are convertible into
our common stock at a rate of 23.2558 shares per $1,000 in
principal amount, which equals approximately $43.00 per share.
During the third quarter, we

10



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


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

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

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

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

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

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

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

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

11



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7.          Stockholders
Equity and Minority Interests

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

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

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

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

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

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

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

8.          Loss
Per Share

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

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

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

12



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##### 



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


9.          Commitments
and Contingencies

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

Minimum Lease Payments.We lease the land at certain of our
hotels under long-term arrangements from third parties. Certain
leases contain contingent rent features based on gross revenues
at the respective property. Future minimum lease payments
required under these operating leases as of September 30, 2003
were as follows (dollars in thousands):

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

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

We lease certain office, retail and parking space
to outside parties under non-cancelable operating leases with
initial or remaining terms in excess of one year. Future minimum
rental receipts under these leases as of September 30, 2003 were
as follows (dollars in thousands):

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

10.          Asset
Dispositions

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

13



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

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

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

11.          Consolidating
Financial Statements

We and certain subsidiaries of MeriStar
Hospitality Operating Partnership, L.P. (MHOP) are
guarantors of senior unsecured notes issued by MHOP. MHOP and
certain of its subsidiaries are guarantors of our senior
subordinated notes. We own a one percent general partner
interest in MHOP, and MeriStar LP, Inc., our wholly-owned
subsidiary, owns approximately a 93 percent limited partner
interest in MHOP. All guarantees are full and unconditional, and
joint and several. Exhibit 99.1 to this Quarterly Report on
Form 10-Q presents supplementary consolidating financial
statements for MHOP, including each of the guarantor
subsidiaries. This exhibit presents MHOPs consolidating
balance sheets as of September 30, 2003 and
December 31, 2002, consolidating statements of operations
for the three and nine months ended September 30, 2003 and
2002, and consolidating statements of cash flows for the nine
months ended September 30, 2003 and 2002. In connection
with the $101 million secured financing completed at the
end of September 2003 (see Note 6), certain of MHOPs
guarantor subsidiaries became non-guarantor subsidiaries.

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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 current slowdown of the national economy;                                                                                                                                                      
|
| |  | economic conditions generally and the real estate
    market specifically;                                                                                                                         
|
| |  | the impact of the September 11, 2001
    terrorist attacks or actual or threatened future terrorist
    incidents;                                                                                 
|
| |  | 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;                                                                             
|
| |  | level of proceeds from asset sales;                                                                                                                                                                
|
| |  | cash available for capital expenditures;                                                                                                                                                           
|
| |  | availability of capital;                                                                                                                                                                           
|
| |  | ability to refinance debt;                                                                                                                                                                         
|
| |  | rising interest rates;                                                                                                                                                                             
|
| |  | rising insurance premiums;                                                                                                                                                                         
|
| |  | competition;                                                                                                                                                                                       
|
| |  | supply and demand for hotel rooms in our current
    and proposed market areas, including the existing and continuing
    weakness in business travel and lower-than-expected daily room
    rates;
|
| |  | other factors that may influence the travel
    industry, including health, safety and economic factors; and                                                                                       
|
| |  | 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.

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BUSINESS SUMMARY

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

Our revenues have been 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. Operating costs include direct costs
to run our hotels, management fees to Interstate Hotels to
manage our properties, depreciation of our properties, as well
as sales, marketing and general and administrative costs. Our
expenses also include interest on our debt and minority interest
allocations, which represent the allocation of income to outside
investors for properties that are not wholly owned.

The following discussion should be read in
conjunction with our Annual Report on Form 10-K for the
year ended December 31, 2002 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

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 results of operations for 2003 and 2002 to
conform to the requirements of SFAS No. 144. See Note 10
Asset Dispositions, included in Item 1 of this
Quarterly Report on Form 10-Q for further information
regarding the amounts reclassified. The following results of
operations discussions compare revenues, operating expenses and
significant charges for continuing operations. Discontinued
operations are discussed as a separate component within each
periods comparison.

Three months ended September 30, 2003
compared with the three months ended September 30,
2002

The following table provides our hotels
operating statistics on a comparable hotel basis for the three
months ended September 30 (comparable hotels are those that
were owned for substantially all of both periods):

|                                    |  |      |       |      |  |        |       |  |  |  |        | 
|----------------------------------- |  | ---- | ----- | ---- |  | ------ | ----- |  |  |  | ------ | 
|                                    |  | 2003 |       | 2002 |  | Change
|                                    |  |      |       |      |  |       
|Average daily rate                  |  | $    | 90.76 |      |  | $      | 94.61 |  |  |  | (4.1)% | 
|Occupancy                           |  |      | 67.0% |      |  |        | 64.9% |  |  |  | 3.2%   | 
|Revenue per available room (RevPAR) |  | $    | 60.81 |      |  | $      | 61.43 |  |  |  | (1.0)% | 

Revenues.Total
revenue decreased $1.5 million to $220.9 million for
the three months ended September 30, 2003 from
$222.4 million for the same period in 2002, primarily due
to a $1.5 million decrease in room revenue mainly
attributable to a decrease in average daily rate. The average
daily rate declined 4.1% for the three months ended
September 30, 2003 when compared with the same period in
2002 primarily due to an increase in rooms sold through
discounted internet sales channels. The increase in occupancy of
3.2% for the same period partially offset the rate decline.

Operating expenses.Total operating expenses increased a
net $26.6 million to $239.1 million for the quarter ended
September 30, 2003 compared to $212.5 million for the
same period in 2002. Hotel operating expenses increased from
$91.4 million for the three months ended September 30,
2002 to $95.6 million for the same period in 2003 due mainly to
an increase in room and food and beverage expenses stemming from
improvements in occupancy at our hotels.

Other operating expenses increased
$22.3 million to $143.4 million for the three months
ended September 30, 2003 from $121.1 million for the
same period in 2002 resulting mainly from a loss on asset

16



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##### 



impairments of $21 million. General and
administrative expenses and property operating costs remained
essentially flat over these periods. Property taxes, insurance
and other costs increased $2.3 million due primarily to
favorable resolutions with taxing jurisdictions in 2002.


Significant items.We recognized a loss on asset
impairment of $21 million related to our asset disposition
program during the three months ended September 30, 2003.
As of September 30, 2003, we had 36 assets planned for
disposition, one of which was sold in October 2003 (see
Discontinued operations discussion below).

On July 1, 2003, we completed an offering of
$170 million aggregate principal amount of 9.5% convertible
subordinated notes due 2010. The proceeds from the new issuance
were used to repurchase $150.6 million of the $154.3
million of outstanding 4.75% convertible notes due 2004, at
varying prices, resulting in a $1.4 million gain.

The proceeds from the issuance were also used to
repurchase $22.6 million of outstanding 8.75% senior
subordinated notes due 2007, at varying prices, resulting in a
$1.5 million gain. Also during the third quarter of 2003,
we redeemed a further $18 million of these senior
subordinated notes in exchange for 2,792,880 shares of our
common stock, resulting in a gain of $1.7 million.

We had three swap agreements that did not qualify
for treatment as cash-flow hedges under SFAS No. 133,
expire since September 30, 2002, one in December 2002, one
in April 2003 and one in July 2003. As of September 30,
2003, we had no outstanding derivative instruments. Results for
the 2002 third quarter included a net expense of
$1.1 million related to the swap agreements in place during
that time. Current quarter results were not materially affected
by marking to market the swap agreement that expired in July
2003.

Interest expense.Interest expense increased
$2.5 million due primarily to the July 2003 issuance of
9.5% convertible subordinated notes due 2010 to repurchase
substantially all of our 4.75% convertible notes (see Note 6 to
our unaudited consolidated financial statements).

Discontinued operations.During 2002, we sold five hotels in
separate transactions for an aggregate of $60.7 million in
cash. During the first nine months of 2003, we completed the
sale of six hotels in separate transactions for an aggregate of
$74.5 million in cash. As of September 30, 2003, we
had one hotel classified as held for sale, which we sold in
early October 2003 for $16.5 million in cash (for a gain of
approximately $7 million). For the three months ended
September 30, 2003, we recognized a $2.8 million loss
on disposal related to the four hotels we sold during the third
quarter. We recognized a $6.4 million loss on disposal
related to the three hotels we sold during the third quarter of
2002.

Nine months ended September 30, 2003
compared with the nine months ended September 30,
2002

The following table provides our hotels
operating statistics on a comparable hotel basis for the nine
months ended September 30 (comparable hotels are those that
were owned for substantially all of both periods):

|                                    |  |      |       |      |  |        |        |  |  |  |        | 
|----------------------------------- |  | ---- | ----- | ---- |  | ------ | ------ |  |  |  | ------ | 
|                                    |  | 2003 |       | 2002 |  | Change
|                                    |  |      |       |      |  |       
|Average daily rate                  |  | $    | 96.53 |      |  | $      | 100.72 |  |  |  | (4.2)% | 
|Occupancy                           |  |      | 66.3% |      |  |        | 66.1%  |  |  |  | 0.3%   | 
|Revenue per available room (RevPAR) |  | $    | 63.98 |      |  | $      | 66.59  |  |  |  | (3.9)% | 

Revenues.Total
revenue decreased $19.3 million to $703.9 million for
the nine months ended September 30, 2003 from
$723.2 million for the same period in 2002, primarily due
to a $19 million decrease in room revenue directly
attributable to a decrease in average daily rate. The average
daily rate declined 4.2% for the nine months ended
September 30, 2003 when compared with the same period in
2002 primarily due to an increase in discounted internet sales
as previously noted. The slight increase in occupancy over the
same period did not significantly offset the rate decline.

17



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##### 



Operating expenses.Total operating expenses increased a
net $274.2 million to $923.6 million for the nine months
ended September 30, 2003 compared with $649.4 million
for the same period in 2002. Hotel operating expenses increased
$7 million from $279.6 million for the nine months
ended September 30, 2002 to $286.6 million for the same
period in 2003 due primarily to increases in food and beverage
expenses and other hotel operations. These expenses increased
mainly due to customer satisfaction initiatives.

Other operating expenses increased
$267.2 million to $637.0 million for the nine months
ended September 30, 2003 from $369.8 million for the
same period in 2002, resulting mainly from losses on asset
impairments totaling $263.4 million in the first three
quarters of 2003 (see Significant items discussion
below). General and administrative and property operating costs
remained essentially flat. Property tax refunds and favorable
resolution of property tax liabilities, totaling approximately
$6 million, during 2002 contributed to the $7 million
increase in property taxes, insurance and other expenses for the
2003 comparative period.

Significant items.We recognized losses on asset
impairments totaling $285.7 million ($22.3 million of
which is included in discontinued operations) related to our
asset disposition program during the nine months ended September
30, 2003. As of September 30, 2003, we had 36 assets
planned for disposition, one of which was sold in October 2003.
(See the discussion in quarter over quarter comparison for
further details related to the significant items occurring in
the three months ended September 30, 2003).

Prior year results included a net expense of
$4.2 million related to the swap agreements previously
discussed. Current period results were not materially affected
by marking to market the swap agreements that expired during
2003. Prior year results also included a $4.7 million loss
on the fair value of derivatives no longer classified as cash
flow hedges due to the repayment of the debt that was originally
hedged.

Interest expense.Interest expense increased
$3.3 million due primarily to the July 2003 issuance of
9.5% convertible subordinated notes due 2010 to substantially
repurchase our 4.75% convertible notes (see Note 6 to our
unaudited consolidated financial statements).

Discontinued operations.During 2002, we sold five hotels in
separate transactions for an aggregate of $60.7 million in
cash. During the first nine months of 2003, we completed the
sale of six hotels in separate transactions for an aggregate of
$74.5 million in cash. As of September 30, 2003, we
had one hotel classified as held for sale, which we sold in
early October 2003 for $16.5 million in cash (with a gain
of approximately $7 million). As previously noted,
discontinued operations for the nine months ended
September 30, 2003 included impairment charges totaling
$22.3 million related to the assets included in our
disposition program. Discontinued operations for the nine months
ended September 30, 2003 included a $2.8 million loss
on disposal related to the four hotels we sold in the third
quarter. Discontinued operations for the nine months ended
September 30, 2002 included a $6.4 million loss on
disposal related to three hotels we sold in the third quarter of
2002.

FUNDS FROM OPERATIONS

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, which we have also adopted.

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

18



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##### 



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. We believe FFO is an indicative measure of our
operating performance due to the significance of our hotel real
estate assets and can be used to measure our ability to service
debt, fund capital expenditures, and expand our business.
Management also uses 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.

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 |         | Nine Months Ended
|                                                                                             |                                     | September 30,      |         | September 30,    
|                                                                                             |                                     |                    |         |                  
|                                                                                             |                                     | 2003               |         | 2002              |        | 2003 |        | 2002   
|                                                                                             |                                     |                    |         |                   |        |      |        |        
|                                                                                             | Net loss                            |                    | $       | (50,694           | )      |      | $      | (29,402 | )      |   | $        | (326,800 | )       |   | $      | (36,372 | )     
|                                                                                             | Loss on disposal of assets          |                    |         | 2,772             |        |      |        | 6,403   |        |   |          | 2,772    |         |   |        | 6,403   |       
|                                                                                             | Hotel depreciation and amortization |                    |         | 25,244            |        |      |        | 28,594  |        |   |          | 80,900   |         |   |        | 86,845  |       
|                                                                                             | Minority interest income to common  |                    |         |                   |        |      |        |         |        |   |          |          |         |   |        |         |       
|                                                                                             |                                     | OP unit holders    |         |                   | (1,803 | )    |        |         | (1,725 | ) |          |          | (16,360 | ) |        |         | (2,389 | )
|                                                                                             |                                     |                    |         |                   |        |      |        |         |        |   |          |          |         |   |        |        
|FFO                                                                                          |                                     |                    | (24,481 | ) (a)             |        |      | 3,870  |         |        |   | (259,488 | ) (a)    |         |   | 54,487 |        
|                                                                                             | Interest on convertible debt        |                    |         |                  |        |      |        |        |        |   |          |         |         |   |        | 5,346   |       
|                                                                                             |                                     |                    |         |                   |        |      |        |         |        |   |          |          |         |   |        |        
|FFO, assuming dilutive conversions                                                           |                                     | $                  | (24,481 | )                 |        | $    | 3,870  |         |        | $ | (259,488 | )        |         | $ | 59,833 |        
|                                                                                             |                                     |                    |         |                   |        |      |        |         |        |   |          |          |         |   |        |        
|FFO per diluted share                                                                        |                                     | $                  | (0.48   | ) (a)             |        | $    | 0.08   |         |        | $ | (5.23    | ) (a)    |         | $ | 1.12   |        
|                                                                                             |                                     |                    |         |                   |        |      |        |         |        |   |          |          |         |   |        |        
|Weighted average number of diluted shares of
    common stock outstanding for loss per share |                                     |                    | 47,709  |                   |        |      | 45,045 |         |        |   | 46,445   |          |         |   | 44,851 |        
|Common stock equivalents:                                                                    |                                     |                    |         |                   |        |      |        |         |        |   |          |          |         |   |        |        
|                                                                                             | Operating partnership units         |                    |         | 2,887             |        |      |        | 3,904   |        |   |          | 3,099    |         |   |        | 3,979   |       
|                                                                                             | Stock options and POPs              |                    |         | 69                |        |      |        | 5       |        |   |          | 32       |         |   |        | 18      |       
|                                                                                             | Convertible debt shares             |                    |         |                  |        |      |        |        |        |   |          |         |         |   |        | 4,538   |       
|                                                                                             |                                     |                    |         |                   |        |      |        |         |        |   |          |          |         |   |        |        
|Weighted average number of diluted shares of
    common stock outstanding for FFO            |                                     |                    | 50,665  |                   |        |      | 48,954 |         |        |   | 49,576   |          |         |   | 53,386 |        
|                                                                                             |                                     |                    |         |                   |        |      |        |         |        |   |          |          |         |   |        |        



---



|    |                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Funds from operations for the three and nine
    months ended September 30, 2003, include the effect of loss
    on asset impairments of $21 million and $285.7 million (or
    ($0.41) and $(5.76) per diluted share), respectively.

19



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##### 



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 possible future acquisitions). We do not
expect to pay a dividend on our common stock during 2003. We
believe we have sufficient free 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, 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, 2002;
|
| |  | Factors that affect our access to bank financing
    and the capital markets, including operational risks, high
    leverage, 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, 2002; and                                                                                    
|
| |  | Other factors described previously under the
    caption, Cautionary Statement Regarding Forward-Looking
    Statements.                                                                                                                                                                                                                                                                                                  

We continue to take steps to strengthen our
balance sheet, build liquidity, reduce our leverage and extend
our debt maturities. We have been committed this year to hold
cash balances of generally $60 million to $80 million in
our operating accounts as a hedge against economic and
geopolitical uncertainties, as well as to provide for our
recurring cash requirements. We will seek to establish a new
$50 million secured revolving credit facility prior to
year-end 2003, which we anticipate would add to our liquidity.

As part of our strategy to reduce our leverage
and extend our debt maturities, on July 1, 2003, we
completed an offering of $170 million of 9.5% convertible
subordinated notes due 2010, which securities rank pari passuwith our 4.75% convertible subordinated notes due 2004. The
proceeds from the issuance were mainly used to repurchase
substantially all of the 4.75% convertible notes due 2004, which
were our next significant maturity, and $22.6 million of
our 8.75% senior subordinated notes due 2007. As a result of
this transaction, we now have no material debt maturities until
the senior subordinated notes mature in 2007. During the third
quarter, we also issued 2,792,880 shares of common stock in
exchange for a further $18 million of senior subordinated
notes, and in October 2003, we repurchased an additional
$59.3 million of the senior subordinated notes.We
currently have less than $4 million of the 2004 convertible
notes outstanding and have reduced the amount of our senior
subordinated notes to $105 million.

We completed a $101 million, 10-year, 6.88%
commercial mortgage-backed securities financing, secured by a
portfolio of four hotels, at the end of September. In September
and October 2003, we also issued 13,800,000 shares of common
stock at a price of $7.20 per share for net proceeds totaling
$95.3 million (of which 1.8 million shares, or
$12.4 million of net proceeds, were issued in October
2003). To date, we have raised in 2003 approximately
$91 million from the sale of seven of our properties,
including the October 2003 sale of one hotel for
$16.5 million. We ended the third quarter of 2003 with cash
balances of $309.7 million (including marketable securities
of $1 million), of which $271.3 million was
unrestricted.

We currently have 35 hotels (after the October
sale) planned for disposition. We expect to generate proceeds of
approximately $280 million to $320 million over the
next six to nine months from the disposition of these
properties. Our ability to realize these estimated proceeds is,
however, dependent upon finding

20



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##### 



qualified buyers willing to pay a purchase price
that we consider reasonable. We intend to use a majority of the
proceeds from any asset sales to reinvest in our core assets, to
repurchase our senior debt and to fund acquisitions. Our
strategy includes acquiring those hotels located in major urban
markets or destination resorts with minimal seasonality and
branded, larger hotels with significant meeting space.


Sources and Uses of Cash

We used a total of $5.3 million of cash in
operations during the first nine months of 2003 compared with
$47.3 million generated in the first nine months of 2002.
Our operating results and the amount of cash generated by our
hotel operations have been adversely affected by the continuing
sluggish economy, the reduction in travel resulting from events
of September 11, 2001, the threat of further terrorist
attacks, and other factors affecting business and leisure
travel. Cash flow from operations also decreased in 2003 due to
higher interest rates on our senior unsecured notes issued in
February 2002 as well as the higher interest rate on our new
9.50% convertible subordinated notes issued in July of this
year. Partially offsetting these increases in interest was
savings of approximately $3.2 million in interest on our
previous revolving credit facility, which was repaid with the
net proceeds from the February 2002 senior unsecured notes
issuance.

Included in our operating results is our 16%
cumulative preferred return on our partnership interest in MIP.
As of September 30, 2003, approximately $16.6 million
of cumulative preferred returns remained unpaid. 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.

Our investing activities provided a net
$75.4 million of cash during the first nine months of 2003,
resulting primarily from:



| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | $42.1 million from Interstate Hotels for the
    repayment of their note receivable; and       
|
| |  | $74.5 million in proceeds from the sale of
    six non-core hotel assets; partially offset by  
|
| |  | $21.8 million in capital expenditures
    (including $2.4 million of capitalized interest); and
|
| |  | $18 million increase in cash restricted for
    mortgage escrows.                              

We generated a net $166.6 million of cash
from financing activities during the first nine months of 2003
due mainly to:



| |   |                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $271 million from the issuance of new debt;                                                                                                                                                                  
|
| |  | $82.9 million from the issuance of common
    stock (total proceeds of $95.3 million, including the
    October 2003 issuance of an additional 1.8 million shares
    for $12.4 million); partially offset by
|
| |  | $179.3 million in repayments of debt.                                                                                                                                                                        

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
permits the payment of dividends in order to maintain REIT
qualification 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

21



---



##### 



charge coverage ratio. 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.


Long-Term Debt

Convertible subordinated notes.On July 1, 2003, we completed an
offering of $170 million aggregate principal amount of 9.5%
convertible subordinated notes due 2010. These notes are
convertible into our common stock at any time prior to or at
maturity, April 1, 2010, at a conversion price of $10.18
per share (equal to a conversion rate of 98.2318 shares per
$1,000 principal amount of notes). These convertible
subordinated notes are unsecured obligations and provide for
semi-annual payments of interest each October 1 and April 1. We
incurred approximately $6.5 million in debt issuance costs
related to the issuance.

The proceeds from the new issuance were used to
repurchase $150.6 million of our $154.3 million 4.75%
convertible notes due 2004, at varying prices, resulting in an
aggregate discount of approximately $1.4 million. These
convertible notes are also unsecured obligations that pay
interest semi-annually, on each April 15 and
October 15. These convertible notes are convertible into
our common stock at a rate of 23.2558 shares per $1,000 in
principal amount, which equals approximately $43.00 per share.
During the third quarter, we recognized this gain and wrote off
approximately $0.6 million of deferred financing costs
related to the repurchase. The remaining proceeds from the
issuance were also used to repurchase a portion of our senior
subordinated notes (see discussion below).

Senior subordinated notes.As of September 30, 2003, we had
outstanding $164.4 million aggregate principal amount of
8.75% senior subordinated notes due 2007. The notes are
unsecured obligations and provide for semi-annual payments of
interest each February 15 and August 15. The related
indenture contains various restrictive covenants, which are
similar to those in our senior unsecured notes.

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

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

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

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

Senior unsecured
notes.As of September 30, 2003,
we had $950 million of aggregate principal of these notes
outstanding. These notes contain various restrictive incurrence
covenants, limiting our ability to initiate or transact certain
business activities if specific financial thresholds are not
achieved. One of those thresholds

22



---



##### 



is maintaining a 2 to 1 fixed charge coverage
ratio (as defined in the indentures, fixed charges only include
interest on debt obligations and preferred equity). As of
September 30, 2003, our fixed charge coverage ratio was
below 2 to 1, and therefore we were not permitted to enter into
certain transactions, including the repurchase of our stock, the
issuance of any preferred stock, the payment of dividends, the
incurrence of any additional debt, or the repayment of
outstanding debt before it comes due, except as noted below.


There are certain exceptions with respect to the
incurrence of additional debt and early repayment of debt
features in the indentures. We currently have the ability to
incur $300 million of secured financing within restricted
subsidiaries. We also have a general carve-out to incur
$50 million of unspecified borrowings within a restricted
subsidiary. Additionally, we are permitted to repay subordinated
debt prior to its maturity from the proceeds of a pari passuor junior financing with a longer term than the debt
refinanced, an equity offering, or a financing within an
unrestricted subsidiary. We are also permitted generally to
invest five percent of consolidated net tangible assets (as
defined in the indentures) in an unrestricted subsidiary and
mortgage the properties contributed to the unrestricted
subsidiary. We completed a qualifying transaction under this
exception during the third quarter of 2003 through a new secured
facility financing (see discussion below).

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

We completed a $330 million non-recourse
financing secured by a portfolio of 19 hotels in 1999. The loan
bears a fixed annual interest rate of 8.01% and matures in 2009.
The secured facility contains standard provisions that require
the servicer to maintain in escrow cash balances for certain
items such as property taxes and insurance. In addition, the
facility contains a provision that requires our mortgage
servicer to retain in escrow the excess cash from the encumbered
hotels after payment of debt service (Excess Cash),
if net hotel operating income (NOI) for the trailing
twelve months declines below $57 million. This provision
was triggered in October 2002 and will be effective until the
hotels generate the minimum cash flow required for two
consecutive quarters, at which time the cash being held in
escrow will be released to us. Approximately $19.9 million
of cash was held in escrow under this provision as of
September 30, 2003. In July 2003, we signed an amendment to
the loan agreement that permits the release of cash placed in
escrow for all capital expenditures incurred on the 19
encumbered properties on or after April 1, 2003. Although the
servicer will continue to retain in escrow any excess cash from
the encumbered hotels, they will release cash for all capital
expenditures we have incurred from April 1, 2003 through
the date of the amendment and future capital expenditures we
incur on the 19 properties. Escrowed funds totaling
approximately $11 million were available to fund capital
expenditures under this provision as of September 30, 2003.

Asset Dispositions

One of our key short-term strategies is to sell
selected non-core assets, many of which were acquired as part of
a portfolio. These non-core assets generally possess
one or more of the following characteristics:



| |   |                                                                 
| | - | ----------------------------------------------------------------
| |  | secondary market locations;                                     
|
| |  | secondary brand affiliations;                                   
|
| |  | higher than average future capital expenditure
    requirements;
|
| |  | limited future growth potential; or                             
|
| |  | an over-weighted market location.                               

We believe that these asset sale transactions
will have the following benefits:



| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | improve the overall quality of the hotel assets
    remaining in our portfolio;       
|
| |  | enhance the ability of our portfolio to perform
    well in all cycles of the economy;

23



---



##### 





| |   |                                                                          
| | - | -------------------------------------------------------------------------
| |  | enhance future growth prospects when strength
    returns to the economy;
|
| |  | reduce future capital requirements on a relative
    basis; and          
|
| |  | reduce our leverage and requirements on our
    liquidity resources.     

We are aided in our disposition program by the
fact that we can terminate the management agreement of any hotel
we sell, in some cases subject to the payment of a fee as
discussed below, as well as the fact that 73 of our current 100
assets are unencumbered and only 13 of those assets are subject
to ground leases. Excluding the assets included in our asset
disposition program, we would have 41 unencumbered assets and
seven subject to ground leases.

We recognized an impairment loss in 2002 on
certain non-core assets we were then actively marketing. We sold
one hotel in January 2003 for $12.7 million. Late in the first
quarter of 2003, we expanded our asset disposition program to
include a total of 16 non-core assets and recorded an impairment
charge in the first quarter of $56.7 million. In April
2003, we sold one of these hotels for $3.1 million. During
the second quarter of 2003, we made the determination to dispose
of an additional 19 non-core assets. Also, due to the market
interest in certain of our other hotel assets, we decided to add
an additional six assets to our disposition program. We
recognized an additional impairment loss of $208 million
related to our asset disposition program during the second
quarter of 2003. In the third quarter of 2003, we sold four more
of these hotels for $59 million. During the third quarter
of 2003, we made the determination to dispose of one additional
asset and retain one of our assets previously included in our
disposition program. We also changed our expected holding period
for another asset and revised our sales prices on certain other
assets included in our disposition program. As a result, we
recognized an additional impairment loss of $21 million
during the three months ended September 30, 2003. In
October 2003, we sold another hotel included in our disposition
program for $16.5 million.

The impairment charges are based on our estimates
of the fair value of the disposition properties. 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.
Actual results could differ materially from these estimates.

As we dispose of the remaining 35 assets in our
disposition program, we may incur termination obligations due to
Interstate Hotels of up to a maximum of approximately
$21 million, calculated assuming the immediate sale of the
properties and assuming buyers of our hotel properties elect to
have the properties managed by third-parties other than
Interstate Hotels or do not assume the obligation as part of the
sale transaction. Any such obligation would affect the
calculation of the final gain or loss on the sale 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. Payment of any obligation due under termination
provisions of the contract is payable over a period of
30 months. This amount may be reduced by replacement
management contracts.

In addition, we may from time to time receive
offers on assets which we might consider selling. Any additional
sales of assets may result in additional impairment charges in
future periods, if and when such transactions might be
undertaken. While we always consider any opportunities that may
improve our financial condition or results of operations, we are
not actively marketing any other assets than the 35 properties
previously discussed. The properties we are disposing of
represent approximately one-third of our total properties. For
the nine months ended September 30, 2003, these 35 assets
accounted for approximately 20% of our consolidated revenue and
approximately 13% of consolidated operating income. For purposes
of this calculation, we exclude depreciation and amortization
and loss on asset impairments from operating income.

Capital Expenditures

We make ongoing capital expenditures in order to
keep our hotels competitive in their markets and to comply with
franchise obligations, as described further in Operating
Risks (the potential adverse impact of

24



---



##### 



our failure to meet the requirements contained in
our franchise and licensing agreements) included in
Item 1  Risk Factors of our Annual Report on
Form 10-K for the year ended December 31, 2002. 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
$21.8 million (including $2.4 million of capitalized
interest) for ongoing capital expenditures during the first nine
months of 2003, and we anticipate investing a total of
$15 million to $20 million on capital expenditures
during the fourth quarter of 2003. These ongoing programs will
include room and facilities refurbishments, renovations, and
furniture and equipment replacements. The deferral of capital
spending to date has not significantly affected our business as,
generally in the past, we acquired good quality assets and spent
a relatively high level of capital in the early years of
ownership. We believe 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.


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. Both categories 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 adopted the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, on January 1, 2002. SFAS No. 144
requires the current and prior period operating results of any
asset that has been classified as held for sale or 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.

We adopted the provisions of SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, on January 1, 2003. SFAS No. 146
requires that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at fair
value only when the liability is incurred. Our

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strategy includes the disposition of certain
hotel assets, all of which are managed under agreements which
typically include termination penalty clauses with Interstate
Hotels. As a result, we may incur termination obligations
related to our asset dispositions. Any such liability will be
recognized at the time the asset disposition is complete and a
termination notice is provided to Interstate Hotels. At that
time, the recognition of the termination obligation will be
included in the calculation of the final gain or loss on sale
and will be included in discontinued operations.


Classification of properties as held for
sale

Held-for-sale classification requires that the
sale be probable and that the transfer of the asset is expected
to be completed within one year, among other criteria. Assessing
the probability of the sale requires significant judgment due to
the uncertainty surrounding completing the transaction. As a
result, we have the following policy in aiding in assessing
probability. 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. If our estimates are incorrect, the carrying values may
not be accurately reflected. We cease depreciation at the time
the asset is classified as held for sale. If material to our
total portfolio, we segregate the held for sale properties on
our consolidated balance sheet. We also reclassify the operating
results of properties held for sale as discontinued operations
for all periods presented.

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 September 30, 2003, we were not involved in any
off-balance sheet arrangements with MIP.

The following table summarizes our aggregate
contractual obligations as of September 30, 2003 (dollars
in thousands):

|                                                     |                                |       |           |           |     |             |        |            |  |            |        |        |  |   |           |           |     |   |         |         | 
|---------------------------------------------------- | ------------------------------ | ----- | --------- | --------- | --- | ----------- | ------ | ---------- |  | ---------- | ------ | ------ |  | - | --------- | --------- | --- | - | ------- | ------- | 
|                                                     |                                |       |           | Less than |     | One to      |        | Three to   |  |           
|                                                     |                                | Total |           | One Year  |     | Three Years |        | Five Years |  | Thereafter
|                                                     |                                |       |           |           |     |             |        |            |  |           
|Long-term debt, net of unamortized discount
    (a): |                                |       |           |           |     |             |        |            |  |            |        |        |  |   |           |           |     |   |         |        
|                                                     | Senior unsecured notes         |       | $         | 944,540   |     |             | $      |           |  |            | $      |       |  |   | $         | 548,221   |     |   | $       | 396,319 | 
|                                                     | Secured facility, due 2009     |       |           | 310,474   |     |             |        | 5,423      |  |            |        | 13,906 |  |   |           | 291,145   |     |   |         |        | 
|                                                     | Secured facility, due 2013     |       |           | 101,000   |     |             |        | 1,304      |  |            |        | 3,605  |  |   |           | 6,188     |     |   |         | 89,903  | 
|                                                     | Senior subordinated notes      |       |           | 163,388   | (b) |             |        |           |  |            |        |       |  |   |           | 163,388   | (b) |   |         |        | 
|                                                     | Convertible subordinated notes |       |           | 173,705   |     |             |        |           |  |            |        | 3,705  |  |   |           |          |     |   |         | 170,000 | 
|                                                     | Mortgage debt and other        |       |           | 36,018    |     |             |        | 2,108      |  |            |        | 12,636 |  |   |           | 8,110     |     |   |         | 13,164  | 
|                                                     |                                |       |           |           |     |             |        |            |  |            |        |        |  |   |           |           |     |   |         |        
|                                                     | Total long-term debt           |       |           | 1,729,125 |     |             |        | 8,835      |  |            |        | 33,852 |  |   |           | 1,017,052 |     |   |         | 669,386 | 
|                                                     |                                |       |           |           |     |             |        |            |  |            |        |        |  |   |           |           |     |   |         |        
|Ground lease obligations                             |                                |       | 62,459    |           |     |             | 1,318  |            |  |            | 2,990  |        |  |   | 3,594     |           |     |   | 54,557  |        
|                                                     |                                |       |           |           |     |             |        |            |  |            |        |        |  |   |           |           |     |   |         |        
|Aggregate contractual obligations                    |                                | $     | 1,791,584 |           |     | $           | 10,153 |            |  | $          | 36,842 |        |  | $ | 1,020,646 |           |     | $ | 723,943 |        
|                                                     |                                |       |           |           |     |             |        |            |  |            |        |        |  |   |           |           |     |   |         |        



---



|    |                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | For a description of the material terms of our
    long-term debt, see Financial Condition, Liquidity, and
    Capital Resources  Long-Term Debt.
|   
|(b) | In October 2003, we repurchased a further
    $59.3 million of these notes.                                                                         

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Our taxable subsidiaries are parties to
management agreements with a subsidiary of Interstate Hotels to
manage all of our hotels. Under these management agreements, the
taxable subsidiaries pay a management fee for each property to a
subsidiary of Interstate Hotels. The taxable subsidiaries in
turn make rental payments to our operating partnership under the
participating leases. Under the management agreements, the base
management fee is 2.5% of total hotel revenue, plus incentive
payments based on meeting performance thresholds that could
total up to an additional 1.5% of total hotel revenue. All of
the agreements expire in 2010 and have three renewal periods of
five years each at the option of Interstate Hotels, subject to
some exceptions.

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ITEM
3.          QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes with respect to
this item from the disclosure included in our Annual Report on
Form 10-K for the year ended December 31, 2002.

ITEM
4.          CONTROLS
AND PROCEDURES

Evaluation of 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 officer, as appropriate, to allow timely decisions
regarding required disclosures based closely on the definition
of disclosure controls and procedures in
Rules 13a-15(e) and 15d-15(e) 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.

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 chief accounting officer, of the effectiveness of
the design and operation of our disclosure controls and
procedures as of September 30, 2003. Based on this
evaluation, we concluded that our disclosure controls and
procedures were effective.

Changes in Internal Controls

During the three months ended September 30,
2003, there were no significant changes in our internal controls
or in other factors that could significantly affect these
controls.

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##### 



ITEM
6.          EXHIBITS
AND REPORTS ON FORM 8-K

(a.) Exhibits

|        |    |                         |  |                                                                                                                                                                                                                                                                                                                                        
|------- | -- | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                        
|No.     |    | Description of Document
|        |    |                        
|        | 4  | .1                      |  | Indenture, dated as of July 1, 2003, by and
    among the registrant, MeriStar Hospitality Operating
    Partnership, L.P., the guarantors party thereto and U.S. Bank
    Trust National Association, as trustee (incorporated by
    reference to Exhibit 4.1 to the registrants current
    report on Form 8-K dated July 3, 2003).
|        | 4  | .2                      |  | Officers Certificate establishing the terms
    of the registrants 9.50% Convertible Subordinated Notes
    due 2010 (incorporated by reference to Exhibit 4.2 to the
    registrants current report on Form 8-K dated
    July 3, 2003).                                                                                           
|        | 4  | .8                      |  | Letter agreement dated November 11, 2003
    relating to exhibits.                                                                                                                                                                                                                                                                     
|        | 13 |                         |  | Financial Statements of MeriStar Hospitality
    Operating Partnership, L.P. as of and for the three and nine
    months ended September 30, 2003.                                                                                                                                                                                     
|        | 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
    Certifications of Chief Executive Officer                                                                                                                                                                                                                                                           
|        | 32 | .2                      |  | Sarbanes-Oxley Act Section 906
    Certifications of Chief Financial Officer.                                                                                                                                                                                                                                                          
|        | 99 | .1                      |  | Consolidating Financial Information of MeriStar
    Hospitality Operating Partnership, L.P.                                                                                                                                                                                                                                            

(b.) Reports on Form 8-K

On September 29, 2003, we filed a current
report on Form 8-K (Items 5 and 7) announcing we had
completed a $101 million commercial mortgage-backed
securities financing, secured by four of our properties.

On September 23, 2003, we filed a current
report on Form 8-K (Items 5 and 7) announcing we had issued
approximately 2.79 million shares of our common stock in
exchange for $18.0 million of our 8.75% senior subordinated
notes due 2007.

On July 28, 2003, we furnished a current
report on Form 8-K (Item 12) announcing the financial
results for the quarter ended June 30, 2003.

On July 3, 2003, we furnished a current
report on Form 8-K (Items 7 and 9) announcing we had
completed the sale of $170 million of 9.5% convertible
subordinated notes.

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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     
| | (Principal Executive Officer and
| | Duly Authorized Officer)        

Dated: November 12, 2003

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