##### 



SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)

[X]   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the quarterly period ended June 30, 2002 or

[  ]   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 of Incorporation) |  | 75-2648842
(IRS Employer Identification No.)

1010 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20007
(Address of Principal Executive Offices)(Zip Code)

202-295-1000
(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 for which the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes X No

The number of shares of Common Stock, par value $0.01 per share, outstanding at
August 9, 2002 was 45,045,410.





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##### 



MERISTAR HOSPITALITY CORPORATION

INDEX

|        |  |                                                                                                                                           |  |     
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                                                                           |  | Page
|        |  |                                                                                                                                           |  |     
|PART I  |  | FINANCIAL INFORMATION                                                                                                                     |  |     
|       
|ITEM 1: |  | FINANCIAL STATEMENTS (UNAUDITED)                                                                                                          |  |     
|       
|        |  | Condensed Consolidated Balance Sheets 
June 30, 2002 and December 31, 2001                                                               |  | 3   
|       
|        |  | Condensed Consolidated Statements of Operations and Other
Comprehensive Income (Loss)  Three and six months ended
June 30, 2002 and 2001 |  | 4   
|       
|        |  | Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 2002 and 2001                                                 |  | 6   
|       
|        |  | Notes to Condensed Consolidated Financial Statements                                                                                      |  | 7   
|       
|ITEM 2: |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                                     |  | 13  
|       
|ITEM 3: |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                                |  | 21  
|       
|PART II |  | OTHER INFORMATION                                                                                                                         |  | 22  
|       
|ITEM 4: |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS                                                                                       |  | 22  
|       
|ITEM 5: |  | OTHER INFORMATION                                                                                                                         |  | 23  
|       
|ITEM 6: |  | EXHIBITS AND REPORTS ON FORM 8-K                                                                                                          |  | 23  

2



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##### 



|        |  |                      
|------- |  | ---------------------
|PART I  |  | FINANCIAL INFORMATION
|ITEM 1: |  | FINANCIAL STATEMENTS 

MERISTAR HOSPITALITY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

|                                                                                                                  |                                                                                                                 |                                                                             |           |               |          |                   |           |           |          |  
|----------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | --------- | ------------- | -------- | ----------------- | --------- | --------- | -------- | -
|                                                                                                                  |                                                                                                                 |                                                                             |           | June 30, 2002 |          | December 31, 2001
|                                                                                                                  |                                                                                                                 |                                                                             |           |               |          |                  
|                                                                                                                  |                                                                                                                 |                                                                             |           | (unaudited)   |          |                   |           |          
|Assets
Investments in hotel properties                                                                            |                                                                                                                 | $                                                                           | 3,208,468 |               |          | $                 | 3,183,677 |          
|                                                                                                                  |                                                                                                                 | Accumulated depreciation                                                    |           |               | (455,714 | )                 |           |           | (397,380 | )
|                                                                                                                  |                                                                                                                 |                                                                             |           |               |          |                   |           |          
|                                                                                                                  |                                                                                                                 |                                                                             | 2,752,754 |               |          |                   | 2,786,297 |          
|                                                                                                                  |                                                                                                                 | Cash and cash equivalents                                                   |           |               | 27,412   |                   |           |           | 23,448   |  
|                                                                                                                  |                                                                                                                 | Accounts receivable, net of allowance for doubtfulaccounts of $735 and $973 |           |               | 51,995   |                   |           |           | 47,178   |  
|                                                                                                                  |                                                                                                                 | Prepaid expenses and other                                                  |           |               | 15,208   |                   |           |           | 18,306   |  
|                                                                                                                  |                                                                                                                 | Notes receivable from Interstate Hotels & Resorts, Inc.                     |           |               | 59,069   |                   |           |           | 36,000   |  
|                                                                                                                  |                                                                                                                 | Due from Interstate Hotels & Resorts                                        |           |               |         |                   |           |           | 8,877    |  
|                                                                                                                  |                                                                                                                 | Investments in affiliates                                                   |           |               | 41,714   |                   |           |           | 41,714   |  
|                                                                                                                  |                                                                                                                 | Restricted cash                                                             |           |               | 16,920   |                   |           |           | 21,304   |  
|                                                                                                                  |                                                                                                                 | Intangible assets, net of accumulated amortization
of $13,824 and $11,224   |           |               | 24,881   |                   |           |           | 26,736   |  
|                                                                                                                  |                                                                                                                 |                                                                             |           |               |          |                   |           |          
|                                                                                                                  |                                                                                                                 | $                                                                           | 2,989,953 |               |          | $                 | 3,009,860 |          
|                                                                                                                  |                                                                                                                 |                                                                             |           |               |          |                   |           |          
|Liabilities, Minority Interests and Stockholders Equity
Accounts payable, accrued expenses and other liabilities |                                                                                                                 | $                                                                           | 126,922   |               |          | $                 | 129,786   |          
|                                                                                                                  |                                                                                                                 | Accrued interest                                                            |           | 53,217        |          |                   |           | 45,009    |         
|                                                                                                                  |                                                                                                                 | Due to Interstate Hotels & Resorts                                          |           | 9,092         |          |                   |           |          |         
|                                                                                                                  |                                                                                                                 | Income taxes payable                                                        |           | 46            |          |                   |           | 350       |         
|                                                                                                                  |                                                                                                                 | Dividends and distributions payable                                         |           | 449           |          |                   |           | 1,090     |         
|                                                                                                                  |                                                                                                                 | Deferred income taxes                                                       |           | 8,656         |          |                   |           | 9,031     |         
|                                                                                                                  |                                                                                                                 | Interest rate swaps                                                         |           | 8,684         |          |                   |           | 12,100    |         
|                                                                                                                  |                                                                                                                 | Long-term debt                                                              |           | 1,669,135     |          |                   |           | 1,700,134 |         
|                                                                                                                  |                                                                                                                 |                                                                             |           |               |          |                   |           |          
|Total liabilities                                                                                                 |                                                                                                                 |                                                                             | 1,876,201 |               |          |                   | 1,897,500 |          
|                                                                                                                  |                                                                                                                 |                                                                             |           |               |          |                   |           |          
|Minority interests                                                                                                |                                                                                                                 |                                                                             | 85,880    |               |          |                   | 89,797    |          
|Stockholders equity:                                                                                             |                                                                                                                 |                                                                             |           |               |          |                   |           |          
|                                                                                                                  |                                                                                                                 | Preferred stock, par value $0.01 per share
     Authorized - 100,000 shares |           |               |         |                   |           |           |         |  
|                                                                                                                  | Common stock, par value $0.01 per share
     Authorized  250,000 shares
     Issued  49,354 and 48,761 shares |                                                                             |           | 493           |          |                   |           | 487       |         
|                                                                                                                  |                                                                                                                 | Additional paid-in capital                                                  |           | 1,192,757     |          |                   |           | 1,183,463 |         
|                                                                                                                  |                                                                                                                 | Retained earnings (deficit)                                                 |           | (76,140       | )        |                   |           | (68,241   | )       
|                                                                                                                  |                                                                                                                 | Accumulated other comprehensive loss                                        |           | (6,428        | )        |                   |           | (12,503   | )       
|                                                                                                                  |                                                                                                                 | Unearned stock-based compensation                                           |           | (6,261        | )        |                   |           | (5,287    | )       
|                                                                                                                  |                                                                                                                 | Less common stock held in treasury  4,308 and 4,237 shares                 |           | (76,549       | )        |                   |           | (75,356   | )       
|                                                                                                                  |                                                                                                                 |                                                                             |           |               |          |                   |           |          
|                                                                                                                  |                                                                                                                 | Total stockholders equity                                                  |           | 1,027,872     |          |                   |           | 1,022,563 |         
|                                                                                                                  |                                                                                                                 |                                                                             |           |               |          |                   |           |          
|                                                                                                                  |                                                                                                                 | $                                                                           | 2,989,953 |               |          | $                 | 3,009,860 |          
|                                                                                                                  |                                                                                                                 |                                                                             |           |               |          |                   |           |          

See accompanying notes to condensed consolidated financial statements.

3



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##### 



MERISTAR HOSPITALITY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE
INCOME (LOSS)
UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

|                                                                                                                     |                             |                                                             |         |                    |         |                  |         |       |         |      |         |       |         |   |         |       |         | 
|-------------------------------------------------------------------------------------------------------------------- | --------------------------- | ----------------------------------------------------------- | ------- | ------------------ | ------- | ---------------- | ------- | ----- | ------- | ---- | ------- | ----- | ------- | - | ------- | ----- | ------- | 
|                                                                                                                     |                             |                                                             |         | Three months ended |         | Six months ended
|                                                                                                                     |                             |                                                             |         | June 30,           |         | June 30,        
|                                                                                                                     |                             |                                                             |         |                    |         |                 
|                                                                                                                     |                             |                                                             |         | 2002               |         | 2001             |         | 2002  |         | 2001
|                                                                                                                     |                             |                                                             |         |                    |         |                  |         |       |         |     
|Revenue:                                                                                                             |                             |                                                             |         |                    |         |                  |         |       |         |      |         |       |         |   |         |      
|                                                                                                                     | Hotel operations:           |                                                             |         |                    |         |                  |         |       |         |      |         |       |         |   |         |       |        
|                                                                                                                     |                             | Rooms                                                       |         | $                  | 183,422 |                  |         | $     | 202,380 |      |         | $     | 353,970 |   |         | $     | 402,760 | 
|                                                                                                                     |                             | Food and beverage                                           |         |                    | 71,905  |                  |         |       | 74,092  |      |         |       | 133,970 |   |         |       | 145,383 | 
|                                                                                                                     |                             | Other operating departments                                 |         |                    | 20,608  |                  |         |       | 23,534  |      |         |       | 39,716  |   |         |       | 46,005  | 
|                                                                                                                     | Participating lease revenue |                                                             |         |                   |         |                  |         | 3,752 |         |      |         |      |         |   |         | 7,536 |        
|Office rental and other revenues                                                                                     |                             |                                                             | 5,320   |                    |         |                  | 3,409   |       |         |      | 10,263  |       |         |   | 8,167   |      
|                                                                                                                     |                             |                                                             |         |                    |         |                  |         |       |         |      |         |       |         |   |         |      
|Total revenue                                                                                                        |                             |                                                             | 281,255 |                    |         |                  | 307,167 |       |         |      | 537,919 |       |         |   | 609,851 |      
|                                                                                                                     |                             |                                                             |         |                    |         |                  |         |       |         |      |         |       |         |   |         |      
|Hotel operating expenses by department:                                                                              |                             |                                                             |         |                    |         |                  |         |       |         |      |         |       |         |   |         |      
|                                                                                                                     |                             | Rooms                                                       |         |                    | 43,443  |                  |         |       | 46,565  |      |         |       | 82,378  |   |         |       | 92,287  | 
|                                                                                                                     |                             | Food and beverage                                           |         |                    | 50,445  |                  |         |       | 52,486  |      |         |       | 94,850  |   |         |       | 103,890 | 
|                                                                                                                     |                             | Other operating departments                                 |         |                    | 11,651  |                  |         |       | 12,046  |      |         |       | 22,345  |   |         |       | 23,616  | 
|Office rental, parking and other operating
expenses                                                                  |                             |                                                             | 790     |                    |         |                  | 688     |       |         |      | 1,604   |       |         |   | 1,625   |      
|Undistributed operating expenses:                                                                                    |                             |                                                             |         |                    |         |                  |         |       |         |      |         |       |         |   |         |      
|                                                                                                                     |                             | Administrative and general                                  |         |                    | 44,727  |                  |         |       | 43,138  |      |         |       | 88,198  |   |         |       | 88,055  | 
|                                                                                                                     |                             | Property operating costs                                    |         |                    | 41,453  |                  |         |       | 42,278  |      |         |       | 78,835  |   |         |       | 84,977  | 
|                                                                                                                     |                             | Property taxes, insurance and other                         |         |                    | 16,842  |                  |         |       | 18,654  |      |         |       | 36,903  |   |         |       | 37,041  | 
|                                                                                                                     |                             | Depreciation and amortization                               |         |                    | 31,449  |                  |         |       | 28,708  |      |         |       | 62,350  |   |         |       | 58,405  | 
|                                                                                                                     |                             | Expense for non-hedging derivatives                         |         | 3,090              |         |                  |         |      |         |      |         | 3,079 |         |   |         |      |        
|                                                                                                                     |                             | Write-off of deferred financing costs                       |         |                    |        |                  |         |       |         |      |         |       | 1,529   |   |         |       |        | 
|                                                                                                                     |                             | Loss on fair value of non-hedging derivatives               |         |                    |        |                  |         |       |        |      |         |       | 4,735   |   |         |       |        | 
|                                                                                                                     |                             | Write down of investment in STS Hotel Net                   |         |                    |        |                  |         |       |        |      |         |       |        |   |         |       | 2,112   | 
|                                                                                                                     |                             | Swap termination costs                                      |         |                    |        |                  |         |       |        |      |         |       |        |   |         |       | 9,297   | 
|                                                                                                                     |                             | Felcor merger costs                                         |         |                    |        |                  |         |       | 3,789   |      |         |       |        |   |         |       | 3,789   | 
|                                                                                                                     |                             | Cost to terminate leases with Prime Hospitality
Corporation |         |                    |        |                  |         |       | 1,315   |      |         |       |        |   |         |       | 1,315   | 
|                                                                                                                     |                             |                                                             |         |                    |         |                  |         |       |         |      |         |       |         |   |         |      
|Total operating expenses                                                                                             |                             |                                                             | 243,890 |                    |         |                  | 249,667 |       |         |      | 476,806 |       |         |   | 506,409 |      
|                                                                                                                     |                             |                                                             |         |                    |         |                  |         |       |         |      |         |       |         |   |         |      
|Net operating income                                                                                                 |                             |                                                             | 37,365  |                    |         |                  | 57,500  |       |         |      | 61,113  |       |         |   | 103,442 |      
|Interest expense, net                                                                                                |                             |                                                             | 34,063  |                    |         |                  | 30,032  |       |         |      | 68,662  |       |         |   | 60,261  |      
|                                                                                                                     |                             |                                                             |         |                    |         |                  |         |       |         |      |         |       |         |   |         |      
|Income (loss) before minority interests, income tax
expense (benefit), loss on sale of assets and
extraordinary loss |                             |                                                             | 3,302   |                    |         |                  | 27,468  |       |         |      | (7,549  | )     |         |   | 43,181  |      
|Minority interests                                                                                                   |                             |                                                             | 245     |                    |         |                  | 2,017   |       |         |      | (382    | )     |         |   | 3,121   |      
|                                                                                                                     |                             |                                                             |         |                    |         |                  |         |       |         |      |         |       |         |   |         |      
|Income (loss) before income tax expense (benefit), loss
on sale of assets and extraordinary loss                     |                             |                                                             | 3,057   |                    |         |                  | 25,451  |       |         |      | (7,167  | )     |         |   | 40,060  |      
|Income tax expense (benefit)                                                                                         |                             |                                                             | 84      |                    |         |                  | 891     |       |         |      | (197    | )     |         |   | 1,402   |      
|                                                                                                                     |                             |                                                             |         |                    |         |                  |         |       |         |      |         |       |         |   |         |      
|Income (loss) before loss on sale of assets and
extraordinary loss                                                   |                             |                                                             | 2,973   |                    |         |                  | 24,560  |       |         |      | (6,970  | )     |         |   | 38,658  |      
|Loss on sale of assets, net of tax effect of ($22)                                                                   |                             |                                                             |        |                    |         |                  |        |       |         |      |        |       |         |   | (1,059  | )    
|Extraordinary loss on early extinguishments of debt,
net of tax effect of ($19)                                      |                             |                                                             |        |                    |         |                  |        |       |         |      |        |       |         |   | (1,224  | )    
|                                                                                                                     |                             |                                                             |         |                    |         |                  |         |       |         |      |         |       |         |   |         |      
|Net income (loss)                                                                                                    |                             | $                                                           | 2,973   |                    |         | $                | 24,560  |       |         | $    | (6,970  | )     |         | $ | 36,375  |      
|                                                                                                                     |                             |                                                             |         |                    |         |                  |         |       |         |      |         |       |         |   |         |      

4



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##### 



|                                   |                                               |                                         |       |                    |      |                  |        |        |      |      |        |        |       |   |        |        |       |  
|---------------------------------- | --------------------------------------------- | --------------------------------------- | ----- | ------------------ | ---- | ---------------- | ------ | ------ | ---- | ---- | ------ | ------ | ----- | - | ------ | ------ | ----- | -
|                                   |                                               |                                         |       | Three months ended |      | Six months ended
|                                   |                                               |                                         |       | June 30,           |      | June 30,        
|                                   |                                               |                                         |       |                    |      |                 
|                                   |                                               |                                         |       | 2002               |      | 2001             |        | 2002   |      | 2001
|                                   |                                               |                                         |       |                    |      |                  |        |        |      |     
|Other comprehensive income (loss): |                                               |                                         |       |                    |      |                  |        |        |      |      |        |        |       |   |        |       
|                                   | Net income (loss)                             |                                         | $     | 2,973              |      |                  | $      | 24,560 |      |      | $      | (6,970 | )     |   | $      | 36,375 |      
|                                   | Foreign currency translation adjustment       |                                         |       | 817                |      |                  |        | 815    |      |      |        | 829    |       |   |        | (159   | )    
|                                   | Derivative instruments transition adjustment  |                                         |       |                   |      |                  |        |       |      |      |        |       |       |   |        | (2,842 | )    
|                                   | Change in valuation of derivative instruments |                                         |       |                   |      |                  |        | 525    |      |      |        | 511    |       |   |        | (4,268 | )    
|                                   |                                               |                                         |       |                    |      |                  |        |        |      |      |        |        |       |   |        |       
|Comprehensive income (loss)        |                                               | $                                       | 3,790 |                    |      | $                | 25,900 |        |      | $    | (5,630 | )      |       | $ | 29,106 |       
|                                   |                                               |                                         |       |                    |      |                  |        |        |      |      |        |        |       |   |        |       
|Earnings per share:                |                                               |                                         |       |                    |      |                  |        |        |      |      |        |        |       |   |        |       
|                                   |                                               | Basic:                                  |       |                    |      |                  |        |        |      |      |        |        |       |   |        |        |       |  
|                                   |                                               | Income (loss) before extraordinary loss |       | $                  | 0.07 |                  |        | $      | 0.55 |      |        | $      | (0.16 | ) |        | $      | 0.84  |  
|                                   |                                               | Extraordinary loss                      |       |                    |     |                  |        |        |     |      |        |        |      |   |        |        | (0.03 | )
|                                   |                                               |                                         |       |                    |      |                  |        |        |      |      |        |        |       |   |        |       
|                                   |                                               | Net income (loss)                       |       | $                  | 0.07 |                  |        | $      | 0.55 |      |        | $      | (0.16 | ) |        | $      | 0.81  |  
|                                   |                                               |                                         |       |                    |      |                  |        |        |      |      |        |        |       |   |        |       
|                                   |                                               | Diluted:                                |       |                    |      |                  |        |        |      |      |        |        |       |   |        |        |       |  
|                                   |                                               | Income (loss) before extraordinary loss |       | $                  | 0.06 |                  |        | $      | 0.52 |      |        | $      | (0.16 | ) |        | $      | 0.82  |  
|                                   |                                               | Extraordinary loss                      |       |                    |     |                  |        |        |     |      |        |        |      |   |        |        | (0.03 | )
|                                   |                                               |                                         |       |                    |      |                  |        |        |      |      |        |        |       |   |        |       
|                                   |                                               | Net income (loss)                       |       | $                  | 0.06 |                  |        | $      | 0.52 |      |        | $      | (0.16 | ) |        | $      | 0.79  |  
|                                   |                                               |                                         |       |                    |      |                  |        |        |      |      |        |        |       |   |        |       

See accompanying notes to condensed consolidated financial statements.

5



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##### 



MERISTAR HOSPITALITY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED (IN THOUSANDS)

|                                                                                         |                                                                       |                                                          |         |                  |        |      |         |          |        |  
|---------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | -------------------------------------------------------- | ------- | ---------------- | ------ | ---- | ------- | -------- | ------ | -
|                                                                                         |                                                                       |                                                          |         | Six months ended
|                                                                                         |                                                                       |                                                          |         | June 30,        
|                                                                                         |                                                                       |                                                          |         |                 
|                                                                                         |                                                                       |                                                          |         | 2002             |        | 2001
|                                                                                         |                                                                       |                                                          |         |                  |        |     
|Operating activities:                                                                    |                                                                       |                                                          |         |                  |        |      |         |         
|Net income (loss)                                                                        |                                                                       | $                                                        | (6,970  | )                |        | $    | 36,375  |         
|Adjustments to reconcile net income (loss) to net
cash provided by operating activities: |                                                                       |                                                          |         |                  |        |      |         |         
|                                                                                         | Depreciation and amortization                                         |                                                          |         | 62,350           |        |      |         | 58,405   |       
|                                                                                         | Loss on fair value of non-hedging derivatives                         |                                                          |         | 4,735            |        |      |         |         |       
|                                                                                         | Write-off of deferred financing costs                                 |                                                          |         | 1,529            |        |      |         |         |       
|                                                                                         | Loss on sale of assets, before tax effect                             |                                                          |         |                 |        |      |         | 1,081    |       
|                                                                                         | Write down of investment in STS Hotel Net                             |                                                          |         |                 |        |      |         | 2,112    |       
|                                                                                         | Extraordinary loss on early extinguishment of debt,
before tax effect |                                                          |         |                 |        |      |         | 1,243    |       
|                                                                                         | Minority interests                                                    |                                                          |         | (382             | )      |      |         | 3,121    |       
|                                                                                         | Amortization of unearned stock based compensation                     |                                                          |         | 1,920            |        |      |         | 1,842    |       
|                                                                                         | Interest rate swaps marked to fair value                              |                                                          |         | (2,905           | )      |      |         |         |       
|                                                                                         | Deferred income taxes                                                 |                                                          |         | (375             | )      |      |         | 379      |       
|                                                                                         | Changes in operating assets and liabilities:                          |                                                          |         |                  |        |      |         |          |       
|                                                                                         |                                                                       | Accounts receivable, net                                 |         |                  | (4,817 | )    |         |          | (7,007 | )
|                                                                                         |                                                                       | Prepaid expenses and other                               |         |                  | 3,098  |      |         |          | 502    |  
|                                                                                         |                                                                       | Due to/from Interstate Hotels & Resorts                  |         |                  | 4,900  |      |         |          | 11,328 |  
|                                                                                         |                                                                       | Accounts payable, accrued expenses and other liabilities |         |                  | (2,864 | )    |         |          | (8,802 | )
|                                                                                         |                                                                       | Accrued interest                                         |         |                  | 8,208  |      |         |          | 15,987 |  
|                                                                                         |                                                                       | Income taxes payable                                     |         |                  | (304   | )    |         |          | 452    |  
|                                                                                         |                                                                       |                                                          |         |                  |        |      |         |         
|Net cash provided by operating activities                                                |                                                                       |                                                          | 68,123  |                  |        |      | 117,018 |         
|                                                                                         |                                                                       |                                                          |         |                  |        |      |         |         
|Investing activities:                                                                    |                                                                       |                                                          |         |                  |        |      |         |         
|                                                                                         | Investment in hotel properties                                        |                                                          |         | (24,696          | )      |      |         | (23,782  | )     
|                                                                                         | Proceeds from disposition of assets                                   |                                                          |         |                 |        |      |         | 7,274    |       
|                                                                                         | Hotel operating cash received in lease conversions                    |                                                          |         |                 |        |      |         | 3,257    |       
|                                                                                         | Notes receivable from Interstate Hotels & Resorts                     |                                                          |         | (10,000          | )      |      |         | (36,000  | )     
|                                                                                         | Change in restricted cash                                             |                                                          |         | 4,384            |        |      |         | (283     | )     
|                                                                                         |                                                                       |                                                          |         |                  |        |      |         |         
|Net cash used in investing activities                                                    |                                                                       |                                                          | (30,312 | )                |        |      | (49,534 | )       
|                                                                                         |                                                                       |                                                          |         |                  |        |      |         |         
|Financing activities:                                                                    |                                                                       |                                                          |         |                  |        |      |         |         
|                                                                                         | Deferred financing costs                                              |                                                          |         | (3,571           | )      |      |         | (9,906   | )     
|                                                                                         | Proceeds from issuance of long-term debt                              |                                                          |         | 234,841          |        |      |         | 599,529  |       
|                                                                                         | Principal payments on long-term debt                                  |                                                          |         | (265,840         | )      |      |         | (584,830 | )     
|                                                                                         | Proceeds from issuance of common stock, net                           |                                                          |         | 3,156            |        |      |         | 705      |       
|                                                                                         | Purchase of OP units                                                  |                                                          |         |                 |        |      |         | (1,513   | )     
|                                                                                         | Purchase of treasury stock                                            |                                                          |         | (1,193           | )      |      |         | (1,767   | )     
|                                                                                         | Dividends paid to stockholders                                        |                                                          |         | (929             | )      |      |         | (45,251  | )     
|                                                                                         | Distributions to minority interests                                   |                                                          |         | (283             | )      |      |         | (4,434   | )     
|                                                                                         |                                                                       |                                                          |         |                  |        |      |         |         
|Net cash used in financing activities                                                    |                                                                       |                                                          | (33,819 | )                |        |      | (47,467 | )       
|                                                                                         |                                                                       |                                                          |         |                  |        |      |         |         
|Effect of exchange rate changes on cash and cash equivalents                             |                                                                       |                                                          | (28     | )                |        |      | 283     |         
|                                                                                         |                                                                       |                                                          |         |                  |        |      |         |         
|Net increase in cash and cash equivalents                                                |                                                                       |                                                          | 3,964   |                  |        |      | 20,300  |         
|Cash and cash equivalents, beginning of period                                           |                                                                       |                                                          | 23,448  |                  |        |      | 250     |         
|                                                                                         |                                                                       |                                                          |         |                  |        |      |         |         
|Cash and cash equivalents, end of period                                                 |                                                                       | $                                                        | 27,412  |                  |        | $    | 20,550  |         
|                                                                                         |                                                                       |                                                          |         |                  |        |      |         |         

See accompanying notes to condensed consolidated financial statements.

6



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MERISTAR HOSPITALITY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
UNAUDITED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1. ORGANIZATION

We own a portfolio of upscale, full-service hotels in the United States and
Canada. Our portfolio is diversified by franchise and brand affiliations. As
of June 30, 2002, we owned 112 hotels, with 28,653 rooms, all of which are
leased by our taxable subsidiaries and managed by Interstate Hotels & Resorts,
Inc, which was created on July 31, 2002 through the merger of MeriStar Hotels & Resorts, Inc. and
Interstate Hotels Corporation, with MeriStar Hotels &
Resorts, Inc. surviving the merger and
changing its name to Interstate Hotels & Resorts, Inc.

We were created on August 3, 1998, when American General Hospitality
Corporation, a corporation operating as a real estate investment trust, and its
associated entities merged with CapStar Hotel Company and its associated
entities. In connection with the merger between CapStar and American General,
we created MeriStar Hotels, a separate publicly traded company, to be the
lessee and manager of nearly all of our hotels.

On January 1, 2001, changes to the federal tax laws governing real estate
investment trusts became effective. Those changes are commonly known as the
REIT Modernization Act, or RMA. The RMA permits real estate investment trusts
to create taxable subsidiaries that are subject to taxation similar to
subchapter C-Corporations. Because of the RMA, we have created a number of
these taxable subsidiaries to lease our real property. The RMA prohibits our
taxable subsidiaries from engaging in the following activities:



| |  |  | managing the properties they lease (our taxable subsidiaries must
enter into an arms length management agreement with an independent
third-party manager that is actively involved in the trade or business
of hotel management and manages properties on behalf of other owners),
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | leasing a property that contains gambling operations; and                                                                                                                                                                                                                           
| |  |  | owning a brand or franchise.                                                                                                                                                                                                                                                        

We believe establishing taxable subsidiaries to lease the properties we own
provides an efficient alignment of and ability to capture the economic
interests of property ownership. Our taxable subsidiaries are parties to
management agreements with a subsidiary of
Interstate
Hotels to manage our
hotels. Under these management agreements, the taxable subsidiaries pay a
management fee to
Interstate
Hotels for each property. The taxable subsidiaries
in turn make rental payments to us under the participating leases. Under the
management agreements, the base management fee is 2.5% of total hotel revenue
plus incentives payments, based on meeting performance thresholds, that could
total up to 1.5% of total hotel revenue. All of the agreements, except for
four agreements with terms that renew annually, have an initial term of 10
years with three renewal periods of five years each at the option of Interstate
Hotels, subject to some exceptions.

In connection with the proposed merger of MeriStar Hotels
with Interstate Hotels Corporation, our Board of Directors established a Special
Committee consisting solely of directors not affiliated with MeriStar Hotels. The
Special Committee, with the assistance of its outside counsel, reviewed the terms of
the merger and the effect of the merger on us and recommended to the full Board
that we (i) consent to the proposed merger, (ii) waive any of our rights to terminate the Intercompany Agreement or any
of the management agreements on our hotels between MeriStar Hotels and us
as a result of the merger and (iii) amend our revolving credit and term loan agreements with MeriStar Hotels subject to
documentation and various conditions including the payment to us of $3.0 million to
reduce MeriStar Hotels borrowings under our credit agreement with them. At
a meeting of the full Board of Directors on April 30, 2002, the Board approved
the recommendations of the Special Committee subject to final documentation and
satisfaction  of the conditions, all of which occurred prior to the merger becoming effective July 31, 2002.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

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 of America. 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, as amended, for the year ended December 31, 2001. Certain 2001 amounts
have been reclassified to conform to the 2002 presentation.

In our opinion, the accompanying unaudited condensed consolidated interim
financial statements reflect all adjustments, which are of a normal and
recurring nature, necessary for a fair presentation of the financial condition
and results of operations and cash flows for the periods presented. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires us to make
estimates and assumptions.

7



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Such estimates and assumptions affect the reported amounts of assets and
liabilities, as well as the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Our actual results could differ from
those estimates. The results of operations for the interim periods are not
necessarily indicative of the results for the entire year.

Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information requires a public entity to
report selected information about operating segments in financial reports
issued to shareholders. Based on the guidance provided in the standard, we
have determined that our business is conducted in one reportable segment. The
standard also establishes requirements for related disclosures about products
and services, geographic areas and major customers. Revenues for Canadian
operations totaled $5,882 and $6,061 for the three months ended June 30, 2002
and 2001, respectively. Revenues for Canadian operations totaled $10,407 and
$11,583 for the six months ended June 30, 2002 and 2001, respectively.

Our interest rate risk management objective is to limit the impact of interest
rate changes on earnings and cash flows. We assess interest rate cash flow
risk by continually identifying and monitoring changes in interest rate
exposures that may adversely impact expected future cash flows, and by
evaluating hedging opportunities. We do not enter into derivative instruments
for any purpose other than cash flow hedging purposes.

Our interest rate swap agreements were initially designated as hedges against
changes in future cash flows associated with specific variable rate debt
obligations. As of June 30, 2002, we had three swap agreements with notional
amounts totaling $300 million. All of these swap agreements have been
converted to non-hedging derivatives due to our repayment of the floating-rate
borrowings they originally hedged, and they are currently being marked to market
through our statement of operations. We have interest rate exposure going
forward as the change in fair value of our non-hedging derivatives will have an
impact on our statement of operations. The interest rate swap agreements are
reflected at fair value in our consolidated balance sheet as of June 30, 2002.
For more information regarding our interest rate hedging activities, see
Quantitative and Qualitative Disclosures about Market Risk.

New Accounting Pronouncements

In July 2002, the Financial Accounting Standards Board issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. If we
enter into these transactions in the future, we will have to evaluate the
effects this new standard will have on our financial statements. The
provisions of this statement are to be applied prospectively to exit or
disposal activities initiated after December 31, 2002.

In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment of SFAS No. 13,
Technical Corrections. We plan to adopt this statement on January 1, 2003.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment of Disposal of Long-Lived Assets, which
supersedes SFAS No. 121. The provisions of SFAS No. 144 were effective on
January 1, 2002 for our financial statements. We did not have any asset sales
or impairments in the first six months of 2002; therefore, SFAS No. 144 has no
effect on our financial statements for the three and six months ended June 30,
2002.

3. NOTE RECEIVABLE FROM MANAGEMENT COMPANY

Under a revolving credit agreement with Interstate Hotels, we lent, from time to time
Interstate Hotels up to $50,000 for general corporate purposes. The interest rate on this credit agreement was 650 basis points over
the 30-day London Interbank Offered Rate. As of June 30, 2002, $46,000 was
outstanding under this revolving credit agreement.

Interstate Hotels also issued us a term note effective January 1, 2002. This
$13,069 term note refinanced outstanding accounts payable Interstate Hotels owed
to us. The term loan bore interest at 650 basis points over the 30-day LIBOR.
The maturity date was the same as that of the revolving credit agreement.

The repayment of the credit agreement and term note were subordinate to MeriStar
Hotels bank debt.

8



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##### 



In connection with the merger that created Interstate Hotels on July 31, 2002, Interstate Hotels paid
$3,000 to reduce its borrowings outstanding on the credit
agreement. Also, the credit agreement and term note were amended
and combined into a term loan agreement with a principal balance of $56,069 and a maturity date of July 31, 2007.

4. LONG-TERM DEBT

Long-term debt consisted of the following:

|                           |  |               |           |                   |  |   |           |  
|-------------------------- |  | ------------- | --------- | ----------------- |  | - | --------- | -
|                           |  | June 30, 2002 |           | December 31, 2001
|                           |  |               |           |                  
|Senior unsecured notes     |  | $             | 950,000   |                   |  | $ | 750,000   |  
|Credit facility            |  |               |          |                   |  |   | 224,000   |  
|Secured facility           |  |               | 317,258   |                   |  |   | 319,788   |  
|Subordinated notes         |  |               | 205,000   |                   |  |   | 205,000   |  
|Convertible notes          |  |               | 154,300   |                   |  |   | 154,300   |  
|Mortgage debt and other    |  |               | 51,025    |                   |  |   | 52,335    |  
|Unamortized issue discount |  |               | (8,448    | )                 |  |   | (5,289    | )
|                           |  |               |           |                   |  |   |           |  
|                           |  | $             | 1,669,135 |                   |  | $ | 1,700,134 |  
|                           |  |               |           |                   |  |   |           |  

As of June 30, 2002 aggregate future maturities of the above obligations are as
follows:

|           |  |   |          
|---------- |  | - | ---------
|2002       |  | $ | 12,155   
|2003       |  |   | 8,584    
|2004       |  |   | 171,164  
|2005       |  |   | 9,259    
|2006       |  |   | 10,001   
|Thereafter |  |   | 1,457,972
|           |  |   |          
|           |  | $ | 1,669,135
|           |  |   |          

In February 2002, we issued an additional $200,000 ($196,250, net of discount)
aggregate principal amount of 9.13% senior unsecured notes due 2011. We used
the proceeds from the issuance of these notes to repay approximately $195,000
of the outstanding balance under our revolving credit agreement. As a result
of this financing, we redesignated some swap agreements as non-hedging
derivatives. We recognized a $4,735 loss when this amount was transferred out
of accumulated other comprehensive income because the debt being hedged was
repaid.

In February 2002, we amended our revolving credit agreement. The amendment
allows us to reduce the revolving commitments to below $300,000. In March
2002, we reduced the borrowing capacity on our revolving credit agreement from
$310,000 to $150,000. We recognized a $1,529 loss due to the write-off of
deferred financing costs related to reducing the borrowing capacity of our
revolving credit agreement.

5. DIVIDENDS AND DISTRIBUTIONS PAYABLE

On June 26, 2002, we declared a dividend for the three months ended June 30, 2002
of $0.01 per share of common stock. The record date for the dividend was July 15, 2002 and we paid the dividend on July 31,
2002.

9



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6. EARNINGS PER SHARE

The following table presents the computation of basic and diluted earnings per
share:

|                                                                            |                             |   |                    |       |                  |   |        |       |      |   |        |   |  |   |        |       | 
|--------------------------------------------------------------------------- | --------------------------- | - | ------------------ | ----- | ---------------- | - | ------ | ----- | ---- | - | ------ | - |  | - | ------ | ----- | 
|                                                                            |                             |   | Three months ended |       | Six months ended
|                                                                            |                             |   |                    |       |                 
|                                                                            |                             |   | June 30,           |       | June 30,        
|                                                                            |                             |   |                    |       |                 
|                                                                            |                             |   | 2002               |       | 2001             |   | 2002   |       | 2001
|                                                                            |                             |   |                    |       |                  |   |        |       |     
|BASIC EARNINGS (LOSS) PER SHARE
COMPUTAION:                                 |                             |   |                    |       |                  |   |        |       |      |   |        |   |  |   |        |      
|Income (loss) before extraordinary
loss                                     |                             | $ | 2,973              |       |                  | $ | 24,560 |       |      | $ | (6,970 | ) |  | $ | 37,599 |      
|Dividends paid on unvested restricted
stock                                 |                             |   | (2                 | )     |                  |   | (202   | )     |      |   | (3     | ) |  |   | (403   | )    
|                                                                            |                             |   |                    |       |                  |   |        |       |      |   |        |   |  |   |        |      
|Income (loss) applicable to common
stockholders                             |                             | $ | 2,971              |       |                  | $ | 24,358 |       |      | $ | (6,973 | ) |  | $ | 37,196 |      
|                                                                            |                             |   |                    |       |                  |   |        |       |      |   |        |   |  |   |        |      
|Weighted average number of shares
of common stock outstanding               |                             |   | 44,955             |       |                  |   | 44,472 |       |      |   | 44,754 |   |  |   | 44,483 |      
|                                                                            |                             |   |                    |       |                  |   |        |       |      |   |        |   |  |   |        |      
|Basic earnings (loss) per share before
extraordinary loss                   |                             | $ | 0.07               |       |                  | $ | 0.55   |       |      | $ | (0.16  | ) |  | $ | 0.84   |      
|                                                                            |                             |   |                    |       |                  |   |        |       |      |   |        |   |  |   |        |      
|DILUTED EARNINGS (LOSS) PER SHARE
COMPUTATION:                              |                             |   |                    |       |                  |   |        |       |      |   |        |   |  |   |        |      
|Income (loss) applicable to common
stockholders                             |                             | $ | 2,971              |       |                  | $ | 24,358 |       |      | $ | (6,973 | ) |  | $ | 37,196 |      
|Minority interest, net of tax                                               |                             |   | 104                |       |                  |   | 1,982  |       |      |   |       |   |  |   | 3,054  |      
|Interest on convertible debt, net of
tax                                    |                             |   |                   |       |                  |   | 1,796  |       |      |   |       |   |  |   | 3,591  |      
|Dividends on unvested restricted
Stock                                      |                             |   |                   |       |                  |   | 8      |       |      |   |       |   |  |   |       |      
|                                                                            |                             |   |                    |       |                  |   |        |       |      |   |        |   |  |   |        |      
|Adjusted net income (loss)                                                  |                             | $ | 3,075              |       |                  | $ | 28,144 |       |      | $ | (6,973 | ) |  | $ | 43,841 |      
|                                                                            |                             |   |                    |       |                  |   |        |       |      |   |        |   |  |   |        |      
|Weighted average number of shares of
common stock outstanding               |                             |   | 44,955             |       |                  |   | 44,472 |       |      |   | 44,754 |   |  |   | 44,483 |      
|Common stock equivalents:                                                   |                             |   |                    |       |                  |   |        |       |      |   |        |   |  |   |        |      
|                                                                            | Operating partnership units |   |                    | 3,420 |                  |   |        | 4,236 |      |   |        |  |  |   |        | 4,265 | 
|                                                                            | Stock options               |   |                    | 75    |                  |   |        | 403   |      |   |        |  |  |   |        | 359   | 
|                                                                            | Convertible debt            |   |                    |      |                  |   |        | 4,538 |      |   |        |  |  |   |        | 4,538 | 
|                                                                            | Restricted stock            |   |                    |      |                  |   |        | 16    |      |   |        |  |  |   |        |      | 
|                                                                            |                             |   |                    |       |                  |   |        |       |      |   |        |   |  |   |        |      
|Total weighted average number of
diluted shares of common stock
outstanding |                             |   | 48,450             |       |                  |   | 53,665 |       |      |   | 44,754 |   |  |   | 53,645 |      
|                                                                            |                             |   |                    |       |                  |   |        |       |      |   |        |   |  |   |        |      
|Diluted earnings (loss) per share
before
extraordinary loss                 |                             | $ | 0.06               |       |                  | $ | 0.52   |       |      | $ | (0.16  | ) |  | $ | 0.82   |      
|                                                                            |                             |   |                    |       |                  |   |        |       |      |   |        |   |  |   |        |      

Stock options, operating partnership units, convertible debt and restricted
stock are not included in the computation of diluted earnings (loss) per share
when their effect is antidilutive.

10



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7.       SUPPLEMENTAL CASH FLOW INFORMATION

| |                                                                          |                                       |                                 |        |                           |   |      |        |        |        | 
| | ------------------------------------------------------------------------ | ------------------------------------- | ------------------------------- | ------ | ------------------------- | - | ---- | ------ | ------ | ------ | 
| |                                                                          |                                       |                                 |        | Six months ended June 30,
| |                                                                          |                                       |                                 |        |                          
| |                                                                          |                                       |                                 |        | 2002                      |   | 2001
| |                                                                          |                                       |                                 |        |                           |   |     
| | Cash paid for interest and income taxes:                                 |                                       |                                 |        |                           |   |      |        |       
| | Interest, net of capitalized interest of
$1,947 and $3,822 respectively  |                                       | $                               | 60,454 |                           |   | $    | 44,274 |       
| | Income taxes                                                             |                                       |                                 | 602    |                           |   |      | 574    |       
| | Non-cash investing and financing activities:                             |                                       |                                 |        |                           |   |      |        |       
| | Issuance of POPs                                                         |                                       |                                 | 2,894  |                           |   |      |       |       
| | Conversion of OP Units to Common Stock                                   |                                       |                                 | 6,146  |                           |   |      | 2,845  |       
| | Operating assets received and liabilities assumed from lease conversion: |                                       |                                 |        |                           |   |      |        |       
| |                                                                          | Accounts receivable                   |                                 | $      |                          |   |      | $      | 47,200 |       
| |                                                                          | Prepaid expenses and other            |                                 |        |                          |   |      |        | 13,500 |       
| |                                                                          | Furniture and fixtures, net           |                                 |        |                          |   |      |        | 152    |       
| |                                                                          | Investment in affiliates, net         |                                 |        |                          |   |      |        | 1,629  |       
| |                                                                          |                                       |                                 |        |                           |   |      |       
| |                                                                          |                                       | Total operating assets received |        | $                         |  |      |        | $      | 62,481 | 
| |                                                                          |                                       |                                 |        |                           |   |      |       
| |                                                                          | Accounts payable and accrued expenses |                                 | $      |                          |   |      | $      | 65,706 |       
| |                                                                          | Long-term debt                        |                                 |        |                          |   |      |        | 32     |       
| |                                                                          |                                       |                                 |        |                           |   |      |       
| |                                                                          | Total liabilities acquired            |                                 | $      |                          |   |      | $      | 65,738 |       
| |                                                                          |                                       |                                 |        |                           |   |      |       

8.     STOCK-BASED COMPENSATION

As of June 30, 2002, we have granted 481,500 shares of restricted stock to
employees. This restricted stock vests ratably over three-year or five-year
periods. As a result of issuing this restricted stock, we have $2,236 of
unearned stock-based compensation recorded as a reduction to stockholders
equity on our condensed consolidated balance sheet as of June 30, 2002.

As of June 30, 2002, we have granted 900,000 Profits-Only OP Units, or POPs, to
some of our employees pursuant to our POPs Plan. These POPs are fixed awards
and vest over three-year or four-year periods. As a result of issuing these
POPs, we have $4,025 of unearned stock-based compensation recorded as a
reduction to stockholders equity on our condensed consolidated balance sheet
as of June 30, 2002.

9.     RESTRUCTURING EXPENSES

During the third quarter of 2001, we incurred a restructuring charge of $1,080 in connection with
operational changes at our corporate headquarters. The restructuring included
eliminating seven corporate staff positions and office space no longer needed
under the new structure. During 2002, we applied $104 of lease costs against the restructuring reserve. Approximately $288 of the
restructuring accrual remains at June 30, 2002.

10.     CONSOLIDATING FINANCIAL INFORMATION

We and certain subsidiaries of MeriStar Hospitality Operating Partnership, L.P.
(MHOP), our subsidiary operating partnership, are guarantors of senior
unsecured notes issued by MHOP. MHOP and certain of its subsidiaries are
guarantors of our unsecured subordinated notes. We own a one percent general
partner interest in MHOP and MeriStar LP, Inc., our wholly-owned subsidiary,
owns approximately a 90 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
information for MHOP, including each of the guarantor subsidiaries. This
exhibit presents MHOPs consolidating balance sheets as of June 30, 2002 and
December 31, 2001, consolidating statements of operations

11



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##### 



for each of the three and six months ended June 30, 2002 and 2001, and
consolidating cash flows for the six months ended June 30, 2002 and 2001.

11. SUBSEQUENT EVENT

On August 1, 2002 we sold 3 hotels for
$25,150. The aggregate carrying amount of the hotel properties
was approximately $24,000.
As of June 30, 2002 the sale of these
assets was not yet considered probable and therefore we did not meet all of the criteria required according
to SFAS No. 144 to reclassify these hotels as held for sale on our Balance Sheet and reclassify the operations
of these hotels to discontinued operations on our Statement of Operations.

12



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

GENERAL

We own a portfolio of upscale, full-service hotels in the United States and
Canada. Our portfolio is diversified by franchise and brand affiliations. As
of June 30, 2002, we owned 112 hotels, with 28,653 rooms, all of which were
leased by our taxable subsidiaries and managed by Interstate Hotels & Resorts,
Inc, which was created on July 31, 2002 through the merger of MeriStar Hotels & Resorts, Inc. and
Interstate Hotels Corporation, with MeriStar Hotels &
Resorts, Inc. surviving the merger and
changing its name to Interstate Hotels & Resorts Inc.

We were created on August 3, 1998, when American General Hospitality
Corporation, a corporation operating as a real estate investment trust, and its
associated entities merged with CapStar Hotel Company and its associated
entities. In connection with the merger between CapStar and American General,
we created MeriStar Hotels, a separate publicly traded company, to be the
lessee and manager of nearly all of our hotels.

On January 1, 2001, changes to the federal tax laws governing REITs became
effective. Those changes are commonly known as the REIT Modernization Act, or
RMA. The RMA permits real estate investment trusts to create taxable
subsidiaries that are subject to taxation similar to subchapter C-Corporations.
We have created a number of these taxable subsidiaries to lease our real
property. The RMA prohibits our taxable subsidiaries from engaging in the
following activities:



| |  |  | managing the properties they lease (our taxable subsidiaries must
enter into an arms length management agreement with an independent
third-party manager actively involved in the trade or business of
hotel management and manages properties on behalf of other owners);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | leasing a property that contains gambling operations; and                                                                                                                                                                                                                   
| |  |  | owning a brand or franchise.                                                                                                                                                                                                                                                

We believe establishing taxable subsidiaries to lease the properties we own
provides an efficient alignment of and ability to capture the economic
interests of property ownership. Our taxable subsidiaries are parties to
management agreements with a subsidiary of Interstate Hotels to manage our
hotels. Under these management agreements, the taxable subsidiaries pay a
management fee to Interstate Hotels for each property. Our taxable subsidiaries
in turn make rental payments to us under the participating leases. Under the
management agreements, the base management fee is 2.5% of total hotel revenue.
Interstate Hotels can also earn incentive management fees, based on meeting
performance thresholds, of up to 1.5% of total hotel revenue. All of the
agreements, except for four agreements with terms that renew annually, have an
initial term of 10 years with three renewal periods of five years each at the
option of Interstate Hotels, subject to some exceptions.

In connection with the proposed merger of MeriStar Hotels
with Interstate Hotels Corporation, our Board of Directors established a Special
Committee consisting solely of directors not affiliated with MeriStar Hotels. The
Special Committee, with the assistance of its outside counsel, reviewed the terms of
the merger and the effect of the merger on us and recommended to the full Board
that we (i) consent to the proposed merger, (ii) waive any of our rights to terminate the Intercompany Agreement or any
of the management agreements on our hotels between MeriStar Hotels and us
as a result of the merger and (iii) amend our revolving credit and term loan agreements with MeriStar Hotels subject to
documentation and various conditions including the payment to us of $3.0 million to
reduce MeriStar Hotels borrowings under our credit agreement with them. At
a meeting of the full Board of Directors on April 30, 2002, the Board approved
the recommendations of the Special Committee subject to final documentation and
satisfaction  of the conditions, all of which occurred prior to the merger becoming effective July 31, 2002.

During 2001, we acquired the eight leases from Prime Hospitality for our hotels
that were previously leased and managed by Prime. These hotels are now managed
by Interstate Hotels under management agreements identical to our other
management agreements with Interstate Hotels, except that the term on four of the
agreements is one year with additional one year renewal periods.

Business Summary

Our results continue to reflect a slowed economy which has caused substantial
declines in business and leisure travel demand nationwide. Our group business
improved during the first two quarters of 2002 but our transient business
continues to be significantly lower than prior to the terrorist attacks on
September 11, 2001, and also lower than our internal projections for 2002.
Overall, our occupancies were ahead of our internal plan for the first half of
2002, but our average daily rate was lower than we projected. We will continue
to work with Interstate Hotels to focus on cost reduction
and control measures at our hotels. We expect year-over-year performance
measures to improve in late 2002 and in 2003 when the economy is expected to
gain momentum.

13



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The September 11, 2001 terrorist attacks have had a dramatic effect on the
insurance and reinsurance industries.

Companies in all industry segments are experiencing increases in premiums
and restriction of coverage upon renewal of their insurance programs. Some
have experienced an inability to obtain insurance. Our secured facility
requires our property insurance carriers to be rated AA or better by
Standard & Poor, or S&P. Our manager, Interstate Hotels, is responsible for
securing property insurance for our properties. In June 2002, Interstate Hotels renewed all expiring
programs and obtained coverage from carriers that are appropriately rated
by S&P. As the effects of the terrorist attacks on September 11, 2001
are more fully reflected on the financial statements of insurers and
reinsurers, however, their ratings may change. If we are unable to
maintain insurance that meets our debt covenant requirements and if we are
unable to amend or waive those covenants, it could have a material adverse
effect on our business. Our total annual property and casualty insurance
premiums are approximately $31 million under our renewed policies.

Critical Accounting Policies

Preparing financial statements in conformity with accounting principles
generally accepted in the United States of America 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 on-going 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 are as follows:

| |  |  | Impairment of long-lived assets;                                                      
| | - |  | --------------------------------------------------------------------------------------
| |  |  | Estimating certain accrued liabilities; and                                           
| |  |  | Determining the impact of future interest rate changes on our statement of operations.

Impairment of long-lived assets

Whenever events or changes in circumstances indicate that the carrying value
of a long-lived asset (including property and equipment and all intangibles) may
be impaired, we perform an analysis to determine the recoverability of the
assets carrying value. The carrying value of the asset includes the original
purchase price (net of depreciation) plus the cost of all capital improvements
(net of depreciation). We make estimates of the undiscounted cash flows from
the expected future operations of the asset. If the analysis indicates that
the carrying value is not recoverable from future cash flows, we write down the
asset to estimated fair value and recognize an impairment loss. Any
impairment losses we recognize are recorded as operating expenses. We did not
recognize any impairment losses for the six months ended 2002 or 2001.

Estimating certain accrued liabilities

Estimates for certain accruals such as real and personal property taxes could
have a material effect on our financial statements. Currently, we estimate
real and personal property taxes based on a combination of preliminary
estimates from state and local jurisdictions, and historical information. The
assessed values of these properties could change significantly from the values
or rates we use in our estimates.

Property tax assessments are subject to periodic and often lengthy appeals.
For example, in instances where a jurisdiction increases our assessed value, we
frequently appeal that assessment. Similarly, when hotel operations are
declining, we may appeal an assessment as too high if it is based on past
operating results. These appeals of assessed values are subject to a
potentially wide range of outcomes. As a result of the economic slowdown and
events of September 11, 2001, we have filed a number of appeals for lower
assessments. As of June 30, 2002, we had ongoing appeals in several
jurisdictions with respect to approximately 20 properties. We accrue for property tax
liabilities based on what we believe is a reasonable judgment of the most
likely outcome of the appeals. We believe our experience in pursuing
reductions through the appeals process is very favorable  for example, during
the second quarter of 2002 we completed the appeals process for 1997 through
2001 for three properties, resulting in refunds of approximately $2.7 million from
taxing authorities. We cannot predict with certainty the outcome of these
appeals, or their effect on our accruals for such items. Also, actual property
tax expense could vary greatly from our estimates used for the current property
tax accrual based on a change in the assessed value, a change in the tax rate,
and/or a different outcome of the appeals process than we currently expect.
Based on our past experience, however, we do not believe that even the loss of
a substantial number of the appeals would result in any additional expense for
us.

14



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Determining impact of future interest rate changes on our statement of
operations

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
requires a company to recognize all derivatives as either assets or liabilities
in the balance sheet and record those instruments at fair value. SFAS No. 137
and No. 138 amended certain provisions of SFAS No. 133. We adopted these
accounting pronouncements effective January 1, 2001.

Our interest rate risk management objective is to limit the impact of interest
rate changes on earnings and cash flows. We assess interest rate cash flow
risk by continually identifying and monitoring changes in interest rate
exposures that may adversely impact expected future cash flows and by
evaluating hedging opportunities. We do not enter into derivative instruments
for any purpose other than cash flow hedging purposes.

Our interest rate swap agreements were initially designated as hedges against
changes in future cash flows associated with specific variable rate debt
obligations.As of June 30, 2002, we had three swap agreements with notional
amounts totaling $300 million. These swap agreements have been converted to
non-hedging derivatives due to our repayment of the floating-rate borrowings
they originally hedged and they are currently being marked to market through
our statement of operations. We have interest rate exposure going forward as
the change in fair value of our non-hedging derivatives will have an impact on
our statement of operations. During the three and six months ended June 30,
2002, we recognized $3.1 million and $3.1 million of expense, respectively, related to
these interest rate swaps. The fair value of these swap agreements is $8.7 million
at June 30, 2002. For more information regarding our interest rate hedging
activities, see Quantitative and Qualitative Disclosures about Market Risk.

FINANCIAL CONDITION

JUNE 30, 2002 COMPARED WITH DECEMBER 31, 2001

Our total assets decreased by $19.9 million to $2,990.0 million at June 30,
2002 from $3,009.9 million at December 31, 2001 primarily due to:

| |  |  | depreciation on hotel assets of $58.3 million;                                                                        
| | - |  | ----------------------------------------------------------------------------------------------------------------------
| |  |  | the $4.4 million decrease in restricted cash due to property tax payments in 2002; and                                
| |  |  | the $3.1 million decrease in prepaid expenses due to 2002 insurance expenses; partially offset by                     
| |  |  | the $4.8 million increase in accounts receivable due to the improved occupancy since December 31, 2001;               
| |  |  | net additional borrowings by Interstate Hotels of $14.2 million;                                                      
| |  |  | capital expenditures of $24.8 million at the hotels; and                                                              
| |  |  | the $4.0 million increase in cash and cash equivalents due to net
borrowings in 2002 offset by our operating activity.

Total liabilities decreased by $21.3 million to $1,876.2 million at June 30,
2002 from $1,897.5 million at December 31, 2001 due mainly to:

| |  |  | net payments of long-term debt of $31.0 million;                                                                                                                                        
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | a $3.4 million decrease in market value of our derivative instruments; and                                                                                                              
| |  |  | a $2.9 million decrease in accounts payable, accrued expenses
and other liabilities due to the timing of payables; partially offset by                                                  
| |  |  | a $9.1 million increase in due to Interstate Hotels primarily due
to our quarterly workers compensation and general liability insurance
which has not been paid as of June 30, 2002; and
| |  |  | a $8.2 million increase in accrued interest following the
issuances of our senior unsecured debt in December 2001 and February
2002;                                                    

Long-term debt decreased by $31.0 million to $1,669.1 million at June 30, 2002
from $1,700.1 million at December 31, 2001 due primarily to:

| |  |  | $224.0 million of net repayments on our revolving credit
facility using proceeds of the issuance of senior unsecured notes in
February and cash generated by operations; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | $2.5 million of net repayments on our secured facility; partially offset by                                                                                                 
| |  |  | $200.0 million ($196.2 million, net of discount) in senior unsecured notes issued in February.                                                                              

15



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Minority interest decreased by $3.9 million to $85.9 million at June 30, 2002
from $89.8 million at December 31, 2002 due mainly to:

| |  |  | $6.1 million of net redemptions of operating partnership units for common stock;                   
| | - |  | ---------------------------------------------------------------------------------------------------
| |  |  | $0.4 million of current year net losses allocated to minority interest holders; partially offset by
| |  |  | $2.9 million of POPs awarded to certain employees.                                                 

Stockholders equity increased $5.3 million to $1,027.9 million at December 31,
2001 from $1,022.6 million at December 31, 2001 due primarily to:

| |  |  | $6.1 million of net redemptions of operating partnership units for common stock;                                                                                   
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | $3.1 million of exercised stock options; and                                                                                                                       
| |  |  | a $6.1 million decrease in accumulated other comprehensive loss
due mainly to the conversion of our swap agreements to non-hedging
derivatives; partially offset by
| |  |  | the $7.0 million of net loss for the first half of 2002; and                                                                                                       
| |  |  | $2.9 million of POPs awarded to certain employees.                                                                                                                 

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2002 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2001

The following table provides our hotels operating statistics on a same store
basis for the three months ended June 30, 2002 and 2001.

|                           |  |      |        |      |  |        |        |   |  |  |       |   
|-------------------------- |  | ---- | ------ | ---- |  | ------ | ------ | - |  |  | ----- | --
|                           |  | 2002 |        | 2001 |  | Change
|                           |  |      |        |      |  |       
|Revenue per available room |  | $    | 70.60  |      |  | $      | 79.61  |   |  |  | (11.3 | )%
|Average daily rate         |  | $    | 101.65 |      |  | $      | 109.48 |   |  |  | (7.2  | )%
|Occupancy                  |  |      | 69.5   | %    |  |        | 72.7   | % |  |  | (4.4  | )%

Overall, the slowing United States economy had a major negative effect on our
hotels during the second quarter of 2002 compared to the second quarter of
2001. This effect is evidenced by a sharp reduction in transient business
travel. This is reflected in the 7.2% reduction in average daily rate and the
4.4% reduction in occupancy in the second quarter 2002 compared to 2001. Our
group and leisure business has been stronger than transient business travel in
most markets.

Total revenue decreased $25.9 million to $281.3 million in 2002 from $307.2 million in 2001 primarily due to:

| |  |  | a $19.0 million decrease in room revenue due to a decrease in occupancy and average daily rate;               
| | - |  | --------------------------------------------------------------------------------------------------------------
| |  |  | a $2.2 million decrease in food and beverage revenue due to a decrease in occupancy; and                      
| |  |  | a $3.8 million decrease in lease revenue following the termination of our hotel leases with Prime Hospitality.

Total operating expenses decreased $5.9 million to $243.9 for the three months
ended June 30, 2002 compared to $249.7 million for the same period in 2001 due
primarily to:

| |  |  | a $3.1 million decrease in room expenses due to lower occupancy;                                                                                                                            
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | a $2.0 million decrease in food and beverage expenses due to lower occupancy;                                                                                                               
| |  |  | a $0.8 million decrease in property operating costs due to a $0.9 million decrease in franchise costs                                                                                       
| |  |  | $3.8 million in Felcor merger costs during 2001; and                                                                                                                                        
| |  |  | $1.3 million of costs to terminate leases with Prime Hospitality Corporation; partially offset by                                                                                           
| |  |  | a $2.7 million increase in depreciation and amortization expenses; and                                                                                                                      
| |  |  | a $3.1 million increase in expense for non-hedging derivatives for the three months ended June 30,
2002 due to our three swap agreements being converted to non-hedging
derivatives in 2002.

Expense for non-hedging derivatives represents the change in fair value of our non-hedging
derivatives, net of cash payments to the counterparty.

Interest expense increased $4.1 million to $34.1 million for the three months
ended June 30, 2002 compared to $30.0 million for the same period in 2001 due
primarily to the issuance of $250 million of senior secured notes in December
2001 and $200 million of senior secured notes in February 2002 at fixed rates
greater than the variable rate of the debt that was repaid.

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SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2001

The following table provides our hotels operating statistics on a same store
basis for the six months ended June 30, 2002 and 2001.

|                           |  |      |        |      |  |        |        |   |  |  |       |   
|-------------------------- |  | ---- | ------ | ---- |  | ------ | ------ | - |  |  | ----- | --
|                           |  | 2002 |        | 2001 |  | Change
|                           |  |      |        |      |  |       
|Revenue per available room |  | $    | 68.53  |      |  | $      | 80.33  |   |  |  | (14.7 | )%
|Average daily rate         |  | $    | 103.20 |      |  | $      | 112.45 |   |  |  | (8.2  | )%
|Occupancy                  |  |      | 66.4   | %    |  |        | 71.4   | % |  |  | (7.0  | )%

Overall, the slowing United States economy had a major negative effect on our
hotels during the first half of 2002 compared to the first half of 2001. This
effect is evidenced by a sharp reduction in transient business travel. This is
reflected in the 8.2% reduction in average daily rate and the 7.0% reduction in
occupancy in the first half of 2002 compared to 2001. Our group and leisure
business has been stronger than transient business travel in most markets.

Total revenue decreased $72.0 million to $537.9 million in 2002 from $609.9 million in 2001 primarily due to:

| |  |  | a $48.8 million decrease in room revenue due to a decrease in occupancy and average daily rate;               
| | - |  | --------------------------------------------------------------------------------------------------------------
| |  |  | a $11.4 million decrease in food and beverage revenue due to a decrease in occupancy; and                     
| |  |  | a $7.5 million decrease in lease revenue following the
termination of our hotel leases with Prime Hospitality.

Total operating expenses decreased $29.6 million to $476.8 for the six months
ended June 30, 2002 compared to $506.4 million for the same period in 2001 due
primarily to:

| |  |  | a $9.9 million decrease in room expenses due to lower occupancy;                                                                                                                                        
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | a $9.0 million decrease in food and beverage expenses due to lower occupancy;                                                                                                                           
| |  |  | a $6.1 million decrease in property operating costs due primarily
to a $2.4 million decrease in franchise costs, a $1.9 million decrease
in energy costs and a $1.6 million decrease in management fees;
| |  |  | $9.3 million in swap termination fees during 2001; and                                                                                                                                                  
| |  |  | a $2.1 million write down of investment in STS Hotel Net during 2001;                                                                                                                                   
| |  |  | $3.8 million in Felcor merger costs during 2001; and                                                                                                                                                    
| |  |  | $1.3 million of costs to terminate leases with Prime Hospitality Corporation; partially offset by                                                                                                       
| |  |  | a $4.7 million loss on fair value of non-hedging derivatives in
2002 due to the repayment of debt that was originally hedged;                                                                           
| |  |  | a $1.5 million write-off of deferred costs due to the reduction
in our borrowing capacity on our revolving credit agreement in 2002;
and                                                                
| |  |  | a $3.9 million increase in depreciation and amortization expense; and                                                                                                                                   
| |  |  | a $3.1 million increase in
expense for non-hedging derivatives for the six months ended June 30,
2002 due to our three swap agreements being converted to non-hedging
derivatives in 2002.              

Interest expense increased $8.4 million to $68.7 million for the six months
ended June 30, 2002 compared to $60.3 million for the same period in 2001 due
primarily to the issuance of $250 million of senior secured notes in December
2001 and $200 million of senior secured notes in February 2002 at fixed rates
greater than the variable rate of the debt that was repaid.

In 2001, we paid down $300 million of our revolving credit facility. This
resulted in an extraordinary loss of $1.2 million, net of tax.

In the first quarter of 2001, we sold one hotel and received $7.3 million.
This resulted in a loss on the sale of the asset of $1.1 million, net of tax.

FUNDS FROM OPERATIONS

The National Association of Real Estate Investment Trusts or NAREIT defines
Funds from Operations, or FFO as net income (loss), computed in accordance with
generally accepted accounting principles, also called GAAP, excluding gains

17



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(or losses) from sales of properties, plus 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
under GAAP are excluded from the calculation of FFO. We believe FFO is helpful
to investors as a measure of the performance of an equity REIT because, along
with cash flow from operating activities, financing activities and investing
activities, it provides investors with an indication of our ability to incur
and service debt, to make capital expenditures and to fund other cash needs.
FFO does not represent cash generated from operating activities determined by
GAAP and should not be considered as an alternative to net income determined in
accordance with GAAP as an indication of our financial performance or to cash
flow from operating activities determined in accordance with GAAP as a measure
of our liquidity, nor is it indicative of funds available to fund our cash
needs, including our ability to make cash distributions. FFO may include funds
that may not be available for managements discretionary use due to functional
requirements to conserve funds for capital expenditures and property
acquisitions, and other commitments and uncertainties.

We use recurring FFO as a measure of our performance. Recurring FFO represents
FFO, as defined above, adjusted for the impact of non-hedging derivatives and
significant non-recurring items. The following is a reconciliation between
income (loss) before loss on the sale of assets and extraordinary items and
recurring FFO on a diluted basis for the three and six months ended June 30,
2002 and 2001 (in thousands):

|                                                                    |                                                  |   |                         |   |                       |   |        |       |      |   |        |       |  |   |         |       | 
|------------------------------------------------------------------- | ------------------------------------------------ | - | ----------------------- | - | --------------------- | - | ------ | ----- | ---- | - | ------ | ----- |  | - | ------- | ----- | 
|                                                                    |                                                  |   | Three months ended June |   | Six months ended June
|                                                                    |                                                  |   | 30,                     |   | 30,                  
|                                                                    |                                                  |   |                         |   |                      
|                                                                    |                                                  |   | 2002                    |   | 2001                  |   | 2002   |       | 2001
|                                                                    |                                                  |   |                         |   |                       |   |        |       |     
|Income (loss) before loss on sale of assets and
extraordinary items |                                                  | $ | 2,973                   |   |                       | $ | 24,560 |       |      | $ | (6,970 | )     |  | $ | 38,658  |      
|Minority interest to common OP Unit Holders                         |                                                  |   | 104                     |   |                       |   | 1,876  |       |      |   | (664   | )     |  |   | 2,839   |      
|Interest on convertible debt                                        |                                                  |   | 1,833                   |   |                       |   | 1,833  |       |      |   | 3,665  |       |  |   | 3,665   |      
|Hotel depreciation and amortization                                 |                                                  |   | 29,598                  |   |                       |   | 27,613 |       |      |   | 58,249 |       |  |   | 56,232  |      
|Expense for non-hedging derivatives                                 |                                                  |   | 3,090                   |   |                       |   |       |       |      |   | 3,079  |       |  |   |        |      
|Non-recurring items (net of minority interests
and income taxes):   |                                                  |   |                         |   |                       |   |        |       |      |   |        |       |  |   |         |      
|                                                                    | Write down of deferred financing costs           |   |                         |  |                       |   |        |      |      |   |        | 1,490 |  |   |         |      | 
|                                                                    | Loss on fair value of non-hedging derivatives    |   |                         |  |                       |   |        |      |      |   |        | 4,615 |  |   |         |      | 
|                                                                    | Swap termination costs                           |   |                         |  |                       |   |        |      |      |   |        |      |  |   |         | 8,998 | 
|                                                                    | Write down of investment in STS Hotel Net        |   |                         |  |                       |   |        |      |      |   |        |      |  |   |         | 2,046 | 
|                                                                    | Felcor merger costs                              |   |                         |  |                       |   |        | 3,667 |      |   |        |      |  |   |         | 3,667 | 
|                                                                    | Costs to terminate leases with Prime
Hospitality |   |                         |  |                       |   |        | 1,272 |      |   |        |      |  |   |         | 1,272 | 
|                                                                    |                                                  |   |                         |   |                       |   |        |       |      |   |        |       |  |   |         |      
|Recurring FFO                                                       |                                                  | $ | 37,598                  |   |                       | $ | 60,821 |       |      | $ | 63,464 |       |  | $ | 117,377 |      
|                                                                    |                                                  |   |                         |   |                       |   |        |       |      |   |        |       |  |   |         |      

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LIQUIDITY AND CAPITAL RESOURCES

Sources of Cash

We generated $68.1 million of cash from operations during the first six months
of 2002. Our principal sources of liquidity are cash on hand, cash generated
from operations, and funds from external borrowings and debt offerings. We
expect to fund our continuing operations through cash generated by our hotels.
In addition, as of August 9, 2002, we had $122.0 million available under our
revolving credit facility. We also expect to finance hotel acquisitions, hotel
renovations and joint venture investments through a combination of internally
generated cash, external borrowings, and the issuance of OP Units and/or common
stock.

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 and other operating risks described under
the caption, Risk FactorsOperating Risks in our 2001 Annual Report
on Form 10-K;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | Factors that affect our access to bank financing and the capital
markets, including interest rate fluctuations, operational risks and
other risks described under the caption Risk FactorsFinancing Risks
in our 2001 Annual Report on Form 10-K; and                                       
| |  |  | The other factors described under the caption, Forward-Looking
Statements.                                                                                                                                                                                                                   

We must distribute to stockholders at least 90% of our taxable income,
excluding net capital gains to preserve the favorable tax treatment accorded to
real estate investment trusts under the Internal Revenue Code. We expect to
fund such distributions through cash generated from operations and borrowings
on our credit agreement. Due to the sluggish economy, we expect our taxable
income to decrease in 2002 compared to 2001. Any future distributions will be
at the discretion of our Board of Directors and will be determined by factors
including our operating results, capital expenditure requirements, the economic
outlook, the Internal Revenue Service dividend payout requirements for REITs
and such other factors as our Board of Directors deems relevant. We cannot
provide assurance of the amounts of any such distributions that will be made in
the future.

Uses of Cash

We used $30.3 million of cash in investing activities during the first six months of 2002 primarily for:

| |  |  | $10.0 million of notes receivable with Interstate Hotels; and
| | - |  | -------------------------------------------------------------
| |  |  | $24.7 million of capital expenditures at hotels.             

We used $33.8 million of cash from financing activities during the first six months of 2002 primarily for:

| |  |  | $30.1 million of net payments on our credit facilities;                                                                                                                                          
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | $3.6 million for additional deferred financing costs related to
issuing the $200 million of senior unsecured notes in February 2002
and the $250 million senior unsecured notes in December 2001;
| |  |  | $1.2 million of distributions to stockholders and minority investors; partially offset by                                                                                                        
| |  |  | $3.2 million of proceeds from issuances of common stock;                                                                                                                                         

Long-Term Debt

Our revolving credit agreement contains customary compliance measures we must meet to borrow on the facility.
At June 30, 2002, we met all compliance measures in the facility. Based on our current financial forecast,
we believe it is possible we may not meet certain compliance measures at the next compliance measurement date,
September 30, 2002. Our compliance will depend substantially on the financial results from our hotels in
future periods. If we failed to meet a future compliance measure, the availability of funds under our credit
facility might be restricted. We do not, however, currently believe a restriction would have a material impact
on our operations, due to the fact that we had no borrowings outstanding on the facility at
June 30, 2002 and expect to generate sufficient cash flow from operations for our operating purposes. In
addition, we are currently negotiating with our lenders to obtain a new revolving credit facility, with
adjusted covenant measurements that reflect current market conditions. If we do not obtain the new credit
facility, we will negotiate appropriate waivers of the financial covenants with our lenders.

In February 2002, we issued $200 million ($196.2 million, net of discount)
aggregate principal amount of 9.13% senior unsecured notes due 2011. We used
the proceeds from the issuance of these notes to repay approximately $195.0
million of the outstanding balance under our revolving credit agreement. As a
result of this financing, we redesignated some swap agreements as non-hedging
derivatives. We recognized a $4.7 million loss when this amount was
transferred out of accumulated other comprehensive income because the debt
being hedged was repaid.

In February 2002, we amended our revolving credit agreement. The amendment
allows us to reduce the revolving commitments to below $300 million. In March
2002, we reduced the borrowing capacity on our revolving credit agreement from
$310 million to $150 million. We recognized a $1,529 loss due to the write-off
of deferred financing costs related to this reduction in our borrowing
capacity.

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Minimum payments due under our debt obligations as of June 30, 2002 are (in
thousands):

|           |  |   |          
|---------- |  | - | ---------
|2002       |  | $ | 12,155   
|2003       |  |   | 8,584    
|2004       |  |   | 171,164  
|2005       |  |   | 9,259    
|2006       |  |   | 10,001   
|Thereafter |  |   | 1,457,972
|           |  |   |          
|           |  | $ | 1,669,135
|           |  |   |          

As of August 9, 2002, we had
$28.0 million of indebtedness outstanding under our
revolving credit agreement. The weighted average interest rate on borrowings
outstanding under the revolving credit agreement as of June 30, 2002 was 5.9%.

Capital Resources

We make ongoing capital expenditures in order to keep our hotels competitive in
their markets. We expect a combination of internally generated cash and
external borrowings to provide capital for renovation work. Initial renovation
programs for most of our hotels are complete or nearing completion. Once
initial renovation programs for a hotel are completed, we expect to spend
approximately 4% of annual hotel revenues for ongoing capital expenditure
programs. These ongoing programs will include room and facilities
refurbishments, renovations, and furniture and equipment replacements. For the
six months ended June 30, 2002, we spent $21.1 million on renovation and
ongoing property capital expenditure programs. We currently expect to spend
approximately $25.0 million during the remaining two quarters of 2002 for our
ongoing capital expenditure programs.

We believe cash generated by operations, together with anticipated borrowing
capacity under our senior credit agreements, will be sufficient to fund our
existing working capital requirements, ongoing capital expenditures, and debt
service requirements. We believe, however, that our future capital decisions
will also be made in response to specific acquisition and/or investment
opportunities, depending on conditions in the capital and/or other financial
markets.

Seasonality

Demand in the lodging industry is affected by recurring seasonal patterns. For
non-resort properties, demand is lower in the winter months due to decreased
travel and higher in the spring and summer months during peak travel season.
For resort properties, demand is generally higher in winter and early spring.
Since the majority of our hotels are non-resort properties, our operations
generally reflect non-resort seasonality patterns. We have lower revenue,
operating income and cash flow in the first and fourth quarters and higher
revenue, operating income and cash flow in the second and third quarters.

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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from changes in interest rates on long-term debt
obligations that impact the fair value of these obligations. Our policy is to
manage interest rates through the use of a combination of fixed and variable
rate debt. Our interest rate risk management objective is to limit the impact
of interest rate changes on earnings and cash flows and to lower our overall
borrowing costs. To achieve our objectives, we borrow at a combination of
fixed and variable rates, and may enter into derivative financial instruments
such as interest rate swaps, caps and treasury locks in order to mitigate our
interest rate risk on a related financial instrument. We do not enter into
derivative or interest rate transactions for speculative purposes. We have no
cash flow exposure due to general interest rate changes for our fixed long-term
debt obligations.

The table below presents, as of June 30, 2002, the principal amounts (in
thousands of dollars) for our fixed and variable rate debt instruments,
weighted-average interest rates, and fair values by year of expected maturity
to evaluate the expected cash flows and sensitivity to interest rate changes.

|                      |  |                |           |      |  |                  |     |          |  |                  |   |  |  |  |     | 
|--------------------- |  | -------------- | --------- | ---- |  | ---------------- | --- | -------- |  | ---------------- | - |  |  |  | --- | 
|                      |  | Long-term Debt
|                      |  |               
|                      |  |                |           |      |  | Average Interest |     | Variable |  | Average Interest
|Expected Maturity     |  | Fixed Rate     |           | Rate |  | Rate             |     | Rate    
|                      |  |                |           |      |  |                  |     |         
|2002                  |  | $              | 12,155    |      |  |                  | 8.6 | %        |  | $                |  |  |  |  | N/A | 
|2003                  |  |                | 8,584     |      |  |                  | 7.6 | %        |  |                  |  |  |  |  | N/A | 
|2004                  |  |                | 171,164   |      |  |                  | 5.1 | %        |  |                  |  |  |  |  | N/A | 
|2005                  |  |                | 9,259     |      |  |                  | 8.1 | %        |  |                  |  |  |  |  | N/A | 
|2006                  |  |                | 10,001    |      |  |                  | 8.1 | %        |  |                  |  |  |  |  | N/A | 
|Thereafter            |  |                | 1,457,972 |      |  |                  | 9.0 | %        |  |                  |  |  |  |  | N/A | 
|                      |  |                |           |      |  |                  |     |          |  |                  |   |  |  |  |     | 
|Total                 |  | $              | 1,669,135 |      |  |                  | 8.6 | %        |  | $                |  |  |  |  | N/A | 
|                      |  |                |           |      |  |                  |     |          |  |                  |   |  |  |  |     | 
|Fair Value at 6/30/02 |  | $              | 1,589,191 |      |  |                  |     |          |  | $                |  |  |  |  |     | 
|                      |  |                |           |      |  |                  |     |          |  |                  |   |  |  |  |     | 

Upon the issuance in February 2002 of $200 million aggregate principal amount
of 9.13% senior unsecured notes due 2011, we reduced the borrowings under our
senior secured credit agreement by $195.0 million. As a result of this financing,
we redesignated two swap agreements as non-hedging derivatives. These swap
agreements had notional principal amounts of approximately $200 million and
were originally designated to hedge variable rate borrowings under our senior
secured credit facility that were repaid. We recognized a $4.7 million loss
when this amount was transferred out of accumulated other comprehensive income
because the debt being hedged was repaid.

As of June 30, 2002, we had three swap agreements with notional principal
amounts totaling $300 million. All of these swap agreements have been
converted to non-hedging derivatives. The swap agreements effectively fix the
30-day LIBOR between 4.77% and 6.4%. The swap agreements expire between
December 2002 and July 2003. For the three months ended June 30, 2002 and 2001,
we have made net payments of approximately $3.1 million and $1.5 million,
respectively. For the six months ended June 30, 2002 and 2001, we have made
net payments of approximately $6.0 million and $1.6 million, respectively.

As of June 30, 2002, 100.0% of our outstanding debt was fixed and our overall weighted average interest
rate was 8.6%.

Although we conduct business in Canada, the Canadian operations were not
material to our consolidated financial position, results of operations or cash
flows during the three months ended March 31, 2002 and 2001. Additionally,
foreign currency transaction gains and losses were not material to our results
of operations for the years ended March 31, 2002 and 2001. Accordingly, we
were not subject to material foreign currency exchange rate risk from the
effects that exchange rate movements of foreign currencies would have on our
future costs or on future cash flows we would receive from our foreign
subsidiaries. To date, we have not entered into any significant foreign
currency forward exchange contracts or other derivative financial instruments
to hedge the effects of adverse fluctuations in foreign currency exchange
rates.

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PART II. OTHER INFORMATION

ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

The annual meeting of the stockholders of the Registrant was held on May 23,
2002.

At that meeting, the following matters were submitted to a vote of the
stockholders of MeriStar Hospitality Corporation:

Item No. 1

To elect directors of the Company.

|                    |  |              |  |  |                      | 
|------------------- |  | ------------ |  |  | -------------------- | 
|Bruce Wiles         |  | For
Withhold |  |  | 37,956,788
1,849,310 | 
|James F. Dannhauser |  | For
Withhold |  |  | 37,956,788
1,849,310 | 
|John Emery          |  | For
Withhold |  |  | 37,915,121
1,890,977 | 
|J. Taylor Crandall  |  | For
Withhold |  |  | 37,951,788
1,854,310 | 

Item No. 2

To ratify the appointment of KPMG LLP as independent auditors for the Company
for the fiscal year ending December 31, 2002

|        |  |  |            | 
|------- |  |  | ---------- | 
|For     |  |  | 37,241,642 | 
|Against |  |  | 2,513,909  | 
|Abstain |  |  | 50,547     | 

Item No. 3

To ratify the stockholder proposal to take measures necessary to change the
Companys jurisdiction of incorporation from Maryland to Delaware.

|         |  |  |            | 
|-------- |  |  | ---------- | 
|For      |  |  | 13,589,975 | 
|Against  |  |  | 17,364,155 | 
|Abstain  |  |  | 1,133,284  | 
|Non-vote |  |  | 7,718,684  | 

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ITEM 5. OTHER INFORMATION

Forward-Looking Statements

Information both included and incorporated by reference in this annual report
on Form 10-K may contain forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act, 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 identifiable by use of the words may, will,
should, expect, anticipate, estimate, believe, intend or project
or the negative of them or other variations of them or comparable terminology.
Factors that 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;
| |  |  | legislative/regulatory changes, including changes to laws governing the taxation of REITs;                
| |  |  | availability of capital;                                                                                  
| |  |  | interest rates;                                                                                           
| |  |  | competition;                                                                                              
| |  |  | supply and demand for hotel rooms in our current and proposed market areas; and                           
| |  |  | changes in general accounting principles, policies and guidelines applicable to REITs.                    

These risks and uncertainties, along with the risk factors set forth in our
Annual Report on Form 10-K for the year ended December 31, 2001 under Risk
Factors, should be considered in evaluating any forward-looking statements
contained in this Form 10-Q.

We undertake no obligation to update or revise any forward-looking statement,
whether as a result of new information, future events, or otherwise, other than
required by law.

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

|     |  |     |  |                                                                                                                                                                                            
|---- |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  | (a) |  | Exhibits                                                                                                                                                                                   
|13   |  |     |  | Unaudited Financial Statements of MeriStar Hospitality Operating
Partnership, L.P. as of June 30, 2002 and December 31, 2001 and for the
three and six months ended June 30, 2002 and 2001.
|99.1 |  |     |  | Unaudited Consolidating Financial Information of MeriStar Hospitality Operating
Partnership, L.P.                                                                                          
|99.2 |  |     |  | Certification of
Chief Executive Officer                                                                                                                                                   
|99.3 |  |     |  | Certification of
Chief Accounting Officer                                                                                                                                                  
|    
|    
|    
|     |  | (b) |  | Reports on Form 8-K                                                                                                                                                                        

Current report on Form 8-K dated and filed May 7, 2002 regarding the first
quarter earnings press release.

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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  
|                      
|Dated: August 13, 2002 |  |                                   
|                       |  | /s/ James A. CalderJames A. Calder
|                       |  | Chief Accounting Officer          

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