##### 









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549


Form 10-Q

|                                                 |  |                                                                                             
|------------------------------------------------ |  | --------------------------------------------------------------------------------------------
|þ                                                |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the quarterly period ended June 30,
    2004
|OR                                              
|                                                
|o                                                |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
    from      to      
|Commission file number: 1-11903                 

MeriStar Hospitality Corporation

(Exact name of registrant as specified in its
charter)


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

(703) 812-7200

(Registrants telephone number, including
area code)


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

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

The number of shares of the registrants
common stock outstanding at July 31, 2004 was 87,258,929.



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##### 



INDEX

|                              |  |                                                                                                               |    |      |    | 
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                              |  |                                                                                                               |    | Page
|                              |  |                                                                                                               |    |     
|PART I. FINANCIAL INFORMATION
|Item 1.                       |  | Financial Statements                                                                                          |    |      |    | 
|                              |  | Consolidated Balance Sheets 
    June 30, 2004 (Unaudited) and December 31, 2003                             |    |      | 2  | 
|                              |  | Consolidated Statements of Operations 
    Three and six months ended June 30, 2004 and 2003
    (Unaudited) |    |      | 3  | 
|                              |  | Consolidated Statements of Cash Flows 
    Six months ended June 30, 2004 and 2003 (Unaudited)               |    |      | 4  | 
|                              |  | Notes to Consolidated Financial Statements
    (Unaudited)                                                    |    |      | 5  | 
|Item 2.                       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                     |    |      | 17 | 
|Item 3.                       |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                |    |      | 35 | 
|Item 4.                       |  | Controls and Procedures                                                                                       |    |      | 36 | 
|PART II. OTHER INFORMATION   
|Item 4.                       |  | Submission of Matters to a Vote of Security
    Holders                                                       |    |      | 37 | 
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                              |    |      | 38 | 
|Signatures                    |  |                                                                                                               | 39 |     

i



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##### 






PART I.          FINANCIAL
INFORMATION




ITEM
1.          FINANCIAL
STATEMENTS



MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED BALANCE SHEETS


(Dollars and shares in thousands, except per
share amounts)


|                                                                                     |                                                                                                               |             |           |              |   |   |           |           |  
|------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------- | ----------- | --------- | ------------ | - | - | --------- | --------- | -
|                                                                                     |                                                                                                               | June 30,    |           |             
|                                                                                     |                                                                                                               | 2004        |           | December 31,
|                                                                                     |                                                                                                               | (Unaudited) |           | 2003        
|                                                                                     |                                                                                                               |             |           |             
|ASSETS                                                                               |                                                                                                               |             |           |              |   |   |           |          
|Property and equipment                                                               |                                                                                                               | $           | 2,633,167 |              |   | $ | 2,481,752 |          
|Accumulated depreciation                                                             |                                                                                                               |             | (488,371  | )            |   |   | (446,032  | )        
|                                                                                     |                                                                                                               |             |           |              |   |   |           |          
|                                                                                     |                                                                                                               |             | 2,144,796 |              |   |   | 2,035,720 |          
|Assets held for sale                                                                 |                                                                                                               |             | 21,826    |              |   |   | 51,169    |          
|Investment in affiliate                                                              |                                                                                                               |             | 15,000    |              |   |   | 15,000    |          
|Prepaid expenses and other assets                                                    |                                                                                                               |             | 41,113    |              |   |   | 47,934    |          
|Accounts receivable, net of allowance for
    doubtful accounts of $3,728 and $2,040 |                                                                                                               |             | 72,173    |              |   |   | 64,709    |          
|Restricted cash                                                                      |                                                                                                               |             | 72,478    |              |   |   | 42,523    |          
|Cash and cash equivalents  unrestricted                                             |                                                                                                               |             | 148,819   |              |   |   | 230,884   |          
|                                                                                     |                                                                                                               |             |           |              |   |   |           |          
|                                                                                     |                                                                                                               | $           | 2,516,205 |              |   | $ | 2,487,939 |          
|                                                                                     |                                                                                                               |             |           |              |   |   |           |          
|                                                                                    
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                             |                                                                                                               |             |           |              |   |   |           |          
|                                                                                    
|Long-term debt                                                                       |                                                                                                               | $           | 1,587,404 |              |   | $ | 1,638,028 |          
|Accounts payable and accrued expenses                                                |                                                                                                               |             | 91,450    |              |   |   | 83,458    |          
|Accrued interest                                                                     |                                                                                                               |             | 41,121    |              |   |   | 46,813    |          
|Due to Interstate Hotels & Resorts                                                   |                                                                                                               |             | 21,887    |              |   |   | 16,411    |          
|Other liabilities                                                                    |                                                                                                               |             | 19,703    |              |   |   | 11,831    |          
|                                                                                     |                                                                                                               |             |           |              |   |   |           |          
|Total liabilities                                                                    |                                                                                                               |             | 1,761,565 |              |   |   | 1,796,541 |          
|                                                                                     |                                                                                                               |             |           |              |   |   |           |          
|Minority interests                                                                   |                                                                                                               |             | 26,880    |              |   |   | 37,785    |          
|Stockholders equity:                                                                |                                                                                                               |             |           |              |   |   |           |          
|                                                                                     | Common stock, par value $0.01 per share
    Authorized  100,000 shares
    Issued  89,307 and 69,135 shares |             |           | 893          |   |   |           | 691       |  
|                                                                                     | Additional paid-in capital                                                                                    |             |           | 1,463,886    |   |   |           | 1,338,959 |  
|                                                                                     | Accumulated deficit                                                                                           |             |           | (693,893     | ) |   |           | (642,094  | )
|                                                                                     | Accumulated other comprehensive loss                                                                          |             |           |             |   |   |           | (977      | )
|                                                                                     | Common stock held in treasury  2,371
    and 2,345 shares                                                    |             |           | (43,126      | ) |   |           | (42,966   | )
|                                                                                     |                                                                                                               |             |           |              |   |   |           |          
|Total stockholders equity                                                           |                                                                                                               |             | 727,760   |              |   |   | 653,613   |          
|                                                                                     |                                                                                                               |             |           |              |   |   |           |          
|                                                                                     |                                                                                                               | $           | 2,516,205 |              |   | $ | 2,487,939 |          
|                                                                                     |                                                                                                               |             |           |              |   |   |           |          

See accompanying notes to the unaudited
consolidated financial statements.

2



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##### 



MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS


UNAUDITED


(Dollars in thousands, except per share
amounts)


|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |          |         | 
|-------------------------------------------------------- | ------------------------------------------------------- | ------------------------------------- | ------- | ---------------- | ------- | ---- | -------- | -------- | ------- | - | ------- | ------- | ------- | - | -------- | -------- | ------- | 
|                                                         |                                                         |                                       |         |                 
|                                                         |                                                         | Three Months Ended                    |         | Six Months Ended
|                                                         |                                                         | June 30,                              |         | June 30,        
|                                                         |                                                         |                                       |         |                 
|                                                         |                                                         | 2004                                  |         | 2003             |         | 2004 |          | 2003    
|                                                         |                                                         |                                       |         |                  |         |      |          |         
|Revenue:                                                 |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|                                                         | Hotel operations:                                       |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |          |        
|                                                         |                                                         | Rooms                                 |         | $                | 143,156 |      |          | $        | 136,911 |   |         | $       | 277,284 |   |          | $        | 266,706 | 
|                                                         |                                                         | Food and beverage                     |         |                  | 59,442  |      |          |          | 56,404  |   |         |         | 110,450 |   |          |          | 107,520 | 
|                                                         |                                                         | Other hotel operations                |         |                  | 17,362  |      |          |          | 19,201  |   |         |         | 34,397  |   |          |          | 35,754  | 
|                                                         | Office rental, parking and other revenue                |                                       |         | 2,929            |         |      |          | 3,453    |         |   |         | 5,828   |         |   |          | 6,716    |        
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Total revenue                                            |                                                         |                                       | 222,889 |                  |         |      | 215,969  |          |         |   | 427,959 |         |         |   | 416,696  |         
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Hotel operating expenses:                                |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|                                                         |                                                         | Rooms                                 |         |                  | 35,046  |      |          |          | 32,467  |   |         |         | 67,795  |   |          |          | 63,163  | 
|                                                         |                                                         | Food and beverage                     |         |                  | 41,739  |      |          |          | 38,789  |   |         |         | 79,923  |   |          |          | 75,646  | 
|                                                         |                                                         | Other hotel operating expenses        |         |                  | 10,864  |      |          |          | 10,936  |   |         |         | 21,162  |   |          |          | 20,392  | 
|Office rental, parking and other expenses                |                                                         |                                       | 670     |                  |         |      | 583      |          |         |   | 1,255   |         |         |   | 1,213    |         
|Other operating expenses:                                |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|                                                         |                                                         | General and administrative, hotel     |         |                  | 32,010  |      |          |          | 31,864  |   |         |         | 65,774  |   |          |          | 62,906  | 
|                                                         |                                                         | General and administrative, corporate |         |                  | 3,473   |      |          |          | 3,132   |   |         |         | 7,106   |   |          |          | 6,105   | 
|                                                         |                                                         | Property operating costs              |         |                  | 31,909  |      |          |          | 30,620  |   |         |         | 62,941  |   |          |          | 59,609  | 
|                                                         |                                                         | Depreciation and amortization         |         |                  | 25,289  |      |          |          | 25,242  |   |         |         | 51,333  |   |          |          | 49,190  | 
|                                                         |                                                         | Property taxes, insurance and other   |         |                  | 16,006  |      |          |          | 17,548  |   |         |         | 32,860  |   |          |          | 34,547  | 
|                                                         |                                                         | Loss on asset impairments             |         |                  | 1,291   |      |          |          | 65,123  |   |         |         | 1,536   |   |          |          | 65,123  | 
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Operating expenses                                       |                                                         |                                       | 198,297 |                  |         |      | 256,304  |          |         |   | 391,685 |         |         |   | 437,894  |         
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Operating income (loss)                                  |                                                         |                                       | 24,592  |                  |         |      | (40,335  | )        |         |   | 36,274  |         |         |   | (21,198  | )       
|Minority interest                                        |                                                         |                                       | 671     |                  |         |      | 10,598   |          |         |   | 1,617   |         |         |   | 14,275   |         
|Interest expense, net                                    |                                                         |                                       | (29,724 | )                |         |      | (34,583  | )        |         |   | (64,103 | )       |         |   | (69,301  | )       
|Loss on early extinguishments of debt                    |                                                         |                                       | (1,980  | )                |         |      |         |          |         |   | (7,903  | )       |         |   |         |         
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Loss before income taxes and discontinued
    operations |                                                         |                                       | (6,441  | )                |         |      | (64,320  | )        |         |   | (34,115 | )       |         |   | (76,224  | )       
|Income tax (expense) benefit                             |                                                         |                                       | (45     | )                |         |      | (12      | )        |         |   | 410     |         |         |   | 164      |         
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Loss from continuing operations                          |                                                         |                                       | (6,486  | )                |         |      | (64,332  | )        |         |   | (33,705 | )       |         |   | (76,060  | )       
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Discontinued operations:                                 |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|                                                         | Loss from discontinued operations before income
    tax |                                       |         | (5,131           | )       |      |          | (142,016 | )       |   |         | (18,314 | )       |   |          | (200,054 | )      
|                                                         | Income tax (expense) benefit                            |                                       |         | 62               |         |      |          | (13      | )       |   |         | 220     |         |   |          | 8        |        
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Loss from discontinued operations                        |                                                         |                                       | (5,069  | )                |         |      | (142,029 | )        |         |   | (18,094 | )       |         |   | (200,046 | )       
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Net loss                                                 |                                                         | $                                     | (11,555 | )                |         | $    | (206,361 | )        |         | $ | (51,799 | )       |         | $ | (276,106 | )       
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Basic loss per share:                                    |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|                                                         | Loss from continuing operations                         |                                       | $       | (0.08            | )       |      | $        | (1.40    | )       |   | $       | (0.45   | )       |   | $        | (1.66    | )      
|                                                         | Loss from discontinued operations                       |                                       |         | (0.06            | )       |      |          | (3.08    | )       |   |         | (0.24   | )       |   |          | (4.37    | )      
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Net loss per basic share                                 |                                                         | $                                     | (0.14   | )                |         | $    | (4.48    | )        |         | $ | (0.69   | )       |         | $ | (6.03    | )       
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Diluted loss per share:                                  |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|                                                         | Loss from continuing operations                         |                                       | $       | (.08             | )       |      | $        | (1.55    | )       |   | $       | (0.45   | )       |   | $        | (1.87    | )      
|                                                         | Loss from discontinued operations                       |                                       |         | (.06             | )       |      |          | (2.92    | )       |   |         | (0.23   | )       |   |          | (4.12    | )      
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         
|Net loss per diluted share                               |                                                         | $                                     | (0.14   | )                |         | $    | (4.47    | )        |         | $ | (0.68   | )       |         | $ | (5.99    | )       
|                                                         |                                                         |                                       |         |                  |         |      |          |          |         |   |         |         |         |   |          |         

See accompanying notes to the unaudited
consolidated financial statements.


3



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##### 



MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS


UNAUDITED


(Dollars in thousands)


|                                                                 |                                                                                               |                                                   |                                                                                |          |        |        |        |          |         |         |  
|---------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------- | ------------------------------------------------------------------------------ | -------- | ------ | ------ | ------ | -------- | ------- | ------- | -
|                                                                 |                                                                                               |                                                  
|                                                                 |                                                                                               | Six Months Ended                                 
|                                                                 |                                                                                               | June 30,                                         
|                                                                 |                                                                                               |                                                  
|                                                                 |                                                                                               | 2004                                              |                                                                                | 2003    
|                                                                 |                                                                                               |                                                   |                                                                                |         
|Operating activities:                                            |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|                                                                 | Net loss                                                                                      |                                                   | $                                                                              | (51,799  | )      |        | $      | (276,106 | )      
|                                                                 | Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities: |                                                   |                                                                                |          |        |        |        |          |        
|                                                                 |                                                                                               | Depreciation and amortization                     |                                                                                |          | 52,585 |        |        |          | 59,055  |        
|                                                                 |                                                                                               | Loss on asset impairments                         |                                                                                |          | 7,441  |        |        |          | 264,677 |        
|                                                                 |                                                                                               | Loss on sale of assets, before tax effect         |                                                                                |          | 11,530 |        |        |          |        |        
|                                                                 |                                                                                               | Loss on early extinguishments of debt             |                                                                                |          | 7,903  |        |        |          |        |        
|                                                                 |                                                                                               | Minority interests                                |                                                                                |          | (1,617 | )      |        |          | (14,275 | )      
|                                                                 |                                                                                               | Amortization of unearned stock-based compensation |                                                                                |          | 1,090  |        |        |          | 1,443   |        
|                                                                 |                                                                                               | Change in value of interest rate swaps            |                                                                                |          |       |        |        |          | (3,395  | )      
|                                                                 |                                                                                               | Deferred income taxes                             |                                                                                |          | (890   | )      |        |          | (2,094  | )      
|                                                                 |                                                                                               | Changes in operating assets and liabilities:      |                                                                                |          |        |        |        |          |         |        
|                                                                 |                                                                                               |                                                   | Accounts receivable                                                            |          |        | (4,227 | )      |          |         | (12,168 | )
|                                                                 |                                                                                               |                                                   | Prepaid expenses and other assets                                              |          |        | 4,864  |        |          |         | 4,225   |  
|                                                                 |                                                                                               |                                                   | Due from/to Interstate Hotels & Resorts                                        |          |        | (3,241 | )      |          |         | (4,575  | )
|                                                                 |                                                                                               |                                                   | Accounts payable, accrued expenses, accrued
    interest and other liabilities |          |        | (5,949 | )      |          |         | (4,977  | )
|                                                                 |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|Net cash provided by operating activities                        |                                                                                               |                                                   | 17,690                                                                         |          |        |        | 11,810 |         
|                                                                 |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|Investing activities:                                            |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|                                                                 | Acquisition of hotels, net of cash acquired of
    $3.5 million                               |                                                   |                                                                                | (182,790 | )      |        |        |         |        
|                                                                 | Capital expenditures for property and equipment                                               |                                                   |                                                                                | (49,898  | )      |        |        | (14,547  | )      
|                                                                 | Proceeds from sales of assets                                                                 |                                                   |                                                                                | 104,873  |        |        |        | 15,720   |        
|                                                                 | Purchases of marketable securities                                                            |                                                   |                                                                                |         |        |        |        | (18,056  | )      
|                                                                 | Payments from Interstate Hotels & Resorts                                                     |                                                   |                                                                                |         |        |        |        | 42,052   |        
|                                                                 | Increase in restricted cash                                                                   |                                                   |                                                                                | (29,955  | )      |        |        | (9,740   | )      
|                                                                 | Costs associated with disposition program and
    other, net                                  |                                                   |                                                                                | (5,081   | )      |        |        | (299     | )      
|                                                                 |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|Net cash (used in) provided by investing
    activities          |                                                                                               |                                                   | (162,851                                                                       | )        |        |        | 15,130 |         
|                                                                 |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|Financing activities:                                            |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|                                                                 | Prepayments on long-term debt                                                                 |                                                   |                                                                                | (105,857 | )      |        |        |         |        
|                                                                 | Proceeds from debt issuance, net of issuance costs                                            |                                                   |                                                                                | 109,687  |        |        |        |         |        
|                                                                 | Scheduled payments on long-term debt                                                          |                                                   |                                                                                | (3,691   | )      |        |        | (4,208   | )      
|                                                                 | Distributions to minority investors                                                           |                                                   |                                                                                | (141     | )      |        |        | (141     | )      
|                                                                 | Proceeds from common stock issuance                                                           |                                                   |                                                                                | 72,340   |        |        |        |         |        
|                                                                 | Purchase of subsidiary partnership interests                                                  |                                                   |                                                                                | (8,690   | )      |        |        | (65      | )      
|                                                                 | Other                                                                                         |                                                   |                                                                                | (325     | )      |        |        |         |        
|                                                                 |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|Net cash provided by (used in) financing
    activities          |                                                                                               |                                                   | 63,323                                                                         |          |        |        | (4,414 | )       
|                                                                 |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|Effect of exchange rate changes on cash and cash
    equivalents |                                                                                               |                                                   | (227                                                                           | )        |        |        | (115   | )       
|                                                                 |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|Net (decrease) increase in cash and cash
    equivalents         |                                                                                               |                                                   | (82,065                                                                        | )        |        |        | 22,411 |         
|Cash and cash equivalents, beginning of period                   |                                                                                               |                                                   | 230,884                                                                        |          |        |        | 33,896 |         
|                                                                 |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|Cash and cash equivalents, end of period                         |                                                                                               | $                                                 | 148,819                                                                        |          |        | $      | 56,307 |         
|                                                                 |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|Supplemental Cash Flow Information                               |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|Cash paid for interest and income taxes:                         |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|                                                                 | Interest, net of capitalized interest                                                         |                                                   | $                                                                              | 69,804   |        |        | $      | 70,399   |        
|                                                                 | Income taxes                                                                                  |                                                   | $                                                                              | 495      |        |        | $      | 1,902    |        
|Non-cash investing and financing activities:                     |                                                                                               |                                                   |                                                                                |          |        |        |        |         
|                                                                 | Senior subordinated debt redeemed in exchange for
    common stock                            |                                                   | $                                                                              | 49,213   |        |        | $      |         |        
|                                                                 | Redemption of OP units                                                                        |                                                   | $                                                                              | 123      |        |        | $      | 20,100   |        

See accompanying notes to the unaudited
consolidated financial statements.

4



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MERISTAR HOSPITALITY CORPORATION




NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


JUNE 30, 2004


1.          Organization

MeriStar Hospitality Corporation is a real estate
investment trust, or REIT. We own a portfolio of primarily upper
upscale, full-service hotels and resorts in the United States.
Our portfolio is diversified geographically as well as by
franchise and brand affiliations. As of June 30, 2004, we
owned 79 hotels with 22,187 rooms, all of which were leased by
our taxable subsidiaries. As of June 30, 2004, 77 hotels
were managed by Interstate Hotels & Resorts, Inc.
(Interstate Hotels), one hotel was managed by The
Ritz-Carlton Hotel Company, LLC (Ritz-Carlton), a
subsidiary of Marriott International, Inc., and one hotel was
managed by another subsidiary of Marriott International, Inc.
(Marriott) (collectively with Interstate Hotels, the
Managers). Of our 79 hotels at June 30, 2004,
seven were included in our non-core disposition program. Two of
these assets with 568 rooms have been sold during the third
quarter of 2004.

The Managers operate our 79 hotels pursuant to
management agreements with our taxable subsidiaries. Under these
management agreements, the taxable subsidiaries pay a management
fee for each property to the Manager of their hotels. The
taxable subsidiaries in turn make rental payments to our
subsidiary operating partnership under the participating leases.

Under the Interstate Hotels management
agreements, the base management fee is 2.5% of total hotel
revenue, plus incentive payments based on meeting performance
thresholds that could total up to an additional 1.5% of total
hotel revenue. The agreements have initial terms expiring on
January 1, 2011 with three renewal periods of five years
each at the option of Interstate Hotels, subject to some
exceptions.

Under the Ritz-Carlton and Marriott management
agreements, the base management fee is 3.0% and 2.5% of total
hotel revenue, respectively, through 2005 and 3.0% under both
thereafter, plus incentive payments based on meeting performance
thresholds that could total up to an additional 2.0% of total
revenue and 20% of available cash flow (as defined),
respectively. The agreements have initial terms expiring in 2015
and 2024, respectively, with four and three renewal periods of
10 and five years each, respectively, at the option of
Ritz-Carlton and Marriott. The Ritz-Carlton and Marriott
management agreements include certain limited performance
guarantees by Ritz-Carlton and Marriott which are designed
primarily to provide downside performance protection and run
through 2005 and up to 2008, respectively. Management expects
funding under these guarantees to be minimal.

2.          Summary
of Significant Accounting Policies

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

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

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

5



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



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

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

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

Impairment or Disposal of Long-Lived
Assets.We apply the provisions of
Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which require the current
and prior period operating results of any asset that has been
classified as held for sale or has been disposed of on or after
January 1, 2002 and where we have no continuing involvement
to be recorded as discontinued operations. Any gains or losses
on final disposition are also included in discontinued
operations.

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

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

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

6



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##### 



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

|                      |                                                                                                                                                    |                    |         |                  |   |      |          |       |   |   |         |        |   |   |          |        |  
|--------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | ------- | ---------------- | - | ---- | -------- | ----- | - | - | ------- | ------ | - | - | -------- | ------ | -
|                      |                                                                                                                                                    |                    |         |                 
|                      |                                                                                                                                                    | Three Months Ended |         | Six Months Ended
|                      |                                                                                                                                                    | June 30,           |         | June 30,        
|                      |                                                                                                                                                    |                    |         |                 
|                      |                                                                                                                                                    | 2004               |         | 2003             |   | 2004 |          | 2003 
|                      |                                                                                                                                                    |                    |         |                  |   |      |          |      
|Net loss, as reported |                                                                                                                                                    | $                  | (11,555 | )                |   | $    | (206,361 | )     |   | $ | (51,799 | )      |   | $ | (276,106 | )     
|                      | Add: Stock-based employee compensation expense
    included in reported net loss, net of related tax effect                                        |                    |         | 395              |   |      |          | 677   |   |   |         | 975    |   |   |          | 1,606  |  
|                      | Deduct: Total stock-based employee compensation
    expense determined under fair value-based method for all awards,
    net of related tax effect |                    |         | (442             | ) |      |          | (816  | ) |   |         | (1,077 | ) |   |          | (1,900 | )
|                      |                                                                                                                                                    |                    |         |                  |   |      |          |       |   |   |         |        |   |   |          |       
|Net loss, pro forma   |                                                                                                                                                    | $                  | (11,602 | )                |   | $    | (206,500 | )     |   | $ | (51,901 | )      |   | $ | (276,400 | )     
|                      |                                                                                                                                                    |                    |         |                  |   |      |          |       |   |   |         |        |   |   |          |       
|Loss per share:       |                                                                                                                                                    |                    |         |                  |   |      |          |       |   |   |         |        |   |   |          |       
|                      | Basic, as reported                                                                                                                                 |                    | $       | (0.14            | ) |      | $        | (4.48 | ) |   | $       | (0.69  | ) |   | $        | (6.03  | )
|                      | Diluted, as reported                                                                                                                               |                    |         | (0.14            | ) |      |          | (4.47 | ) |   |         | (0.68  | ) |   |          | (5.99  | )
|                      | Basic, pro forma                                                                                                                                   |                    |         | (0.14            | ) |      |          | (4.48 | ) |   |         | (0.69  | ) |   |          | (6.03  | )
|                      | Diluted, pro forma                                                                                                                                 |                    |         | (0.14            | ) |      |          | (4.47 | ) |   |         | (0.69  | ) |   |          | (5.99  | )

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

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

Acquisition of
Hotels.Our hotel acquisitions consist
almost exclusively of land, building, furniture, fixtures and
equipment. We allocate the purchase price among these asset
classes and any acquired intangible assets based upon their
respective fair values as required by Statement of Financial
Accounting Standards, or SFAS 141, Business
Combinations.

3.          Comprehensive
Loss

Comprehensive loss was $10.3 million and
$202.5 million for the three months ended June 30,
2004 and 2003, respectively. Comprehensive loss consisted of net
loss ($11.6 million and $206.4 million for the three
months ended June 30, 2004 and 2003, respectively) and
foreign currency translation adjustments.

Comprehensive loss was $50.8 million and
$271.2 million for the six months ended June 30, 2004
and 2003, respectively. Comprehensive loss consisted of net loss
($51.8 million and $276.1 million for the six months
ended June 30, 2004 and 2003, respectively) and foreign
currency translation adjustments.

4.          Acquisitions

On May 10, 2004 and June 25, 2004, we
acquired the 366-room Ritz-Carlton, Pentagon City in Arlington,
Virginia and the 485-room Marriott Irvine in Orange County,
California, respectively, for a total purchase price of
$185.5 million, plus net acquisition costs and adjustments
of $0.7 million.

The Ritz-Carlton, Pentagon City luxury hotel is
operated by The Ritz-Carlton Hotel Company, LLC under a
long-term contract. On June 30, 2004, we partially financed
the acquisition through the placement of a

7



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$55.8 million fixed-rate mortgage loan which
is secured by this property, matures on June 1, 2011 and
bears interest at an annual rate of 5.80%.


The Marriott Irvine is operated by a subsidiary
of Marriott International, Inc. under a long-term contract. We
expect to invest approximately $7.5 million in property
improvements over the next 12 months, primarily in the
hotels guest rooms. We financed a portion of the
acquisition with a $55.5 million fixed-rate mortgage loan
which is secured by this property, matures on July 1, 2011
and bears interest at an annual rate of 5.69%. Because Marriott
International, Inc. reports results in 13 four week periods
during the year rather than the 12 monthly periods that we
employ, we will include 12 weeks of results in each of
quarters one through three and 16 weeks of results in
quarter four.

The acquisitions were accounted for under the
purchase method of accounting, and the assets and liabilities
and results of operations of the hotels have been consolidated
in our financial statements since the date of purchase. On an
unaudited pro forma basis, revenues, net income and basic and
diluted loss per share for the three and six months ended
June 30, 2004 and 2003 would have been reported as follows
if the acquisitions had occurred at the beginning of each of the
respective periods (in thousands):

|                    |         |                |         |                  |   |      |          |       |   |   |         |       |   |   |          |       |  
|------------------- | ------- | -------------- | ------- | ---------------- | - | ---- | -------- | ----- | - | - | ------- | ----- | - | - | -------- | ----- | -
|                    |         |                |         |                 
|                    |         | Three Months   |         | Six Months Ended
|                    |         | Ended June 30, |         | June 30,        
|                    |         |                |         |                 
|                    |         | 2004           |         | 2003             |   | 2004 |          | 2003 
|                    |         |                |         |                  |   |      |          |      
|Total revenue       |         | $              | 238,655 |                  |   | $    | 231,535  |       |   | $ | 455,136 |       |   | $ | 446,324  |      
|Net loss            |         |                | (10,213 | )                |   |      | (204,660 | )     |   |   | (49,634 | )     |   |   | (273,975 | )    
|Net loss per share: |         |                |         |                  |   |      |          |       |   |   |         |       |   |   |          |      
|                    | Basic   |                | $       | (0.12            | ) |      | $        | (4.44 | ) |   | $       | (0.66 | ) |   | $        | (5.98 | )
|                    | Diluted |                |         | (0.13            | ) |      |          | (4.44 | ) |   |         | (0.66 | ) |   |          | (5.94 | )

The following is a summary of the combined
preliminary allocation of the purchase price (thousands), which
may be revised upon completion of our valuation procedures:

|                                  |                      |   |         |         | 
|--------------------------------- | -------------------- | - | ------- | ------- | 
|Land                              |                      | $ | 15,000  |        
|Buildings and improvements        |                      |   | 151,592 |        
|Furniture, fixtures and equipment |                      |   | 18,220  |        
|Net working capital               |                      |   | 1,435   |        
|                                  |                      |   |         |        
|                                  | Total purchase price |   | $       | 186,247 | 
|                                  |                      |   |         |        

5.          Property
and Equipment

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

|                                  |  |          |           |              |  |   |           | 
|--------------------------------- |  | -------- | --------- | ------------ |  | - | --------- | 
|                                  |  | June 30, |           | December 31,
|                                  |  | 2004     |           | 2003        
|                                  |  |          |           |             
|Land                              |  | $        | 247,479   |              |  | $ | 238,772   | 
|Buildings and improvements        |  |          | 2,016,233 |              |  |   | 1,930,155 | 
|Furniture, fixtures and equipment |  |          | 301,502   |              |  |   | 284,602   | 
|Construction-in-progress          |  |          | 67,953    |              |  |   | 28,223    | 
|                                  |  |          |           |              |  |   |           | 
|                                  |  | $        | 2,633,167 |              |  | $ | 2,481,752 | 
|                                  |  |          |           |              |  |   |           | 

For the six months ended June 30, 2004 and
2003, we capitalized interest of $2.0 million and
$1.6 million, respectively.

During the first and second quarters of 2004, we
recognized impairment losses of $5.0 million and
$2.4 million, respectively, of which $4.8 million and
$1.1 million, respectively, are recorded in discontinued
operations (see Note 12). As of June 30, 2004, we had
seven hotels remaining in our disposition program, three of
which are classified as held for sale as of June 30, 2004
(see Note 6).

8



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During the first and second quarters of 2003, we
recognized impairment losses of $56.7 million and
$208.0 million, respectively, of which $56.7 million
and $142.9 million, respectively, are recorded in
discontinued operations as of June 30, 2004 (see
Note 12).

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

6.          Assets
Held for Sale

At December 31, 2003, seven assets were
classified as held for sale. All seven of these assets were sold
during the six months ended June 30, 2004. At June 30,
2004, three of the seven remaining properties in our non-core
disposition program met our criteria for classification as held
for sale. The four other assets included in our asset
disposition program did not meet the probability criteria as
prescribed by SFAS No. 144 to classify them as held
for sale. Assets held for sale consisted of the following (in
thousands):

|                                  |  |          |        |              |  |   |        |  
|--------------------------------- |  | -------- | ------ | ------------ |  | - | ------ | -
|                                  |  | June 30, |        | December 31,
|                                  |  | 2004     |        | 2003        
|                                  |  |          |        |             
|Land                              |  | $        | 598    |              |  | $ | 5,061  |  
|Buildings and improvements        |  |          | 20,082 |              |  |   | 43,391 |  
|Furniture, fixtures and equipment |  |          | 765    |              |  |   | 2,759  |  
|Construction-in-progress          |  |          | 381    |              |  |   | 1,114  |  
|                                  |  |          |        |              |  |   |        |  
|                                  |  |          | 21,826 |              |  |   | 52,325 |  
|Accumulated depreciation          |  |          |       |              |  |   | (1,156 | )
|                                  |  |          |        |              |  |   |        |  
|                                  |  | $        | 21,826 |              |  | $ | 51,169 |  
|                                  |  |          |        |              |  |   |        |  

7.          Investment
in Affiliate

In 1999, we, through MeriStar Hospitality
Operating Partnership, L.P. (MHOP), our principal
operating subsidiary, invested $40 million in MeriStar
Investment Partners, L.P. (MIP), a joint venture
established to acquire upscale, full-service hotels. Our
cost-basis investment is in the form of a partnership interest,
in which we earn a 16% cumulative preferred return with
outstanding balances compounded quarterly. While the return on
this investment is preferred and cumulative, the underlying
investment ranks equally with the investments of the other
investors in MIP. We recognize the return quarterly as it
becomes due to us. For the six months ended June 30, 2004
and 2003, we recognized a preferred return of $3.2 million
and $4.2 million, respectively, from this investment. As of
June 30, 2004 and December 31, 2003, cumulative
preferred returns of $24.5 million and $19.6 million,
respectively, were due from MIP. We have reserved a portion of
this balance and have included the net $21.4 million and
$18.2 million in accounts receivable on the accompanying
consolidated balance sheets as of June 30, 2004 and
December 31, 2003, respectively. We expect that any
cumulative unpaid preferred returns will be paid in the future
from excess cash flow above our current return and from
potential partnership hotel disposition proceeds in excess of
debt allocated to individual assets. Given the current economic
environment, we do not expect MIPs operations to provide
adequate cash flow in the near term for significant payment of
our current returns or repayments of our cumulative unpaid
preferred returns; however we expect to receive payments from
MIP during 2004 resulting from planned dispositions of certain
assets combined with cash flow improvements on other assets. We
evaluate the collectibility of our preferred return based on our
preference to distributions and the underlying value of the
hotel properties.

While we believe that our current and cumulative
returns continue to be fully collectible, during 2003, the value
of our underlying investment declined due to the decline in
MIPs cash flow, particularly driven by

9



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##### 



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


8.          Long-Term
Debt

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

|                                             |  |          |           |              |  |   |           |  
|-------------------------------------------- |  | -------- | --------- | ------------ |  | - | --------- | -
|                                             |  | June 30, |           | December 31,
|                                             |  | 2004     |           | 2003        
|                                             |  |          |           |             
|Senior unsecured notes due 2011  9.125%     |  | $        | 355,665   |              |  | $ | 400,000   |  
|Senior unsecured notes due 2008  9.0%       |  |          | 270,500   |              |  |   | 300,000   |  
|Senior unsecured notes due 2009  10.5%      |  |          | 224,187   |              |  |   | 250,000   |  
|Secured facility, due 2009                   |  |          | 306,067   |              |  |   | 309,035   |  
|Secured facility, due 2013                   |  |          | 100,041   |              |  |   | 100,765   |  
|Convertible subordinated notes               |  |          | 173,705   |              |  |   | 173,705   |  
|Senior subordinated notes                    |  |          | 34,225    |              |  |   | 83,438    |  
|Mortgage debt                                |  |          | 137,505   |              |  |   | 27,011    |  
|Unamortized issue discount                   |  |          | (4,417    | )            |  |   | (5,926    | )
|                                             |  |          |           |              |  |   |           |  
|                                             |  |          | 1,597,478 |              |  |   | 1,638,028 |  
|Fair value adjustment for interest rate swap |  |          | (10,074   | )            |  |   |          |  
|                                             |  |          |           |              |  |   |           |  
|                                             |  | $        | 1,587,404 |              |  | $ | 1,638,028 |  
|                                             |  |          |           |              |  |   |           |  

Aggregate future maturities as of June 30,
2004 were as follows (in thousands):

|                                             |  |   |           |  
|-------------------------------------------- |  | - | --------- | -
|2004 (six months)                            |  | $ | 9,373     |  
|2005                                         |  |   | 11,743    |  
|2006                                         |  |   | 12,687    |  
|2007                                         |  |   | 47,578    |  
|2008                                         |  |   | 282,318   |  
|Thereafter                                   |  |   | 1,233,779 |  
|                                             |  |   |           |  
|                                             |  |   | 1,597,478 |  
|Fair value adjustment for interest rate swap |  |   | (10,074   | )
|                                             |  |   |           |  
|                                             |  | $ | 1,587,404 |  
|                                             |  |   |           |  

As of June 30, 2004, 81% of our debt bore
fixed rates of interest, and the remaining 19% bore interest at
fixed rates that have been, since April 2, 2004,
effectively swapped to a floating rate. Our overall weighted
average interest rate was 8.30% after giving effect to the
interest rate swap. Based on market prices at June 30,
2004, the fair value of our long-term debt was
$1.62 billion.

Credit facility.On
December 23, 2003, we entered into a new three-year
$50 million senior credit facility, secured by six of our
hotels, and terminated our previous credit facility. The
facility bears interest at an annual rate of the London
Interbank Offered Rate, or LIBOR, plus 450 basis points. As
of June 30, 2004, we had no outstanding borrowings under
this facility.

The facility contains financial and other
restrictive covenants. Our ability to borrow under this facility
is subject to compliance with financial covenants, including
leverage, fixed charge coverage and interest coverage ratios and
minimum net worth requirements. Our compliance with these
covenants in future periods will

10



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##### 



depend substantially upon the financial results
of our hotels. The agreement governing our new senior credit
facility limits our ability to effect mergers, asset sales and
change of control events and limits the payments of dividends
other than those required for us to maintain our status as a
REIT and our ability to incur additional secured and total
indebtedness.


Senior unsecured
notes.During the six months ended
June 30, 2004, we repurchased from available cash
$99.6 million of our senior unsecured notes, including
$29.5 million of the 9.0% notes due 2008,
$44.3 million of the 9.125% notes due 2011, and
$25.8 million of the 10.5% notes due 2009. We recorded
a loss on early extinguishment of debt of $6.2 million and
wrote off deferred financing costs of $1.2 million related
to these repurchases which is included in depreciation and
amortization expense on the accompanying consolidated statements
of operations.

These senior unsecured notes are unsecured
obligations of MHOP, our principal operating subsidiary, and we
guarantee payment of principal and interest on the notes. These
notes contain various restrictive covenants, limiting our
ability to initiate or transact certain business activities if
specific financial thresholds are not achieved. One of those
thresholds is having a 2 to 1 fixed charge
coverage ratio (as defined in the indentures, fixed charges only
include interest on debt obligations and preferred equity) in
order to enter into certain types of transactions, including the
repurchase of our stock, the issuance of any preferred stock,
the payment of certain dividends, the incurrence of any
additional debt, or the repayment of certain outstanding debt
before it comes due. As of June 30, 2004, our fixed charge
coverage ratio was significantly below 2 to 1, and
therefore we were not permitted generally to enter into those
transactions, except as noted below.

There are certain exceptions with respect to the
incurrence of additional debt and early repayment of debt
features in the indentures. We have the ability to incur up to
$300 million of secured financing within restricted
subsidiaries, subject to meeting other maintenance tests under
the indentures, of which $194 million was available at
June 30, 2004. We also have a general carve-out to incur
$50 million of unspecified borrowings within a restricted
subsidiary, of which the full amount was available at
June 30, 2004. We have the ability to lever assets within
an unrestricted subsidiary, such as the mortgage financing
related to the acquisition of Marriott Irvine. Additionally, we
are permitted to repay subordinated debt prior to its maturity
from the proceeds of an equal or junior financing with a longer
term than the debt refinanced, an equity offering, or a
financing within an unrestricted subsidiary.

Secured facilities.We completed a $330 million non-recourse financing secured
by a portfolio of 19 hotels in 1999. The loan bears a fixed
annual interest rate of 8.01% and matures in 2009. The secured
facility contains standard provisions that require the servicer
to maintain in escrow cash balances for certain items such as
property taxes and insurance. In addition, the facility contains
a provision that requires our mortgage servicer to retain in
escrow the excess cash from the encumbered hotels after payment
of debt service (Excess Cash), if net hotel
operating income (NOI) for the trailing twelve
months declines below $57 million. This provision was
triggered in October 2002 and will be effective until the hotels
generate the minimum cash flow required for two consecutive
quarters, at which time the cash being held in escrow will be
released to us. As of June 30, 2004 and December 31,
2003, $39.2 million and $27.2 million, respectively,
of cash was held in escrow under this provision. In July 2003,
we signed an amendment to the loan agreement that permits the
release of cash placed in escrow for all capital expenditures
incurred on the 19 encumbered properties on or after
April 1, 2003. Although the servicer will continue to
retain in escrow any excess cash from the encumbered hotels,
they will release cash for all capital expenditures we have
incurred from April 1, 2003 through the date of the
amendment and future capital expenditures we incur on the
19 properties. Escrowed funds totaling $30.3 million
were available to fund capital expenditures under this provision
as of June 30, 2004. In July 2004, we received a cash
reimbursement of $12.2 million from the servicer related to
capital expenditures incurred on the 19 encumbered
properties.

The fair value adjustments for the interest rate
swap agreement of $(10.1) million that are discussed in
further detail below are related to the outstanding secured
facility balance of $306.1 million as of June 30, 2004.

11



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On September 26, 2003, as permitted by the
indentures governing our senior unsecured notes and senior
subordinated notes, we completed a $101 million commercial
mortgage-backed securities financing, secured by a portfolio of
four hotels. The loan carries a fixed annual interest rate of
6.88% and matures in 2013.

Convertible subordinated
notes.On July 1, 2003, we
completed an offering of $170 million aggregate principal
amount of 9.5% convertible subordinated notes due 2010.
These notes are convertible into our common stock at any time
prior to or at maturity, April 1, 2010, at a conversion
price of $10.18 per share (equal to a conversion rate of
98.2318 shares per $1,000 principal amount of notes).

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

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

During the six months ended June 30, 2004,
we retired $49.2 million of our senior subordinated notes
(plus $0.9 million of accrued interest) through the
issuance of 8,138,728 shares of common stock. We recorded a
loss on early extinguishment of debt of $1.7 million and
wrote off deferred financing costs of $0.5 million related
to this activity. The write off of deferred financing costs is
included in depreciation and amortization expense on the
accompanying consolidated statements of operations.

Mortgage debt.As of
June 30, 2004, we had four mortgage loans, two of which
were placed during the second quarter of 2004 and one of which
is in foreclosure.

We financed a portion of the Marriott Irvine
acquisition (see Note 4) with a $55.5 million
fixed-rate mortgage effective June 25, 2004, collateralized
by the hotel, which matures on July 1, 2011 and bears
interest at an annual rate of 5.69%. On June 30, 2004, in
connection with The Ritz-Carlton, Pentagon City acquisition (see
Note 4), we entered into a $55.8 million fixed-rate
mortgage loan, collateralized by the hotel, which matures on
June 1, 2011 and bears interest at an annual rate of 5.80%.

We have a mortgage that matures in 2011 and
carries an interest rate of 8.8%; however, the lender, with our
acquiescence, initiated foreclosure proceedings which are
expected to be completed in the third quarter of 2004. This
mortgage loan is collateralized by one of our properties, which
we will relinquish to the bank upon completion of foreclosure,
which we expect to occur in the third quarter of 2004. The
carrying value of the mortgage loan and the fair value of the
building both approximate $11 million. This property is
included in the seven properties remaining in our disposition
program.

Our only other individual mortgage matures in
2011 and carries an interest rate of 9.0%.

Derivatives.On
April 2, 2004, we entered into an interest rate swap
arrangement with a third party to manage our interest rate risk
related to our secured facility due 2009, effectively converting
the interest the facility bears from a fixed rate to a floating
rate. Under the swap, we receive fixed-rate payments of 8.01%
and pay floating rate payments based on a one month LIBOR plus
444 basis points on a $307 million notional amount. We
do not use derivative instruments for speculative purposes. Due
to the fact that the notional amount of the swap matches the
principal amount of the underlying debt and other hedge
accounting criteria were met, the swap was designated as highly
effective at the inception of the swap arrangement and
designated as a fair value hedge. We continue to evaluate the
effectiveness of the hedge and believe that the hedge continues
to be highly effective.

For a derivative qualifying as a fair value
hedge, the change in net unrealized gain or loss upon measuring
the fair value hedge and the fair value of the debt instrument
is recorded on our consolidated statements of operations. These
amounts offset each other as there is no ineffectiveness, and
therefore had no impact on our net loss for the three and six
months ended June 30, 2004. The fair value of the swap is
recorded as either an asset or liability, with a corresponding
increase or decrease to the carrying value of the debt
instrument being

12



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##### 



hedged on our consolidated balance sheets. The
fair value of our hedge was approximately a $10.1 million
liability as of June 30, 2004. This amount is included in
the consolidated balance sheet in the other liabilities line
item. During the three and six months ended June 30, 2004,
we earned cash payments of $1.7 million under the swap,
which were recorded as a reduction in interest expense.


During 2003, our only derivative instruments
consisted of two swap agreements that did not qualify for
treatment as hedges under SFAS No. 133, of which one
expired in April 2003 and one in July 2003. During the three and
six months ended June 30, 2003, we recognized
$1.3 million and $3.4 million, respectively, of income
related to the decrease in fair value of the liability recorded
for the interest rate swaps in place in those time periods. For
the three and six months ended June 30, 2003, we made cash
payments on those swaps of $1.3 and $3.4 million,
respectively. The change in fair value and the swap payments are
netted together on our consolidated statement of operations,
thus resulting in no impact on net income.

9.          Stockholders
Equity and Minority Interests

Common Stock
Transactions.On April 23, 2004,
we issued and sold 12.0 million shares of common stock at a
price to the public of $6.25 per share pursuant to our
effective shelf registration statement filed under the
Securities Act of 1933. The offering closed on April 28,
2004 with net proceeds of $72.3 million.

During the six months ended June 30, 2004,
we retired $49.2 million of our senior subordinated notes
(plus $0.9 million of accrued interest) through the
issuance of 8,138,728 shares of common stock (see
Note 8).

During the six months ended June 30, 2004,
we issued 8,570 shares of common stock with a value of
$.05 million, related to shares issued under our employee
stock purchase plan.

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

Common OP Unit holders converted 25,141 and
878,000 of their OP Units, with a value of
$0.1 million and $20.1 million, respectively, into
common stock during the six months ended June 30, 2004 and
2003, respectively. A POPs unit holder converted 25,000 POPs for
cash during the six months ended June 30, 2004.

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

13



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##### 



10.          Loss
Per Share

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

|                        |                                                                                 |                             |   |                  |       |      |   |         |       |  |   |         |       |  |   |         |       | 
|----------------------- | ------------------------------------------------------------------------------- | --------------------------- | - | ---------------- | ----- | ---- | - | ------- | ----- |  | - | ------- | ----- |  | - | ------- | ----- | 
|                        |                                                                                 |                             |   |                 
|                        |                                                                                 | Three Months Ended          |   | Six Months Ended
|                        |                                                                                 | June 30,                    |   | June 30,        
|                        |                                                                                 |                             |   |                 
|                        |                                                                                 | 2004                        |   | 2003             |       | 2004 |   | 2003   
|                        |                                                                                 |                             |   |                  |       |      |   |        
|Basic Loss Per Share:   |                                                                                 |                             |   |                  |       |      |   |         |       |  |   |         |       |  |   |        
|                        | Loss from continuing operations                                                 |                             | $ | (6,486           | )     |      | $ | (64,332 | )     |  | $ | (33,705 | )     |  | $ | (76,060 | )    
|                        |                                                                                 |                             |   |                  |       |      |   |         |       |  |   |         |       |  |   |        
|                        | Weighted average number of basic shares of common
    stock outstanding         |                             |   | 82,855           |       |      |   | 46,078  |       |  |   | 75,748  |       |  |   | 45,813  |      
|                        |                                                                                 |                             |   |                  |       |      |   |         |       |  |   |         |       |  |   |        
|                        | Basic loss per share from continuing operations                                 |                             | $ | (0.08            | )     |      | $ | (1.40   | )     |  | $ | (0.45   | )     |  | $ | (1.66   | )    
|                        |                                                                                 |                             |   |                  |       |      |   |         |       |  |   |         |       |  |   |        
|Diluted Loss Per Share: |                                                                                 |                             |   |                  |       |      |   |         |       |  |   |         |       |  |   |        
|                        | Loss from continuing operations                                                 |                             | $ | (6,486           | )     |      | $ | (64,332 | )     |  | $ | (33,705 | )     |  | $ | (76,060 | )    
|                        | Minority interest, net of tax                                                   |                             |   | (650             | )     |      |   | (10,733 | )     |  |   | (1,735  | )     |  |   | (14,563 | )    
|                        |                                                                                 |                             |   |                  |       |      |   |         |       |  |   |         |       |  |   |        
|                        | Adjusted net loss                                                               |                             | $ | (7,136           | )     |      | $ | (75,065 | )     |  | $ | (35,440 | )     |  | $ | (90,623 | )    
|                        |                                                                                 |                             |   |                  |       |      |   |         |       |  |   |         |       |  |   |        
|                        | Weighted average number of basic shares of common
    stock outstanding         |                             |   | 82,855           |       |      |   | 46,078  |       |  |   | 75,748  |       |  |   | 45,813  |      
|                        | Common stock equivalents:                                                       |                             |   |                  |       |      |   |         |       |  |   |         |       |  |   |         |      
|                        |                                                                                 | Operating partnership units |   |                  | 2,415 |      |   |         | 2,486 |  |   |         | 2,421 |  |   |         | 2,767 | 
|                        |                                                                                 |                             |   |                  |       |      |   |         |       |  |   |         |       |  |   |        
|                        | Total weighted average number of diluted shares
    of common stock outstanding |                             |   | 85,270           |       |      |   | 48,564  |       |  |   | 78,169  |       |  |   | 48,580  |      
|                        |                                                                                 |                             |   |                  |       |      |   |         |       |  |   |         |       |  |   |        
|                        | Diluted loss per share from continuing operations                               |                             | $ | (0.08            | )     |      | $ | (1.55   | )     |  | $ | (0.45   | )     |  | $ | (1.87   | )    
|                        |                                                                                 |                             |   |                  |       |      |   |         |       |  |   |         |       |  |   |        

For the three months ended June 30, 2004 and
2003, 17,534,088 shares and 6,701,075 shares,
respectively, consisting of shares issuable upon conversion,
exchange or exercise of stock options, certain operating
partnership units, POPs of MeriStar Hospitality Operating
Partnership, L.P., and shares from our outstanding convertible
notes, were excluded from the calculation of diluted loss per
share as their inclusion would be anti-dilutive.

For the six months ended June 30, 2004 and
2003, 17,546,153 shares and 6,689,304 shares,
respectively, consisting of shares issuable upon conversion,
exchange or exercise of stock options, certain operating
partnership units, POPs of MeriStar Hospitality Operating
Partnership, L.P., and shares from our outstanding convertible
notes, were excluded from the calculation of diluted loss per
share as their inclusion would be anti-dilutive.

11.          Commitments
and Contingencies

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

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Minimum Lease
Payments.We lease the land at certain
of our hotels and office space of our corporate headquarters
under long-term arrangements from third parties. Certain leases
contain contingent rent features based on gross revenues at the
respective property. Future minimum lease payments required
under these operating leases as of June 30, 2004 were as
follows (in thousands):

|                  |  |   |        | 
|----------------- |  | - | ------ | 
|2004 (six months) |  | $ | 1,206  | 
|2005              |  |   | 2,373  | 
|2006              |  |   | 2,289  | 
|2007              |  |   | 2,313  | 
|2008              |  |   | 2,313  | 
|Thereafter        |  |   | 72,351 | 
|                  |  |   |        | 
|                  |  | $ | 82,845 | 
|                  |  |   |        | 

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

We lease certain office, retail and parking space
to outside parties under non-cancelable operating leases with
initial or remaining terms in excess of one year. Future minimum
rental receipts under these leases as of June 30, 2004 were
as follows (in thousands):

|                   |  |   |        | 
|------------------ |  | - | ------ | 
|2004 ( six months) |  | $ | 2,143  | 
|2005               |  |   | 3,444  | 
|2006               |  |   | 2,704  | 
|2007               |  |   | 2,542  | 
|2008               |  |   | 1,786  | 
|Thereafter         |  |   | 3,089  | 
|                   |  |   |        | 
|                   |  | $ | 15,708 | 
|                   |  |   |        | 

We may be obligated to pay Interstate Hotels
termination fees of up to a maximum of approximately
$12.0 million with respect to the 32 properties we
have sold between January 1, 2003 and August 3, 2004.
In addition, as we dispose of the five remaining assets in our
disposition program, we may incur termination obligations due to
Interstate Hotels of up to a maximum of approximately
$1.7 million,assuming the disposition of all five
of the properties in 2004 and assuming buyers of our hotel
properties elect to have the properties managed by parties other
than Interstate Hotels or do not assume the obligation as part
of the disposition transaction and no new management agreements
are substituted. Any obligation due under the termination
provisions of the contract is payable over a period of
48 months after termination. Termination fees payable to
Interstate Hotels may be reduced by amounts paid under
replacement management contracts.

During July 2004, we concluded negotiations with
Interstate Hotels to terminate the intercompany agreement. In
exchange for terminating the intercompany agreement, we will
receive, among other things, the following: the right to
terminate up to 600 rooms per year upon the payment of a
termination fee equal to 1.5 times the fees earned during
the preceding 12 months, with the ability to carryover up
to 600 rooms for termination in a succeeding year; the
right to terminate the management contract of a hotel, where
Interstate Hotels invests in a competing hotel, with no
termination fee; and an extension of the termination fee payment
period for terminations related to hotel sales, from
30 months to 48 months.

Separately, we reached an agreement with
Interstate Hotels regarding the calculation of termination fees
payable upon a sale. Although termination fees for the
properties that have been sold or were included in our
previously announced disposition program (which includes four
assets in our current disposition program) will be unchanged, we
will receive a $2.5 million credit, which will be
applicable to fees payable with respect to future dispositions.
Of the $2.5 million credit, $0.6 million has been
applied to terminations that have occurred in the third quarter
of 2004, and an additional $1.7 million will be applied to
terminations resulting from the sale of two of our remaining
assets in our current disposition program.

15



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##### 



12.          Dispositions

Between January 1, 2003 and June 30,
2004, we have sold 30 hotels with 6,241 rooms for
total gross proceeds of $232.8 million. Of these
30 hotels, 15 hotels were sold in 2003, 11 hotels
were sold in the first quarter of 2004, and four hotels were
sold in the second quarter of 2004. As of June 30, 2004, we
had seven hotels remaining in our non-core disposition program.
Three of these hotels met our criteria for held-for-sale
classification as of June 30, 2004 (see Note 6).
Operating results for the sold hotels, and where applicable, the
gain or loss on final disposition, and the three classified as
held-for-sale are included in discontinued operations. Two of
the seven hotels in our disposition program have been sold in
the third quarter of 2004 for approximately $14.5 million.

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

|                                   |  |                    |        |                  |  |      |          |      |  |   |         |   |  |   |          |  
|---------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | -------- | ---- |  | - | ------- | - |  | - | -------- | -
|                                   |  |                    |        |                 
|                                   |  | Three Months Ended |        | Six Months Ended
|                                   |  | June 30,           |        | June 30,        
|                                   |  |                    |        |                 
|                                   |  | 2004               |        | 2003             |  | 2004 |          | 2003
|                                   |  |                    |        |                  |  |      |          |     
|Revenue                            |  | $                  | 7,296  |                  |  | $    | 44,638   |      |  | $ | 22,006  |   |  | $ | 87,076   |  
|Loss on asset impairments          |  |                    | (1,139 | )                |  |      | (142,876 | )    |  |   | (5,905  | ) |  |   | (199,553 | )
|Pretax gain (loss) from operations |  |                    | 592    |                  |  |      | 860      |      |  |   | (879    | ) |  |   | (501     | )
|Loss on disposal                   |  |                    | (4,584 | )                |  |      |         |      |  |   | (11,530 | ) |  |   |         |  

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

13.          Consolidating
Financial Statements

We and certain subsidiaries of MHOP, our
subsidiary operating partnership, are guarantors of senior
unsecured notes issued by MHOP. MHOP and certain of its
subsidiaries are guarantors of our unsecured senior subordinated
notes. We own a one percent general partner interest in MHOP,
and MeriStar LP, Inc., our wholly-owned subsidiary, owns
approximately a 96 percent limited partner interest in
MHOP. All guarantees are full and unconditional, and joint and
several. Exhibit 99.1 to this Quarterly Report on
Form 10-Q presents supplementary consolidating financial
statements for MHOP, including each of the guarantor
subsidiaries. This exhibit presents MHOPs consolidating
balance sheets as of June 30, 2004 and December 31,
2003, consolidating statements of operations for the three and
six months ended June 30, 2004 and 2003, and consolidating
statements of cash flows for the six months ended June 30,
2004 and 2003.

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS

Managements Discussion and Analysis of
Financial Condition and Results of Operations may contain
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements, which are based on various
assumptions and describe our future plans, strategies and
expectations, are generally identified by our use of words such
as intend, plan, may,
should, will, project,
estimate, anticipate,
believe, expect, continue,
potential, opportunity, and similar
expressions, whether in the negative or affirmative. We cannot
guarantee that we actually will achieve these plans, intentions
or expectations. All statements regarding our expected financial
position, business and financing plans are forward-looking
statements.

Except for historical information, matters
discussed in this Managements Discussion and Analysis of
Financial Condition and Results of Operations are subject to
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.

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



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

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

17



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##### 



BUSINESS SUMMARY

We are a real estate investment trust, or REIT,
and own a portfolio of primarily upper upscale, full-service
hotels and resorts. Our portfolio is diversified geographically
as well as by franchise and brand affiliations. As of
June 30, 2004, we owned 79 hotels with
22,187 rooms. Two of these assets with 568 total rooms
have been sold during the third quarter of 2004. Our hotels are
located in major metropolitan areas, rapidly growing secondary
markets or resort locations in the United States. All of our
hotels are leased by our taxable subsidiaries. As of
June 30, 2004, 77 hotels are currently managed by
Interstate Hotels & Resorts (Interstate
Hotels), which was created on July 31, 2002 through
the merger of MeriStar Hotels & Resorts, Inc. and
Interstate Hotels Corporation, one hotel is managed by The
Ritz-Carlton Hotel Company LLC (Ritz-Carlton), a
subsidiary of Marriott International, Inc., and one hotel is
managed by another subsidiary of Marriott International, Inc.
(Marriott) (collectively with Interstate Hotels, the
Managers).

The Managers operate our 79 hotels pursuant
to management agreements with our taxable subsidiaries. Under
these management agreements, the taxable subsidiaries pay a
management fee for each property to the Manager of their hotels.
The taxable subsidiaries in turn make rental payments to our
subsidiary operating partnership under the participating leases.

Under the Interstate Hotels management
agreements, the base management fee is 2.5% of total hotel
revenue, plus incentive payments based on meeting performance
thresholds that could total up to an additional 1.5% of total
hotel revenue. The agreements have initial terms expiring on
January 1, 2011 with three renewal periods of five years
each at the option of Interstate Hotels, subject to some
exceptions.

Under the Ritz-Carlton and Marriott management
agreements, the base management fee is 3.0% and 2.5% of total
hotel revenue, respectively, through 2005 and 3.0% under both
thereafter, plus incentive payments based on meeting performance
thresholds that could total up to an additional 2.0% of total
hotel revenue and 20% of available cash flow (as defined),
respectively. The agreements have initial terms expiring in 2015
and 2024, respectively, with four and three renewal periods of
10 and five years each, respectively, at the option of
Ritz-Carlton and Marriott. The Ritz-Carlton and Marriott
management agreements include certain limited performance
guarantees by Ritz-Carlton and Marriott which are designed
primarily to provide downside performance protection and run
through 2005 and up to 2008, respectively. Management expects
funding under these guarantees to be minimal.

Since the July 2002 merger that formed Interstate
Hotels, we and Interstate Hotels have separated the senior
management teams of the two companies in order to allow each
senior management team to devote more attention to its
respective companys matters. In December 2003, MeriStar
Hospitalitys Board of Directors and that of Interstate
Hotels each formed a special committee of independent directors
to explore further changes to the relationship between our
company and Interstate Hotels, including possible changes to the
terms, or complete elimination, of the intercompany agreement.

During July 2004, we concluded negotiations with
Interstate Hotels to terminate the intercompany agreement. In
exchange for terminating the intercompany agreement, we will
receive, among other things, the following: the right to
terminate up to 600 rooms per year upon the payment of a
termination fee equal to 1.5 times the fees earned during
the preceding 12 months, with the ability to carryover up
to 600 rooms for termination in a succeeding year; the
right to terminate the management contract of a hotel, where
Interstate Hotels invests in a competing hotel, with no
termination fee; and an extension of the termination fee payment
period for terminations related to hotel sales, from
30 months to 48 months. The termination of the
intercompany agreement eliminates the last vestige of our
original paper clip relationship with Interstate Hotels.

Separately, we reached an agreement with
Interstate Hotels regarding the calculation of termination fees
payable upon a sale. Although termination fees for the
properties that have been sold or were included in our
previously announced disposition program (which includes four
assets in our current disposition program) will be unchanged, we
will receive a $2.5 million credit, which will be
applicable to fees payable with respect to future dispositions.
Of the $2.5 million credit, $0.6 million has been
applied to terminations that have occurred

18



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##### 



in the third quarter of 2004, and an additional
$1.7 million will be applied to terminations resulting from
the sale of two of our remaining assets in our current
disposition program.


RESULTS OVERVIEW

At the beginning of 2003, we set out a strategy
to position our company to best take advantage of an expected
economic and industry recovery. We believe that we are in the
midst of the early stages of a lodging industry economic
recovery, however, the recovery is not uniform throughout the
country. Certain of our markets are performing well, while
others have not yet recovered. Our strategy includes the
following key initiatives: focus on growth of earnings and cash
flow from our existing core portfolio using an aggressive asset
management program; upgrade our core portfolio through extensive
renovations; reshape the portfolio through asset sales and
strategic acquisitions; maintain liquidity; improve our capital
structure; and maintain upside potential.

We are in the process of upgrading the product
quality and growth potential of our core hotels through our
aggressive capital expenditure program and brand conversions. We
have continued to reshape our portfolio through two strategic,
high-quality acquisitions, and dispositions of a number of lower
yielding properties. Through our asset disposition program, we
completed the sale of 30 non-core assets from
January 1, 2003 through June 30, 2004, with two
additional hotels sold through early August 2004. We have
generated $247.2 million in gross cash proceeds from the
disposition of those 32 assets, which has significantly
enhanced our liquidity. We ended the quarter with approximately
$222 million in cash and cash equivalents,
$149 million of which was unrestricted. We have no material
maturities of long-term debt until 2007. We expect to retire the
remaining $34.2 million face amount of our
8.75% senior subordinated notes due 2007 by the end of 2004.

We have recently developed a unique process to
renovations, which we expect to reduce the time and cost
required to renovate hotels going forward, allowing us to
improve the quality of our hotels faster to take advantage of
the rebound in the economy and better control the level of
disruption associated with renovations. During the quarter, we
accelerated our renovation program for certain key assets which
created somewhat more short-term disruption than we had
originally expected, but also positioned us to participate more
quickly in the lodging industry recovery. We expect to invest
approximately $225 million in capital expenditures during
2004 and 2005 to enhance the quality of our core product to meet
or exceed the standards of our primary brands 
Hilton, Marriott, and Starwood  as well as to improve
the competitiveness of these assets in their markets and enable
them to more fully participate in any economic recovery. While
results are negatively impacted during renovations due to out of
service rooms and the negative impact on the ability to sell
other hotel services, we expect to have positioned these
renovated properties well to be able to benefit from the
economic recovery.

Since the beginning of 2004, we have completed
five of ten planned or contemplated brand conversions at the
Sheraton Bellevue, Holiday Inn Walt Disney World Village,
Doubletree Universal, Doubletree Hotel Dallas Galleria, and
Sheraton Key Largo with 1,724 total rooms converted to
date. We experienced the short term effect of these brand
conversions in the first and second quarters due to customer
displacement, renovation work and initial costs of training and
marketing associated with brand conversions. We expect the
conversions to generate longer term positive results at these
hotels going forward with increased brand support, better
alignment of hotel characteristics to the brand, or a more
beneficial cost structure.

Revenues from continuing operations increased to
$428 million for the six months ended June 30, 2004
compared to $417 million for the same period in 2003. Net
loss for the six months ended June 30, 2004 includes other
operating expenses that are 3.6% higher compared to the same
period in 2003, mainly due to the short-term impact of hotel
renovations and brand conversions during 2004, the impact in
2003 of aggressive cost-cutting initiatives that were
implemented last year prior to the war in Iraq, and a
restoration of 2003 cost reductions, particularly in areas
having the most impact on guest satisfaction such as concierge,
lounge, restaurant and lounge hours and front desk and bell
stand staffing. In addition, we incurred a $7.9 million
loss on early extinguishment of debt during the six months ended
June 30, 2004.

19



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##### 



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

RESULTS OF OPERATIONS

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

The provisions of Statement of Financial
Accounting Standards (SFAS) No. 144 require that
current and prior period operating results of any asset that has
been classified as held for sale or has been disposed of on or
after January 1, 2002, including any gain or loss
recognized on the sale, be recorded as discontinued operations.
Accordingly, we have reclassified all prior periods presented to
conform to this requirement. See Note 12,
Dispositions, included in Item 1 of this
Quarterly Report on Form 10-Q for further information
regarding the amounts included in discontinued operations.

Summary data for the three and six months ended
June 30 were as follows (dollars in thousands, except
operating data statistics):

|                                      |  |                             |         |                           |  |        |          |         |  |      |        |        |  |   |         |   |  |   |          |   |  |  |        |   
|------------------------------------- |  | --------------------------- | ------- | ------------------------- |  | ------ | -------- | ------- |  | ---- | ------ | ------ |  | - | ------- | - |  | - | -------- | - |  |  | ------ | --
|                                      |  |                             |         |                          
|                                      |  | Three Months Ended June 30, |         | Six Months Ended June 30,
|                                      |  |                             |         |                          
|                                      |  |                             |         | Percent                   |  |        |          | Percent
|Summary of Operations:                |  | 2004                        |         | 2003                      |  | Change |          | 2004    |  | 2003 |        | Change
|                                      |  |                             |         |                           |  |        |          |         |  |      |        |       
|Total revenue                         |  | $                           | 222,889 |                           |  | $      | 215,969  |         |  |      | 3.2    | %      |  | $ | 427,959 |   |  | $ | 416,696  |   |  |  | 2.7    | % 
|                                      |  |                             |         |                           |  |        |          |         |  |      |        |        |  |   |         |   |  |   |          |   |  |  |        |   
|Hotel operating expenses              |  |                             | 88,319  |                           |  |        | 82,775   |         |  |      | 6.7    |        |  |   | 170,135 |   |  |   | 160,414  |   |  |  | 6.1    |   
|Other operating expenses              |  |                             | 108,687 |                           |  |        | 108,406  |         |  |      | 0.3    |        |  |   | 220,014 |   |  |   | 212,357  |   |  |  | 3.6    |   
|Loss on asset impairments             |  |                             | 1,291   |                           |  |        | 65,123   |         |  |      | (98.0  | )      |  |   | 1,536   |   |  |   | 65,123   |   |  |  | (97.6  | ) 
|                                      |  |                             |         |                           |  |        |          |         |  |      |        |        |  |   |         |   |  |   |          |   |  |  |        |   
|Total operating expenses              |  |                             | 198,297 |                           |  |        | 256,304  |         |  |      | (22.6  | )      |  |   | 391,685 |   |  |   | 437,894  |   |  |  | (10.6  | ) 
|                                      |  |                             |         |                           |  |        |          |         |  |      |        |        |  |   |         |   |  |   |          |   |  |  |        |   
|Operating income (loss)               |  |                             | 24,592  |                           |  |        | (40,335  | )       |  |      | >100.0 |        |  |   | 36,274  |   |  |   | (21,198  | ) |  |  | >100.0 |   
|Minority interest                     |  |                             | 671     |                           |  |        | 10,598   |         |  |      | (93.7  | )      |  |   | 1,617   |   |  |   | 14,275   |   |  |  | (88.7  | ) 
|Loss on early extinguishment of debt  |  |                             | (1,980  | )                         |  |        |         |         |  |      | N/A    |        |  |   | (7,903  | ) |  |   |         |   |  |  | N/A    |   
|Interest expense, net                 |  |                             | (29,724 | )                         |  |        | (34,583  | )       |  |      | (14.1  | )      |  |   | (64,103 | ) |  |   | (69,301  | ) |  |  | (7.5   | ) 
|Income tax benefit (expense)          |  |                             | (45     | )                         |  |        | (12      | )       |  |      | >100.0 |        |  |   | 410     |   |  |   | 164      |   |  |  | >100.0 |   
|                                      |  |                             |         |                           |  |        |          |         |  |      |        |        |  |   |         |   |  |   |          |   |  |  |        |   
|Loss from continuing operations       |  |                             | (6,486  | )                         |  |        | (64,332  | )       |  |      | (89.9  | )      |  |   | (33,705 | ) |  |   | (76,060  | ) |  |  | (55.7  | ) 
|Loss from discontinued operations (a) |  |                             | (5,069  | )                         |  |        | (142,029 | )       |  |      | (96.4  | )      |  |   | (18,094 | ) |  |   | (200,046 | ) |  |  | (91.0  | ) 
|                                      |  |                             |         |                           |  |        |          |         |  |      |        |        |  |   |         |   |  |   |          |   |  |  |        |   
|Net loss                              |  | $                           | (11,555 | )                         |  | $      | (206,361 | )       |  |      | (94.4  | )%     |  | $ | (51,799 | ) |  | $ | (276,106 | ) |  |  | (81.2  | )%
|                                      |  |                             |         |                           |  |        |          |         |  |      |        |        |  |   |         |   |  |   |          |   |  |  |        |   



---



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Includes loss on asset impairments of
    $1.1 million and $142.9 million for the three months
    ended June 30, 2004 and 2003, respectively. Also includes
    loss on disposal of $4.6 million for the three months ended
    June 30, 2004. Includes loss on asset impairments of
    $5.9 million and $199.6 million for the six months
    ended June 30, 2004 and 2003, respectively. Also includes
    loss on disposal of $11.5 million for the six months ended
    June 30, 2004.

20



---



##### 



Three Months Ended June 30, 2004
Compared with the Three Months Ended June 30,
2003

Continuing operations results for 76
properties

Our 76 properties in continuing operations
include four properties planned for disposition, four properties
impacted by brand conversions, and two properties acquired in
2004.

Total revenue.Total
revenue increased in the second quarter of 2004 compared to the
same period of 2003, as the industry began to benefit from an
increase in travel due to a general strengthening of the
economy, partially offset by the short-term impacts of
rebranding and renovation-related disruptions. Additionally, the
prior year was impacted by the war in Iraq. The increase in
total revenue was primarily due to a $6.2 million increase
in room revenue, as well as revenues from properties acquired in
2004.

Hotel operating
expenses.Hotel operating expenses
increased $5.5 million or 6.7% in the second quarter of
2004 compared to same period of 2003. The increase was
attributable to a 7.9% increase in rooms expense mainly due to
the restoration of services with an emphasis on improving guest
satisfaction, the impact of renovation-related costs, the impact
of brand conversion costs and the effect of expenses of hotels
acquired in 2004. Also, prior year results reflect aggressive
cost reductions as a result of the war in Iraq. Food and
beverage expense also increased 7.6% as rapidly increasing food
costs and labor expenses outpaced adjustments in menu pricing.

Other operating
expenses.Other operating expenses,
which include general and administrative expenses, property
operating costs, depreciation and amortization, non-income
taxes, and insurance, remained relatively flat in the aggregate.
Individual variations in these expenses were as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Corporate general and administrative expenses
    increased by approximately $0.3 million during the second
    quarter of 2004 primarily due to an increase in costs associated
    with corporate headquarters resources as we separate ourselves
    from Interstate Hotels as well as the increased cost to comply
    with the increase in public company compliance requirements.                                                                                                                                                                                                         
|
| |  | Property operating costs, which consist of
    repairs and maintenance, energy, franchise and management costs,
    increased $1.3 million to $31.9 million during the
    three months ended June 30, 2004 as compared to the same
    period in 2003 mainly due to increases in franchise fees and
    management fees as a result of increasing revenues and higher
    energy costs. The energy costs increase was partially mitigated
    by a strategic program implemented in late 2003 which is
    designed to help us manage the increasingly volatile energy
    costs at our hotels.
|
| |  | Insurance expense decreased 18% for the three
    months ended June 30, 2004 as compared to the same period
    in 2003 primarily due to an improvement in property insurance
    premiums upon renewal.                                                                                                                                                                                                                                                                                                                                                                                        

Loss on asset
impairments.We recognized losses on
asset impairments totaling $2.4 million and
$208.0 million related to our asset disposition program
during the three months ended June 30, 2004 and 2003,
respectively. Of these total asset impairment losses,
$1.1 million and $142.9 million for the three months
ended 2004 and 2003, respectively, are included in discontinued
operations. The impairment losses recorded during the three
months ended June 30, 2004 primarily represent a decrease
in estimated proceeds from the sale of our remaining assets
planned for disposition. Impairments were significant during the
three months ended June 30, 2003 due to our decision during
that quarter to expand our asset disposition program, thereby
resulting in a change in our expected holding period for these
assets.

Loss on early extinguishment of
debt.During the second quarter of
2004, we recorded a loss on early extinguishment of debt of
$1.6 million related to our repurchase of
$28.1 million of our senior unsecured notes, and
$0.3 million related to our redemption of
$11.2 million of our senior subordinated notes.

Interest expense,
net.Interest expense declined 14.1%
in the second quarter of 2004 compared to the same period of
2003 primarily due to repurchases of higher interest bearing
debt and placement of lower interest bearing debt.

Loss from discontinued
operations.During the second
quarter of 2004, we completed the sale of four hotels in
separate transactions for an aggregate of $30.8 million in
cash, resulting in loss on disposal of

21



---



##### 



$4.6 million. Loss on disposal resulted
primarily from the recognition of termination fees payable to
Interstate Hotels with respect to these hotels management
contracts. As of June 30, 2004, we had three hotels
classified as held for sale. Discontinued operations for the
three months ended June 30, 2004 included impairment
charges totaling $1.1 million related to the assets held
for sale. Discontinued operations for the three months ended
June 30, 2003 included impairment charges totaling
$142.9 million.


Six Months Ended June 30, 2004
Compared with the Six Months Ended June 30,
2003

Continuing operations results for 76
properties

Our 76 properties in continuing operations
include four properties planned for disposition, four properties
impacted by brand conversions, and two properties acquired in
2004.

Total revenue.Total
revenue increased $11.3 million for the six months ended
June 30, 2004 compared to the same period of 2003, as the
industry began to benefit from an increase in travel due to a
general strengthening of the economy. Additionally, the prior
year was impacted by the build-up and start of the war in Iraq.
Current year revenues were also impacted by rebranding and
renovations at several hotels.

Hotel operating
expenses.Hotel operating expenses
increased $9.7 million or 6.1% for the six months ended
June 30, 2004 compared to the same period of 2003. The
increase was attributable to a 7.3% increase in rooms expense
mainly due to the restoration of services with an emphasis on
improving guest satisfaction, the impact in 2004 of
renovation-related costs, and the impact of brand conversion
costs. Also, prior year results reflect aggressive cost
reductions in anticipation of economic impacts associated with
the war in Iraq. Food and beverage expense also increased 5.7%
as rapidly increasing food costs and labor expenses outpaced
adjustments in menu pricing.

Other operating
expenses.Other operating expenses,
which include general and administrative expenses, property
operating costs, depreciation and amortization, non-income
taxes, and insurance, increased 3.6%. Individual variations in
these expenses were as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Hotel general and administrative expenses
    increased by approximately $2.9 million or 4.6% for the six
    months ended June 30, 2004 as compared to the same period
    in 2003 primarily due to a 7.5% increase in sales and marketing
    expense at the hotel level associated with new initiatives
    implemented in the first quarter of 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Corporate general and administrative expenses
    increased $1.0 million or 16.4% during the six months ended
    June 30, 2004 primarily due to an increase in costs
    associated with corporate headquarters resources as we separate
    ourselves from Interstate Hotels as well as the increased cost
    to comply with the increase in public company compliance
    requirements.                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Property operating costs, which consist of
    repairs and maintenance, energy, franchise and management costs,
    increased $3.3 million to $62.9 million during the six
    months ended June 30, 2004 as compared to the same period
    in 2003 mainly due to an increase in repairs and maintenance as
    a result of a strategy to improve operating capabilities and
    longer term quality of our assets, increases in franchise fees
    and management fees as a result of increasing revenues and
    higher energy costs (due to colder weather in January and
    February 2004). The energy costs increase was partially
    mitigated by a strategic program implemented in late 2003 which
    is designed to help us manage the increasingly volatile energy
    costs at our hotels.
|
| |  | Insurance expense decreased 6.7% for the six
    months ended June 30, 2004 as compared to the same period
    in 2003 primarily due to an improvement in property insurance
    premiums upon renewal in the three months ended June 30,
    2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Depreciation and amortization expense increased
    $2.1 million for the six months ended June 30, 2004 to
    $51.3 million from $49.2 million for the six months
    ended June 30, 2003. The increase is due to the write-off
    of deferred financing fees related to early repayments of our
    debt securities and depreciation on our properties acquired in
    2004.                                                                                                                                                                                                                                                                                                                                                                                                                          

22



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##### 



Loss on asset
impairments.We recognized losses on
asset impairments totaling $7.4 million and
$264.7 million related to our asset disposition program
during the six months ended June 30, 2004 and 2003,
respectively. Of these total asset impairment losses,
$5.9 million and $199.6 million for the six months
ended 2004 and 2003, respectively, are included in discontinued
operations. The impairment losses recorded during the six months
ended June 30, 2004 primarily represent a decrease in
estimated proceeds from the sale of our remaining assets planned
for disposition. Impairments were significant during the six
months ended June 30, 2003 due to our decision early that
year to expand our asset disposition program, thereby resulting
in a change in our expected holding period for these assets.

Loss on early extinguishment of
debt.For the six months ended
June 30, 2004, we recorded a loss on early extinguishment
of debt of $6.2 million related to our repurchase of
$99.6 million of our senior unsecured notes, and
$1.7 million related to our redemption of
$49.2 million of our senior subordinated notes.

Interest expense,
net.Interest expense declined 7.5%
during the six months ended June 30, 2004 compared to the
same period in 2003 primarily due to repurchases of higher
interest bearing debt and placement of lower interest bearing
debt.

Loss from discontinued
operations.During the six months
ended June 30, 2004, we completed the sale of 15 hotels in
separate transactions for an aggregate of $104.9 million in
cash, resulting in a loss on disposal of $11.5 million. The
loss on disposal resulted primarily from the recognition of
termination fees payable to Interstate Hotels with respect to
these hotels management contracts. As of June 30,
2004, we had three hotels classified as held for sale.
Discontinued operations for the six months ended June 30,
2004 included impairment charges totaling $5.9 million
related to the assets held for sale. Discontinued operations for
the six months ended June 30, 2003 included impairment
charges totaling $199.6 million.

FUNDS FROM OPERATIONS (FFO)

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

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

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

23



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##### 



FFO

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

|                                                                                             |                                                         |                    |        |                  |   |      |          |          |   |   |        |         |   |   |          |          |  
|-------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------------------ | ------ | ---------------- | - | ---- | -------- | -------- | - | - | ------ | ------- | - | - | -------- | -------- | -
|                                                                                             |                                                         |                    |        |                 
|                                                                                             |                                                         | Three Months Ended |        | Six Months Ended
|                                                                                             |                                                         | June 30,           |        | June 30,        
|                                                                                             |                                                         |                    |        |                 
|                                                                                             |                                                         | 2004               |        | 2003             |   | 2004 |          | 2003    
|                                                                                             |                                                         |                    |        |                  |   |      |          |         
|                                                                                             | Net loss                                                |                    | $      | (11,555          | ) |      | $        | (206,361 | ) |   | $      | (51,799 | ) |   | $        | (276,106 | )
|                                                                                             | Depreciation and amortization of real estate
    assets |                    |        | 23,617           |   |      |          | 28,042   |   |   |        | 48,120  |   |   |          | 55,656   |  
|                                                                                             | Loss on disposal of assets                              |                    |        | 4,584            |   |      |          |         |   |   |        | 11,530  |   |   |          |         |  
|                                                                                             | Minority interest to common OP unit holders             |                    |        | (671             | ) |      |          | (10,260  | ) |   |        | (1,759  | ) |   |          | (13,628  | )
|                                                                                             |                                                         |                    |        |                  |   |      |          |          |   |   |        |         |   |   |          |         
|FFO                                                                                          |                                                         | $                  | 15,975 | (A)              |   | $    | (188,579 | ) (B)    |   | $ | 6,092  | (C)     |   | $ | (234,078 | ) (D)   
|                                                                                             |                                                         |                    |        |                  |   |      |          |          |   |   |        |         |   |   |          |         
|FFO per share                                                                                |                                                         | $                  | .19    | (A)              |   | $    | (3.90    | ) (B)    |   | $ | .08    | (C)     |   | $ | (4.86    | ) (D)   
|Weighted average number of shares of common stock
    outstanding for loss per share and FFO |                                                         |                    | 85,333 |                  |   |      | 48,392   |          |   |   | 78,234 |         |   |   | 48,127   |         



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) | Funds from operations included the effect of
    asset impairment charges, loss on early extinguishment of debt
    and related write off of deferred financing fees recognized
    during the three months ended June 30, 2004, totaling
    $(4.9) million, or $(0.06) per diluted share. Weighted
    average number of shares of common stock and common OP units
    outstanding at June 30, 2004 on a fully diluted basis were
    85.3 million.                                                                                               
|   
|(B) | Funds from operations included the effect of
    asset impairment charges, interest on convertible debt (the
    convertible debt becomes dilutive if asset impairment charges
    are excluded from the FFO calculation) and related minority
    interest amounts recognized during the three months ended
    June 30, 2003, totaling $(209.3) million or $(3.91)
    per diluted share. The weighted average number of shares of
    common stock and common OP units outstanding at June 30,
    2003 on a fully diluted basis was 53.6 million.
|   
|(C) | Funds from operations included the effect of
    asset impairment charges, loss on early extinguishment of debt
    and related write off of deferred financing fees recognized
    during the six months ended June 30, 2004, totaling
    $(17.1) million, or $(0.22) per diluted share. The weighted
    average number of shares of common stock and common OP units
    outstanding at June 30, 2004 on a fully diluted basis was
    78.2 million.                                                                                             
|   
|(D) | Funds from operations included the effect of
    asset impairment charges and related minority interest amounts
    recognized during the six months ended June 30, 2003,
    totaling $(263.7) million or $(5.38) per diluted share. The
    weighted average number of shares of common stock and common OP
    units outstanding at June 30, 2003 on a fully diluted basis
    was 49.0 million.                                                                                                                                                  

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL
RESOURCES

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

Factors that may influence our liquidity include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Factors that affect our results of operations,
    including general economic conditions, demand for business and
    leisure travel, public concerns about travel safety related
    primarily to terrorism and related concerns, capital investments
    required to maintain our propertys competitive position
    and other operating risks described under the caption,
    Risk Factors  Operating Risks in
    Item 1 of our Annual Report on Form 10-K for the year
    ended December 31, 2003;

24



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| |   |                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Factors that affect our access to bank financing
    and the capital markets, including operational risks, high
    leverage, covenant compliance, interest rate fluctuations, and
    other risks described under the caption Risk
    Factors  Financing Risks in Item 1 of our
    Annual Report on Form 10-K for the year ended
    December 31, 2003; and
|
| |  | Other factors described previously under the
    caption, Cautionary Statement Regarding Forward-Looking
    Statements in this Quarterly Report on Form 10-Q.                                                                                                                                                                                                 

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

As part of our strategy to manage our leverage,
we have raised proceeds through an equity issuance, and we have
retired debt with higher interest rates and acquired added debt
with lower interest rates. On April 23, 2004, we issued and
sold 12.0 million shares of common stock at a price to the
public of $6.25 per share pursuant to our effective shelf
registration statement filed under the Securities Act of 1933.
The offering closed on April 28, 2004 with net proceeds of
approximately $72.3 million. During fiscal 2004, we have
retired $49.2 million of our 8.75% senior subordinated
notes (plus $0.9 million of accrued interest) by issuing
8,138,728 shares of common stock through August 3,
2004. In addition, as of August 3, 2004, we have purchased
from available cash $99.6 million of our senior unsecured
notes, including $25.8 million of the 10.5% notes,
$29.5 million of the 9% notes and $44.3 million
of the 9.125% notes. Following these exchanges and the
repurchases, we had as of August 3, 2004,
$34.2 million of outstanding senior subordinated notes due
2007 and $850.4 million of outstanding senior unsecured
notes. We expect to retire the remaining senior subordinated
notes due 2007 by the end of 2004. Additionally, in June 2004,
we entered into two fixed-rate mortgages at 5.69% and 5.80%,
respectively, secured by our two hotels acquired during the
second quarter of 2004.

During the six months ended June 30, 2004,
we have sold $104.9 million of underperforming and non-core
assets. Non-core assets were largely upscale and midscale assets
that do not fit with our upper upscale focus, were located in
markets that are not strategically important or where we have
multiple assets, had significant capital expenditure needs or
produced insufficient cash flow or have lower growth
opportunities. Proceeds were used to redeem debt or upgrade the
existing portfolio through our asset renovation program or
acquisition strategy.

As part of our acquisition strategy, on
May 10, 2004 we acquired the four-star, four-diamond rated
Ritz-Carlton, Pentagon City in Arlington, Virginia for a
purchase price of $93 million. The 366-room luxury hotel is
operated by The Ritz-Carlton Hotel Company, LLC under a
long-term contract. The hotel features nearly 18,000 square
feet of meeting space, which can accommodate meetings of up to
900 guests. On June 30, 2004, we partially financed the
acquisition through closing on a $55.8 million fixed-rate
mortgage loan which is secured by this property, matures on
June 1, 2011 and bears interest at an annual rate of 5.80%.

Additionally, on June 25, 2004, we acquired
the 485-room Marriott Irvine in Orange County, California, for a
purchase price of $92.5 million. The hotel is operated by a
subsidiary of Marriott International, Inc. under a long-term
contract. The hotel features 30,000 square feet of meeting
space, including a 13,000 square foot ballroom that can
accommodate meetings of up to 1,500. We expect to invest
approximately $7.5 million in property improvements over
the next 12 months, primarily in the hotels guest
rooms. To take advantage of the current low interest rate
environment, we financed a portion of the acquisition with a
$55.5 million fixed-rate mortgage which is secured by this
property, matures on July 1, 2011 and bears interest at an
annual rate of 5.69%.

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Sources and Uses of Cash

The following table shows our consolidated cash
flows, generated by (used in) our various activities, for the
six months ended June 30 (in thousands):

|                                                            |  |      |          |      |  |              |        |   |  |   |          |  
|----------------------------------------------------------- |  | ---- | -------- | ---- |  | ------------ | ------ | - |  | - | -------- | -
|                                                            |  | 2004 |          | 2003 |  | 2004 vs 2003
|                                                            |  |      |          |      |  |             
|Operating activities                                        |  | $    | 17,690   |      |  | $            | 11,810 |   |  | $ | 5,880    |  
|Investing activities                                        |  |      | (162,851 | )    |  |              | 15,130 |   |  |   | (177,981 | )
|Financing activities                                        |  |      | 63,323   |      |  |              | (4,414 | ) |  |   | 67,737   |  
|Cash and cash equivalents, end of
    period  unrestricted |  |      | 148,819  |      |  |              | 56,307 |   |  |   | 92,512   |  

Our operating results and the amount of cash
generated by our hotel operations were adversely affected
beginning in late 2001 by a general downturn in the economy
compounded by the events of September 11, 2001 and while we
are seeing the impacts of a recovering economy, our operating
results have continued to be negatively affected by the
reduction in travel resulting from economic conditions,
geopolitical events, war, the continued threat of domestic
terrorism, and other factors affecting business and leisure
travel.

We used a net $162.9 million of cash from
investing activities during the first half of 2004, primarily
due to:



| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | $182.8 million for acquisition of hotels,
    net of cash acquired;                        
|
| |  | $49.9 million in capital expenditures
    (including $2.0 million of capitalized interest);
|
| |  | $30.0 million increase in cash restricted
    for mortgage escrows, partially offset by    
|
| |  | $104.9 million of proceeds from the sale of
    15 non-core hotel assets.                  

Our investing activities provided a net
$15.1 million of cash during the first half of 2003,
resulting primarily from:



| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | $42.1 million from Interstate Hotels for the
    payment of a note receivable; and             
|
| |  | $15.8 million of proceeds from the sale of
    two non-core hotel assets, partially offset by  
|
| |  | $18.1 million investment in marketable
    securities;                                         
|
| |  | $14.5 million in capital expenditures
    (including $1.6 million of capitalized interest); and
|
| |  | $9.7 million increase in cash restricted for
    mortgage escrows.                             

We realized a net $63.3 million in proceeds
from financing activities during the first half of 2004
primarily due to proceeds from debt issuance, net of issuance
costs, of $109.7 million, proceeds from common stock
issuances of $72.3 million, partially offset by prepayments
on long-term debt of $105.9 million, scheduled payments on
long-term debt of $3.7 million and the purchase of
subsidiary partnership interests for $8.7 million. We used
$4.4 million of cash in financing activities during the
first half of 2003 due mainly to the repayment of our long-term
debt obligations.

We must distribute to stockholders at least 90%
of our REIT taxable income, excluding net capital gains, to
preserve the favorable tax treatment accorded to REITs under the
Internal Revenue Code. Under certain circumstances, we may be
required to make distributions in excess of cash available for
distribution in order to meet the Internal Revenue Code
requirements. In that event, we would seek to borrow additional
funds or sell additional non-core assets for cash, or both, to
the extent necessary to obtain cash sufficient to make the
distributions required to retain our qualification as a REIT.
Any future distributions will be at the discretion of our board
of directors and will be determined by factors including our
operating results, restrictions imposed by our borrowing
agreements, capital expenditure requirements, the economic
outlook, the distribution requirements for REITs under the
Internal Revenue Code and such other factors as our board of
directors deems relevant. Our senior unsecured notes indenture
and our senior credit facility permit the payment of dividends
in order to maintain REIT qualification even if we fall below a
2 to 1 fixed charge coverage ratio. However, our senior
subordinated notes indenture is more restrictive in that it
permits the payment of

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dividends only if we exceed the 2 to 1 fixed
charge coverage ratio. We expect to retire the remaining
outstanding senior subordinated notes due 2007 by the end of
2004. As of June 30, 2004, our fixed charge coverage ratio
was significantly below 2 to 1. The timing and amount of any
future distributions is dependent upon these factors, and we
cannot provide assurance that any such distributions will be
made in the future. We do not expect to pay a dividend on our
common stock in 2004.


Long-Term Debt

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

|                                             |  |          |           |              |  |   |           |  
|-------------------------------------------- |  | -------- | --------- | ------------ |  | - | --------- | -
|                                             |  | June 30, |           | December 31,
|                                             |  | 2004     |           | 2003        
|                                             |  |          |           |             
|Senior unsecured notes due 2011  9.125%     |  | $        | 355,665   |              |  | $ | 400,000   |  
|Senior unsecured notes due 2008  9.0%       |  |          | 270,500   |              |  |   | 300,000   |  
|Senior unsecured notes due 2009  10.5%      |  |          | 224,187   |              |  |   | 250,000   |  
|Secured facility, due 2009                   |  |          | 306,067   |              |  |   | 309,035   |  
|Secured facility, due 2013                   |  |          | 100,041   |              |  |   | 100,765   |  
|Convertible subordinated notes               |  |          | 173,705   |              |  |   | 173,705   |  
|Senior subordinated notes                    |  |          | 34,225    |              |  |   | 83,438    |  
|Mortgage debt                                |  |          | 137,505   |              |  |   | 27,011    |  
|Unamortized issue discount                   |  |          | (4,417    | )            |  |   | (5,926    | )
|                                             |  |          |           |              |  |   |           |  
|                                             |  |          | 1,597,478 |              |  |   | 1,638,028 |  
|Fair value adjustment for interest rate swap |  |          | (10,074   | )            |  |   |          |  
|                                             |  |          |           |              |  |   |           |  
|                                             |  | $        | 1,587,404 |              |  | $ | 1,638,028 |  
|                                             |  |          |           |              |  |   |           |  

As of June 30, 2004, 81% of our debt bore
fixed rates of interest, and the remaining 19% bore interest at
fixed rates that have been, since April 2, 2004,
effectively swapped to a floating rate. Our overall weighted
average interest rate was 8.30% after giving effect to the
interest rate swap. Based on market prices at June 30,
2004, the fair value of our long-term debt was
$1.62 billion.

Credit facility.On
December 23, 2003, we entered into a new three-year
$50 million senior credit facility, secured by six of our
hotels, and terminated our previous credit facility. The
facility bears interest at an annual rate of the London
Interbank Offered Rate, or LIBOR, plus 450 basis points. As
of June 30, 2004, we had no outstanding borrowings under
this facility.

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

Senior unsecured
notes.During the six months ended
June 30, 2004, we repurchased from available cash
$99.6 million of our senior unsecured notes, including
$29.5 million of the 9.0% notes due 2008,
$44.3 million of the 9.125% notes due 2011, and
$25.8 million of the 10.5% notes due 2009. We recorded
a loss on early extinguishment of debt of $6.2 million and
wrote off deferred financing costs of $1.2 million related
to these repurchases which is included in depreciation and
amortization expense on the accompanying consolidated statements
of operations.

These senior unsecured notes are unsecured
obligations of MHOP, and we guarantee payment of principal and
interest on the notes. These notes contain various restrictive
covenants, limiting our ability to initiate or transact certain
business activities if specific financial thresholds are not
achieved. One of those

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thresholds is having a 2 to 1 fixed
charge coverage ratio (as defined in the indentures, fixed
charges only include interest on debt obligations and preferred
equity) in order to enter into certain types of transactions,
including the repurchase of stock, the issuance of any preferred
stock, the payment of certain dividends, the incurrence of any
additional debt, or the repayment of certain outstanding debt
before it comes due. As of June 30, 2004, our fixed charge
coverage ratio was significantly below 2 to 1, and
therefore we were not permitted generally to enter into those
transactions, except as noted below.


There are certain exceptions with respect to the
incurrence of additional debt and early repayment of debt
features in the indentures. We have the ability to incur up to
$300 million of secured financing within restricted
subsidiaries, subject to meeting other maintenance tests under
the indentures, of which $194 million was available at
June 30, 2004. We also have a general carve-out to incur
$50 million of unspecified borrowings within a restricted
subsidiary, of which the full amount was available at
June 30, 2004. We have the ability to lever assets within
an unrestricted subsidiary, such as the mortgage financing
related to the acquisition of Marriott Irvine. Additionally, we
are permitted to repay subordinated debt prior to its maturity
from the proceeds of an equal or junior financing with a longer
term than the debt refinanced, an equity offering, or a
financing within an unrestricted subsidiary.

Secured facilities.We completed a $330 million non-recourse financing secured
by a portfolio of 19 hotels in 1999. The loan bears a fixed
annual interest rate of 8.01% and matures in 2009. The secured
facility contains standard provisions that require the servicer
to maintain in escrow cash balances for certain items such as
property taxes and insurance. In addition, the facility contains
a provision that requires our mortgage servicer to retain in
escrow the excess cash from the encumbered hotels after payment
of debt service (Excess Cash), if net hotel
operating income (NOI) for the trailing twelve
months declines below $57 million. This provision was
triggered in October 2002 and will be effective until the hotels
generate the minimum cash flow required for two consecutive
quarters, at which time the cash being held in escrow will be
released to us. We expect that net hotel NOI will remain below
$57 million for the foreseeable future. As of June 30,
2004 and December 31, 2003, $39.2 million and
$27.2 million, respectively, of cash was held in escrow
under this provision. In July 2003, we signed an amendment to
the loan agreement that permits the release of cash placed in
escrow for all capital expenditures incurred on the 19
encumbered properties on or after April 1, 2003. Although
the servicer will continue to retain in escrow any excess cash
from the encumbered hotels, they will release cash for all
capital expenditures we have incurred from April 1, 2003
through the date of the amendment and future capital
expenditures we incur on the 19 properties. Escrowed funds
totaling approximately $30.3 million were available to fund
capital expenditures under this provision as of June 30,
2004. In July 2004, we received a cash reimbursement of
$12.2 million from the servicer related to capital
expenditures incurred on the 19 encumbered properties.

The fair value adjustments for the interest rate
swap agreement of $(10.1) million that are discussed in
further detail below are related to the outstanding secured
facility balance of $306.1 million as of June 30, 2004.

On September 26, 2003, as permitted by the
indentures to our senior unsecured notes and senior subordinated
notes, we completed a $101 million commercial
mortgage-backed securities financing, secured by a portfolio of
four hotels. The loan carries a fixed annual interest rate of
6.88% and matures in 2013. We placed this commercial
mortgage-backed security in order to reduce our average
borrowing cost by paying down debt with higher interest rates.

Convertible subordinated
notes.On July 1, 2003, we
completed an offering of $170 million aggregate principal
amount of 9.5% convertible subordinated notes due 2010.
These notes are convertible into our common stock at any time
prior to or at maturity, April 1, 2010 at a conversion
price of $10.18 per share (equal to a conversion rate of
98.2318 shares per $1,000 principal amount of notes).

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

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

The senior subordinated notes, plus accrued and
unpaid interest at the redemption date, are subject to
redemption at our option. Under the indenture governing these
notes, the redemption price for redemptions occurring through
August 15, 2004 and August 15, 2005 will be 102.917%
and 101.458%, respectively, of the principal amount, and for
redemptions occurring after August 15, 2005, the redemption
price will be 100.000% of the principal amount.

During the six months ended June 30, 2004,
we retired $49.2 million of our senior subordinated notes
(plus $0.9 million of accrued interest) through the
issuance of 8,138,728 shares of common stock. We recorded a
loss on early extinguishment of debt of $1.7 million and
wrote off deferred financing costs of $0.5 million related
to this activity. The write off of deferred financing costs is
included in depreciation and amortization expense on the
accompanying consolidated statements of operations. We expect to
retire the remaining outstanding senior subordinated notes due
2007 by the end of 2004.

Mortgage debt.As of
June 30, 2004, we had four mortgage loans, two of which
were placed during the second quarter of 2004 and one of which
is in foreclosure.

We financed a portion of the Marriott Irvine
acquisition (see Asset Acquisitionsbelow) with a
$55.5 million fixed-rate mortgage effective June 25,
2004, collateralized by the hotel, which matures on July 1,
2011 and bears interest at an annual rate of 5.69%. On
June 30, 2004, in connection with The Ritz-Carlton,
Pentagon City acquisition (see Asset Acquisitionsbelow),
we entered into a $55.8 million fixed-rate mortgage loan,
collateralized by the hotel, which matures on June 1, 2011
and bears interest at an annual rate of 5.80%.

We have a mortgage that matures in 2011 and
carries an interest rate of 8.8%; however, the lender, with our
acquiescence, initiated foreclosure proceedings which are
expected to be completed in the third quarter of 2004. This
mortgage loan is collateralized by one of our properties, which
we will relinquish to the bank upon completion of foreclosure,
which we expect to occur in the third quarter of 2004. The
carrying value of the mortgage loan and the fair value of the
building both approximate $11 million. This property is
included in the seven properties remaining in our disposition
program.

Our only other individual mortgage matures in
2011 and carries an interest rate of 9.0%.

Derivatives.On
April 2, 2004, we entered into an interest rate swap
arrangement with a third party to manage our interest rate risk
related to our secured facility due 2009, effectively converting
the interest the facility bears from a fixed rate to a floating
rate. Under the swap, we receive fixed-rate payments of 8.01%
and pay floating rate payments based on a one month LIBOR plus
444 basis points on a $307 million notional amount. We
do not use derivative instruments for speculative purposes. Due
to the fact that the notional amount of the swap matches the
principal amount of the underlying debt and other hedge
accounting criteria were met, the swap was designated as highly
effective at the inception of the swap arrangement and
designated as a fair value hedge. We continue to evaluate the
effectiveness of the hedge and believe that the hedge continues
to be highly effective.

For a derivative qualifying as a fair value
hedge, the change in net unrealized gain or loss upon measuring
the fair value hedge and the fair value of the debt instrument
is recorded on our consolidated statements of operations. These
amounts offset each other as there is no ineffectiveness, and
therefore had no impact on our net income for the three and six
months ended June 30, 2004. The fair value of the swap is
recorded as either an asset or liability, with a corresponding
increase or decrease to the carrying value of the debt
instrument being hedged on our consolidated balance sheets. The
fair value of our hedge was approximately a $10.1 million
liability as of June 30, 2004. This amount is included in
the Consolidated Balance Sheet as other liabilities with the
offset recorded to long-term debt. During the three and six
months ended June 30, 2004, we earned cash payments of
$1.7 million under the swap, which were recorded as a
reduction in interest expense.

During 2003, our only derivative instruments
consisted of two swap agreements that did not qualify for
treatment as hedges under SFAS No. 133, of which one
expired in April 2003 and one in July 2003. During

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the three and six months ended June 30,
2003, we recognized $1.3 million and $3.4 million,
respectively, of income related to the decrease in fair value of
the liability recorded for the interest rate swaps in place in
those time periods. For the three and six months ended
June 30, 2003, we made cash payments on those swaps of $1.3
and $3.4 million, respectively. The change in fair value
and the swap payments are netted together on our consolidated
statement of operations, thus resulting in no impact on net
income.


Asset Acquisitions

One of our key strategies is the acquisition of
high quality, upper upscale full-service hotels strategically
located in major urban markets or destination resorts with high
barriers to entry. Our acquisitions may involve management
contracts with hotel brands where our long-term investment focus
makes us a preferred owner. We intend to acquire assets with
strong existing cash flow and use moderate or no leverage in the
near term to finance these potential acquisitions, thereby
enabling us to improve our overall leverage and interest
coverage levels. In pursuing this strategy, we may be somewhat
limited by the terms of our senior note indentures, which limit
our ability to obtain financing beyond certain limited
exceptions (including up to $300 million of mortgage
indebtedness, of which $194 million was available at
June 30, 2004, and $50 million of general indebtedness
and other borrowings, of which the full amount was available at
June 30, 2004, to the extent capacity exists within
unrestricted subsidiaries) to acquire assets (as we are below
the required fixed charge coverage ratio of 2 to 1). We have the
ability to lever assets within an unrestricted subsidiary, such
as the mortgage financing related to the acquisition of the
Marriott Irvine. In order to incur additional indebtedness
beyond that permitted by those limited exceptions, we would have
to comply with the 2 to 1 fixed charge coverage ratio test on a
pro forma basis after incurring the indebtedness and applying
its proceeds. As of June 30, 2004, our fixed charge
coverage ratio was significantly below 2 to 1.

On May 10, 2004 and June 25, 2004, we
acquired the 366-room Ritz-Carlton, Pentagon City in Arlington,
Virginia and the 485-room Marriott Irvine in Orange County,
California, respectively, for a total purchase price of
$185.5 million, plus net acquisition costs and adjustments
of $0.7 million.

The Ritz-Carlton, Pentagon City luxury hotel is
operated by The Ritz-Carlton Hotel Company, LLC under a
long-term contract. On June 30, 2004, we partially financed
the acquisition through the placement of a $55.8 million
fixed-rate mortgage loan which is secured by this property,
matures on June 1, 2011 and bears interest at an annual
rate of 5.80%.

The Marriott Irvine is operated by a subsidiary
of Marriott International, Inc. under a long-term contract. We
expect to invest approximately $7.5 million in property
improvements over the next 12 months, primarily in the
hotels guest rooms. We financed a portion of the
acquisition with a $55.5 million fixed-rate mortgage loan
which is secured by this property, matures on July 1, 2011
and bears interest at an annual rate of 5.69%. Because Marriott
International, Inc. reports results in 13 four week periods
during the year rather than the 12 monthly periods that we
employ, we will include 12 weeks of results in each of
quarters one through three and 16 weeks of results in
quarter four.

The acquisitions were accounted for under the
purchase method of accounting, and the assets and liabilities
and results of operations of the hotels have been consolidated
in our financial statements since the date of purchase. On an
unaudited pro forma basis, revenues, net income and basic and
diluted loss per share for the three and six months ended
June 30, 2004 and 2003 would have been reported as follows
if the acquisitions had occurred at the beginning of each of the
respective periods (in thousands):

|                    |         |                    |         |                  |   |      |          |       |   |   |         |       |   |   |          |       |  
|------------------- | ------- | ------------------ | ------- | ---------------- | - | ---- | -------- | ----- | - | - | ------- | ----- | - | - | -------- | ----- | -
|                    |         |                    |         |                 
|                    |         | Three Months Ended |         | Six Months Ended
|                    |         | June 30,           |         | June 30,        
|                    |         |                    |         |                 
|                    |         | 2004               |         | 2003             |   | 2004 |          | 2003 
|                    |         |                    |         |                  |   |      |          |      
|Total revenue       |         | $                  | 238,655 |                  |   | $    | 231,535  |       |   | $ | 455,136 |       |   | $ | 446,324  |      
|Net loss            |         |                    | (10,213 | )                |   |      | (204,660 | )     |   |   | (49,634 | )     |   |   | (273,975 | )    
|Net loss per share: |         |                    |         |                  |   |      |          |       |   |   |         |       |   |   |          |      
|                    | Basic   |                    | $       | (0.12            | ) |      | $        | (4.44 | ) |   | $       | (0.66 | ) |   | $        | (5.98 | )
|                    | Diluted |                    |         | (0.13            | ) |      |          | (4.44 | ) |   |         | (0.66 | ) |   |          | (5.94 | )

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The following is a summary of the combined
preliminary allocation of the purchase price (thousands), which
may be revised upon completion of our valuation procedures:

|                                  |                      |   |         |         | 
|--------------------------------- | -------------------- | - | ------- | ------- | 
|Land                              |                      | $ | 15,000  |        
|Buildings and improvements        |                      |   | 151,592 |        
|Furniture, fixtures and equipment |                      |   | 18,220  |        
|Net working capital               |                      |   | 1,435   |        
|                                  |                      |   |         |        
|                                  | Total purchase price |   | $       | 186,247 | 
|                                  |                      |   |         |        

We have an active pipeline of acquisition
opportunities, but we will continue to be highly selective,
focusing primarily on larger properties located in major urban
markets or high-end resort destinations with strong brand
affiliations and significant meeting space. While we plan to
pursue strategic acquisitions, our capacity is somewhat limited
by the terms of our senior note indentures, as discussed above.

Asset Dispositions

During 2003, we began executing one of our key
short-term strategies, which is to reposition our portfolio by
disposing of selected non-core assets in order to begin
repositioning our portfolio into one generally consisting of
high-quality, upscale full service hotels with significant
meeting space, located in urban or high-end resort locations
with high barriers to entry. Many of these non-core assets were
acquired as part of portfolios of assets.

We have nearly completed our disposition program,
completing 30 hotel sales from January 1, 2003 through
June 30, 2004, 11 of which were sold during the first
quarter of 2004 for $74.1 million and 4 of which were sold
during the second quarter of 2004 for $30.8 million. Two
additional assets have been sold in the third quarter of 2004
for $14.5 million. We have five assets remaining in our
non-core disposition program with expected proceeds totaling
approximately $40 million.

As a result of a continuing review of assets in
our disposition program, we recorded an impairment charge in the
first half of 2004 of $1.5 million with respect to assets
not classified as held for sale and $5.9 million with
respect to assets held for sale. The impairment charge is based
on our estimates of the fair value of the disposition
properties. These estimates require us to make assumptions about
the disposition prices that we expect to realize for each
property as well as the timing of a potential disposition. In
making these estimates, we consider the operating results of the
assets, the market for comparable properties, and quotes from
brokers, among other information. In nearly all cases, our
estimates have reflected the results of an extensive marketing
effort and negotiations with prospective buyers. Actual results
could differ materially from these estimates.

We will continue to analyze our portfolio to
determine if we should dispose of additional assets and recycle
that capital into higher yielding investments. Any dispositions
of additional assets may result in further impairment charges in
future periods, if and when such transactions might be
undertaken.

We may be obligated to pay Interstate Hotels
termination fees of up to a maximum of approximately
$12.0 million with respect to the 32 properties that we
have sold between January 1, 2003 and August 3, 2004.
In addition, as we dispose of the five remaining assets in our
disposition program, we may incur termination obligations due to
Interstate Hotels of up to a maximum of approximately
$1.7 million,assuming the disposition of all five
of the properties in 2004 and assuming buyers of our hotel
properties elect to have the properties managed by parties other
than Interstate Hotels or do not assume the obligation as part
of the disposition transaction and no new management agreements
are substituted. Any such obligation would affect the
calculation of the final gain or loss on the disposition of a
particular asset, since in accordance with current accounting
guidance, the obligation is not recognized until such time as
the asset disposition is complete and a termination notice is
provided to Interstate Hotels. At that time, the recognition of
any termination obligation will be included in discontinued
operations. Any obligation due under the termination provisions
of the contract is payable over a period of 48 months after
termination. Termination fees payable to Interstate Hotels may
be reduced by amounts paid under replacement management
contracts.

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During July 2004, we concluded negotiations with
Interstate Hotels to terminate the intercompany agreement. In
exchange for terminating the intercompany agreement, we will
receive, among other things, the following: the right to
terminate up to 600 rooms per year upon the payment of a
termination fee equal to 1.5 times the fees earned during the
preceding 12 months, with the ability to carryover up to
600 rooms for termination in a succeeding year; the right to
terminate the management contract of a hotel, where Interstate
Hotels invests in a competing hotel, with no termination fee;
and an extension of the termination fee payment period for
terminations related to hotel sales, from 30 months to
48 months. The termination of the intercompany agreement
eliminates the last vestige of our original paper clip
relationship with Interstate Hotels.

Separately, we reached an agreement with
Interstate Hotels regarding the calculation of termination fees
payable upon a sale. Although termination fees for the
properties that have been sold or were included in our
previously announced disposition program (which includes four
assets in our current disposition program) will be unchanged, we
will receive a $2.5 million credit, which will be
applicable to fees payable with respect to future dispositions.
Of the $2.5 million credit, $0.6 million has been
applied to terminations that have occurred in the third quarter
of 2004, and an additional $1.7 million will be applied to
terminations resulting from the sale of two of our remaining
assets in our current disposition program.

Capital Expenditures

We make ongoing capital expenditures in order to
keep our hotels competitive in their markets and to comply with
franchise obligations. Additionally, certain of our hotels
management contracts and franchise agreements contain reserve
requirements for property improvements. We fund our capital
expenditures primarily from cash generated from operations and
existing cash on hand and intend to use a portion of the
proceeds from the sales of non-core assets to provide capital
for renovation work. We invested $49.9 million for ongoing
capital expenditures during the first half of 2004. We have
initiated an aggressive renovation program for our core assets
and anticipate investing a total of $125 million on capital
expenditures in 2004. The emphasis will be on completing these
projects on budget with minimal disruptions to operations. We
will focus on complete room and facility renovations,
eliminating to the degree possible, piecemeal work where the
typical consumer might not ascribe value to the improvements. We
believe we are timing this work appropriately to take full
advantage of the anticipated industry recovery. The properties
we are now marketing for sale typically have higher per room
capital expenditure requirements than our core assets. Sales of
these properties will allow us to focus our capital spending
dollars in the future on our core portfolio. We expect to
continually review our portfolio with a goal of recycling
capital out of lower yielding investments into higher yielding
opportunities.

OTHER FINANCIAL INFORMATION

Critical Accounting Policies

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

Our critical accounting policies include the
accounting for the impairment or disposal of long-lived assets
and the classification of properties as held for sale. Our hotel
properties generally fall into two categories, held for use and
held for sale. Our held for use properties may include those
that we are actively marketing. Until such time as our criteria
for held for sale are met, as described below in further detail,
we maintain classification as an operational asset. At the time
we determine an asset to meet the criteria noted below, we

32



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reclassify the asset and its operations to
discontinued operations. All of our properties are subject to an
impairment analysis whenever events or changes in circumstances
indicate that the carrying value may be impaired.


Accounting for the impairment or disposal of
long-lived assets

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

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

Classification of properties as held for
sale

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



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

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

Off-Balance Sheet Arrangements

We have future ground lease obligations related
to our consolidated entities and properties. The ground leases
are accounted for as operating leases, and are expensed evenly
over the lives of the leases. These leases exist at properties
where we do not own the land associated with our hotel. As of
June 30, 2004, we were not involved in any other
off-balance sheet arrangements.

Aggregate Contractual Obligations

We have future long-term debt obligations related
to our consolidated entities and properties, as disclosed under
Financial Condition, Liquidity and Capital Resources.

We may be obligated to pay Interstate Hotels
termination fees with respect to properties that we sell. See
Financial Condition, Liquidity and Capital
Resources  Asset Dispositions.

The Managers operate our 79 hotels pursuant to
management agreements with our taxable subsidiaries. Under these
management agreements, the taxable subsidiaries pay a management
fee for each property to the Manager of their hotels. The
taxable subsidiaries in turn make rental payments to our
subsidiary operating partnership under the participating leases.

Under the Interstate Hotels management
agreements, the base management fee is 2.5% of total hotel
revenue, plus incentive payments based on meeting performance
thresholds that could total up to an additional

33



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1.5% of total hotel revenue. The agreements
generally have initial terms expiring on January 1, 2011
with three renewal periods of five years each at the option of
Interstate Hotels, subject to some exceptions.


Under the Ritz-Carlton and Marriott management
agreements, the base management fee is 3.0% and 2.5% of total
hotel revenue, respectively, through 2005 and 3.0% under both
thereafter, plus incentive payments based on meeting performance
thresholds that could total up to an additional 2.0% of total
hotel revenue and 20% of available cash flow (as defined),
respectively. The agreements have initial terms expiring in 2015
and 2024, respectively, with four and three renewal periods of
10 and five years each, respectively, at the option of
Ritz-Carlton and Marriott, subject to some exceptions.

As part of our asset renovation program, we have
entered into contractual obligations with vendors to acquire
capital assets and perform renovations totaling approximately
$60 million over the next six months.

34



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ITEM
3.          QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

On April 2, 2004, we entered into an
interest rate swap on our secured facility due 2009, effectively
converting the interest the facility bears from a fixed rate to
a floating rate. Under the swap, we receive fixed-rate payments
of 8.01% and pay floating rate payments based on a one month
LIBOR plus 444 basis points on a $307 million notional
amount.

We have designated the interest rate swap as a
fair value hedge for financial reporting purposes and the
amounts paid or received under the swap agreement will be
recognized over the life of the agreement as an adjustment to
interest expense. Changes in the fair value of the swap and the
secured facilities are reflected in the balance sheet as
offsetting changes and have no income statement effect. The fair
value of the interest rate swap at June 30, 2004 was
approximately a $10.1 million liability, which is included
in the other liabilities line item on our consolidated balance
sheet.

In conjunction with the interest rate swap, we
have posted collateral of $17.5 million as of June 30,
2004. The required collateral amount fluctuates based on the
changes in the swap rate and the amount of time left to
maturity. We will receive all remaining collateral upon maturity
of the swap.

The table below provides information about our
derivative financial instrument that is sensitive to changes in
interest rates. The table presents contractual payments to be
exchanged under the contract and weighted average interest rates
by expected (contractual) maturity dates for our interest
rate swap. Weighted average interest rates and notional amounts
are used to calculate the contractual payments to be exchanged
under the contract. Weighted average interest rates are based on
implied forward rates in the yield curve as of June 30,
2004. The interest rate swap that we have entered into is
strictly to hedge interest rate risk and not for trading
purposes.

Expected Maturity Date

($ in millions)


|                         |                    |                      |  |      |      |      |  |      |      |      |  |            |      |       |  |            |      |   |  |   |      |   |  |   |      |   |  |   |      |   |  |   |       |  
|------------------------ | ------------------ | -------------------- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  | ---------- | ---- | ----- |  | ---------- | ---- | - |  | - | ---- | - |  | - | ---- | - |  | - | ---- | - |  | - | ----- | -
|                         |                    |                      |  |      |      |      |  |      |      |      |  |            |      |       |  | Fair Value
|                         |                    |                      |  |      |      |      |  |      |      |      |  |            |      |       |  | as of     
|                         |                    | 2004                 |  | 2005 |      | 2006 |  | 2007 |      | 2008 |  | Thereafter |      | Total |  | 6/30/04   
|                         |                    |                      |  |      |      |      |  |      |      |      |  |            |      |       |  |           
|Interest Rate Derivative |                    |                      |  |      |      |      |  |      |      |      |  |            |      |       |  |            |      |   |  |   |      |   |  |   |      |   |  |   |      |   |  |  
|                         | Interest Rate Swap |                      |  |      |      |      |  |      |      |      |  |            |      |       |  |            |      |   |  |   |      |   |  |   |      |   |  |   |      |   |  |   |      
|                         |                    | Fixed to Variable    |  | $    | 4.0  |      |  | $    | 1.0  |      |  | $          | (1.8 | )     |  | $          | (3.9 | ) |  | $ | (5.3 | ) |  | $ | (3.7 | ) |  | $ | (9.7 | ) |  | $ | (10.1 | )
|                         |                    | Average pay rate     |  |      | 5.98 | %    |  |      | 7.49 | %    |  |            | 8.43 | %     |  |            | 9.21 | % |  |   | 9.73 | % |  |   | 9.94 | % |  |   |      |   |  |   |       |  
|                         |                    | Average receive rate |  |      | 8.01 | %    |  |      | 8.01 | %    |  |            | 8.01 | %     |  |            | 8.01 | % |  |   | 8.01 | % |  |   | 8.01 | % |  |   |      |   |  |   |       |  

As a result of our interest rate swap, we are
exposed to market risks related to changes in interest rates. In
the future, we intend to manage our interest rate exposure using
a mix of fixed and floating interest rate debt. A change in one
month LIBOR of 50 basis points would result in an increase
or decrease in current annual interest expense of approximately
$1.5 million.

Approximately 19% of our outstanding debt bears
fixed rates of interest that have been effectively swapped from
a fixed rate to a floating rate, with the remaining 81% of debt
bearing fixed rates of interest.

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ITEM
4.          CONTROLS
AND PROCEDURES

Disclosure Controls and Procedures

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

As of June 30, 2004, we carried out an
evaluation, under the supervision and with the participation of
our management, including our chief executive officer, our chief
financial officer, and our chief accounting officer of the
effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, we concluded
that our disclosure controls and procedures were effective.

Internal Control Over Financial
Reporting

There has been no change in our internal control
over financial reporting during the three months ended
June 30, 2004 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.

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##### 






PART II.          OTHER
INFORMATION




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

Our Annual Meeting of Stockholders was held on
May 26, 2004. At that meeting, the following matters were
submitted to a vote of our stockholders:

Proposal No. 1

To elect three members of the Board of Directors
to serve three-year terms expiring on the date of the Annual
Meeting in 2007, and until their successors are duly elected and
qualify.

|                 |  |          |  |  |            | 
|---------------- |  | -------- |  |  | ---------- | 
|D. Ellen Shuman  |  | For      |  |  | 54,566,724 | 
|                 |  | Withheld |  |  | 8,183,823  | 
|Paul W. Whetsell |  | For      |  |  | 55,774,967 | 
|                 |  | Withheld |  |  | 6,975,580  | 
|James R. Worms   |  | For      |  |  | 47,442,097 | 
|                 |  | Withheld |  |  | 15,308,450 | 

Proposal No. 2

To elect one member of the Board of Directors to
serve a two-year term expiring on the date of the Annual Meeting
in 2006, and until his successor is duly elected and qualifies.

|                   |  |          |  |  |            | 
|------------------ |  | -------- |  |  | ---------- | 
|H. Cabot Lodge III |  | For      |  |  | 48,483,673 | 
|                   |  | Withheld |  |  | 14,266,874 | 

The following directors continue to hold their
positions as directors: Bruce G. Wiles, J. Taylor Crandall,
James F. Dannhauser and William S. Janes.

In July 2004, Paul J. Klaassen was elected to the
companys Board of Directors.

Proposal No. 3

To consider the ratification of the appointment
of KPMG LLP as independent auditors for the Company for the
fiscal year ending December 31, 2004.

|        |  |  |            | 
|------- |  |  | ---------- | 
|For     |  |  | 55,792,425 | 
|Against |  |  | 6,937,557  | 
|Abstain |  |  | 20,565     | 

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##### 






ITEM
6.          EXHIBITS
AND REPORTS ON FORM 8-K

(a.) Exhibits

|        |    |                         |  |                                                                                                                                                                                                                                                                                                      
|------- | -- | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                        
|No.     |    | Description of Document
|        |    |                        
|        | 3  | .1                      |  | Second Articles of Amendment and Restatement of
    Incorporation of the Registrant (incorporated by reference to
    Exhibit 3.4 to our Registration Statement on Form S-11
    (No. 333-4568), and filed with the Commission on
    July 24, 1996).                                                
|        | 3  | .1.1                    |  | Articles of Amendment of Second Articles of
    Amendment and Restatement of Incorporation dated August 11,
    2000 (incorporated by reference to Exhibit 3.1.1 to our
    annual report on Form 10-K for the year ended
    December 31, 2001, and filed with the Commission on
    March 6, 2002).
|        | 3  | .1.2                    |  | Articles of Amendment of Second Articles of
    Amendment and Restatement of Incorporation dated June 30,
    2001 (incorporated by reference to Exhibit 3.1.2 to our
    annual report on Form 10-K for the year ended
    December 31, 2001, and filed with the Commission on
    March 6, 2002).  
|        | 3  | .2                      |  | Amended and Restated By-laws of the Registrant
    (incorporated by reference to Exhibit 3.2 to our
    Registration Statement No. 333-66229, and filed with the
    Commission on October 28, 1998).                                                                                                
|        | 3  | .2.1                    |  | Amended and Restated By-laws of the Registrant
    dated and effective April 22, 2003 (incorporated by
    reference to Exhibit 3.2.1 to our quarterly report on
    Form 10-Q for the quarter ended March 31, 2003, and
    filed with the Commission on May 14, 2003).                             
|        | 10 | .4.2                    |  | Second Amendment to the MeriStar Hospitality
    Corporation Incentive Plan (incorporated by reference to
    Exhibit 10.4.2 to our quarterly report on Form 10-Q
    for the quarter ended March 31, 2004, and filed with the
    Commission on May 10, 2004).                                      
|        | 10 | .10.1*                  |  | Amendment to Executive Employment Agreement
    between MeriStar Hospitality Corporation and Bruce G. Wiles. **                                                                                                                                                                                      
|        | 13 |                         |  | Financial Statements of MeriStar Hospitality
    Operating Partnership, L.P. as of and for the three and six
    months ended June 30, 2004. **                                                                                                                                                      
|        | 31 | .1                      |  | Sarbanes-Oxley Act Section 302 Certification
    of Chief Executive Officer. **                                                                                                                                                                                                                      
|        | 31 | .2                      |  | Sarbanes-Oxley Act Section 302 Certification
    of Chief Financial Officer. **                                                                                                                                                                                                                      
|        | 32 | .1                      |  | Sarbanes-Oxley Act Section 906 Certification
    of Chief Executive Officer. **                                                                                                                                                                                                                      
|        | 32 | .2                      |  | Sarbanes-Oxley Act Section 906 Certification
    of Chief Financial Officer. **                                                                                                                                                                                                                      
|        | 99 | .1                      |  | Consolidating Financial Information of MeriStar
    Hospitality Operating Partnership, L.P. **                                                                                                                                                                                                       



---



|  |                                                                                                                                      
|- | -------------------------------------------------------------------------------------------------------------------------------------
|* | Indicates a management contract or compensatory
    plan or arrangement required to be filed pursuant to
    Item 14(c) of Form 10-K.



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

(b.) Reports on Form 8-K

None.

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SIGNATURES

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



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



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

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

Dated: August 6, 2004

39