##### 



SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)

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

For the quarterly period ended September 30, 2002 or

[   ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from          to

COMMISSION FILE NUMBER 1-11903

MERISTAR HOSPITALITY CORPORATION
(Exact name of Registrant as specified in its Charter)

|                         |  |                                  
|------------------------ |  | ---------------------------------
|MARYLAND                 |  | 75-2648842                       
|(State of Incorporation) |  | (IRS Employer Identification No.)

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

202-295-1000
(Registrants Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period for which the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes X No

The number of shares of Common Stock, par value $0.01 per share, outstanding at
November 12, 2002 was 45,031,382.





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##### 



MERISTAR HOSPITALITY CORPORATION

INDEX

|        |  |                                                                                                                                                 |  |     
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                                                                                 |  | Page
|        |  |                                                                                                                                                 |  |     
|        |  |                                                                                                                                                 |  |     
|PART I  |  | FINANCIAL INFORMATION                                                                                                                           |  |     
|        |  |                                                                                                                                                 |  |     
|ITEM 1: |  | FINANCIAL STATEMENTS (UNAUDITED)                                                                                                                |  |     
|        |  |                                                                                                                                                 |  |     
|        |  | Condensed Consolidated Balance Sheets 
September 30, 2002 and December 31, 2001                                                                |  | 3   
|        |  |                                                                                                                                                 |  |     
|        |  | Condensed Consolidated Statements of Operations and Other
Comprehensive Income (Loss)  Three and nine months ended
September 30, 2002 and 2001 |  | 4   
|        |  |                                                                                                                                                 |  |     
|        |  | Condensed Consolidated Statements of Cash Flows 
Nine months ended September 30, 2002 and 2001                                                 |  | 6   
|        |  |                                                                                                                                                 |  |     
|        |  | Notes to Condensed Consolidated Financial Statements                                                                                            |  | 7   
|        |  |                                                                                                                                                 |  |     
|        |  |                                                                                                                                                 |  |     
|ITEM 2: |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                                           |  | 13  
|        |  |                                                                                                                                                 |  |     
|ITEM 3: |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                                      |  | 23  
|        |  |                                                                                                                                                 |  |     
|ITEM 4: |  | CONTROLS AND PROCEDURES                                                                                                                         |  | 24  
|        |  |                                                                                                                                                 |  |     
|PART II |  | OTHER INFORMATION                                                                                                                               |  | 24  
|        |  |                                                                                                                                                 |  |     
|ITEM 5: |  | OTHER INFORMATION                                                                                                                               |  | 24  
|        |  |                                                                                                                                                 |  |     
|ITEM 6: |  | EXHIBITS AND REPORTS ON FORM 8-K                                                                                                                |  | 25  

2



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##### 



PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS

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

|                                                         |                                                             |                                                                              |                                   |           |                    |     |                   |           |           |     | 
|-------------------------------------------------------- | ----------------------------------------------------------- | ---------------------------------------------------------------------------- | --------------------------------- | --------- | ------------------ | --- | ----------------- | --------- | --------- | --- | 
|                                                         |                                                             |                                                                              |                                   |           | September 30, 2002 |     | December 31, 2001
|                                                         |                                                             |                                                                              |                                   |           |                    |     |                  
|                                                         |                                                             |                                                                              |                                   |           | (unaudited)        |     |                   |           |          
|Assets                                                   |                                                             |                                                                              |                                   |           |                    |     |                   |          
|                                                         |                                                             | Investments in hotel properties                                              |                                   | $         | 3,181,539          |     |                   | $         | 3,183,677 |    
|                                                         |                                                             | Accumulated depreciation                                                     |                                   |           | (477,625           | )   |                   |           | (397,380  | )  
|                                                         |                                                             |                                                                              |                                   |           |                    |     |                   |          
|                                                         |                                                             |                                                                              | 2,703,914                         |           |                    |     | 2,786,297         |          
|                                                         |                                                             | Cash and cash equivalents                                                    |                                   |           | 24,735             |     |                   |           | 23,448    |    
|                                                         |                                                             | Accounts receivable, net of allowance for doubtful
accounts of $650 and $973 |                                   |           | 52,791             |     |                   |           | 47,178    |    
|                                                         |                                                             | Prepaid expenses and other                                                   |                                   |           | 23,357             |     |                   |           | 18,306    |    
|                                                         |                                                             | Income tax receivable                                                        |                                   |           | 360                |     |                   |           |          |    
|                                                         |                                                             | Notes receivable from Interstate Hotels & Resorts                            |                                   |           | 56,069             |     |                   |           | 36,000    |    
|                                                         |                                                             | Due from Interstate Hotels & Resorts                                         |                                   |           |                   |     |                   |           | 8,877     |    
|                                                         |                                                             | Investments in affiliates                                                    |                                   |           | 41,714             |     |                   |           | 41,714    |    
|                                                         |                                                             | Restricted cash                                                              |                                   |           | 16,443             |     |                   |           | 21,304    |    
|                                                         |                                                             | Intangible assets, net of accumulated amortization
of $15,385 and $11,224    |                                   |           | 23,165             |     |                   |           | 26,736    |    
|                                                         |                                                             |                                                                              |                                   |           |                    |     |                   |          
|                                                         |                                                             | $                                                                            | 2,942,548                         |           |                    | $   | 3,009,860         |          
|                                                         |                                                             |                                                                              |                                   |           |                    |     |                   |          
|                                                         |                                                             |                                                                              |                                   |           |                    |     |                   |           |           |     | 
|Liabilities, Minority Interests and Stockholders Equity |                                                             |                                                                              |                                   |           |                    |     |                   |          
|                                                         |                                                             | Accounts payable, accrued expenses and other liabilities                     |                                   | $         | 123,361            |     |                   | $         | 129,786   |    
|                                                         |                                                             | Accrued interest                                                             |                                   |           | 41,144             |     |                   |           | 45,009    |    
|                                                         |                                                             | Due to Interstate Hotels & Resorts                                           |                                   |           | 9,954              |     |                   |           |          |    
|                                                         |                                                             | Income taxes payable                                                         |                                   |           |                   |     |                   |           | 350       |    
|                                                         |                                                             | Dividends and distributions payable                                          |                                   |           | 449                |     |                   |           | 1,090     |    
|                                                         |                                                             | Deferred income taxes                                                        |                                   |           | 8,160              |     |                   |           | 9,031     |    
|                                                         |                                                             | Interest rate swaps                                                          |                                   |           | 6,802              |     |                   |           | 12,100    |    
|                                                         |                                                             | Long-term debt                                                               |                                   |           | 1,669,654          |     |                   |           | 1,700,134 |    
|                                                         |                                                             |                                                                              |                                   |           |                    |     |                   |          
|Total liabilities                                        |                                                             |                                                                              | 1,859,524                         |           |                    |     | 1,897,500         |          
|                                                         |                                                             |                                                                              |                                   |           |                    |     |                   |          
|Minority interests                                       |                                                             |                                                                              | 84,601                            |           |                    |     | 89,797            |          
|Stockholders equity:                                    |                                                             |                                                                              |                                   |           |                    |     |                   |          
|                                                         |                                                             | Preferred stock, par value $0.01 per share                                   |                                   |           |                    |     |                   |           |           |    
|                                                         |                                                             |                                                                              | Authorized - 100,000 shares       |           |                    |    |                   |           |           |    | 
|                                                         | Common stock, par value $0.01 per share                     |                                                                              |                                   |           |                    |     |                   |           |          
|                                                         |                                                             |                                                                              | Authorized  250,000 shares       |           |                    |     |                   |           |           |     | 
|                                                         |                                                             |                                                                              | Issued  49,354 and 48,761 shares |           |                    | 493 |                   |           |           | 487 | 
|                                                         | Additional paid-in capital                                  |                                                                              |                                   | 1,192,757 |                    |     |                   | 1,183,463 |          
|                                                         | Retained earnings (deficit)                                 |                                                                              |                                   | (105,993  | )                  |     |                   | (68,241   | )        
|                                                         | Accumulated other comprehensive loss                        |                                                                              |                                   | (7,145    | )                  |     |                   | (12,503   | )        
|                                                         | Unearned stock-based compensation                           |                                                                              |                                   | (5,140    | )                  |     |                   | (5,287    | )        
|                                                         | Less common stock held in treasury  4,308 and 4,237
shares |                                                                              |                                   | (76,549   | )                  |     |                   | (75,356   | )        
|                                                         |                                                             |                                                                              |                                   |           |                    |     |                   |          
|                                                         | Total stockholders equity                                  |                                                                              |                                   | 998,423   |                    |     |                   | 1,022,563 |          
|                                                         |                                                             |                                                                              |                                   |           |                    |     |                   |          
|                                                         |                                                             | $                                                                            | 2,942,548                         |           |                    | $   | 3,009,860         |          
|                                                         |                                                             |                                                                              |                                   |           |                    |     |                   |          

See accompanying notes to condensed consolidated financial statements.

3



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##### 



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

|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |       |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------- | ------------------------------------------------------------------------------------------- | ------- | ------------------ | ------- | ----------------- | ------- | ----- | ------- | ---- | ------- | ------ | ------- | - | ------- | ----- | ------- | 
|                                                                                                                                                                         |                                          |                                                                                             |         | Three months ended |         | Nine months ended
|                                                                                                                                                                         |                                          |                                                                                             |         | September 30,      |         | September 30,    
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                  
|                                                                                                                                                                         |                                          |                                                                                             |         | 2002               |         | 2001              |         | 2002  |         | 2001
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |     
|Revenue:                                                                                                                                                                 |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |      
|                                                                                                                                                                         | Hotel operations:                        |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |       |        
|                                                                                                                                                                         |                                          | Rooms                                                                                       |         | $                  | 156,935 |                   |         | $     | 163,568 |      |         | $      | 506,054 |   |         | $     | 562,497 | 
|                                                                                                                                                                         |                                          | Food and beverage                                                                           |         |                    | 56,548  |                   |         |       | 55,886  |      |         |        | 189,423 |   |         |       | 200,273 | 
|                                                                                                                                                                         |                                          | Other operating departments                                                                 |         |                    | 18,306  |                   |         |       | 18,721  |      |         |        | 57,715  |   |         |       | 64,511  | 
|                                                                                                                                                                         | Participating lease revenue              |                                                                                             |         |                   |         |                   |         | 1,841 |         |      |         |       |         |   |         | 8,146 |        
|Office rental and other revenues                                                                                                                                         |                                          |                                                                                             | 4,017   |                    |         |                   | 4,016   |       |         |      | 14,282  |        |         |   | 12,183  |      
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |      
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |       |         | 
|Total revenue                                                                                                                                                            |                                          |                                                                                             | 235,806 |                    |         |                   | 244,032 |       |         |      | 767,474 |        |         |   | 847,610 |      
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |      
|Hotel operating expenses by department:                                                                                                                                  |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |      
|                                                                                                                                                                         |                                          | Rooms                                                                                       |         |                    | 40,895  |                   |         |       | 42,715  |      |         |        | 122,194 |   |         |       | 134,225 | 
|                                                                                                                                                                         |                                          | Food and beverage                                                                           |         |                    | 44,187  |                   |         |       | 44,122  |      |         |        | 138,234 |   |         |       | 147,320 | 
|                                                                                                                                                                         |                                          | Other operating departments                                                                 |         |                    | 10,967  |                   |         |       | 10,353  |      |         |        | 33,159  |   |         |       | 33,845  | 
|Office rental, parking and other operating expenses                                                                                                                      |                                          |                                                                                             | 767     |                    |         |                   | 819     |       |         |      | 2,372   |        |         |   | 2,444   |      
|Undistributed operating expenses:                                                                                                                                        |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |      
|                                                                                                                                                                         |                                          | Administrative and general                                                                  |         |                    | 42,136  |                   |         |       | 39,610  |      |         |        | 129,098 |   |         |       | 126,774 | 
|                                                                                                                                                                         |                                          | Property operating costs                                                                    |         |                    | 40,166  |                   |         |       | 40,716  |      |         |        | 117,842 |   |         |       | 124,812 | 
|                                                                                                                                                                         |                                          | Property taxes, insurance and other                                                         |         |                    | 16,490  |                   |         |       | 20,789  |      |         |        | 52,937  |   |         |       | 57,275  | 
|                                                                                                                                                                         |                                          | Depreciation and amortization                                                               |         |                    | 30,348  |                   |         |       | 28,810  |      |         |        | 92,168  |   |         |       | 86,522  | 
|                                                                                                                                                                         |                                          | Expense for non-hedging derivatives                                                         |         |                    | 1,132   |                   |         |       |        |      |         |        | 4,211   |   |         |       |        | 
|                                                                                                                                                                         |                                          | Write-off of deferred financing costs                                                       |         |                    |        |                   |         |       |         |      |         |        | 1,529   |   |         |       |        | 
|                                                                                                                                                                         |                                          | Loss on fair value of non-hedging derivatives                                               |         |                    |        |                   |         |       |        |      |         |        | 4,735   |   |         |       |        | 
|                                                                                                                                                                         |                                          | Write down of investment in STS Hotel Net                                                   |         |                    |        |                   |         |       |        |      |         |        |        |   |         |       | 2,112   | 
|                                                                                                                                                                         |                                          | Swap termination costs                                                                      |         |                    |        |                   |         |       |        |      |         |        |        |   |         |       | 9,297   | 
|                                                                                                                                                                         |                                          | FelCor merger costs                                                                         |         |                    |        |                   |         |       | 2,028   |      |         |        |        |   |         |       | 5,817   | 
|                                                                                                                                                                         |                                          | Cost to terminate leases with Prime Hospitality Corporation                                 |         |                    |        |                   |         |       |        |      |         |        |        |   |         |       | 1,315   | 
|                                                                                                                                                                         |                                          | Restructuring charge                                                                        |         |                    |        |                   |         |       | 1,080   |      |         |        |        |   |         |       | 1,080   | 
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |      
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |       |         | 
|Total operating expenses                                                                                                                                                 |                                          |                                                                                             | 227,088 |                    |         |                   | 231,042 |       |         |      | 698,479 |        |         |   | 732,838 |      
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |      
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |       |         | 
|Net operating income                                                                                                                                                     |                                          |                                                                                             | 8,718   |                    |         |                   | 12,990  |       |         |      | 68,995  |        |         |   | 114,772 |      
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |       |         | 
|Interest expense, net                                                                                                                                                    |                                          |                                                                                             | 33,846  |                    |         |                   | 31,354  |       |         |      | 102,543 |        |         |   | 91,661  |      
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |      
|Income (loss) from continuing operations before minority
interests, income tax expense (benefit), discontinued
operations, loss on sale of assets and extraordinary loss |                                          |                                                                                             | (25,128 | )                  |         |                   | (18,364 | )     |         |      | (33,548 | )      |         |   | 23,111  |      
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |       |         | 
|Minority interests                                                                                                                                                       |                                          |                                                                                             | (1,584  | )                  |         |                   | (989    | )     |         |      | (1,965  | )      |         |   | 2,132   |      
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |      
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |       |         | 
|Income (loss) from continuing operations before income tax
expense (benefit), discontinued operations, loss on sale of
assets and extraordinary loss                     |                                          |                                                                                             | (23,544 | )                  |         |                   | (17,375 | )     |         |      | (31,583 | )      |         |   | 20,979  |      
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |       |         | 
|Income tax expense (benefit)                                                                                                                                             |                                          |                                                                                             | (654    | )                  |         |                   | (588    | )     |         |      | (851    | )      |         |   | 814     |      
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |      
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |       |         | 
|Income (loss) from continuing operations before discontinued
operations, loss on sale of assets and extraordinary loss                                                   |                                          |                                                                                             | (22,890 | )                  |         |                   | (16,787 | )     |         |      | (30,732 | )      |         |   | 20,165  |      
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |       |         | 
|Discontinued operations:                                                                                                                                                 |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |      
|                                                                                                                                                                         |                                          | Income (loss) from operations of assets sold (including
loss on disposal of $6,403 in 2002) |         |                    | (6,640  | )                 |         |       | 558     |      |         |        | (5,768  | ) |         |       | 2,264   | 
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |       |         | 
|                                                                                                                                                                         | Income tax benefit                       |                                                                                             |         | 128                |         |                   |         |      |         |      |         | 128    |         |   |         |      |        
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |      
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |       |         | 
|                                                                                                                                                                         | Income (loss) on discontinued operations |                                                                                             |         | (6,512             | )       |                   |         | 558   |         |      |         | (5,640 | )       |   |         | 2,264 |        
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |       |         | 
|Loss on sale of assets, net of tax effect of ($22) and ($44)                                                                                                             |                                          |                                                                                             |        |                    |         |                   | (1,073  | )     |         |      |        |        |         |   | (2,132  | )    
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |       |         | 
|Extraordinary loss on early extinguishments of debt, net of tax
effect of ($19)                                                                                          |                                          |                                                                                             |        |                    |         |                   |        |       |         |      |        |        |         |   | (1,224  | )    
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |      
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |       |         | 
|Net income (loss)                                                                                                                                                        |                                          | $                                                                                           | (29,402 | )                  |         | $                 | (17,302 | )     |         | $    | (36,372 | )      |         | $ | 19,073  |      
|                                                                                                                                                                         |                                          |                                                                                             |         |                    |         |                   |         |       |         |      |         |        |         |   |         |      

4



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##### 



|                                   |                                               |                                                                                |         |                    |       |                   |         |         |       |      |         |         |       |   |       |        |       |  
|---------------------------------- | --------------------------------------------- | ------------------------------------------------------------------------------ | ------- | ------------------ | ----- | ----------------- | ------- | ------- | ----- | ---- | ------- | ------- | ----- | - | ----- | ------ | ----- | -
|                                   |                                               |                                                                                |         | Three months ended |       | Nine months ended
|                                   |                                               |                                                                                |         | September 30,      |       | September 30,    
|                                   |                                               |                                                                                |         |                    |       |                  
|                                   |                                               |                                                                                |         | 2002               |       | 2001              |         | 2002    |       | 2001
|                                   |                                               |                                                                                |         |                    |       |                   |         |         |       |     
|Other comprehensive income (loss): |                                               |                                                                                |         |                    |       |                   |         |         |       |      |         |         |       |   |       |       
|                                   | Net income (loss)                             |                                                                                | $       | (29,402            | )     |                   | $       | (17,302 | )     |      | $       | (36,372 | )     |   | $     | 19,073 |      
|                                   | Foreign currency translation adjustment       |                                                                                |         | (717               | )     |                   |         | (842    | )     |      |         | 112     |       |   |       | (1,001 | )    
|                                   | Derivative instruments transition adjustment  |                                                                                |         |                   |       |                   |         |        |       |      |         |        |       |   |       | (2,842 | )    
|                                   | Change in valuation of derivative instruments |                                                                                |         |                   |       |                   |         | (5,410  | )     |      |         | 511     |       |   |       | (9,678 | )    
|                                   |                                               |                                                                                |         |                    |       |                   |         |         |       |      |         |         |       |   |       |       
|                                   |                                               |                                                                                |         |                    |       |                   |         |         |       |      |         |         |       |   |       |        |       |  
|Comprehensive income (loss)        |                                               | $                                                                              | (30,119 | )                  |       | $                 | (23,554 | )       |       | $    | (35,749 | )       |       | $ | 5,552 |       
|                                   |                                               |                                                                                |         |                    |       |                   |         |         |       |      |         |         |       |   |       |       
|                                   |                                               |                                                                                |         |                    |       |                   |         |         |       |      |         |         |       |   |       |        |       |  
|                                   |                                               |                                                                                |         |                    |       |                   |         |         |       |      |         |         |       |   |       |        |       |  
|Earnings per share:                |                                               |                                                                                |         |                    |       |                   |         |         |       |      |         |         |       |   |       |       
|                                   |                                               |                                                                                |         |                    |       |                   |         |         |       |      |         |         |       |   |       |        |       |  
|                                   |                                               | Basic:                                                                         |         |                    |       |                   |         |         |       |      |         |         |       |   |       |        |       |  
|                                   |                                               | Continuing income (loss) before discontinued
operations and extraordinary loss |         | $                  | (0.51 | )                 |         | $       | (0.41 | )    |         | $       | (0.69 | ) |       | $      | 0.39  |  
|                                   |                                               | Discontinued operations                                                        |         |                    | (0.14 | )                 |         |         | 0.02  |      |         |         | (0.12 | ) |       |        | 0.05  |  
|                                   |                                               | Extraordinary loss                                                             |         |                    |      |                   |         |         |      |      |         |         |      |   |       |        | (0.03 | )
|                                   |                                               |                                                                                |         |                    |       |                   |         |         |       |      |         |         |       |   |       |       
|                                   |                                               |                                                                                |         |                    |       |                   |         |         |       |      |         |         |       |   |       |        |       |  
|                                   |                                               | Net income (loss)                                                              |         | $                  | (0.65 | )                 |         | $       | (0.39 | )    |         | $       | (0.81 | ) |       | $      | 0.41  |  
|                                   |                                               |                                                                                |         |                    |       |                   |         |         |       |      |         |         |       |   |       |       
|                                   |                                               |                                                                                |         |                    |       |                   |         |         |       |      |         |         |       |   |       |        |       |  
|                                   |                                               | Diluted:                                                                       |         |                    |       |                   |         |         |       |      |         |         |       |   |       |        |       |  
|                                   |                                               | Continuing income (loss) before discontinued
operations and extraordinary loss |         | $                  | (0.51 | )                 |         | $       | (0.41 | )    |         | $       | (0.69 | ) |       | $      | 0.39  |  
|                                   |                                               | Discontinued operations                                                        |         |                    | (0.14 | )                 |         |         | 0.02  |      |         |         | (0.12 | ) |       |        | 0.05  |  
|                                   |                                               | Extraordinary loss                                                             |         |                    |      |                   |         |         |      |      |         |         |      |   |       |        | (0.03 | )
|                                   |                                               |                                                                                |         |                    |       |                   |         |         |       |      |         |         |       |   |       |       
|                                   |                                               |                                                                                |         |                    |       |                   |         |         |       |      |         |         |       |   |       |        |       |  
|                                   |                                               | Net income (loss)                                                              |         | $                  | (0.65 | )                 |         | $       | (0.39 | )    |         | $       | (0.81 | ) |       | $      | 0.41  |  
|                                   |                                               |                                                                                |         |                    |       |                   |         |         |       |      |         |         |       |   |       |       

See accompanying notes to condensed consolidated financial statements.

5



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##### 



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

|                                                                                         |                                                                       |                                                          |         |          |                   |   |         |          |         |   | 
|---------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | -------------------------------------------------------- | ------- | -------- | ----------------- | - | ------- | -------- | ------- | - | 
|                                                                                         |                                                                       |                                                          |         |          | Nine months ended
|                                                                                         |                                                                       |                                                          |         |          | September 30,    
|                                                                                         |                                                                       |                                                          |         |          |                  
|                                                                                         |                                                                       |                                                          |         |          | 2002              |   | 2001   
|                                                                                         |                                                                       |                                                          |         |          |                   |   |        
|Operating activities:                                                                    |                                                                       |                                                          |         |          |                   |   |         |         
|Net income (loss)                                                                        |                                                                       | $                                                        | (36,372 | )        |                   | $ | 19,073  |         
|                                                                                         |                                                                       |                                                          |         |          |                   |   |         |          |         |   | 
|Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |                                                                       |                                                          |         |          |                   |   |         |         
|                                                                                         | Depreciation and amortization                                         |                                                          |         | 92,698   |                   |   |         | 87,566   |        
|                                                                                         | Loss on fair value of non-hedging derivatives                         |                                                          |         | 4,735    |                   |   |         |         |        
|                                                                                         | Write-off of deferred financing costs                                 |                                                          |         | 1,529    |                   |   |         |         |        
|                                                                                         | Loss on sale of assets, before tax effect                             |                                                          |         | 6,403    |                   |   |         | 2,176    |        
|                                                                                         | Write down of investment in STS Hotel Net                             |                                                          |         |         |                   |   |         | 2,112    |        
|                                                                                         | Extraordinary loss on early extinguishment of debt, before tax effect |                                                          |         |         |                   |   |         | 1,243    |        
|                                                                                         | Minority interests                                                    |                                                          |         | (1,965   | )                 |   |         | 2,132    |        
|                                                                                         | Amortization of unearned stock based compensation                     |                                                          |         | 3,041    |                   |   |         | 2,628    |        
|                                                                                         | Interest rate swaps marked to fair value                              |                                                          |         | (4,787   | )                 |   |         |         |        
|                                                                                         | Deferred income taxes                                                 |                                                          |         | (871     | )                 |   |         | 13       |        
|                                                                                         |                                                                       |                                                          |         |          |                   |   |         |          |         |   | 
|                                                                                         | Changes in operating assets and liabilities:                          |                                                          |         |          |                   |   |         |          |        
|                                                                                         |                                                                       | Accounts receivable, net                                 |         |          | (5,613            | ) |         |          | 11,256  |  
|                                                                                         |                                                                       | Prepaid expenses and other                               |         |          | (5,051            | ) |         |          | (6,135  | )
|                                                                                         |                                                                       | Due to/from Interstate Hotels & Resorts                  |         |          | 5,762             |   |         |          | 9,152   |  
|                                                                                         |                                                                       | Accounts payable, accrued expenses and other liabilities |         |          | (6,425            | ) |         |          | (13,516 | )
|                                                                                         |                                                                       | Accrued interest                                         |         |          | (3,865            | ) |         |          | 3,080   |  
|                                                                                         |                                                                       | Income taxes payable                                     |         |          | (710              | ) |         |          | 152     |  
|                                                                                         |                                                                       |                                                          |         |          |                   |   |         |         
|                                                                                         |                                                                       |                                                          |         |          |                   |   |         |          |         |   | 
|Net cash provided by operating activities                                                |                                                                       |                                                          | 48,509  |          |                   |   | 120,932 |         
|                                                                                         |                                                                       |                                                          |         |          |                   |   |         |         
|                                                                                         |                                                                       |                                                          |         |          |                   |   |         |          |         |   | 
|Investing activities:                                                                    |                                                                       |                                                          |         |          |                   |   |         |         
|                                                                                         | Investment in hotel properties                                        |                                                          |         | (35,824  | )                 |   |         | (31,067  | )      
|                                                                                         | Proceeds from disposition of assets                                   |                                                          |         | 25,150   |                   |   |         | 9,715    |        
|                                                                                         | Hotel operating cash received in lease conversions                    |                                                          |         |         |                   |   |         | 3,257    |        
|                                                                                         | Notes receivable from Interstate Hotels & Resorts                     |                                                          |         | (7,000   | )                 |   |         | (36,000  | )      
|                                                                                         | Change in restricted cash                                             |                                                          |         | 4,861    |                   |   |         | (2,741   | )      
|                                                                                         |                                                                       |                                                          |         |          |                   |   |         |         
|                                                                                         |                                                                       |                                                          |         |          |                   |   |         |          |         |   | 
|Net cash used in investing activities                                                    |                                                                       |                                                          | (12,813 | )        |                   |   | (56,836 | )       
|                                                                                         |                                                                       |                                                          |         |          |                   |   |         |         
|                                                                                         |                                                                       |                                                          |         |          |                   |   |         |          |         |   | 
|Financing activities:                                                                    |                                                                       |                                                          |         |          |                   |   |         |         
|                                                                                         | Deferred financing costs                                              |                                                          |         | (3,416   | )                 |   |         | (10,872  | )      
|                                                                                         | Proceeds from issuance of long-term debt                              |                                                          |         | 283,138  |                   |   |         | 684,710  |        
|                                                                                         | Principal payments on long-term debt                                  |                                                          |         | (313,618 | )                 |   |         | (608,148 | )      
|                                                                                         | Proceeds from issuance of common stock, net                           |                                                          |         | 3,156    |                   |   |         | 844      |        
|                                                                                         | Purchase of OP units                                                  |                                                          |         |         |                   |   |         | (1,513   | )      
|                                                                                         | Purchase of treasury stock                                            |                                                          |         | (1,193   | )                 |   |         | (2,515   | )      
|                                                                                         | Dividends paid to stockholders                                        |                                                          |         | (1,395   | )                 |   |         | (73,085  | )      
|                                                                                         | Distributions to minority interests                                   |                                                          |         | (1,072   | )                 |   |         | (6,359   | )      
|                                                                                         |                                                                       |                                                          |         |          |                   |   |         |         
|                                                                                         |                                                                       |                                                          |         |          |                   |   |         |          |         |   | 
|Net cash used in financing activities                                                    |                                                                       |                                                          | (34,400 | )        |                   |   | (16,938 | )       
|                                                                                         |                                                                       |                                                          |         |          |                   |   |         |         
|                                                                                         |                                                                       |                                                          |         |          |                   |   |         |          |         |   | 
|Effect of exchange rate changes on cash and cash equivalents                             |                                                                       |                                                          | (9      | )        |                   |   | 245     |         
|                                                                                         |                                                                       |                                                          |         |          |                   |   |         |         
|Net increase in cash and cash equivalents                                                |                                                                       |                                                          | 1,287   |          |                   |   | 47,403  |         
|                                                                                         |                                                                       |                                                          |         |          |                   |   |         |         
|Cash and cash equivalents, beginning of period                                           |                                                                       |                                                          | 23,448  |          |                   |   | 250     |         
|                                                                                         |                                                                       |                                                          |         |          |                   |   |         |         
|Cash and cash equivalents, end of period                                                 |                                                                       | $                                                        | 24,735  |          |                   | $ | 47,653  |         
|                                                                                         |                                                                       |                                                          |         |          |                   |   |         |         

See accompanying notes to condensed consolidated financial statements.

6



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##### 



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

1. ORGANIZATION

General

We own a portfolio of upscale, full-service hotels in the United States and
Canada. Our portfolio is diversified by franchise and brand affiliations. As of
September 30, 2002, we owned 109 hotels, with 28,099 rooms, all of which are
leased by our taxable subsidiaries and managed by Interstate Hotels & Resorts,
Inc. Interstate Hotels was created on July 31, 2002 through the merger of
MeriStar Hotels & Resorts, Inc. and Interstate Hotels Corporation.

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

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



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

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

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

We have prepared these unaudited interim financial statements according to the
rules and regulations of the Securities and Exchange Commission. We have
omitted certain information and footnote disclosures that are normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America. These interim financial
statements should be read in conjunction with the financial statements,
accompanying notes and other information included in our Annual Report on Form
10-K, as amended, for the year ended December 31, 2001. Certain 2001 amounts
have been reclassified to conform to the 2002 presentation.

7



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##### 



In our opinion, the accompanying unaudited condensed consolidated interim
financial statements reflect all adjustments, which are of a normal and
recurring nature, necessary for a fair presentation of the financial condition
and results of operations and cash flows for the periods presented. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires us to make
estimates and assumptions. Such estimates and assumptions affect the reported
amounts of assets and liabilities, as well as the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Our actual results
could differ from those estimates. The results of operations for the interim
periods are not necessarily indicative of the results for the entire year.

Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information requires a public entity to
report selected information about operating segments in financial reports
issued to shareholders. Based on the guidance provided in the standard, we
have determined that our business is conducted in one reportable segment. The
standard also establishes requirements for related disclosures about products
and services, geographic areas and major customers. Revenues for Canadian
operations totaled $6,166 and $6,716 for the three months ended September 30,
2002 and 2001, respectively. Revenues for Canadian operations totaled $16,573
and $18,299 for the nine months ended September 30, 2002 and 2001,
respectively.

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

Our interest rate swap agreements were initially designated as hedges against
changes in future cash flows associated with specific variable rate debt
obligations. As of September 30, 2002, we had three swap agreements with
notional amounts totaling $300,000. All of these swap agreements have been
converted to non-hedging derivatives due to our repayment of the floating-rate
borrowings they originally hedged and they are currently being marked to market
through our statement of operations. We have interest rate exposure going
forward as the change in fair value of our non-hedging derivatives will have an
impact on our statement of operations. The interest rate swap agreements are
reflected at fair value in our consolidated balance sheet as of September 30,
2002. For more information regarding our interest rate hedging activities, see
Quantitative and Qualitative Disclosures about Market Risk.

New Accounting Pronouncements

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

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

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144
Accounting for the Impairment of Disposal of Long-Lived Assets, which
supersedes SFAS No. 121. The provisions of SFAS No. 144 were effective on
January 1, 2002 for our financial statements. SFAS No. 144 requires the
current and prior period operating results of any asset that has been disposed
of, on or after January 1, 2002, including any gain or loss recognized, to be
recorded as discontinued operations. In August 2002, we sold three hotels. All
operating results, including the loss on disposal, have been recorded as
discontinued operations. We have reclassified prior periods to reflect
operations of the three hotels as discontinued operations.

3.     AMOUNTS DUE TO/FROM INTERSTATE HOTELS

Due to/from Interstate Hotels and Resorts

In the normal course of managing our hotel properties, Interstate Hotels incurs day to day
operating costs which are reimbursed by us. The balance of $9,954 at September 30, 2002,
includes management fees due, and reimbursements due for insurance, employee benefits, sales and marketing expenses,

8



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##### 



and other miscellaneous operating expenses. These
amounts are normally paid within 30 days.

Pursuant to an intercompany agreement, we and Interstate Hotels provide each other with, among other things, reciprocal rights to participate
in certain transactions entered into by each party. In particular, Interstate Hotels has a right of first refusal to become the manager of any real property we acquire. We
also may provide each other with certain services. These may include administrative, renovation supervision, corporate, accounting, finance, risk management, legal,
tax, information technology, human resources, acquisition identification and due diligence, and operational services, for which Interstate Hotels is compensated in an amount
that we would be charged by a third party for comparable services. As of December 31, 2001, Interstate owed us $8,877 for working capital deficits at the RMA lease conversion date and these services.

Note Receivable From Interstate Hotels and Resorts

Under a revolving credit agreement with Interstate Hotels through July 31,
2002, we had the ability to lend Interstate Hotels up to $50,000 for general
corporate purposes. The interest rate on this credit agreement was 650 basis
points over the 30-day London Interbank Offered Rate.

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

In connection with the merger that created Interstate Hotels on July 31, 2002,
Interstate Hotels paid $3,000 to reduce its borrowings outstanding on the
credit agreement. Also, the credit agreement and term note were amended and
combined into a term loan agreement with a principal balance of $56,069 and a
maturity date of July 31, 2007. The interest rate remained at 650 basis points
over the 30-day LIBOR. This term loan is subordinate to Interstates new
credit agreement, and the term loan does not allow for any additional amount of
further borrowings by Interstate Hotels.

4.     LONG-TERM DEBT

Long-term debt consisted of the following:

|                           |  |                    |           |                   |  |   |           |  
|-------------------------- |  | ------------------ | --------- | ----------------- |  | - | --------- | -
|                           |  | September 30, 2002 |           | December 31, 2001
|                           |  |                    |           |                  
|Senior unsecured notes     |  | $                  | 950,000   |                   |  | $ | 750,000   |  
|Credit facility            |  |                    | 14,000    |                   |  |   | 224,000   |  
|Secured facility           |  |                    | 315,955   |                   |  |   | 319,788   |  
|Subordinated notes         |  |                    | 205,000   |                   |  |   | 205,000   |  
|Convertible notes          |  |                    | 154,300   |                   |  |   | 154,300   |  
|Mortgage debt and other    |  |                    | 38,550    |                   |  |   | 52,335    |  
|Unamortized issue discount |  |                    | (8,151    | )                 |  |   | (5,289    | )
|                           |  |                    |           |                   |  |   |           |  
|                           |  | $                  | 1,669,654 |                   |  | $ | 1,700,134 |  
|                           |  |                    |           |                   |  |   |           |  

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

|           |  |   |           | 
|---------- |  | - | --------- | 
|2002       |  | $ | 1,914     | 
|2003       |  |   | 22,188    | 
|2004       |  |   | 170,669   | 
|2005       |  |   | 8,665     | 
|2006       |  |   | 9,407     | 
|Thereafter |  |   | 1,456,811 | 
|           |  |   |           | 
|           |  | $ | 1,669,654 | 
|           |  |   |           | 

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

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

On October 29, 2002, we entered into a new three-year, $100,000 senior
unsecured revolving credit facility. The initial interest rate is 30-day LIBOR plus 388 basis points. We repaid the outstanding
balance of $14,000 on our previous credit facility in conjunction with closing
this facility.

9



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##### 



5.     DIVIDENDS AND DISTRIBUTIONS PAYABLE

On September 25, 2002, we declared a dividend for the three months ended
September 30, 2002 of $0.01 per share of common stock. The record date for the
dividend was October 15, 2002 and we paid the dividend on October 31, 2002.

6.     EARNINGS PER SHARE

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

|                                                                                       |                             |   |                    |   |                   |   |         |   |      |   |         |   |  |   |        |       | 
|-------------------------------------------------------------------------------------- | --------------------------- | - | ------------------ | - | ----------------- | - | ------- | - | ---- | - | ------- | - |  | - | ------ | ----- | 
|                                                                                       |                             |   | Three months ended |   | Nine months ended
|                                                                                       |                             |   | September 30,      |   | September 30,    
|                                                                                       |                             |   |                    |   |                  
|                                                                                       |                             |   | 2002               |   | 2001              |   | 2002    |   | 2001
|                                                                                       |                             |   |                    |   |                   |   |         |   |     
|BASIC EARNINGS (LOSS) PER
SHARE COMPUTAION:                                            |                             |   |                    |   |                   |   |         |   |      |   |         |   |  |   |        |      
|Income (loss) from continuing
operations before extraordinary loss                     |                             | $ | (22,890            | ) |                   | $ | (17,860 | ) |      | $ | (30,732 | ) |  | $ | 18,033 |      
|Dividends paid on unvested restricted
stock                                            |                             |   | (2                 | ) |                   |   | (198    | ) |      |   | (5      | ) |  |   | (593   | )    
|                                                                                       |                             |   |                    |   |                   |   |         |   |      |   |         |   |  |   |        |      
|Income (loss) applicable to common
stockholders                                        |                             | $ | (22,892            | ) |                   | $ | (18,058 | ) |      | $ | (30,737 | ) |  | $ | 17,440 |      
|                                                                                       |                             |   |                    |   |                   |   |         |   |      |   |         |   |  |   |        |      
|Weighted average number of shares
of common stock outstanding                          |                             |   | 45,045             |   |                   |   | 44,528  |   |      |   | 44,851  |   |  |   | 44,498 |      
|                                                                                       |                             |   |                    |   |                   |   |         |   |      |   |         |   |  |   |        |      
|Basic earnings (loss) per share from
continuing operations before
extraordinary loss   |                             | $ | (0.51              | ) |                   | $ | (0.41   | ) |      | $ | (0.69   | ) |  | $ | 0.39   |      
|                                                                                       |                             |   |                    |   |                   |   |         |   |      |   |         |   |  |   |        |      
|                                                                                       |                             |   |                    |   |                   |   |         |   |      |   |         |   |  |   |        |       | 
|DILUTED EARNINGS (LOSS) PER SHARE
COMPUTATION:                                         |                             |   |                    |   |                   |   |         |   |      |   |         |   |  |   |        |      
|Income (loss) applicable to common
stockholders                                        |                             | $ | (22,892            | ) |                   | $ | (18,058 | ) |      | $ | (30,737 | ) |  | $ | 17,440 |      
|Minority interest, net of tax                                                          |                             |   |                   |   |                   |   |        |   |      |   |        |   |  |   | 1,197  |      
|                                                                                       |                             |   |                    |   |                   |   |         |   |      |   |         |   |  |   |        |      
|Adjusted net income (loss)                                                             |                             | $ | (22,892            | ) |                   | $ | (18,058 | ) |      | $ | (30,737 | ) |  | $ | 18,637 |      
|                                                                                       |                             |   |                    |   |                   |   |         |   |      |   |         |   |  |   |        |      
|                                                                                       |                             |   |                    |   |                   |   |         |   |      |   |         |   |  |   |        |       | 
|Weighted average number of shares of
common stock outstanding                          |                             |   | 45,045             |   |                   |   | 44,528  |   |      |   | 44,851  |   |  |   | 44,498 |      
|Common stock equivalents:                                                              |                             |   |                    |   |                   |   |         |   |      |   |         |   |  |   |        |      
|                                                                                       | Operating partnership units |   |                    |  |                   |   |         |  |      |   |         |  |  |   |        | 2,791 | 
|                                                                                       | Stock options               |   |                    |  |                   |   |         |  |      |   |         |  |  |   |        | 324   | 
|                                                                                       |                             |   |                    |   |                   |   |         |   |      |   |         |   |  |   |        |      
|Total weighted average number of
diluted shares of common stock
outstanding            |                             |   | 45,045             |   |                   |   | 44,528  |   |      |   | 44,851  |   |  |   | 47,613 |      
|                                                                                       |                             |   |                    |   |                   |   |         |   |      |   |         |   |  |   |        |      
|Diluted earnings (loss) per share from
continuing operations before
extraordinary loss |                             | $ | (0.51              | ) |                   | $ | (0.41   | ) |      | $ | (0.69   | ) |  | $ | 0.39   |      
|                                                                                       |                             |   |                    |   |                   |   |         |   |      |   |         |   |  |   |        |      

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

10



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7.     SUPPLEMENTAL CASH FLOW INFORMATION

|                                                                         |                                                                         |                                       |                                 |         |                                 |   |      |        |        |        | 
|------------------------------------------------------------------------ | ----------------------------------------------------------------------- | ------------------------------------- | ------------------------------- | ------- | ------------------------------- | - | ---- | ------ | ------ | ------ | 
|                                                                         |                                                                         |                                       |                                 |         | Nine months ended September 30,
|                                                                         |                                                                         |                                       |                                 |         |                                
|                                                                         |                                                                         |                                       |                                 |         | 2002                            |   | 2001
|                                                                         |                                                                         |                                       |                                 |         |                                 |   |     
|                                                                         |                                                                         |                                       |                                 |         |                                 |   |      |        |        |        | 
|                                                                         | Cash paid for interest and income taxes:                                |                                       |                                 |         |                                 |   |      |        |       
|                                                                         | Interest, net of capitalized interest of
$3,093 and $5,435 respectively |                                       | $                               | 110,619 |                                 |   | $    | 88,522 |       
|                                                                         | Income taxes                                                            |                                       |                                 | 726     |                                 |   |      | 630    |       
|                                                                         |                                                                         |                                       |                                 |         |                                 |   |      |        |        |        | 
|                                                                         | Non-cash investing and financing activities:                            |                                       |                                 |         |                                 |   |      |        |       
|                                                                         | Issuance of POPs                                                        |                                       |                                 | 3,339   |                                 |   |      | 1,243  |       
|                                                                         | Conversion of OP Units to Common Stock                                  |                                       |                                 | 6,146   |                                 |   |      | 4,504  |       
|                                                                         |                                                                         |                                       |                                 |         |                                 |   |      |        |        |        | 
|Operating assets received and liabilities assumed from lease conversion: |                                                                         |                                       |                                 |         |                                 |   |      |       
|                                                                         |                                                                         | Accounts receivable                   |                                 | $       |                                |   |      | $      | 47,200 |       
|                                                                         |                                                                         | Prepaid expenses and other            |                                 |         |                                |   |      |        | 13,500 |       
|                                                                         |                                                                         | Furniture and fixtures, net           |                                 |         |                                |   |      |        | 152    |       
|                                                                         |                                                                         | Investment in affiliates, net         |                                 |         |                                |   |      |        | 1,629  |       
|                                                                         |                                                                         |                                       |                                 |         |                                 |   |      |       
|                                                                         |                                                                         |                                       | Total operating assets received |         | $                               |  |      |        | $      | 62,481 | 
|                                                                         |                                                                         |                                       |                                 |         |                                 |   |      |       
|                                                                         |                                                                         |                                       |                                 |         |                                 |   |      |        |        |        | 
|                                                                         |                                                                         | Accounts payable and accrued expenses |                                 | $       |                                |   |      | $      | 65,706 |       
|                                                                         |                                                                         | Long-term debt                        |                                 |         |                                |   |      |        | 32     |       
|                                                                         |                                                                         |                                       |                                 |         |                                 |   |      |       
|                                                                         |                                                                         | Total liabilities acquired            |                                 | $       |                                |   |      | $      | 65,738 |       
|                                                                         |                                                                         |                                       |                                 |         |                                 |   |      |       

8.     STOCK-BASED COMPENSATION

As of September 30, 2002, we have granted 481,500 shares of restricted stock to
employees. This restricted stock vests ratably over three-year or five-year
periods. As a result of issuing this restricted stock, we have $1,571 of
unearned stock-based compensation recorded as a reduction to stockholders
equity on our condensed consolidated balance sheet as of September 30, 2002.

As of September 30, 2002, we have granted 925,000 Profits-Only OP Units, or
POPs, to some of our employees pursuant to our POPs Plan. These POPs are fixed
awards and vest over three-year or four-year periods. As a result of issuing
these POPs, we have $3,569 of unearned stock-based compensation recorded as a
reduction to stockholders equity on our condensed consolidated balance sheet
as of September 30, 2002.

9.     RESTRUCTURING EXPENSES

During 2001, we incurred a restructuring charge of $1,080 in connection with
operational changes at our corporate headquarters. The restructuring included
eliminating seven corporate staff positions and office space no longer needed
under the new structure. During 2002, we applied $156 of lease termination
costs against the restructuring reserve. Approximately $236 of the
restructuring accrual remains at September 30, 2002.

10.     CONSOLIDATING FINANCIAL INFORMATION

We and certain subsidiaries of MeriStar Hospitality Operating Partnership, L.P.
(MHOP), our subsidiary operating partnership, are guarantors of senior
unsecured notes issued by MHOP. MHOP and certain of its subsidiaries are
guarantors of our unsecured subordinated notes. We own a one percent general
partner interest in MHOP and MeriStar LP, Inc., our wholly-owned subsidiary,
owns approximately a 90 percent limited partner interest in MHOP. All
guarantees are full and unconditional, and joint and several. Exhibit 99.1 to
this Quarterly Report on Form 10-Q presents supplementary consolidating
information for MHOP, including each of the guarantor subsidiaries. This
exhibit presents MHOPs consolidating balance sheets as of September 30, 2002
and December 31, 2001, consolidating statements of

11



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operations for each of the three and nine months ended September 30, 2002 and
2001, and consolidating cash flows for the nine months ended September 30, 2002
and 2001.

11.     DISPOSITIONS

On August 1, 2002 we sold three hotels for $25,150, which resulted in a loss on
sale of assets of $6,403 ($6,275, net of tax). Revenue and pre-tax income
included in discontinued operations for these three hotels were:

|                      |  |                    |      |                   |  |      |       |      |  |   |       |  |  |   |       | 
|--------------------- |  | ------------------ | ---- | ----------------- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                      |  | Three months ended |      | Nine months ended
|                      |  | September 30       |      | September 30,    
|                      |  |                    |      |                  
|                      |  | 2002               |      | 2001              |  | 2002 |       | 2001
|                      |  |                    |      |                   |  |      |       |     
|Revenue               |  | $                  | 981  |                   |  | $    | 3,506 |      |  | $ | 7,233 |  |  | $ | 9,779 | 
|                      |  |                    |      |                   |  |      |       |      |  |   |       |  |  |   |       | 
|Pre-tax income (loss) |  | $                  | (237 | )                 |  | $    | 558   |      |  | $ | 635   |  |  | $ | 2,264 | 
|                      |  |                    |      |                   |  |      |       |      |  |   |       |  |  |   |       | 

12.     SUBSEQUENT EVENTS

On October 29, 2002, we entered into a new three-year $100,000
senior unsecured revolving credit facility. The initial interest rate is 30-day LIBOR plus 388
basis points. We repaid the outstanding balance of $14,000 on our previous credit facility in  conjunction with
closing this facility.

On November 6, 2002, we sold one hotel for
$12,500. The book carrying value of this hotel at the date of sale was
approximately $26,000. In the fourth quarter, we will record a loss on sale from
the disposition of this hotel of approximately $13,500.

SFAS No. 144 requires companies to classify
long-lived assets as held for sale (as opposed to held for use) as of a balance
sheet date if several criteria are met. One of those criteria is that the sale
of the asset must be considered probable (that is, likely to occur) as of the
balance sheet date. As of September 30, 2002, we did not consider the sale of
this asset to be probable and therefore we did not meet the criteria according to
SFAS No. 144 to classify this hotel as held for sale on our balance sheet and to reclassify the operations of the hotel to discontinued operations
on our statement of operations. We did not consider this sale probable as of September 30, 2002 for
the following reasons:



| |  |  | although we had listed this property to be sold
with an independent broker prior to September 30, 2002, we believed the
probability of a sale within one year was low. Based on our history of listing
assets for possible sale, we expected the listing, bidding, and negotiation
process for a possible sale, if any, to be extended;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | the offer to purchase this property was received
after the balance sheet date, in mid-October 2002;                                                                                                                                                                                                                                    
| |  |  | the offer was received from a new prospective
buyer with whom we had no previous dealings and therefore it was difficult to
assess the potential buyers ability or willingness to close a transaction
on a timely basis;                                                                                                              
| |  |  | the buyer was not willing to put up a
nonrefundable deposit; and                                                                                                                                                                                                                                                                       
| |  |  | we did not have an executed sales contract until
November 4, 2002.                                                                                                                                                                                                                                                                     

Based on the reasons above, we did not consider
this property as held for sale as of the balance sheet date.

In addition, as of September 30, 2002, we did not
consider this property impaired in accordance with the provisions of SFAS No. 144.
In situations when the criteria of SFAS No. 144 are met to classify an asset as
held for sale after the balance sheet date but before issuance of the financial
statements, SFAS No. 144 requires that the asset continue to be classified as
held and used in those financial statements when issued. We tested the asset for
recoverability on a held and used basis as of the balance sheet date. The
estimates of future cash flows used in this test considered the likelihood of
possible outcomes that existed at the balance sheet date, including the assessment of
the likelihood of the future sale of the asset. We performed the recoverability analysis using a
probability-weighted cash flows test to assess the asset for possible impairment.
Based on the results of the probability-weighted cash flows test for impairment,
the carrying value of this asset would be recoverable as of September 30, 2002;
therefore the asset was not considered impaired as of that date.

We sold this asset in light of the severe downturn in
the overall economy that has had a negative effect on our operating results, and
decreased the amount of cash generated by our operations. We believe we have
sufficient free cash flow currently, and project to have adequate cash flow in
future periods. Our current and future liquidity is, however, greatly dependent
upon our operating results, which are driven largely by overall economic
conditions. If the general economic conditions continue to be depressed for an
extended period, this would negatively impact our projections of
available cash flow and liquidity. In order to maintain our current operating
flexibility and establish a further cushion against the slowed economy and
future economic and other uncertainties, we are taking several steps to further
improve our liquidity. One of these steps is the marketing of non-core assets. We elected to
sell this asset principally because of the rapid closing offered by the seller.
This allowed us to improve our short-term liquidity and provide an additional
cushion against future operating results.

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

GENERAL

We own a portfolio of upscale, full-service hotels in the United States and
Canada. Our portfolio is diversified by franchise and brand affiliations. As of
September 30, 2002, we owned 109 hotels, with 28,099 rooms, all of which were
leased by our taxable subsidiaries and managed by Interstate Hotels & Resorts.
Interstate Hotels was created on July 31, 2002 through the merger of MeriStar
Hotels & Resorts, Inc. and Interstate Hotels Corporation.

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

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



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

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

Business Summary

Our results continue to reflect a slowed economy which has caused substantial
declines in business and leisure travel demand nationwide. Our group business
improved during the first three quarters of 2002 but our transient business
continues to be significantly lower than prior to the terrorist attacks on
September 11, 2001, and also lower than our initial internal projections for
2002. Overall, our occupancies were ahead of our internal plan for the first
three quarters of 2002, but our average daily rate was lower than we projected.
We will continue to work with Interstate Hotels to focus on cost reduction and
control measures at our hotels. We have also shifted our marketing efforts
towards our group and leisure business customers. We expect year-over-year
performance measures to improve in the fourth quarter of 2002 and in 2003, but
our business is highly dependent upon general economic conditions.

The September 11, 2001 terrorist attacks have had a dramatic effect on the
insurance and reinsurance industries. Companies in all industry segments are
experiencing increases in premiums and restriction of coverage upon renewal of
their insurance programs. Some have experienced an inability to obtain
insurance. Our secured facility requires our

13



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

Relationships with Interstate Hotels

Since our formation in 1998, we have had close operating, management and
governance relationships with the manager of our hotel properties, MeriStar
Hotels (now part of Interstate Hotels). Interstate Hotels manages all of our
hotel properties under long-term management contracts. We have shared several
key management personnel with Interstate Hotels, and our board of directors has
four members who also serve on Interstate Hotels board of directors. Due to
the merger of Interstate Hotels Corporation and MeriStar Hotels and the
resulting increased scale and size of Interstate Hotels, we and Interstate
Hotels plan to separate more completely the management teams of the two
companies. This separation of management will eliminate all but one shared
management position between the two companies. It will allow each company to
provide additional, dedicated resources for the management of each respective
company. Paul W. Whetsell will remain Chairman and Chief Executive Officer of
each company, but we do not expect any other management positions to be shared
between the companies. This plan to further separate the management teams will
mainly affect the legal, finance and accounting, and development departments.
On November 4, 2002, we announced that Donald D. Olinger will join
our company as chief financial officer in December. John Emery
previously performed the duties of chief financial officer for us.
On November 5, 2002, we announced that John Emery, our president and
chief operating officer, would resign from those positions. Mr. Emery
will continue to serve as president and chief operating officer of
Interstate Hotels. Bruce Wiles, who was our chief investment officer, will be our new chief operating
officer. Mr. Olinger will also
serve as our chief accounting officer. James A. Calder,
our current chief accounting officer, will resign from that position. Mr.
Calder will continue to serve as chief financial officer of
Interstate Hotels. We expect to complete all other separation of
management positions by the first quarter of 2003.

Critical Accounting Policies

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

Our critical accounting policies are as follows:



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

Impairment of long-lived assets

Whenever events or changes in circumstances indicate that the carrying value of
a long-lived asset (including property and equipment and all intangibles) may
be impaired, we perform an analysis to determine the recoverability of the
assets carrying value. The carrying value of the asset includes the original
purchase price (net of depreciation) plus the cost of all capital improvements
(net of depreciation). We make estimates of the undiscounted cash flows from
the expected future operations of the asset. If the analysis indicates that the
carrying value is not recoverable from future cash flows, we write down the
asset to estimated fair value and recognize an impairment loss. Any impairment
losses we recognize are recorded as operating expenses. We did not recognize
any impairment losses for the nine months ended September 30, 2002. We did
recognize an impairment loss of $43.6 million during the fourth quarter of
2001 to write-down certain hotel assets. These write-downs resulted
from the negative impact of changes in the economic climate on the
value of these assets. 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 warranted by then current economic
and operational forecasts.

Estimating certain accrued liabilities

Estimates for certain accruals such as real and personal property taxes could
have a material effect on our financial statements. Currently, we estimate real
and personal property taxes based on a combination of preliminary estimates
from

14



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state and local jurisdictions, and historical information. The assessed values
of these properties could change significantly from the values or rates we use
in our estimates.

Property tax assessments are subject to periodic and often lengthy appeals. For
example, in instances where a jurisdiction increases our assessed value, we
frequently appeal that assessment. Similarly, when hotel operations are
declining, we may appeal an assessment as too high if it is based on past
operating results. These appeals of assessed values are subject to a
potentially wide range of outcomes. As a result of the economic slowdown and
events of September 11, 2001, we have filed a number of appeals for lower
assessments. As of September 30, 2002, we had ongoing appeals in several
jurisdictions with respect to approximately nine properties. We accrue for
property tax liabilities based on what we believe is a reasonable judgment of
the most likely outcome of the appeals. We believe our experience in pursuing
reductions through the appeals process is very favorable  for example, during
the nine months ended September 30, 2002 we completed the appeals process for
1997 through 2001 for approximately 25 properties. Of these appeals,
three of the larger ones resulted in refunds of approximately
$ $2.7 million from taxing authorities. We cannot predict with certainty the
outcome of these appeals, or their effect on our accruals for such items. Also,
actual property tax expense could vary greatly from our estimates used for the
current property tax accrual based on a change in the assessed value, a change
in the tax rate, and/or a different outcome of the appeals process than we
currently expect.

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

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

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

Our interest rate swap agreements were initially designated as hedges against
changes in future cash flows associated with specific variable rate debt
obligations. As of September 30, 2002, we had three swap agreements with
notional amounts totaling $300 million. These swap agreements have been
converted to non-hedging derivatives due to our repayment of the floating-rate
borrowings they originally hedged and they are currently being marked to market
through our statement of operations. We have interest rate exposure going
forward as the change in fair value of our non-hedging derivatives will have an
impact on our statement of operations. During the three and nine months ended
September 30, 2002, we recognized $1.1 million and $4.2 million of expense,
respectively, related to these interest rate swaps. The fair value of these
swap agreements is a liability of $6.8 million at September 30, 2002. For more
information regarding our interest rate hedging activities, see Quantitative
and Qualitative Disclosures about Market Risk.

FINANCIAL CONDITION

SEPTEMBER 30, 2002 COMPARED WITH DECEMBER 31, 2001

Our total assets decreased by $67.4 million to $2,942.5 million at September
30, 2002 from $3,009.9 million at December 31, 2001 primarily due to:



| |  |  | depreciation on hotel assets of $86.0 million; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | the sale of three hotels and the use of the $25.2 million in proceeds to pay down debt; partially offset by                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |  | the $5.6 million increase in accounts receivable due to our
accrual of our preferred return on our investment in MeriStar
Investment Partners. (We accrue this preferred return although
MeriStar Investment Partners is not permitted to pay it in cash until
they refinance or re-pay their existing bank debt. We evaluate the collectibility of our preferred return based on the underlying value of the hotel properties. MeriStar Investment
Partners ability to refinance their bank debt is dependent upon the operations of the hotels and other factors.);
| |  |  | the $5.1 million increase in prepaid expenses due to increased premiums paid on 2003 insurance policies;                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |  | net additional borrowings by Interstate Hotels of $11.2 million; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |  | capital expenditures of $35.8 million at the hotels.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

15



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Total liabilities decreased by $38.0 million to $1,859.5 million at September
30, 2002 from $1,897.5 million at December 31, 2001 due mainly to:



| |  |  | net payments of long-term debt of $30.5 million;                                                                                                                                          
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | a $5.3 million decrease in market value of our derivative instruments;                                                                                                                    
| |  |  | a $6.4 million decrease in accounts payable, accrued expenses
and other liabilities due to the timing of payments; and                                                                    
| |  |  | a $3.9 million decrease in accrued interest due to the
semi-annual interest payments on our senior unsecured debt issued in
December 2001 and February 2002; partially offset by          
| |  |  | a $10.0 million increase in due to Interstate Hotels primarily
due to our quarterly workers compensation and general liability
insurance which has not been paid as of September 30, 2002.

Long-term debt decreased by $30.4 million to $1,669.7 million at September 30,
2002 from $1,700.1 million at December 31, 2001 due primarily to:



| |  |  | $210.0 million of net repayments on our previous revolving credit
facility using proceeds of the issuance of senior unsecured notes in
February and cash generated by operations;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | $13.8 million of net repayments on our mortgage debt and other; and                                                                                                              
| |  |  | $3.8 million of net repayments on our secured facility; partially offset by                                                                                                      
| |  |  | $200 million ($196.2 million, net of discount) in senior unsecured notes issued in February.                                                                                     

Minority interest decreased by $5.2 million to $84.6 million at September 30,
2002 from $89.8 million at December 31, 2002 due mainly to:



| |  |  | $6.1 million of net redemptions of operating partnership units for common stock;                   
| | - |  | ---------------------------------------------------------------------------------------------------
| |  |  | $2.0 million of current year net losses allocated to minority interest holders; partially offset by
| |  |  | $3.3 million of POPs awarded to certain employees.                                                 

Stockholders equity decreased $24.2 million to $998.4 million at September 30,
2002 from $1,022.6 million at December 31, 2001 due primarily to:



| |  |  | $36.4 million of net loss for the first three quarters of 2002; and                                                                            
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | $3.3 million of POPs awarded to certain employees; partially offset by                                                                         
| |  |  | $6.1 million of net redemptions of operating partnership units for common stock;                                                               
| |  |  | $3.1 million of exercised stock options; and                                                                                                   
| |  |  | a $5.4 million decrease in accumulated other comprehensive loss
due mainly to the conversion of our swap agreements to non-hedging
derivatives.

RESULTS OF OPERATIONS

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

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

|                           |  |      |       |      |  |        |       |   |  |  |      |   
|-------------------------- |  | ---- | ----- | ---- |  | ------ | ----- | - |  |  | ---- | --
|                           |  | 2002 |       | 2001 |  | Change
|                           |  |      |       |      |  |       
|Revenue per available room |  | $    | 60.95 |      |  | $      | 64.36 |   |  |  | (5.3 | )%
|Average daily rate         |  | $    | 94.36 |      |  | $      | 97.79 |   |  |  | (3.5 | )%
|Occupancy                  |  |      | 64.6  | %    |  |        | 65.8  | % |  |  | (1.8 | )%

Overall, the lingering softness of the United States economy and the
anniversary of the September 11 terrorist attacks had a negative effect on our
hotels during the third quarter of 2002. This effect is evidenced by lower
than anticipated transient business travel. This is reflected in the 3.5%
reduction in average daily rate and the 1.8% reduction in occupancy in the
third quarter 2002 compared to 2001. Our group and leisure business has been
stronger than transient business travel in most markets. We have shifted our
marketing efforts towards these customer groups.

Total revenue decreased $8.2 million to $235.8 million in 2002 from $244.0
million in 2001 primarily due to:

16



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| |  |  | a $6.6 million decrease in room revenue due to a decrease in
average daily rate; and                          
| | - |  | --------------------------------------------------------------------------------------------------------------
| |  |  | a $1.8 million decrease in lease revenue following the
termination of our hotel leases with Prime Hospitality.

Total operating expenses decreased $3.9 million to $227.1 for the three months
ended September 30, 2002 compared to $231.0 million for the same period in 2001
due primarily to:



| |  |  | a $1.8 million decrease
in room expenses due to lower occupancy;                                                                                                                                 
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | a $4.3 million decrease in property taxes, insurance and other
due to a $3.4 million decrease in property taxes and a $0.4 million
decrease in leases;                                           
| |  |  | $2.0 million in costs associated with a proposed merger with Felcor during 2001; and                                                                                                             
| |  |  | $1.1 million restructuring costs during 2001; partially offset by                                                                                                                                
| |  |  | a $1.5 million increase in depreciation and amortization expenses;                                                                                                                               
| |  |  | a $2.5 million increase in administrative and general expenses
due primarily to a $2.0 million increase in sales and marketing
expense; and                                                      
| |  |  | a $1.1 million increase in expense for non-hedging derivatives
for the three months ended September 30, 2002 due to our three swap
agreements being converted to non-hedging derivatives in 2002.

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

Interest expense increased $2.4 million to $33.8 million for the three months
ended September 30, 2002 compared to $31.4 million for the same period in 2001
due primarily to the issuance of $250 million of senior secured notes in
December 2001 and $200 million of senior secured notes in February 2002 at
fixed rates greater than the variable rate of the debt that was repaid.

In the third quarter of 2002, we sold three hotels and received $25.2 million.
This resulted in a loss on the sale of assets of $6.3 million, net of tax.

In the third quarter of 2001, we sold one hotel and received $2.4 million. The
sale resulted in a loss of $1.1. million net of tax.

NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2001

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

|                           |  |      |        |      |  |        |        |   |  |  |       |   
|-------------------------- |  | ---- | ------ | ---- |  | ------ | ------ | - |  |  | ----- | --
|                           |  | 2002 |        | 2001 |  | Change
|                           |  |      |        |      |  |       
|Revenue per available room |  | $    | 66.24  |      |  | $      | 75.19  |   |  |  | (11.9 | )%
|Average daily rate         |  | $    | 100.56 |      |  | $      | 108.01 |   |  |  | (6.9  | )%
|Occupancy                  |  |      | 65.9   | %    |  |        | 69.6   | % |  |  | (5.3  | )%

Overall, the slowing United States economy had a major negative effect on our
hotels during the first three quarters of 2002 compared to the first three
quarters 2001. This effect is evidenced by a sharp reduction in transient
business travel. This is reflected in the 6.9% reduction in average daily rate
and the 5.3% reduction in occupancy in the first three quarters 2002 compared
to 2001. Our group and leisure business has been stronger than transient
business travel in most markets. We have shifted our marketing efforts towards
these customer groups.

Total revenue decreased $80.1 million to $767.5 million in 2002 from $847.6 million in 2001 primarily due to:



| |  |  | a $56.4 million decrease in room revenue due to a decrease in occupancy and average daily rate;               
| | - |  | --------------------------------------------------------------------------------------------------------------
| |  |  | a $10.9 million decrease in food and beverage revenue due to a decrease in occupancy;                         
| |  |  | a $6.8 million decrease in other operating departments due to a decrease in occupancy; and                    
| |  |  | a $8.1 million decrease in lease revenue following the
termination of our hotel leases with Prime Hospitality.

Total operating expenses decreased $34.3 million to $698.5 for the nine months
ended September 30, 2002 compared to $732.8 million for the same period in 2001
due primarily to:

17



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| |  |  | a $12.0 million decrease in room expenses due to lower occupancy;                                                                                                                                                                             
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | a $9.1 million decrease in food and beverage expenses due to lower occupancy;                                                                                                                                                                 
| |  |  | a $7.0 million decrease in property operating costs due primarily
to a $3.5 million decrease in franchise costs, a $2.0 million decrease
in energy costs and a $1.9 million decrease in management fees;                                      
| |  |  | a $4.3 million decrease in property taxes, insurance and other
due to a $5.4 million decrease in property taxes and a $0.6 million
decrease in leases partially offset by a $2.8 million increase in
property and general liability insurance;
| |  |  | $9.3 million in swap termination fees during 2001;                                                                                                                                                                                            
| |  |  | a $2.1 million write down of investment in STS Hotel Net during 2001;                                                                                                                                                                         
| |  |  | $5.8 million in costs associated with a proposed merger with Felcor during 2001;                                                                                                                                                              
| |  |  | $1.1 million of restructuring costs during 2001; and                                                                                                                                                                                          
| |  |  | $1.3 million of costs to terminate leases with Prime Hospitality Corporation; partially offset by                                                                                                                                             
| |  |  | a $4.7 million loss on fair value of non-hedging derivatives in
2002 due to the repayment of debt that was originally hedged;                                                                                                                 
| |  |  | a $1.5 million write-off of deferred costs due to the reduction
in our borrowing capacity on our revolving credit agreement in 2002;                                                                                                          
| |  |  | a $5.6 million increase in depreciation and amortization expense;                                                                                                                                                                             
| |  |  | a $2.3 million increase in administrative and general expenses
due primarily to a $2.9 million increase in sales and marketing
expense; and                                                                                                   
| |  |  | a $4.2 million increase in expense for non-hedging derivatives
for the nine months ended September 30, 2002 due to our three swap
agreements being converted to non-hedging derivatives in 2002.                                              

Interest expense increased $10.8 million to $102.5 million for the nine months
ended September 30, 2002 compared to $91.7 million for the same period in 2001
due primarily to the issuance of $250 million of senior secured notes in
December 2001 and $200 million of senior secured notes in February 2002 at
fixed rates greater than the variable rate of the debt that was repaid.

In the third quarter of 2002, we sold three hotels and received $25.2 million.
This resulted in a loss on the sale of assets of $6.3 million, net of tax.

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

In 2001, we sold two hotels and received $9.7 million.
This resulted in a loss on the sale of assets of $2.1 million, net of tax.

Funds from Operations

The National Association of Real Estate Investment Trusts or NAREIT defines
Funds from Operations, or FFO as net income (loss), computed in accordance with
generally accepted accounting principles, also called GAAP, excluding gains (or
losses) from sales of properties, plus real estate related depreciation and
amortization and after comparable adjustments for our portion of these items
related to unconsolidated partnerships and joint ventures. Extraordinary items
under GAAP are excluded from the calculation of FFO. We believe FFO is helpful
to investors as a measure of the performance of an equity REIT because, along
with cash flow from operating activities, financing activities and investing
activities, it provides investors with an indication of our ability to incur
and service debt, to make capital expenditures and to fund other cash needs.
FFO does not represent cash generated from operating activities determined by
GAAP and should not be considered as an alternative to net income determined in
accordance with GAAP as an indication of our financial performance or to cash
flow from operating activities determined in accordance with GAAP as a measure
of our liquidity, nor is it indicative of funds available to fund our cash
needs, including our ability to make cash distributions. FFO may include funds
that may not be available for managements discretionary use due to functional
requirements to conserve funds for capital expenditures and property
acquisitions, and other commitments and uncertainties.

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

18



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|                                                                    |                                                  |   |         |                    |  |                   |         |       |  |      |         |       |  |   |         |       |  | 
|------------------------------------------------------------------- | ------------------------------------------------ | - | ------- | ------------------ |  | ----------------- | ------- | ----- |  | ---- | ------- | ----- |  | - | ------- | ----- |  | 
|                                                                    |                                                  |   |         | Three months ended |  | Nine months ended
|                                                                    |                                                  |   |         | September 30,      |  | September 30,    
|                                                                    |                                                  |   |         | 2002               |  | 2001              |         | 2002  |  | 2001
|                                                                   
|Income (loss) before loss on sale of assets and
extraordinary items |                                                  | $ | (23,127 | )                  |  | $                 | (16,229 | )     |  | $    | (30,097 | )     |  | $ | 22,429  |      
|Minority interest to common OP Unit Holders                         |                                                  |   | (1,725  | )                  |  |                   | (1,132  | )     |  |      | (2,389  | )     |  |   | 1,707   |      
|Interest on convertible debt                                        |                                                  |   | 1,832   |                    |  |                   | 1,832   |       |  |      | 5,497   |       |  |   | 5,497   |      
|Hotel depreciation and amortization                                 |                                                  |   | 28,594  |                    |  |                   | 27,965  |       |  |      | 86,844  |       |  |   | 84,197  |      
|Interest rate swaps                                                 |                                                  |   | 1,132   |                    |  |                   |        |       |  |      | 4,211   |       |  |   |        |      
|Non-recurring items (net of minority interests
and income taxes):   |                                                  |   |         |                    |  |                   |         |       |  |      |         |       |  |   |         |      
|                                                                    | Write down of deferred financing costs           |   |         |                   |  |                   |         |      |  |      |         | 1,490 |  |   |         |      | 
|                                                                    | Loss on fair value of non-hedging derivatives    |   |         |                   |  |                   |         |      |  |      |         | 4,615 |  |   |         |      | 
|                                                                    | Swap termination costs                           |   |         |                   |  |                   |         |      |  |      |         |      |  |   |         | 8,998 | 
|                                                                    | Write down of investment in STS Hotel Net        |   |         |                   |  |                   |         |      |  |      |         |      |  |   |         | 2,046 | 
|                                                                    | Felcor merger costs                              |   |         |                   |  |                   |         | 1,955 |  |      |         |      |  |   |         | 5,622 | 
|                                                                    | Costs to terminate leases with Prime Hospitality |   |         |                   |  |                   |         |      |  |      |         |      |  |   |         | 1,272 | 
|                                                                    | Restructuring charge                             |   |         |                   |  |                   |         | 1,053 |  |      |         |      |  |   |         | 1,053 | 
|                                                                    |                                                  |   |         |                    |  |                   |         |       |  |      |         |       |  |   |         |      
|                                                                    |                                                  |   |         |                    |  |                   |         |       |  |      |         |       |  |   |         |       |  | 
|Comparative FFO                                                     |                                                  | $ | 6,706   |                    |  | $                 | 15,444  |       |  | $    | 70,171  |       |  | $ | 132,821 |      
|                                                                    |                                                  |   |         |                    |  |                   |         |       |  |      |         |       |  |   |         |      

19



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LIQUIDITY AND CAPITAL RESOURCES

Sources of Cash

We generated $48.5 million of cash from operations during the first nine months
of 2002. Our principal sources of liquidity are cash on hand, cash generated
from operations, and funds from external borrowings and debt offerings. We
expect to fund our continuing operations through cash generated by our hotels.
We also use the periodic sales of non-core assets to generate cash.
On November 6, we sold one hotel for $12.5 million, see footnote 12 of
our condensed consolidated financial statements.
On October 29, 2002 we entered into a new $100 million revolving credit facility, under which, as of November 12, 2002, $100.0 million was available.

We also expect to finance hotel acquisitions, hotel renovations and joint
venture investments through a combination of internally generated cash,
external borrowings, potential proceeds from the sale of non-core assets and
the issuance of OP Units and/or common stock.

Factors that may influence our liquidity include:



| |  |  | factors that affect our results of operations, including general
economic conditions, demand for business and leisure travel, public
concerns about travel safety and other operating risks described under
the caption, Risk FactorsOperating Risks in our 2001 Annual Report
on Form 10-K;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | factors that affect our access to bank financing and the capital
markets, including interest rate fluctuations, operational risks and
other risks described under the caption Risk FactorsFinancing Risks
in our 2001 Annual Report on Form 10-K; and                                       
| |  |  | the other factors described under the caption, Forward-Looking
Statements.                                                                                                                                                                                                                   

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

Uses of Cash

We used $12.8 million of cash in investing activities during the first nine months of 2002 primarily for:



| |  |  | $7.0 million of notes receivable from Interstate Hotels; and          
| | - |  | ----------------------------------------------------------------------
| |  |  | $35.8 million of capital expenditures at hotels; partially offset by  
| |  |  | $25.2 million of net proceeds related to the sale of three hotels; and
| |  |  | a $4.9 million change in restricted cash.                             

We used $34.4 million of cash from financing activities during the first nine months of 2002 primarily for:



| |  |  | $30.5 million of net payments on our credit facilities;                                                                                                                                          
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | $3.4 million for additional deferred financing costs related to
issuing the $200 million of senior unsecured notes in February 2002
and the $250 million senior unsecured notes in December 2001;
| |  |  | $2.5 million of distributions to stockholders and minority investors; partially offset by                                                                                                        
| |  |  | $3.2 million of proceeds from issuances of common stock as a result of stock option conversions;                                                                                                 

Capital Structure Plan

The severe downturn in the overall economy has had a negative effect on our
operating results, and decreased the amount of cash generated by our hotel
operations. Based on current expectations, we believe we have sufficient free cash flow currently, and
project to have adequate cash flow in the next twelve months. Our current and future
liquidity is, however, greatly dependent upon our operating results, which are
driven largely by overall economic conditions. If the general economic
conditions continue to be depressed for an extended period, this would
negatively impact our projections of available cash flow and liquidity. In

20



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order to maintain our operating flexibility and establish a further cushion
against the slowed economy, we are taking several steps to further improve our
liquidity. These steps include:



| |  |  | Marketing of non-core assets  we are marketing eight to 10 non-core
assets for sale. If these properties are sold, we expect to generate
net proceeds of $80 million to $100 million which will be used to pay
down outstanding debt. Our ability to realize these estimated proceed
amounts is, however, dependent upon finding qualified buyers willing to
pay a purchase price that we consider reasonable. We can give no
assurance about the ultimate timing of these sales.
On November 6, 2002, we sold one hotel for $12.5 million, see footnote 12 of our
condensed consolidated financial statements.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | Discussions on repayment of note receivable from Interstate Hotels -
we are currently in discussions with Interstate Hotels about possible
early repayment of their $56.1 million note payable to us. Interstate
Hotels ability to repay this note would, however, be dependent on their
ability to find an alternative source of funds to provide cash for a
repayment. An early repayment of the note, if completed, would likely
be at a discount to the current face amount of the note. We have not
reached a conclusion as to what, if any, discount we would accept.                                    
| |  |  | Establishing new senior unsecured revolving credit facility  in
October 2002, we entered into a new revolving credit facility. As a
result of the refinancing the credit facility, we have no significant maturities
until October 2004 and have approximately $50.0 of available borrowing
capacity currently.                                                                                                                                                                                                                                                                                                
| |  |  | Deferral of certain capital expenditures  we will also be shifting
the majority of our 2003 planned capital expenditures to the second half
of the year to allow us to better forecast our operations for the year.
This deferral could have a negative effect on our properties in their
markets.                                                                                                                                                                                                                                                                                                             

We believe the combination of these items will help maintain our liquidity. To
reduce the overall amount and cost of our debt, we may also look to repurchase
some of our currently outstanding debt. Any such transactions, however, are
subject to limits and restrictions imposed by our borrowing arrangements.

Long-Term Debt

Our revolving credit agreement contains customary compliance measures we must
meet to borrow on the facility. At September 30, 2002, we did not meet some of
our compliance measures in that facility. However, on October 29, 2002, we
entered into a new $100 million revolving credit facility. This facility contains debt covenants with which we must comply. Our compliance with these covenants in future
periods will depend substantially on the financial results from our hotels. If
we fail to meet a future compliance measure, the availability of funds under
our credit facility might be restricted. We do not, however, currently believe
a restriction would have a material impact on our operations, due to the fact
that we expect to generate sufficient cash flow from operations for our
operating purposes.

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

In February 2002, we amended our revolving credit agreement. The amendment
allows us to reduce the revolving commitments to below $300 million. In March
2002, we reduced the borrowing capacity on our previous senior credit agreement from
$310 million to $150 million. We recognized a $1.5 million loss due to the write-off
of deferred financing costs related to this reduction in our borrowing
capacity.

On October 29, 2002, we entered into a new three-year $100 million senior
unsecured revolving credit facility. The initial interest rate is the London
Interbank Offered Rate plus 388 basis points. We repaid the outstanding balance of $14.0 million on our previous credit facility in conjunction with closing this facility.

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

|           |  |   |          
|---------- |  | - | ---------
|2002       |  | $ | 1,914    
|2003       |  |   | 22,188   
|2004       |  |   | 170,669  
|2005       |  |   | 8,665    
|2006       |  |   | 9,407    
|Thereafter |  |   | 1,456,811
|           |  |   |          
|           |  | $ | 1,669,654
|           |  |   |          

21



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As of November 12, 2002, we had no indebtedness outstanding under
our new revolving credit agreement.

Capital Resources

We make ongoing capital expenditures in order to keep our hotels competitive in
their markets. We expect a combination of internally generated cash and
external borrowings to provide capital for renovation work. We expect to spend
approximately 4% of annual hotel revenues for ongoing capital expenditure
programs. These ongoing programs will include room and facilities
refurbishments, renovations, and furniture and equipment replacements. For the
nine months ended September 30, 2002, we spent $35.8 million on
capital expenditures. We expect to spend $12.0 to
$14.0 million during the last quarter of 2002 for our ongoing capital
expenditure programs and approximately $40.0 to $50.0 million in 2003.

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

Seasonality

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

22



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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

|                      |  |                |           |      |  |          |     |          |  |          |        |         |  |  |     | 
|--------------------- |  | -------------- | --------- | ---- |  | -------- | --- | -------- |  | -------- | ------ | ------- |  |  | --- | 
|                      |  | Long-term Debt
|                      |  |               
|                      |  |                |           |      |  | Average  |     |          |  |          |        | Average
|                      |  |                |           |      |  | Interest |     | Variable |  | Interest
|Expected Maturity     |  | Fixed Rate     |           | Rate |  | Rate     |     | Rate    
|                      |  |                |           |      |  |          |     |         
|2002                  |  | $              | 1,914     |      |  |          | 7.9 | %        |  | $        |       |         |  |  | N/A | 
|2003                  |  |                | 8,188     |      |  |          | 7.6 | %        |  |          | 14,000 |         |  |  | 5.8 | 
|2004                  |  |                | 170,669   |      |  |          | 5.1 | %        |  |          |       |         |  |  | N/A | 
|2005                  |  |                | 8,665     |      |  |          | 8.1 | %        |  |          |       |         |  |  | N/A | 
|2006                  |  |                | 9,407     |      |  |          | 8.1 | %        |  |          |       |         |  |  | N/A | 
|Thereafter            |  |                | 1,456,811 |      |  |          | 9.0 | %        |  |          |       |         |  |  | N/A | 
|                      |  |                |           |      |  |          |     |          |  |          |        |         |  |  |     | 
|Total                 |  | $              | 1,655,654 |      |  |          | 8.6 | %        |  | $        | 14,000 |         |  |  | 5.8 | 
|                      |  |                |           |      |  |          |     |          |  |          |        |         |  |  |     | 
|                      |  |                |           |      |  |          |     |          |  |          |        |         |  |  |     | 
|Fair Value at 9/30/02 |  | $              | 1,519,075 |      |  |          |     |          |  | $        | 14,000 |         |  |  |     | 
|                      |  |                |           |      |  |          |     |          |  |          |        |         |  |  |     | 

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

As of September 30, 2002, we had three swap agreements with notional principal
amounts totaling $300 million. All of these swap agreements have been converted
to non-hedging derivatives. The swap agreements effectively fix the 30-day
LIBOR between 4.77% and 6.4%. The swap agreements expire between December 2002
and July 2003. For the three months ended September 30, 2002 and 2001, we have
made net payments of approximately $3.0 million and $2.5 million, respectively.
For the nine months ended September 30, 2002 and 2001, we have made net
payments of approximately $9.0 million and $4.1 million, respectively.

As of September 30, 2002, 99% of our debt was fixed and our overall weighted
average interest rate was 8.6%.

Although we conduct business in Canada, the Canadian operations were not
material to our consolidated financial position, results of operations or cash
flows during the nine months ended September 30, 2002 and 2001. Additionally,
foreign currency transaction gains and losses were not material to our results
of operations for the years ended September 30, 2002 and 2001. Accordingly, we
were not subject to material foreign currency exchange rate risk from the
effects that exchange rate movements of foreign currencies would have on our
future costs or on future cash flows we would receive from our foreign
subsidiaries. To date, we have not entered into any significant foreign
currency forward exchange contracts or other derivative financial instruments
to hedge the effects of adverse fluctuations in foreign currency exchange
rates.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange Act
reports is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms, and that
the information is accumulated and communicated to our management,
including our chief executive officer and chief accounting officer,
as appropriate, to allow timely decisions regarding required
disclosure based closely on the definition of disclosure
controls and procedures in Rule 13a-1(c). 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 judgement 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 the
these entities are substantially more limited than those we maintain
with respect to our consolidated subsidiaries.

Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our
management, including our chief executive officer and our chief
accounting officer of the effectiveness of the design and operation
of our disclosure controls and procedures. Based on this evaluation,
it was concluded that our disclosure controls and procedures were
effective.

Changes in Internal Controls

N/A

PART II. OTHER INFORMATION

ITEM 5. OTHER INFORMATION

Forward-Looking Statements

Information both included and incorporated by reference in this quarterly report
on Form 10-Q may contain forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act, and as
such may involve known and unknown risks, uncertainties and other factors which
may cause our actual results, performance or achievements to be materially
different from future results, performance or achievements expressed or implied
by such forward-looking statements. Forward-looking statements, which are based
on certain assumptions and describe our future plans, strategies and
expectations, are generally identifiable by use of the words may, will,
should, expect, anticipate, estimate, believe, intend or project
or the negative of them or other variations of them or comparable terminology.
Factors that could have a material adverse effect on our operations and future
prospects include, but are not limited to:



| |  |  | the current slowdown of the national economy;                                                             
| | - |  | ----------------------------------------------------------------------------------------------------------
| |  |  | economic conditions generally and the real estate market specifically;                                    
| |  |  | the impact of the September 11, 2001 terrorist attacks or actual or threatened future terrorist incidents;
| |  |  | the threatened or actual outbreak of hostilities;                                                         
| |  |  | governmental actions;                                                                                     
| |  |  | legislative/regulatory changes, including changes to laws governing the taxation of REITs;                
| |  |  | availability of capital;                                                                                  
| |  |  | interest rates;                                                                                           
| |  |  | competition;                                                                                              
| |  |  | supply and demand for hotel rooms in our current and proposed market areas; and                           
| |  |  | changes in general accounting principles, policies and guidelines applicable to REITs.                    

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

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

24



---



##### 



ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

All Exhibits listed below are filed with this Quarterly Report on Form
10-Q unless specifically stated to be incorporated by reference to other
documents previously filed with the Commission.

|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                   
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 No. 333-4568).                                                                                                                                                                                                                                            
|           
|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 Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange 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 Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission on March 6, 2002).                                                                                                                                 
|           
|3.2         |  | Amended and Restated By-laws of the Registrant (incorporated
by reference to Exhibit 3.2 on our Form S-3 (Registration Statement
No. 333-66229) filed with the Securities and Exchange Commission on
October 28, 1998).                                                                                                                                                                                           
|           
|4.1         |  | Form of Share Certificate (incorporated by reference to
Exhibit 4.1 on our Registration Statement No. 333-4568).                                                                                                                                                                                                                                                                                                  
|           
|4.2         |  | Indenture, dated as of August 19, 1997 (the August 1997
Indenture), between CapStar Hotel Company and IBJ Schroder Bank &
Trust Company, as Trustee (incorporated by reference to Exhibit 4.4
to our Form 10-K for the year ended December 31, 1999 filed with the
Securities and Exchange Commission on March 15, 2000).                                                                                       
|           
|4.2.1       |  | Specimen Subordinated Note to August 1997 Indenture
(incorporated by reference to Exhibit 4.2 to our Form 10-K for the
year ended December 31, 1999 filed with the Securities and Exchange
Commission on March 15, 2000).                                                                                                                                                                                         
|           
|4.2.2       |  | First Supplemental Indenture to the August 1997 Indenture (incorporated by reference
to Exhibit 4.2.2 to our Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission on March 6, 2002).                                                                                                                                                                                  
|           
|4.2.3       |  | Second Supplemental Indenture to the August 1997 Indenture
(incorporated by reference to Exhibit 4.5 to our Form 10-K for the
year ended December 31, 1999 filed with the Securities and Exchange
Commission on March 15, 2000).                                                                                                                                                                                  
|           
|4.2.4       |  | Third Supplemental Indenture to the August 1997 Indenture
(incorporated by reference to Exhibit 4.15 to our Form 10-K for the
year ended December 31, 2000 filed with the Securities and Exchange
Commission on March 6, 2001).                                                                                                                                                                                   
|           
|4.2.5       |  | Fourth Supplemental Indenture to the August 1997 Indenture (incorporated by reference
to Exhibit 4.2.5 to our Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission on March 6, 2002).                                                                                                                                                                                 
|           
|4.2.6       |  | Fifth Supplemental Indenture to the August 1997 Indenture (incorporated by reference
to Exhibit 4.2.6 to our Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission on March 6, 2002).                                                                                                                                                                                  
|           
|4.3         |  | Indenture (the Convertible Notes Indenture), dated as of
October 16, 1997, between CapStar Hotel Company and First Trust,
National Association, as Trustee (incorporated by reference to
Exhibit 4.6 to our Form 10-K filed with the Securities and Exchange
Commission on March 15, 2000).                                                                                                                     
|           
|4.3.1       |  | Specimen Convertible Note to the Convertible Notes Indenture (incorporated by reference to Exhibit
4.7 to our Form 10-K for the year ended December 31, 1999 filed with
the Securities and Exchange Commission on March 15, 2000).                                                                                                                                                                                
|           
|4.3.2       |  | First Supplemental Indenture to the Convertible Notes
Indenture (incorporated by reference to Exhibit 4.8 to our Form
10-K for the year ended December 31, 1999 filed with the Securities
and Exchange Commission on March 15, 2000).                                                                                                                                                                             
|           
|4.4         |  | Indenture (the March 1999 Indenture), dated as of March 18,
1999, between MeriStar Hospitality Corporation and IBJ Whitehall
Bank & Trust Company, as Trustee (incorporated by reference to
Exhibit B to our Form S-4 (Registration Statement No. 333-78163)
filed with the Securities and Exchange Commission on May 10, 1999).                                                                                
|           
|4.4.1       |  | Specimen Subordinated Note to March 1999
Indenture (incorporated by reference to Exhibit A to our Form S-4 (Registration Statement No. 333-78163) filed
with the Securities and Exchange Commission on May 10, 1999).                                                                                                                                                                                             
|           
|4.4.1a      |  | First Supplemental Indenture to the March 1999 Indenture (incorporated by reference to
Exhibit 4.13 to our Form 10-K for the year ended December 31, 2000 filed with the
Securities and Exchange Commission on March 6, 2001).                                                                                                                                                                                    
|           
|4.4.2       |  | Second Supplemental Indenture to the March 1999 Indenture (incorporated by reference
to Exhibit 4.4.2 to our Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission on March 6, 2002).                                                                                                                                                                                  
|           
|4.4.3       |  | Third Supplemental Indenture to the March 1999 Indenture (incorporated by reference
to Exhibit 4.4.3 to our Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission on March 6, 2002).                                                                                                                                                                                   
|           
|4.5         |  | Indenture (the January 2001 Indenture), dated January 26,
2001, between MeriStar Hospitality Operating Partnership, L.P.,
MeriStar Hospitality Finance Corp., MeriStar Hospitality
Corporation, and U.S. Bank Trust National Association (incorporated
by reference to Exhibit 4.14 to our Form 10-K for the year ended
December 31, 2000 filed with the Securities and Exchange Commission
on March 6, 2001).  
|           
|4.5.1       |  | Specimen Senior Note to the January 2001 Indenture (incorporated by reference
to Exhibit 4.5.1 to our Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission on March 6, 2002).                                                                                                                                                                                         
|           
|4.5.2       |  | First Supplemental Indenture to the January 2001 Indenture (incorporated by reference
to Exhibit 4.5.2 to our Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission on March 6, 2002).                                                                                                                                                                                 
|           
|4.5.3       |  | Second Supplemental Indenture to the January 2001 Indenture (incorporated by reference
to Exhibit 4.5.3 to our Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission on March 6, 2002).                                                                                                                                                                                
|           
|4.6         |  | Indenture (the December 2001 Indenture), dated December 19,
2001, between MeriStar Hospitality Operating Partnership, L.P.,
MeriStar Hospitality Finance Corp., MeriStar Hospitality Corporation, and U.S. Bank Trust National Association (incorporated by reference
to Exhibit 4.6 to our Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission on March 6, 2002). 
|           
|4.6.1       |  | Specimen Senior Note to the December 2001 Indenture (incorporated by reference
to Exhibit 4.6.1 to our Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission on March 6, 2002).                                                                                                                                                                                        
|           
|4.6.3       |  | First Supplemental Indenture to the December 2001 Indenture (incorporated by reference
to Exhibit 4.6.3 to our Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission on March 6, 2002).                                                                                                                                                                                
|           
|4.7         |  | Indenture (the February 2002 Indenture), dated February 7,
2002, between MeriStar Hospitality Operating Partnership, L.P.,
MeriStar Hospitality Finance Corp., MeriStar Hospitality
Corporation, and U. S. Bank Trust National Association, (incorporated by reference to Exhibit 4.7 to our Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission on
March 6, 2002).
|           
|4.7.1       |  | Specimen Senior Note to the February 2002 Indenture (incorporated by reference
to Exhibit 4.7.1 to our Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission on March 6, 2002).                                                                                                                                                                                        
|           
|10.1        |  | Second Amended and Restated Agreement of Limited Partnership
of MeriStar Hospitality Operating Partnership, L.P. dated as of
August 3, 1998 (incorporated by reference to Exhibit 10.3 to our
Form 10-K for the year ended December 31, 1998 filed with the
Securities and Exchange Commission on March 2, 1999).                                                                                                 
|           
|10.3        |  | Loan Agreement, dated as of August 12, 1999, between MeriStar
Hospitality Operating Partnership, L.P. and Lehman Brothers Holdings
Inc. D/B/A Lehman Capital, a division of Lehman Brothers Holdings
Inc. (incorporated by reference to Exhibit 10.13 to our Form 10-K
for the year ended December 31, 1999 filed with the Securities and
Exchange Commission on March 15, 2000).                                 
|           
|10.4        |  | Intercompany Agreement between MeriStar Hospitality
Corporation, MeriStar Hospitality Operating Partnership, L.P.,
MeriStar Hotels & Resorts, Inc. and MeriStar H&R Operating Company
L.P. (Intercompany Agreement) (incorporated by reference
to Exhibit 10.4 to our Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission on March 6, 2002).                       
|           
|10.4.1      |  | Amendment to the Intercompany Agreement (incorporated by reference
to Exhibit 10.15 to our Form 10-K for the year ended December 31,
2000 filed with the Securities and Exchange Commission on March 6,
2001).                                                                                                                                                                                                    
|           
|10.5        |  | Revolving Credit Agreement (the MeriStar Hotels Revolving Credit
Agreement), dated as of August 3, 1998, by and between MeriStar H&R
Operating Company, L.P. and MeriStar Hospitality Operating
Partnership, L.P. (incorporated by reference
to Exhibit 10.5 to our Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission on March 6, 2002)                          
|           
|10.5.1      |  | Amendment to MeriStar Hotels Revolving Credit Agreement (incorporated by reference
to Exhibit 10.5.1 to our Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission on March 6, 2002).                                                                                                                                                                                   
|           
|10.5.2      |  | Second Amendment to MeriStar Hotels Revolving Credit Agreement (incorporated by reference
to Exhibit 10.5.2 to our Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission on March 6, 2002).                                                                                                                                                                            
|           
|10.5.3      |  | Third Amendment to MeriStar Hotels Revolving Credit Agreement, dated July 31, 2002 (incorporated by
reference to Exhibit 10.4 for Interstate Hotels and Resorts, Inc. Form 8-K dated August 7, 2002).                                                                                                                                                                                                             
|           
|10.5.4      |  | Fourth Amendment to MeriStar Hotels Revolving Credit Agreement, dated August 15, 2002.                                                                                                                                                                                                                                                                                                                            
|           
|10.7        |  | Senior Secured Credit Agreement, dated October 28, 2002, between MeriStar Hospitality Operating Partnership, L.P. and SG Cowen Securities Corporation.                                                                                                                                                                                                                                                            

|     |  |                                                                                                                                                                                                       
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|13   |  | Unaudited Financial Statements of MeriStar Hospitality Operating
Partnership, L.P. as of September 30, 2002 and December 31, 2001 and for
the three and nine months ended September 30, 2002 and 2001.
|    
|99.1 |  | Consolidating Financial Information of MeriStar Hospitality Operating Partnership, L.P.                                                                                                               
|    
|99.2 |  | Certification of Chief Executive Officer.                                                                                                                                                             
|    
|99.3 |  | Certification of Chief Accounting Officer.                                                                                                                                                            

(b)  Reports on Form 8-k

Current report on Form 8-K (Items 5 and 7) dated and filed August 7, 2002 regarding the second
quarter earnings press release.

Current report on Form 8-K (Item 9) dated and filed on September 11, 2002 regarding the
search for a Chief Financial Officer.

Current report on Form 8-K (Items 5 and 7) dated and filed on September 27, 2002 regarding us
lowering earnings guidance for third quarter.



---



##### 



|          
|----------
|SIGNATURES

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

|                                
|--------------------------------
|MeriStar Hospitality Corporation

Dated: November 13, 2002

|/s/ James A. Calder     
|------------------------
|                        
|James A. Calder         
|Chief Accounting Officer

25



---



##### 



Sarbanes-Oxley Act Section 302 Certifications

I, Paul W. Whetsell, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of MeriStar
Hospitality Corporation;                                                                                                                                                                                                                                       
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;                   
|
| | 4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a  14 and 15d  14) for the registrant
and have:                                                                                                    



| | a. |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the Evaluation
Date); and                                                                                                  
|
| | c. |  | presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        



| | 5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data
and have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls: and                                                                                                                                        



| | 6. |  | The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: November 13, 2002

/s/ Paul W. Whetsell
Paul W. Whetsell
Chief Executive Officer

26



---



##### 



I, James A. Calder, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of MeriStar
Hospitality Corporation;                                                                                                                                                                                                                                       
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;                   
|
| | 4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a  14 and 15d  14) for the registrant
and have:                                                                                                    



| | a. |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the Evaluation
Date); and                                                                                                  
|
| | c. |  | presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        



| | 5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data
and have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls: and                                                                                                                                        



| | 6. |  | The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: November 13, 2002

/s/ James A. Calder
James A. Calder
Chief Accounting Officer

27