##### 









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549


Form 10-Q

|                                                 |  |                                                                                             
|------------------------------------------------ |  | --------------------------------------------------------------------------------------------
|þ                                                |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the quarterly period ended June 30,
    2003
|OR                                              
|                                                
|o                                                |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
    from     to       
|Commission File Number: 1-11903                 

MeriStar Hospitality Corporation

(Exact name of registrant as specified in its
charter)


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

(703) 812-7200

(Registrants telephone number, including
area code)


1010 Wisconsin Avenue, N.W.

Washington, D.C. 20007


(202) 295-1000


(Former name, former address and former fiscal
year, if changed since last report)


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

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

The number of shares of the registrants
common stock outstanding at July 31, 2003 was 46,111,977.



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INDEX

|                                      |  |                                                                                                   |    |      |    | 
|------------------------------------- |  | ------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                      |  |                                                                                                   |    | Page
|                                      |  |                                                                                                   |    |     
|PART I.     FINANCIAL
    INFORMATION
|Item 1.                               |  | Financial Statements:                                                                             |    |      |    | 
|                                      |  | Consolidated Balance Sheets  June
    30, 2003 and December 31, 2002                             |    |      | 2  | 
|                                      |  | Consolidated Statements of
    Operations  Three and six months ended June 30,
    2003 and 2002 |    |      | 3  | 
|                                      |  | Consolidated Statements of Cash
    Flows  Six months ended June 30, 2003 and 2002               |    |      | 4  | 
|                                      |  | Notes to Unaudited Consolidated Financial
    Statements                                          |    |      | 5  | 
|Item 2.                               |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations         |    |      | 14 | 
|Item 3.                               |  | Quantitative and Qualitative Disclosures About
    Market Risk                                    |    |      | 26 | 
|Item 4.                               |  | Controls and Procedures                                                                           |    |      | 26 | 
|PART II.     OTHER
    INFORMATION   
|Item 4.                               |  | Submission of Matters to a Vote of Security
    Holders                                           |    |      | 27 | 
|Item 6.                               |  | Exhibits and Reports on Form 8-K                                                                  |    |      | 28 | 
|Signatures                            |  |                                                                                                   | 29 |     

i



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##### 



PART
I.          FINANCIAL
INFORMATION

ITEM
1.          FINANCIAL
STATEMENTS

MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED BALANCE SHEETS


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


|                                                                                 |                                                                                                               |             |           |              |   |   |           |           |  
|-------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------- | ----------- | --------- | ------------ | - | - | --------- | --------- | -
|                                                                                 |                                                                                                               | June 30,    |           |             
|                                                                                 |                                                                                                               | 2003        |           | December 31,
|                                                                                 |                                                                                                               | (Unaudited) |           | 2002        
|                                                                                 |                                                                                                               |             |           |             
|ASSETS                                                                           |                                                                                                               |             |           |              |   |   |           |          
|Investments in hotel properties                                                  |                                                                                                               | $           | 2,653,959 |              |   | $ | 3,020,909 |          
|Accumulated depreciation                                                         |                                                                                                               |             | (407,965  | )            |   |   | (460,972  | )        
|                                                                                 |                                                                                                               |             |           |              |   |   |           |          
|                                                                                 |                                                                                                               |             | 2,245,994 |              |   |   | 2,559,937 |          
|Restricted cash                                                                  |                                                                                                               |             | 30,105    |              |   |   | 20,365    |          
|Investments in and advances to affiliates                                        |                                                                                                               |             | 41,714    |              |   |   | 41,714    |          
|Note receivable from Interstate Hotels &
    Resorts                             |                                                                                                               |             |          |              |   |   | 42,052    |          
|Prepaid expenses and other assets                                                |                                                                                                               |             | 36,155    |              |   |   | 43,228    |          
|Accounts receivable, net of allowance for
    doubtful accounts of $980 and $848 |                                                                                                               |             | 68,996    |              |   |   | 56,828    |          
|Marketable securities (Note 2)                                                   |                                                                                                               |             | 18,056    |              |   |   |          |          
|Cash and cash equivalents (Note 2)                                               |                                                                                                               |             | 56,307    |              |   |   | 33,896    |          
|                                                                                 |                                                                                                               |             |           |              |   |   |           |          
|                                                                                 |                                                                                                               | $           | 2,497,327 |              |   | $ | 2,798,020 |          
|                                                                                 |                                                                                                               |             |           |              |   |   |           |          
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                         |                                                                                                               |             |           |              |   |   |           |          
|Long-term debt                                                                   |                                                                                                               | $           | 1,650,487 |              |   | $ | 1,654,102 |          
|Accounts payable and accrued expenses                                            |                                                                                                               |             | 104,681   |              |   |   | 109,790   |          
|Accrued interest                                                                 |                                                                                                               |             | 52,121    |              |   |   | 52,907    |          
|Due to Interstate Hotels & Resorts                                               |                                                                                                               |             | 5,925     |              |   |   | 10,500    |          
|Other liabilities                                                                |                                                                                                               |             | 15,064    |              |   |   | 18,013    |          
|                                                                                 |                                                                                                               |             |           |              |   |   |           |          
|Total liabilities                                                                |                                                                                                               |             | 1,828,278 |              |   |   | 1,845,312 |          
|                                                                                 |                                                                                                               |             |           |              |   |   |           |          
|                                                                                
|Minority interests                                                               |                                                                                                               |             | 39,693    |              |   |   | 74,422    |          
|Stockholders equity:                                                            |                                                                                                               |             |           |              |   |   |           |          
|                                                                                 | Common stock, par value $0.01 per share
    Authorized  100,000 shares
    Issued  50,484 and 49,555 shares |             |           | 505          |   |   |           | 495       |  
|                                                                                 | Additional paid-in capital                                                                                    |             |           | 1,217,049    |   |   |           | 1,196,025 |  
|                                                                                 | Retained deficit                                                                                              |             |           | (506,976     | ) |   |           | (230,870  | )
|                                                                                 | Accumulated other comprehensive loss                                                                          |             |           | (2,141       | ) |   |           | (7,052    | )
|                                                                                 | Unearned stock-based compensation                                                                             |             |           | (2,195       | ) |   |           | (3,638    | )
|                                                                                 | Common stock held in treasury  4,374
    and 4,324 shares                                                    |             |           | (76,886      | ) |   |           | (76,674   | )
|                                                                                 |                                                                                                               |             |           |              |   |   |           |          
|Total stockholders equity                                                       |                                                                                                               |             | 629,356   |              |   |   | 878,286   |          
|                                                                                 |                                                                                                               |             |           |              |   |   |           |          
|                                                                                 |                                                                                                               | $           | 2,497,327 |              |   | $ | 2,798,020 |          
|                                                                                 |                                                                                                               |             |           |              |   |   |           |          

See accompanying notes to unaudited consolidated
financial statements.

2



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##### 



MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS


UNAUDITED


(Dollars in thousands, except per share
amounts)


|                                                                                       |                                                                             |                                                                           |                                     |                  |         |       |         |       |         |      |          |        |         |       |         |       |         |       |  
|-------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------------------------------- | ----------------------------------- | ---------------- | ------- | ----- | ------- | ----- | ------- | ---- | -------- | ------ | ------- | ----- | ------- | ----- | ------- | ----- | -
|                                                                                       |                                                                             |                                                                           |                                     |                 
|                                                                                       |                                                                             | Three Months Ended                                                        |                                     | Six Months Ended
|                                                                                       |                                                                             | June 30,                                                                  |                                     | June 30,        
|                                                                                       |                                                                             |                                                                           |                                     |                 
|                                                                                       |                                                                             | 2003                                                                      |                                     | 2002             |         | 2003  |         | 2002 
|                                                                                       |                                                                             |                                                                           |                                     |                  |         |       |         |      
|Revenue:                                                                               |                                                                             |                                                                           |                                     |                  |         |       |         |       |         |      |          |        |         |       |         |      
|                                                                                       | Hotel operations:                                                           |                                                                           |                                     |                  |         |       |         |       |         |      |          |        |         |       |         |       |        
|                                                                                       |                                                                             | Rooms                                                                     |                                     | $                | 164,393 |       |         | $     | 174,945 |      |          | $      | 319,610 |       |         | $     | 336,830 |      
|                                                                                       |                                                                             | Food and beverage                                                         |                                     |                  | 68,496  |       |         |       | 69,817  |      |          |        | 130,196 |       |         |       | 129,673 |      
|                                                                                       |                                                                             | Other hotel operations                                                    |                                     |                  | 21,693  |       |         |       | 20,614  |      |          |        | 40,402  |       |         |       | 39,298  |      
|                                                                                       | Office rental, parking and other revenue                                    |                                                                           |                                     | 3,461            |         |       |         | 4,240 |         |      |          | 6,756  |         |       |         | 8,501 |        
|                                                                                       |                                                                             |                                                                           |                                     |                  |         |       |         |       |         |      |          |        |         |       |         |      
|Total revenue                                                                          |                                                                             |                                                                           | 258,043                             |                  |         |       | 269,616 |       |         |      | 496,964  |        |         |       | 514,302 |      
|                                                                                       |                                                                             |                                                                           |                                     |                  |         |       |         |       |         |      |          |        |         |       |         |      
|Hotel operating expenses:                                                              |                                                                             |                                                                           |                                     |                  |         |       |         |       |         |      |          |        |         |       |         |      
|                                                                                       |                                                                             | Rooms                                                                     |                                     |                  | 40,036  |       |         |       | 41,199  |      |          |        | 77,902  |       |         |       | 78,085  |      
|                                                                                       |                                                                             | Food and beverage                                                         |                                     |                  | 47,803  |       |         |       | 48,752  |      |          |        | 93,042  |       |         |       | 91,515  |      
|                                                                                       |                                                                             | Other hotel operating expenses                                            |                                     |                  | 12,787  |       |         |       | 11,382  |      |          |        | 23,835  |       |         |       | 21,827  |      
|Office rental, parking and other expenses                                              |                                                                             |                                                                           | 583                                 |                  |         |       | 684     |       |         |      | 1,213    |        |         |       | 1,497   |      
|Other operating expenses:                                                              |                                                                             |                                                                           |                                     |                  |         |       |         |       |         |      |          |        |         |       |         |      
|                                                                                       |                                                                             | General and administrative                                                |                                     |                  | 42,612  |       |         |       | 42,717  |      |          |        | 84,301  |       |         |       | 84,161  |      
|                                                                                       |                                                                             | Property operating costs                                                  |                                     |                  | 37,893  |       |         |       | 39,085  |      |          |        | 74,116  |       |         |       | 73,999  |      
|                                                                                       |                                                                             | Depreciation and amortization                                             |                                     |                  | 29,842  |       |         |       | 29,969  |      |          |        | 58,562  |       |         |       | 60,900  |      
|                                                                                       |                                                                             | Loss on asset impairments                                                 |                                     |                  | 207,630 |       |         |       |        |      |          |        | 262,608 |       |         |       |        |      
|                                                                                       |                                                                             | Property taxes, insurance and other                                       |                                     |                  | 20,454  |       |         |       | 16,179  |      |          |        | 40,509  |       |         |       | 35,546  |      
|                                                                                       |                                                                             | Change in fair value of non-hedging derivatives,
    net of swap payments |                                     |                  |        |       |         |       | 3,090   |      |          |        |        |       |         |       | 3,079   |      
|                                                                                       |                                                                             | Loss on fair value of non-hedging derivatives                             |                                     |                  |        |       |         |       |        |      |          |        |        |       |         |       | 4,735   |      
|                                                                                       |                                                                             |                                                                           |                                     |                  |         |       |         |       |         |      |          |        |         |       |         |      
|Operating expenses                                                                     |                                                                             |                                                                           | 439,640                             |                  |         |       | 233,057 |       |         |      | 716,088  |        |         |       | 455,344 |      
|                                                                                       |                                                                             |                                                                           |                                     |                  |         |       |         |       |         |      |          |        |         |       |         |      
|Operating (loss) income                                                                |                                                                             |                                                                           | (181,597                            | )                |         |       | 36,559  |       |         |      | (219,124 | )      |         |       | 58,958  |      
|Interest expense, net                                                                  |                                                                             |                                                                           | 34,739                              |                  |         |       | 34,112  |       |         |      | 69,565   |        |         |       | 68,767  |      
|                                                                                       |                                                                             |                                                                           |                                     |                  |         |       |         |       |         |      |          |        |         |       |         |      
|(Loss) income before minority interests, income
    taxes, and discontinued operations |                                                                             |                                                                           | (216,336                            | )                |         |       | 2,447   |       |         |      | (288,689 | )      |         |       | (9,809  | )    
|Minority interests                                                                     |                                                                             |                                                                           | 10,598                              |                  |         |       | (245    | )     |         |      | 14,275   |        |         |       | 382     |      
|Income tax (expense) benefit                                                           |                                                                             |                                                                           | (28                                 | )                |         |       | (60     | )     |         |      | 175      |        |         |       | 259     |      
|                                                                                       |                                                                             |                                                                           |                                     |                  |         |       |         |       |         |      |          |        |         |       |         |      
|(Loss) income from continuing operations                                               |                                                                             |                                                                           | (205,766                            | )                |         |       | 2,142   |       |         |      | (274,239 | )      |         |       | (9,168  | )    
|Discontinued operations:                                                               |                                                                             |                                                                           |                                     |                  |         |       |         |       |         |      |          |        |         |       |         |      
|                                                                                       | (Loss) income from discontinued operations before
    tax benefit (expense) |                                                                           |                                     | (598             | )       |       |         | 855   |         |      |          | (1,864 | )       |       |         | 2,260 |        
|                                                                                       | Income tax benefit (expense)                                                |                                                                           |                                     | 3                |         |       |         | (24   | )       |      |          | (3     | )       |       |         | (62   | )      
|                                                                                       |                                                                             |                                                                           |                                     |                  |         |       |         |       |         |      |          |        |         |       |         |      
|(Loss) income from discontinued operations                                             |                                                                             |                                                                           | (595                                | )                |         |       | 831     |       |         |      | (1,867   | )      |         |       | 2,198   |      
|                                                                                       |                                                                             |                                                                           |                                     |                  |         |       |         |       |         |      |          |        |         |       |         |      
|Net (loss) income                                                                      |                                                                             | $                                                                         | (206,361                            | )                |         | $     | 2,973   |       |         | $    | (276,106 | )      |         | $     | (6,970  | )    
|                                                                                       |                                                                             |                                                                           |                                     |                  |         |       |         |       |         |      |          |        |         |       |         |      
|Earnings per share:                                                                    |                                                                             |                                                                           |                                     |                  |         |       |         |       |         |      |          |        |         |       |         |      
|                                                                                       | Basic:                                                                      |                                                                           |                                     |                  |         |       |         |       |         |      |          |        |         |       |         |       |        
|                                                                                       |                                                                             | (Loss) income from continuing operations                                  |                                     | $                | (4.47   | )     |         | $     | 0.05    |      |          | $      | (5.99   | )     |         | $     | (0.21   | )    
|                                                                                       |                                                                             | (Loss) income from discontinued operations                                |                                     |                  | (0.01   | )     |         |       | 0.02    |      |          |        | (0.04   | )     |         |       | 0.05    |      
|                                                                                       |                                                                             |                                                                           |                                     |                  |         |       |         |       |         |      |          |        |         |       |         |      
|                                                                                       |                                                                             |                                                                           | Net (loss) income per basic share   |                  | $       | (4.48 | )       |       | $       | 0.07 |          |        | $       | (6.03 | )       |       | $       | (0.16 | )
|                                                                                       |                                                                             |                                                                           |                                     |                  |         |       |         |       |         |      |          |        |         |       |         |      
|                                                                                       | Diluted:                                                                    |                                                                           |                                     |                  |         |       |         |       |         |      |          |        |         |       |         |       |        
|                                                                                       |                                                                             | (Loss) income from continuing operations                                  |                                     | $                | (4.47   | )     |         | $     | 0.04    |      |          | $      | (5.99   | )     |         | $     | (0.21   | )    
|                                                                                       |                                                                             | (Loss) income from discontinued operations                                |                                     |                  | (0.01   | )     |         |       | 0.02    |      |          |        | (0.04   | )     |         |       | 0.05    |      
|                                                                                       |                                                                             |                                                                           |                                     |                  |         |       |         |       |         |      |          |        |         |       |         |      
|                                                                                       |                                                                             |                                                                           | Net (loss) income per diluted share |                  | $       | (4.48 | )       |       | $       | 0.06 |          |        | $       | (6.03 | )       |       | $       | (0.16 | )
|                                                                                       |                                                                             |                                                                           |                                     |                  |         |       |         |       |         |      |          |        |         |       |         |      

See accompanying notes to unaudited consolidated
financial statements.

3



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##### 



MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS


UNAUDITED


(Dollars in thousands)


|                                                                 |                                                                                     |                                                                   |                                                                                |          |         |         |         |          |        |        |  
|---------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ------------------------------------------------------------------------------ | -------- | ------- | ------- | ------- | -------- | ------ | ------ | -
|                                                                 |                                                                                     |                                                                  
|                                                                 |                                                                                     | Six Months Ended                                                 
|                                                                 |                                                                                     | June 30,                                                         
|                                                                 |                                                                                     |                                                                  
|                                                                 |                                                                                     | 2003                                                              |                                                                                | 2002    
|                                                                 |                                                                                     |                                                                   |                                                                                |         
|Operating activities:                                            |                                                                                     |                                                                   |                                                                                |          |         |         |         |         
|                                                                 | Net loss                                                                            |                                                                   | $                                                                              | (276,106 | )       |         | $       | (6,970   | )     
|                                                                 | Adjustments to reconcile net loss to net cash
    provided by operating activities: |                                                                   |                                                                                |          |         |         |         |          |       
|                                                                 |                                                                                     | Depreciation and amortization                                     |                                                                                |          | 59,055  |         |         |          | 63,879 |       
|                                                                 |                                                                                     | Loss on asset impairments                                         |                                                                                |          | 264,677 |         |         |          |       |       
|                                                                 |                                                                                     | Loss on fair value of non-hedging derivatives                     |                                                                                |          |        |         |         |          | 4,735  |       
|                                                                 |                                                                                     | Minority interests                                                |                                                                                |          | (14,275 | )       |         |          | (382   | )     
|                                                                 |                                                                                     | Amortization of unearned stock-based compensation                 |                                                                                |          | 1,443   |         |         |          | 1,920  |       
|                                                                 |                                                                                     | Unrealized gain on interest rate swaps recognized
    in net loss |                                                                                |          | (3,395  | )       |         |          | (2,905 | )     
|                                                                 |                                                                                     | Deferred income taxes                                             |                                                                                |          | (2,094  | )       |         |          | (375   | )     
|                                                                 |                                                                                     | Changes in operating assets and liabilities:                      |                                                                                |          |         |         |         |          |        |       
|                                                                 |                                                                                     |                                                                   | Accounts receivable                                                            |          |         | (12,168 | )       |          |        | (4,817 | )
|                                                                 |                                                                                     |                                                                   | Prepaid expenses and other assets                                              |          |         | 4,225   |         |          |        | 3,098  |  
|                                                                 |                                                                                     |                                                                   | Due from/to Interstate Hotels & Resorts                                        |          |         | (4,575  | )       |          |        | 4,900  |  
|                                                                 |                                                                                     |                                                                   | Accounts payable, accrued expenses, accrued
    interest and other liabilities |          |         | (4,977  | )       |          |        | 3,847  |  
|                                                                 |                                                                                     |                                                                   |                                                                                |          |         |         |         |         
|Net cash provided by operating activities                        |                                                                                     |                                                                   | 11,810                                                                         |          |         |         | 66,930  |         
|                                                                 |                                                                                     |                                                                   |                                                                                |          |         |         |         |         
|Investing activities:                                            |                                                                                     |                                                                   |                                                                                |          |         |         |         |         
|                                                                 | Investments in hotel properties                                                     |                                                                   |                                                                                | (14,547  | )       |         |         | (24,696  | )     
|                                                                 | Proceeds from sales of assets                                                       |                                                                   |                                                                                | 15,720   |         |         |         |         |       
|                                                                 | Purchases of marketable securities                                                  |                                                                   |                                                                                | (18,056  | )       |         |         |         |       
|                                                                 | Net payments from (advances to) Interstate Hotels
    & Resorts                     |                                                                   |                                                                                | 42,052   |         |         |         | (10,000  | )     
|                                                                 | (Increase) decrease in restricted cash                                              |                                                                   |                                                                                | (9,740   | )       |         |         | 4,384    |       
|                                                                 | Other, net                                                                          |                                                                   |                                                                                | (299     | )       |         |         |         |       
|                                                                 |                                                                                     |                                                                   |                                                                                |          |         |         |         |         
|Net cash provided by (used in) investing
    activities          |                                                                                     |                                                                   | 15,130                                                                         |          |         |         | (30,312 | )       
|                                                                 |                                                                                     |                                                                   |                                                                                |          |         |         |         |         
|Financing activities:                                            |                                                                                     |                                                                   |                                                                                |          |         |         |         |         
|                                                                 | Principal payments on long-term debt                                                |                                                                   |                                                                                | (4,208   | )       |         |         | (265,840 | )     
|                                                                 | Proceeds from issuance of long-term debt                                            |                                                                   |                                                                                |         |         |         |         | 234,841  |       
|                                                                 | Deferred financing fees                                                             |                                                                   |                                                                                |         |         |         |         | (3,571   | )     
|                                                                 | Proceeds from option exercises                                                      |                                                                   |                                                                                |         |         |         |         | 3,156    |       
|                                                                 | Dividends paid to stockholders                                                      |                                                                   |                                                                                |         |         |         |         | (930     | )     
|                                                                 | Distributions to minority investors                                                 |                                                                   |                                                                                | (141     | )       |         |         | (282     | )     
|                                                                 | Purchase of limited partnership unit                                                |                                                                   |                                                                                | (65      | )       |         |         |         |       
|                                                                 |                                                                                     |                                                                   |                                                                                |          |         |         |         |         
|Net cash used in financing activities                            |                                                                                     |                                                                   | (4,414                                                                         | )        |         |         | (32,626 | )       
|                                                                 |                                                                                     |                                                                   |                                                                                |          |         |         |         |         
|Effect of exchange rate changes on cash and cash
    equivalents |                                                                                     |                                                                   | (115                                                                           | )        |         |         | (28     | )       
|Net increase in cash and cash equivalents                        |                                                                                     |                                                                   | 22,411                                                                         |          |         |         | 3,964   |         
|Cash and cash equivalents, beginning of period                   |                                                                                     |                                                                   | 33,896                                                                         |          |         |         | 23,448  |         
|                                                                 |                                                                                     |                                                                   |                                                                                |          |         |         |         |         
|Cash and cash equivalents, end of period                         |                                                                                     | $                                                                 | 56,307                                                                         |          |         | $       | 27,412  |         
|                                                                 |                                                                                     |                                                                   |                                                                                |          |         |         |         |         
|Supplemental Cash Flow Information                               |                                                                                     |                                                                   |                                                                                |          |         |         |         |         
|Cash paid for interest and income taxes:                         |                                                                                     |                                                                   |                                                                                |          |         |         |         |         
|                                                                 | Interest, net of capitalized interest                                               |                                                                   | $                                                                              | 70,399   |         |         | $       | 60,454   |       
|                                                                 |                                                                                     |                                                                   |                                                                                |          |         |         |         |         
|                                                                 | Income taxes                                                                        |                                                                   | $                                                                              | 1,902    |         |         | $       | 602      |       
|                                                                 |                                                                                     |                                                                   |                                                                                |          |         |         |         |         

See accompanying notes to unaudited consolidated
financial statements.

4



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##### 



MERISTAR HOSPITALITY CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


JUNE 30, 2003


1.          Organization

MeriStar Hospitality Corporation is a real estate
investment trust, or REIT. We own a portfolio of upscale,
full-service hotels and resorts in the United States and Canada.
Our portfolio is diversified geographically as well as by
franchise and brand affiliations. As of June 30, 2003, we
owned 105 hotels, with 27,269 rooms, all of which were
leased by our taxable subsidiaries and managed by Interstate
Hotels & Resorts, Inc. (Interstate Hotels). In
July 2003, we sold two hotels with 422 rooms.

Our taxable subsidiaries are parties to
management agreements with a subsidiary of Interstate Hotels to
manage all of our hotels. Under these management agreements, the
taxable subsidiaries pay a management fee to a subsidiary of
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 incentive payments based on meeting
performance thresholds that could total up to an additional 1.5%
of total hotel revenue. All of the agreements expire in 2010 and
have three renewal periods of five years each at the option of
Interstate Hotels, subject to some exceptions.

2.          Summary
of Significant Accounting Policies

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

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

Principles of Consolidation.In January 2003, the Financial
Accounting Standards Board (FASB) issued Interpretation No.
(FIN) 46, Consolidation of Variable Interest
Entities, an interpretation of Accounting Research
Bulletin No. 51, Consolidated Financial
Statements. The interpretation addresses how to identify
variable interest entities and when to consolidate those
entities. Consolidation of variable interest entities is
required by the primary beneficiary. The interpretation applied
immediately to variable interest entities created after
January 31, 2003, and applies beginning July 1, 2003
to those variable interest entities that were acquired before
February 1, 2003. The initial application of the
interpretation did not affect our results of operations or
financial condition as we have not obtained an interest in any
qualifying entity on or after January 31, 2003. We do not
expect the application of the second phase to have a material
affect on our results of operations or financial condition.

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



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

5



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

Cash and Cash Equivalents.Our cash equivalents consist of
investments in debt securities, including commercial paper,
overnight repurchase agreements and money market funds, with an
original maturity of three months or less. We classify
investments in these types of securities with original
maturities greater than three months as marketable securities.

Marketable Securities.Our marketable securities consist of
investments in debt securities, including commercial paper and
agency discount notes, with maturities less than six months from
their date of purchase. As of June 30, 2003, the majority
of the securities mature within 90 days. We record these
securities at amortized cost. As of June 30, 2003, the fair
value of these securities was $18.1 million.

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

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

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

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

Stock-Based Compensation.We adopted the recognition provisions
of SFAS No. 123, Accounting for Stock-Based
Compensation, as amended in December 2002 by SFAS
No. 148, on January 1, 2003 for new stock options
issued under our compensation programs. As permitted by SFAS
No. 148, we elected to apply the provisions prospectively,
which includes recognizing compensation expense for only those
stock options issued in 2003 and after. During the six months
ended June 30, 2003, we granted 172,500 stock options to
employees which vest ratably over three years. Compensation
costs related to these stock options were not material to our
results of operations for the six months ended June 30,
2003. We apply the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees, in accounting for our stock options issued
under our compensation programs prior to January 1, 2003.
As we granted these stock

6



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options at market value, no compensation cost has
been recognized. For our other equity-based compensation plans,
we recognize compensation expense over the vesting period based
on the fair market value of the award at the date of grant.


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

|                               |                                                                                                                                                    |                    |          |                  |   |      |       |        |   |   |          |        |   |   |        |        |  
|------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | -------- | ---------------- | - | ---- | ----- | ------ | - | - | -------- | ------ | - | - | ------ | ------ | -
|                               |                                                                                                                                                    |                    |          |                 
|                               |                                                                                                                                                    | Three Months Ended |          | Six Months Ended
|                               |                                                                                                                                                    | June 30,           |          | June 30,        
|                               |                                                                                                                                                    |                    |          |                 
|                               |                                                                                                                                                    | 2003               |          | 2002             |   | 2003 |       | 2002  
|                               |                                                                                                                                                    |                    |          |                  |   |      |       |       
|Net (loss) income, as reported |                                                                                                                                                    | $                  | (206,361 | )                |   | $    | 2,973 |        |   | $ | (276,106 | )      |   | $ | (6,970 | )     
|                               | Add: Stock-based employee compensation expense
    included in reported net (loss) income, net of related tax effect                               |                    |          | 677              |   |      |       | 1,206  |   |   |          | 1,606  |   |   |        | 2,252  |  
|                               | Deduct: Total stock-based employee compensation
    expense determined under fair value-based method for all awards,
    net of related tax effect |                    |          | (816             | ) |      |       | (1,411 | ) |   |          | (1,900 | ) |   |        | (2,704 | )
|                               |                                                                                                                                                    |                    |          |                  |   |      |       |        |   |   |          |        |   |   |        |       
|Net (loss) income, pro forma   |                                                                                                                                                    | $                  | (206,500 | )                |   | $    | 2,768 |        |   | $ | (276,400 | )      |   | $ | (7,422 | )     
|                               |                                                                                                                                                    |                    |          |                  |   |      |       |        |   |   |          |        |   |   |        |       
|Earnings per share:            |                                                                                                                                                    |                    |          |                  |   |      |       |        |   |   |          |        |   |   |        |       
|                               | Basic, as reported                                                                                                                                 |                    | $        | (4.48            | ) |      | $     | 0.07   |   |   | $        | (6.03  | ) |   | $      | (0.16  | )
|                               | Basic, pro forma                                                                                                                                   |                    | $        | (4.48            | ) |      | $     | 0.06   |   |   | $        | (6.03  | ) |   | $      | (0.17  | )
|                               |                                                                                                                                                    |                    |          |                  |   |      |       |        |   |   |          |        |   |   |        |       
|                               | Diluted, as reported                                                                                                                               |                    | $        | (4.48            | ) |      | $     | 0.06   |   |   | $        | (6.03  | ) |   | $      | (0.16  | )
|                               | Diluted, pro forma                                                                                                                                 |                    | $        | (4.48            | ) |      | $     | 0.06   |   |   | $        | (6.03  | ) |   | $      | (0.17  | )
|                               |                                                                                                                                                    |                    |          |                  |   |      |       |        |   |   |          |        |   |   |        |       

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

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

New Accounting Pronouncements.The FASB issued FASB No. 149
Amendment of Statement 133 on Derivative Instruments
and Hedging Activities in April 2003. The statement
clarifies under what circumstances a contract with an initial
net investment meets the characteristics of a derivative,
clarifies when a derivative contains a financing component,
amends the definition of an underlying derivative, and amends
certain other pronouncements. The statement applies to any
freestanding financial derivative instruments entered into or
modified after June 30, 2003. We do not expect adoption of
this standard to have a material effect on our results of
operations or financial condition, but we will assess its impact
if and when we enter into any new derivative instruments that
fall within the scope of this standard.

The FASB issued FASB No. 150
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity in May
2003. The statement establishes standards for how to classify
and measure certain financial instruments with characteristics
of both liabilities and equity. It requires many instruments
which were previously classified as equity to now be classified
as a liability (or an asset in some circumstances), including:
mandatorily redeemable instruments, instruments with repurchase
obligations and instruments with obligations to issue a variable
number of shares. The statement applies immediately to any
freestanding financial instruments entered into or modified
after May 31, 2003, and applies to all other instruments on
July 1, 2003. We have no financial instruments which are
covered by the provisions of this standard.

7



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3.          Comprehensive
(Loss) Income

Comprehensive loss was $202.5 million and
comprehensive income was $3.8 million for the three months
ended June 30, 2003 and 2002, respectively. Comprehensive
(loss) income consisted of net loss of $206.4 million
and net income of $3 million for the three months ended
June 30, 2003 and 2002, respectively, and foreign currency
translation adjustments.

Comprehensive loss was $271.2 million and
$5.6 million for the six months ended June 30, 2003
and 2002, respectively. Comprehensive loss consisted of net loss
of $276.1 million and $7 million for the six months
ended June 30, 2003 and 2002, respectively, foreign
currency translation adjustments, and in 2002 a
$0.5 million fair value gain adjustment for derivatives.

4.          Investments
in Hotel Properties

Investments in hotel properties consisted of the
following (dollars in thousands):

|                                  |  |          |           |              |  |   |           | 
|--------------------------------- |  | -------- | --------- | ------------ |  | - | --------- | 
|                                  |  | June 30, |           | December 31,
|                                  |  | 2003     |           | 2002        
|                                  |  |          |           |             
|Land                              |  | $        | 260,613   |              |  | $ | 288,611   | 
|Buildings and improvements        |  |          | 2,063,912 |              |  |   | 2,351,769 | 
|Furniture, fixtures and equipment |  |          | 286,405   |              |  |   | 344,541   | 
|Construction-in-progress          |  |          | 43,029    |              |  |   | 35,988    | 
|                                  |  |          |           |              |  |   |           | 
|                                  |  | $        | 2,653,959 |              |  | $ | 3,020,909 | 
|                                  |  |          |           |              |  |   |           | 

For the six months ended June 30, 2003 and
2002, we capitalized interest of $1.6 million and
$1.9 million, respectively.

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

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

During the second quarter of 2003, we made the
determination to dispose of an additional 19 non-core
assets, for a total of 35 non-core assets included in our
disposition program. Also during the second quarter, due to the
market interest in certain of our other hotel assets, we decided
to add an additional six assets to our disposition program. Due
to this change in our expected holding period for these assets,
we recognized an additional impairment loss of $208 million
related to the disposition of these 41 assets during the
three months ended June 30, 2003. We sold one of these
hotels in April 2003 and two more hotels in July 2003.

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

As of June 30, 2003, our net investments in
hotel properties included $16 million for two assets (both
sold in July 2003), which met our criteria for held-for-sale
classification. The remaining hotels included in our asset
disposition program do not meet the probability criterion as
prescribed by SFAS No. 144 to classify as held-for-sale.

8



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5.          Investments
in and Advances to Affiliates

In 1999, we invested $40 million in MeriStar
Investment Partners, L.P. (MIP), a joint venture
established to acquire upscale, full-service hotels. Our
cost-basis investment is in the form of a partnership interest,
in which we earn a 16% cumulative preferred return. We recognize
the return quarterly as it becomes due to us. As of
June 30, 2003, cumulative preferred returns of
$15 million were due from MIP and included in accounts
receivable on the accompanying consolidated balance sheet. We
expect that any cumulative unpaid preferred returns would be
paid in the future from excess cash flow above our current
return and from potential disposition proceeds in excess of debt
allocated to individual assets. Given the current economic
environment, we do not expect MIPs operations to provide
adequate cash flow in the near term for significant payment of
our current returns or repayments of our cumulative unpaid
preferred returns. We evaluate the collectibility of our
preferred return based on our preference to distributions and
the underlying value of the hotel properties. Should the cash
flow from MIPs operations or the underlying value of the
hotel properties continue to weaken over an extended period of
time, the value of our original investment may also decline.

6.          Long-Term
Debt

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

|                           |  |          |           |              |  |   |           |  
|-------------------------- |  | -------- | --------- | ------------ |  | - | --------- | -
|                           |  | June 30, |           | December 31,
|                           |  | 2003     |           | 2002        
|                           |  |          |           |             
|Senior unsecured notes     |  | $        | 950,000   |              |  | $ | 950,000   |  
|Secured facility           |  |          | 311,886   |              |  |   | 314,626   |  
|Senior subordinated notes  |  |          | 205,000   |              |  |   | 205,000   |  
|Convertible notes          |  |          | 154,300   |              |  |   | 154,300   |  
|Mortgage and other debt    |  |          | 36,562    |              |  |   | 38,030    |  
|Unamortized issue discount |  |          | (7,261    | )            |  |   | (7,854    | )
|                           |  |          |           |              |  |   |           |  
|                           |  | $        | 1,650,487 |              |  | $ | 1,654,102 |  
|                           |  |          |           |              |  |   |           |  

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

|                  |  |   |           |    
|----------------- |  | - | --------- | ---
|2003 (six months) |  | $ | 3,956     |    
|2004              |  |   | 170,720   | (a)
|2005              |  |   | 8,670     |    
|2006              |  |   | 9,412     |    
|2007              |  |   | 213,616   | (b)
|Thereafter        |  |   | 1,244,113 |    
|                  |  |   |           |    
|                  |  | $ | 1,650,487 |    
|                  |  |   |           |    



---



|    |                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Includes the $154.3 million convertible
    notes, substantially all of which were repurchased in July 2003
    with the proceeds from a new convertible note issuance. See
    New convertible notes discussion below for further
    details.  
|(b) | Includes the $205 million senior
    subordinated notes, $22.6 million of which were repurchased
    in July 2003 with the proceeds from a new convertible note
    issuance. See New convertible notes discussion below
    for further details.

As of June 30, 2003, all of our debt bore
fixed rates of interest. Our overall weighted average interest
rate was 8.59%. The fair value, based on market prices at the
end of the period, of our fixed-rate, long-term debt was
$1.62 billion at June 30, 2003.

Senior unsecured notes.The notes are unsecured obligations of
certain subsidiaries of ours, and we guarantee payment of
principal and interest on the notes. These notes contain various
restrictive incurrence covenants, limiting our ability to
initiate or transact certain business activities if specific
financial thresholds are not achieved. One of those thresholds
is maintaining a 2 to 1 fixed charge coverage ratio (as defined
in the indentures, fixed charges only include interest on debt
obligations and preferred equity). As of June 30, 2003, our
fixed charge coverage ratio was below 2 to 1, and therefore we
were not permitted to enter into certain

9



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transactions, including the repurchase of our
stock, the issuance of any preferred stock, the payment of
dividends, the incurrence of any additional debt, or the
repayment of outstanding debt before it comes due.


There are certain exceptions, however, with
respect to the incurrence of additional debt and early repayment
of debt features in the indentures. We currently have the
ability to incur $300 million of secured financing within
restricted subsidiaries. We also have a general carve-out to
incur $50 million of unspecified borrowings within a
restricted subsidiary. Additionally, we are permitted to repay
subordinated debt prior to its maturity from the proceeds of a
pari passuor junior financing with a longer term than
the debt refinanced, an equity offering, or a financing within
an unrestricted subsidiary. We are permitted to invest five
percent of consolidated net tangible assets (as defined in the
indentures) in an unrestricted subsidiary. We would then be able
to mortgage the properties contributed to the unrestricted
subsidiary. See Financial Condition, Liquidity, and
Capital Resources in Item 2 of this Quarterly Report
on Form 10-Q for our expectations in this regard.

Secured facility.We
completed a $330 million, 10-year, non-recourse financing
secured by a portfolio of 19 hotels in 1999. The loan bears a
fixed interest rate of 8.01% and matures in 2009. The secured
facility contains standard provisions that require the servicer
to maintain in escrow cash balances for certain items such as
property taxes and insurance. In addition, the facility contains
a provision that requires our mortgage servicer to retain in
escrow the excess cash from the encumbered hotels after payment
of debt service (Excess Cash), if net hotel
operating income (NOI) for the trailing twelve
months declines below $57 million. This provision was
triggered in October 2002 and will be effective until the
hotels generate the minimum cash flow required for two
consecutive quarters, at which time the cash being held in
escrow will be released to us. Approximately $14.5 million
of cash was held in escrow under this provision as of
June 30, 2003. In July 2003, we signed an amendment to
the loan agreement that permits the release of cash placed in
escrow for all capital expenditures incurred on the 19
encumbered properties on or after April 1, 2003
(approximately one million as of June 30, 2003). Although
the servicer will continue to retain in escrow any excess cash
from the encumbered hotels, they will release cash for all
capital expenditures we have incurred from April 1, 2003
through the date of the amendment and future capital
expenditures we incur on the 19 properties.

New convertible notes.On July 1, 2003, we completed an
offering of $170 million aggregate principal amount of 9.5%
convertible subordinated notes due 2010. The convertible notes
are unsecured obligations and provide for semi-annual payments
of interest on October 1 and April 1. We incurred
approximately $6.5 million in debt issuance costs, which
will be capitalized and amortized over the life of the new notes.

The proceeds from the new issuance were used to
repurchase $150.6 million of the $154.3 million 4.75%
convertible notes, at varying prices, resulting in an aggregate
discount of approximately $1.4 million. During the third
quarter, we will recognize this gain and write off approximately
$0.6 million of deferred financing costs related to the
repurchase. The proceeds from the issuance were also used to
repurchase $22.6 million of our $205 million senior
subordinated notes, at varying prices, resulting in an aggregate
discount of approximately $2 million. During the third
quarter, we will recognize this gain and write off approximately
$0.2 million of deferred financing costs related to the
repurchases.

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

This facility contains customary financial
compliance measures, which became more stringent on a quarterly
basis beginning in the first quarter of 2003. The sale of two
hotels during the fourth quarter of 2002, one in
January 2003, and one in April 2003, as well as the
settlement of our note receivable with Interstate Hotels,
impacted our leverage covenant due to the loss of trailing
12-month EBITDA (as defined in the credit agreement) on a pro
forma basis. If we are not in compliance with the leverage
covenant or any other financial covenants at the end of a
quarterly measuring period, we will be in default under the
credit facility and will not be permitted to borrow under the
credit facility. We have obtained a waiver of compliance with
this leverage covenant from our lending group, which was
extended through August 20, 2003. Because we do not
anticipate needing to draw under the bank line or having
borrowing capacity to do so in the near term, we expect to

10



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##### 



terminate the facility in late 2003. We have
approximately $0.6 million of unamortized capitalized
financing costs related to this facility as of June 30,
2003, which would be written off should we decide to terminate
the facility.


Derivatives.As of
June 30, 2003, we had one swap agreement with a notional
principal amount of $100 million that does not qualify for
treatment as a cash-flow hedge under SFAS No. 133. This
swap agreement is currently being marked to market through our
statement of operations. The fair value of this swap as of
June 30, 2003 was a liability of $0.6 million, and is
included in other liabilities in the accompanying consolidated
balance sheet. We made additional cash payments on this swap of
$0.6 million through its date of expiration, July 31,
2003.

During the three and six months ended
June 30, 2003, we recognized $1.3 million and
$3.4 million, respectively, of income related to the
decrease in fair value of the liability recorded for the
interest rate swaps in place in those time periods. For the
three and six months ended June 30, 2003, we made cash
payments on these swaps of $1.3 million and
$3.4 million, respectively. The change in fair value and
the swap payments are netted together on our statement of
operations.

During the six months ended June 30, 2002,
we recognized $2.9 million of income related to the
decrease in fair value of the liability recorded for the
interest rate swaps in place in that time period. For the three
and six months ended June 30, 2002, we made cash payments
on these swaps of $3.1 million and $6 million,
respectively. The change in fair value and the swap payments are
netted together on our statement of operations.

7.          Stockholders
Equity and Minority Interests

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

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

Common OP Unit holders converted 878,000 and
400,000 of their OP Units, with a value of $20.1 million
and $6.1 million, respectively, into common stock during
the six months ended June 30, 2003 and 2002, respectively.
There were no material conversions for cash during the six
months ended June 30, 2003 and 2002.

In May 2002, we issued 162,500 POPs to an
executive officer pursuant to an employment agreement, with a
value of $2.9 million.

11



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8.          Earnings
Per Share

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

|                            |                                                                                 |                             |   |                  |   |      |   |        |       |  |   |          |   |  |   |        |   | 
|--------------------------- | ------------------------------------------------------------------------------- | --------------------------- | - | ---------------- | - | ---- | - | ------ | ----- |  | - | -------- | - |  | - | ------ | - | 
|                            |                                                                                 |                             |   |                 
|                            |                                                                                 | Three Months Ended          |   | Six Months Ended
|                            |                                                                                 | June 30,                    |   | June 30,        
|                            |                                                                                 |                             |   |                 
|                            |                                                                                 | 2003                        |   | 2002             |   | 2003 |   | 2002  
|                            |                                                                                 |                             |   |                  |   |      |   |       
|Basic Earnings Per Share:   |                                                                                 |                             |   |                  |   |      |   |        |       |  |   |          |   |  |   |       
|                            | (Loss) income from continuing operations                                        |                             | $ | (205,766         | ) |      | $ | 2,142  |       |  | $ | (274,239 | ) |  | $ | (9,168 | )
|                            | Dividends declared on unvested restricted stock                                 |                             |   |                 |   |      |   | (2     | )     |  |   |         |   |  |   | (3     | )
|                            |                                                                                 |                             |   |                  |   |      |   |        |       |  |   |          |   |  |   |       
|                            | (Loss) income available to common stockholders                                  |                             | $ | (205,766         | ) |      | $ | 2,140  |       |  | $ | (274,239 | ) |  | $ | (9,171 | )
|                            |                                                                                 |                             |   |                  |   |      |   |        |       |  |   |          |   |  |   |       
|                            | Weighted average number of basic shares of common
    stock outstanding         |                             |   | 46,078           |   |      |   | 44,955 |       |  |   | 45,813   |   |  |   | 44,754 |  
|                            |                                                                                 |                             |   |                  |   |      |   |        |       |  |   |          |   |  |   |       
|                            | Basic (loss) earnings per share from
    continuing operations                  |                             | $ | (4.47            | ) |      | $ | 0.05   |       |  | $ | (5.99    | ) |  | $ | (0.21  | )
|                            |                                                                                 |                             |   |                  |   |      |   |        |       |  |   |          |   |  |   |       
|Diluted Earnings Per Share: |                                                                                 |                             |   |                  |   |      |   |        |       |  |   |          |   |  |   |       
|                            | (Loss) income available to common stockholders                                  |                             | $ | (205,766         | ) |      | $ | 2,140  |       |  | $ | (274,239 | ) |  | $ | (9,171 | )
|                            | Minority interest, net of tax                                                   |                             |   |                 |   |      |   | 104    |       |  |   |         |   |  |   |       |  
|                            |                                                                                 |                             |   |                  |   |      |   |        |       |  |   |          |   |  |   |       
|                            | Adjusted net (loss) income                                                      |                             | $ | (205,766         | ) |      | $ | 2,244  |       |  | $ | (274,239 | ) |  | $ | (9,171 | )
|                            |                                                                                 |                             |   |                  |   |      |   |        |       |  |   |          |   |  |   |       
|                            | Weighted average number of basic shares of common
    stock outstanding         |                             |   | 46,078           |   |      |   | 44,955 |       |  |   | 45,813   |   |  |   | 44,754 |  
|                            | Common stock equivalents:                                                       |                             |   |                  |   |      |   |        |       |  |   |          |   |  |   |        |  
|                            |                                                                                 | Operating partnership units |   |                  |  |      |   |        | 3,420 |  |   |          |  |  |   |        |  | 
|                            |                                                                                 | Stock options               |   |                  |  |      |   |        | 75    |  |   |          |  |  |   |        |  | 
|                            |                                                                                 |                             |   |                  |   |      |   |        |       |  |   |          |   |  |   |       
|                            | Total weighted average number of diluted shares
    of common stock outstanding |                             |   | 46,078           |   |      |   | 48,450 |       |  |   | 45,813   |   |  |   | 44,754 |  
|                            |                                                                                 |                             |   |                  |   |      |   |        |       |  |   |          |   |  |   |       
|                            | Diluted (loss) earnings per share from
    continuing operations                |                             | $ | (4.47            | ) |      | $ | 0.04   |       |  | $ | (5.99    | ) |  | $ | (0.21  | )
|                            |                                                                                 |                             |   |                  |   |      |   |        |       |  |   |          |   |  |   |       

For the three months ended June 30, 2003 and
2002, 9,152 shares and 5,445 shares, respectively, were excluded
from the calculation of diluted earnings per share as the effect
of their inclusion would be anti-dilutive. For the six months
ended June 30, 2003 and 2002, 9,433 shares and 8,947
shares, respectively, were excluded from the calculation of
diluted earnings per share as the effect of their inclusion
would be anti-dilutive.

On July 1, 2003, we completed an offering of
$170 million aggregate principal amount of 9.5% convertible
subordinated notes due 2010 (see Note 6). These notes are
convertible into our common stock at any time prior to or at
maturity, April 1, 2010, at a conversion price of $10.18
per share (equal to a conversion rate of 98.2318 shares per
$1,000 principal amount of notes).

9.          Commitments
and Contingencies

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

Minimum Lease Payments.We lease the land at certain of our
hotels under long-term arrangements from third parties. Certain
leases contain contingent rent features based on gross revenues
at the respective

12



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##### 



property. Future minimum lease payments required
under these operating leases as of June 30, 2003 were as
follows (dollars in thousands):


|                  |  |   |        | 
|----------------- |  | - | ------ | 
|2003 (six months) |  | $ | 719    | 
|2004              |  |   | 1,437  | 
|2005              |  |   | 1,440  | 
|2006              |  |   | 1,427  | 
|2007              |  |   | 1,427  | 
|Thereafter        |  |   | 56,368 | 
|                  |  |   |        | 
|                  |  | $ | 62,818 | 
|                  |  |   |        | 

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

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

|                  |  |   |        | 
|----------------- |  | - | ------ | 
|2003 (six months) |  | $ | 2,349  | 
|2004              |  |   | 4,428  | 
|2005              |  |   | 2,896  | 
|2006              |  |   | 2,027  | 
|2007              |  |   | 1,456  | 
|Thereafter        |  |   | 1,929  | 
|                  |  |   |        | 
|                  |  | $ | 15,085 | 
|                  |  |   |        | 

10.          Asset
Dispositions

We sold three hotels during the third quarter of
2002, two hotels in the fourth quarter of 2002, one in January
2003 and one in April 2003. In July 2003, we sold two hotels
that met our criteria for held-for-sale classification as of
June 30, 2003 (see Note 4). Operating results for the three
and six months ended June 30, 2002 for these nine hotels
have been reclassified to discontinued operations, and where
applicable included in discontinued operations in the current
periods results. Results of operations for the three and
six months ended June 30, 2003 included impairment charges
of $0.4 million and $2.1 million, respectively.

Revenue included in discontinued operations for
these hotels were (dollars in thousands):

|        |  |                |       |                |  |      |        |      |  |   |       |  |  |   |        | 
|------- |  | -------------- | ----- | -------------- |  | ---- | ------ | ---- |  | - | ----- |  |  | - | ------ | 
|        |  |                |       |               
|        |  | Three Months   |       | Six Months    
|        |  | Ended June 30, |       | Ended June 30,
|        |  |                |       |               
|        |  | 2003           |       | 2002           |  | 2003 |        | 2002
|        |  |                |       |                |  |      |        |     
|Revenue |  | $              | 2,564 |                |  | $    | 11,285 |      |  | $ | 6,808 |  |  | $ | 22,724 | 

11.          Consolidating
Financial Statements

We and certain subsidiaries of MeriStar
Hospitality Operating Partnership, L.P. (MHOP) are
guarantors of senior unsecured notes issued by MHOP. MHOP and
certain of its subsidiaries are guarantors of our 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 financial
statements for MHOP, including each of the guarantor
subsidiaries. This exhibit presents MHOPs consolidating
balance sheets as of June 30, 2003 and December 31,
2002, consolidating statements of operations for the three and
six months ended June 30, 2003 and 2002, and consolidating
statements of cash flows for the six months ended June 30,
2003 and 2002.

13



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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS

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

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



| |   |                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the current slowdown of the national economy;                                                                                                                                                      
|
| |  | economic conditions generally and the real estate
    market specifically;                                                                                                                         
|
| |  | the impact of the September 11, 2001
    terrorist attacks or actual or threatened future terrorist
    incidents;                                                                                 
|
| |  | the threatened or actual outbreak of hostilities
    and international political instability;                                                                                                      
|
| |  | governmental actions;                                                                                                                                                                              
|
| |  | legislative/regulatory changes, including changes
    to laws governing the taxation of real estate investment trusts;                                                                             
|
| |  | level of proceeds from asset sales;                                                                                                                                                                
|
| |  | cash available for capital expenditures;                                                                                                                                                           
|
| |  | availability of capital;                                                                                                                                                                           
|
| |  | ability to refinance debt;                                                                                                                                                                         
|
| |  | rising interest rates;                                                                                                                                                                             
|
| |  | rising insurance premiums;                                                                                                                                                                         
|
| |  | competition;                                                                                                                                                                                       
|
| |  | supply and demand for hotel rooms in our current
    and proposed market areas, including the existing and continuing
    weakness in business travel and lower-than-expected daily room
    rates;
|
| |  | other factors that may influence the travel
    industry, including health, safety and economic factors; and                                                                                       
|
| |  | generally accepted accounting principles,
    policies and guidelines applicable to real estate investment
    trusts.                                                                             

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

14



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##### 



BUSINESS SUMMARY

We are a real estate investment trust, or REIT,
and own a portfolio of upscale, full-service hotels and resorts
in the United States and Canada. Our portfolio is diversified by
franchise and brand affiliations. As of June 30, 2003, we
owned 105 hotels, with 27,269 rooms, all of which were leased by
our taxable subsidiaries and managed by Interstate Hotels &
Resorts, Inc. (Interstate Hotels). In July 2003, we
sold two hotels with 422 rooms.

Our revenues have been derived from the
operations of our hospitality properties, including room, food
and beverage revenues, as well as from our leases of office,
retail and parking rentals. Operating costs include direct costs
to run our hotels, management fees to Interstate Hotels to
manage our properties, depreciation of our properties, as well
as sales, marketing and general and administrative costs. Our
expenses also include interest on our debt and minority interest
allocations, which represent the allocation of income to outside
investors for properties that are not wholly owned.

The following discussion should be read in
conjunction with our Annual Report on Form 10-K for the
year ended December 31, 2002 as filed with the Securities
and Exchange Commission, and with the unaudited consolidated
financial statements and related notes included in Item 1
of this Quarterly Report on Form 10-Q.

RESULTS OF OPERATIONS

The provisions of Statement of Financial
Accounting Standards (SFAS) No. 144 require that current
and prior period operating results of any asset that has been
classified as held for sale or has been disposed of on or after
January 1, 2002, including any gain or loss recognized on
the sale, be recorded as discontinued operations. Accordingly,
we have reclassified results of operations for 2003 and 2002 to
conform to the requirements of SFAS No. 144. See Note 10
Asset Dispositions, included in Item 1 of this
Quarterly Report on Form 10-Q for further information
regarding the amounts reclassified. The following results of
operations discussions compare revenues, operating expenses and
significant charges for continuing operations. Discontinued
operations are discussed as a separate component within each
periods comparison.

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

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

|                                    |  |      |       |      |  |        |        |  |  |  |        | 
|----------------------------------- |  | ---- | ----- | ---- |  | ------ | ------ |  |  |  | ------ | 
|                                    |  | 2003 |       | 2002 |  | Change
|                                    |  |      |       |      |  |       
|Average daily rate                  |  | $    | 98.36 |      |  | $      | 102.67 |  |  |  | (4.2)% | 
|Occupancy                           |  |      | 68.3% |      |  |        | 69.5%  |  |  |  | (1.8)% | 
|Revenue per available room (RevPAR) |  | $    | 67.18 |      |  | $      | 71.37  |  |  |  | (5.9)% | 

The conflict in Iraq and an elevated terrorist
alert level had a negative effect on our hotel operations,
evidenced by a reduction in transient business travel. This is
reflected in the 4.2% reduction in average daily rate and the
1.8% reduction in occupancy for the three months ended
June 30, 2003 compared to the same period in 2002. We did
however begin to see improvement in our hotel reservations in
May as the conflict in Iraq ended. Also, our sales and marketing
efforts focused on group business, which helped to partially
offset lower levels of transient business travel.

Revenues.Total
revenue decreased $11.6 million to $258.0 million for
the three months ended June 30, 2003 from
$269.6 million for the same period in 2002, primarily due
to a $10.6 million decrease in room revenue directly
attributable to a decrease in average daily rate and occupancy.
The decrease was also due to a $1.3 million decrease in
food and beverage revenue related to a decrease in occupancy.

Operating expenses.Total operating expenses increased a
net $206.5 million to $439.6 million for the quarter ended
June 30, 2003 compared to $233.1 million for the same
period in 2002. Hotel operating expenses (including office
rental, parking and other expenses) decreased from $102.0
million for the three

15



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##### 



months ended June 30, 2002 to
$101.2 million for the same period in 2003 due mainly to a
reduction in room expenses stemming from our cost-cutting
measures.


Other operating expenses increased
$207.4 million to $338.4 million for the three months
ended June 30, 2003 from $131.0 million for the same
period in 2002, resulting mainly from an impairment charge of
$207.6 million in the second quarter of 2003 (see
discussion under Significant charges below). General
and administrative costs remained essentially flat period over
period. Property tax refunds totaling approximately
$2.7 million during the three months ended June 30,
2002 contributed to the $4.3 million increase in property
taxes for the 2003 comparative period. Property operating costs
decreased $1.2 million due to a reduction in franchise fees,
which are generally calculated as a percentage of revenues. As
previously noted, revenues declined in the quarter from prior
year levels.

Significant charges.During the second quarter of 2003, we
made the determination to dispose of an additional 19 non-core
assets. Also, due to the market interest in certain of our other
hotel assets, we decided to add an additional six assets to our
disposition program. We recognized an impairment loss of
$208 million ($0.4 million of which is included in
discontinued operations) related to our asset disposition
program during the three months ended June 30, 2003. As of
June 30, 2003, we had 40 assets planned for disposition,
two of which were sold in July 2003.

We had two swap agreements that did not qualify
for treatment as cash-flow hedges under SFAS No. 133,
expire since June 30, 2002, one in December 2002 and one in
April 2003. As of June 30, 2003, we had one swap agreement,
which we account for as a fair-value hedge, with a notional
principal amount of $100 million remaining outstanding. Results
for the 2002 second quarter include a net expense of
$3.1 million related to these agreements. Current period
results were not materially affected by marking to market the
remaining swap agreement. This swap expired on July 31,
2003.

Discontinued operations.During 2002, we sold five hotels in
separate transactions for an aggregate of $60.7 million in
cash. In mid-January 2003, we completed the sale of one hotel,
which was classified as held for sale at December 31, 2002,
for $12.7 million in cash. In April 2003, we completed the
sale of another hotel for $3.1 million in cash. As of
June 30, 2003, we had two hotels classified as held for
sale, both of which were sold during July 2003 for an aggregate
of $17.3 million in cash. We classified losses of $0.6
million and income of $0.8 million (both net of tax) from
these nine hotels operations as discontinued for the three
months ended June 30, 2003 and 2002, respectively. As
previously noted, discontinued operations for the three months
ended June 30, 2003 include a $0.4 million impairment
charge related to these hotels.

Six months ended June 30, 2003
compared with the six months ended June 30,
2002

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

|                                    |  |      |        |      |  |        |        |  |  |  |        | 
|----------------------------------- |  | ---- | ------ | ---- |  | ------ | ------ |  |  |  | ------ | 
|                                    |  | 2003 |        | 2002 |  | Change
|                                    |  |      |        |      |  |       
|Average daily rate                  |  | $    | 100.25 |      |  | $      | 104.25 |  |  |  | (3.8)% | 
|Occupancy                           |  |      | 65.8%  |      |  |        | 66.5%  |  |  |  | (1.1)% | 
|Revenue per available room (RevPAR) |  | $    | 65.94  |      |  | $      | 69.33  |  |  |  | (4.9)% | 

Revenues.Total
revenue decreased $17.3 million to $497 million for
the six months ended June 30, 2003 from $514.3 million
for the same period in 2002, primarily due to a
$17.2 million decrease in room revenue directly
attributable to a decrease in average daily rate and occupancy.

Operating expenses.Total operating expenses increased a
net $260.8 million to $716.1 million for the six months
ended June 30, 2003 compared to $455.3 million for the
same period in 2002. Hotel operating expenses (including office
rental, parking and other expenses) increased $3.1 million
from $192.9 million for the six months ended June 30,
2002 to $196 million for the same period in 2003 due
primarily to increases in food and beverage expenses stemming
from increases in general conference expenses, as well as from
expenses related to our real estate brokerage activities at one
property.

16



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##### 



Other operating expenses increased
$257.7 million to $520.1 million for the six months
ended June 30, 2003 from $262.4 million for the same
period in 2002, resulting mainly from impairment charges of
$262.6 million in the first half of 2003 (see discussion
under Significant charges below). General and
administrative and property operating costs remained essentially
flat period over period. Property tax refunds totaling
approximately $2.7 million during 2002 contributed to the
$5 million increase in property taxes for the 2003
comparative period. Depreciation and amortization decreased
$2.3 million, stemming mainly from a write off of deferred
financing fees in 2002 totaling approximately $1.5 million
related to the reduction in our borrowing capacity on our
revolving credit agreement in place at that time.

Significant charges.We recognized impairment losses
totaling $264.7 million ($2.1 million is included in
discontinued operations) related to our asset disposition
program during the six months ended June 30, 2003. As of
June 30, 2003, we had 40 assets planned for disposition,
two of which were sold in July 2003.

Prior year results include a net expense of
$3.1 million related to the swap agreements previously
discussed. Current period results were not materially affected
by marking to market the remaining swap agreement. This swap
expired on July 31, 2003. Prior year results also include a
$4.7 million loss on the fair value of derivatives due to
the repayment of debt that was originally hedged.

Discontinued operations.During 2002, we sold five hotels in
separate transactions for an aggregate of $60.7 million in
cash. In mid-January 2003, we completed the sale of one hotel,
which was classified as held for sale at December 31, 2002,
for $12.7 million in cash. In April 2003, we completed the
sale of another hotel for $3.1 million in cash. As of
June 30, 2003, we had two hotels classified as held for
sale, both of which sold during July 2003 for an aggregate of
$17.3 million in cash. We classified losses of
$1.9 million and income of $2.2 million (both net of
tax) from these nine hotels operations as discontinued for
the six months ended June 30, 2003 and 2002, respectively.
As previously noted, discontinued operations for the six months
ended June 30, 2003 include impairment charges totaling
$2.1 million related to these hotels.

FUNDS FROM OPERATIONS AND EBITDA

Substantially all of our assets consist of real
estate, and in accordance with accounting principles generally
accepted in the United States, or GAAP, those assets are subject
to straight-line depreciation, which reflects the assumption
that the value of real estate assets, other than land, will
decline over time. That assumption is often not true with
respect to the actual market values of real estate assets (and,
in particular, hotels), which fluctuate based on economic,
market and other conditions. As a result, we and many industry
investors believe the presentation of GAAP operating measures
for real estate companies to be more informative and useful when
other measures, adjusted for depreciation and amortization, are
also presented. In an effort to address these concerns, the
National Association of Real Estate Investment Trusts, or
NAREIT, adopted a definition of Funds From Operations, or FFO,
which we have also adopted.

NAREIT defines FFO as net income (computed in
accordance with GAAP), excluding gains (or losses) from sales of
real estate and 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 as defined by GAAP are also
excluded from the calculation of FFO. We believe FFO is an
indicative measure of our operating performance due to the
significance of our hotel real estate assets and can be used to
measure our ability to service debt, fund capital expenditures,
and expand our business. We also use FFO in our annual budget
process. In addition, some of the restrictive covenants in our
debt instruments are based on FFO.

EBITDA represents consolidated earnings before
interest expense, income taxes, depreciation and amortization
and includes operations from the assets included in discontinued
operations. We believe EBITDA provides useful information to
investors regarding our financial condition and results of
operations because EBITDA is useful for evaluating our operating
performance and our capacity to incur and service debt, fund
capital expenditures, and expand our business. Also, we use
EBITDA to provide a measure of unleveraged cash flow that can be
isolated on an asset by asset basis, to determine overall
property performance and to measure our ability to service debt.
We believe that the rating agencies and a number of our lenders
also use EBITDA for those purposes. Restrictive covenants in our
senior and subordinated note

17



---



##### 



indentures contain financial ratios based on
EBITDA. We also use EBITDA as one measure in determining the
value of acquisitions and dispositions and, like FFO, it is also
widely used in our annual budget process.


FFO and EBITDA should not be considered as
alternatives to any other performance measures prescribed by
GAAP. Although FFO and EBITDA are considered standard benchmarks
utilized by the investment community, our FFO and EBITDA may not
be comparable to similarly titled measures reported by other
companies.

FFO

We use FFO as a measure of our performance. We
define FFO as NAREITs definition as described above. The
following reconciles our GAAP net (loss) income to FFO on a
diluted basis (amounts in thousands, except per share amounts):

|                                                                                                 |                                                                  |                |        |                  |   |      |        |        |  |   |        |          |   |   |        |        |  
|------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------- | -------------- | ------ | ---------------- | - | ---- | ------ | ------ |  | - | ------ | -------- | - | - | ------ | ------ | -
|                                                                                                 |                                                                  |                |        |                 
|                                                                                                 |                                                                  | Three Months   |        | Six Months Ended
|                                                                                                 |                                                                  | Ended June 30, |        | June 30,        
|                                                                                                 |                                                                  |                |        |                 
|                                                                                                 |                                                                  | 2003           |        | 2002             |   | 2003 |        | 2002  
|                                                                                                 |                                                                  |                |        |                  |   |      |        |       
|                                                                                                 | Net (loss) income                                                |                | $      | (206,361         | ) |      | $      | 2,973  |  |   | $      | (276,106 | ) |   | $      | (6,970 | )
|                                                                                                 | Loss on asset impairments                                        |                |        | 208,000          |   |      |        |       |  |   |        | 264,677  |   |   |        |       |  
|                                                                                                 | Hotel depreciation and amortization                              |                |        | 28,042           |   |      |        | 29,598 |  |   |        | 55,656   |   |   |        | 58,250 |  
|                                                                                                 | Minority interest (income) expense to common
    OP unit holders |                |        | (10,738          | ) |      |        | 104    |  |   |        | (14,558  | ) |   |        | (664   | )
|                                                                                                 |                                                                  |                |        |                  |   |      |        |        |  |   |        |          |   |   |        |       
|FFO                                                                                              |                                                                  |                | 18,943 |                  |   |      | 32,675 |        |  |   | 29,669 |          |   |   | 50,616 |       
|                                                                                                 | Interest on convertible debt                                     |                |        | 1,805            |   |      |        | 1,833  |  |   |        |         |   |   |        | 3,665  |  
|                                                                                                 |                                                                  |                |        |                  |   |      |        |        |  |   |        |          |   |   |        |       
|FFO on a diluted basis                                                                           |                                                                  | $              | 20,748 |                  |   | $    | 34,508 |        |  | $ | 29,669 |          |   | $ | 54,281 |       
|                                                                                                 |                                                                  |                |        |                  |   |      |        |        |  |   |        |          |   |   |        |       
|FFO per diluted share                                                                            |                                                                  | $              | 0.39   |                  |   | $    | 0.65   |        |  | $ | 0.60   |          |   | $ | 1.02   |       
|                                                                                                 |                                                                  |                |        |                  |   |      |        |        |  |   |        |          |   |   |        |       
|Weighted average number of diluted shares of
    common stock outstanding for earnings per share |                                                                  |                | 46,078 |                  |   |      | 48,450 |        |  |   | 45,813 |          |   |   | 44,754 |       
|Common stock equivalents:                                                                        |                                                                  |                |        |                  |   |      |        |        |  |   |        |          |   |   |        |       
|                                                                                                 | Operating partnership units                                      |                |        | 2,922            |   |      |        |       |  |   |        | 3,204    |   |   |        | 4,016  |  
|                                                                                                 | Stock options and POPs                                           |                |        | 35               |   |      |        | 496    |  |   |        | 23       |   |   |        | 49     |  
|                                                                                                 | Convertible debt shares                                          |                |        | 4,538            |   |      |        | 4,538  |  |   |        |         |   |   |        | 4,538  |  
|                                                                                                 |                                                                  |                |        |                  |   |      |        |        |  |   |        |          |   |   |        |       
|Weighted average number of diluted shares of
    common stock outstanding for FFO                |                                                                  |                | 53,573 |                  |   |      | 53,484 |        |  |   | 49,040 |          |   |   | 53,357 |       
|                                                                                                 |                                                                  |                |        |                  |   |      |        |        |  |   |        |          |   |   |        |       

18



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##### 



EBITDA

EBITDA was as follows (dollars in thousands):

|                                                             |  |                    |          |                  |  |      |        |      |  |   |          |   |  |   |         |         
|------------------------------------------------------------ |  | ------------------ | -------- | ---------------- |  | ---- | ------ | ---- |  | - | -------- | - |  | - | ------- | --------
|                                                             |  |                    |          |                 
|                                                             |  | Three Months Ended |          | Six Months Ended
|                                                             |  | June 30,           |          | June 30,        
|                                                             |  |                    |          |                 
|                                                             |  | 2003               |          | 2002             |  | 2003 |        | 2002
|                                                             |  |                    |          |                  |  |      |        |     
|(Loss) income from continuing operations                     |  | $                  | (205,766 | )                |  | $    | 2,142  | (a)  |  | $ | (274,239 | ) |  | $ | (9,168  | ) (a)(b)
|(Loss) income from discontinued operations                   |  |                    | (595     | )                |  |      | 831    |      |  |   | (1,867   | ) |  |   | 2,198   |         
|                                                             |  |                    |          |                  |  |      |        |      |  |   |          |   |  |   |         |         
|Net (loss) income                                            |  | $                  | (206,361 | )                |  | $    | 2,973  | (a)  |  | $ | (276,106 | ) |  | $ | (6,970  | ) (a)(b)
|                                                             |  |                    |          |                  |  |      |        |      |  |   |          |   |  |   |         |         
|(Loss) income from continuing operations                     |  | $                  | (205,766 | )                |  | $    | 2,142  |      |  | $ | (274,239 | ) |  | $ | (9,168  | )       
|Interest expense, net                                        |  |                    | 34,739   |                  |  |      | 34,112 |      |  |   | 69,565   |   |  |   | 68,767  |         
|Income tax expense (benefit)                                 |  |                    | 28       |                  |  |      | 60     |      |  |   | (175     | ) |  |   | (259    | )       
|Minority interests                                           |  |                    | (10,598  | )                |  |      | 245    |      |  |   | (14,275  | ) |  |   | (382    | )       
|Depreciation, amortization and loss on asset
    impairments |  |                    | 237,472  |                  |  |      | 29,969 |      |  |   | 321,170  |   |  |   | 60,900  |         
|                                                             |  |                    |          |                  |  |      |        |      |  |   |          |   |  |   |         |         
|EBITDA from continuing operations                            |  | $                  | 55,875   |                  |  | $    | 66,528 | (a)  |  | $ | 102,046  |   |  | $ | 119,858 | (a)(b)  
|                                                             |  |                    |          |                  |  |      |        |      |  |   |          |   |  |   |         |         
|(Loss) income from discontinued operations                   |  | $                  | (595     | )                |  | $    | 831    |      |  | $ | (1,867   | ) |  | $ | 2,198   |         
|Interest expense, net                                        |  |                    |         |                  |  |      | (49    | )    |  |   |         |   |  |   | (105    | )       
|Income tax (benefit) expense                                 |  |                    | (3       | )                |  |      | 24     |      |  |   | 3        |   |  |   | 62      |         
|Depreciation, amortization and loss on asset
    impairments |  |                    | 589      |                  |  |      | 1,480  |      |  |   | 2,562    |   |  |   | 2,979   |         
|                                                             |  |                    |          |                  |  |      |        |      |  |   |          |   |  |   |         |         
|EBITDA from discontinued operations                          |  | $                  | (9       | )                |  | $    | 2,286  |      |  | $ | 698      |   |  | $ | 5,134   |         
|                                                             |  |                    |          |                  |  |      |        |      |  |   |          |   |  |   |         |         
|EBITDA, total operations                                     |  | $                  | 55,866   |                  |  | $    | 68,814 | (a)  |  | $ | 102,744  |   |  | $ | 124,992 | (a)(b)  
|                                                             |  |                    |          |                  |  |      |        |      |  |   |          |   |  |   |         |         



---



|    |                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | (Loss) income from continuing operations, net
    (loss) income, EBITDA from continuing operations and
    EBITDA, total operations, included the effect of changes in fair
    value of non-hedging derivatives, net of swap payments, of $3.1
    million for both the three and six months ended June 30,
    2002.
|   
|(b) | (Loss) income from continuing operations, net
    (loss) income, EBITDA from continuing operations and
    EBITDA, total operations, included the effect of a
    $4.7 million loss due to our swap agreements being
    converted to non-hedging derivatives in January 2002.                                        

FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL
RESOURCES

Our principal sources of liquidity are cash
generated from operations, funds from borrowings, funds from the
sales of assets and existing cash on hand. Our principal uses of
cash include the funding of working capital obligations, debt
service, investments in hotels (primarily capital projects
currently), and the repurchase of our debt. We do not expect to
pay a dividend on our common stock during 2003. We believe we
have sufficient free cash flow currently, and we expect to have
adequate cash flow during the next twelve months in order to
fund our operations, capital commitments and debt service
obligations. Our current and future liquidity is, however,
greatly dependent upon our operating results, which are driven
largely by overall economic conditions, and since
September 11, 2001 have been heavily affected by
geopolitical concerns and other factors affecting business and
leisure travel. If general economic conditions are significantly
worse than we expect for an extended period, this will likely
have a negative effect on our projections of available cash flow
and liquidity.

Factors that may influence our liquidity include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Factors that affect our results of operations,
    including general economic conditions, demand for business and
    leisure travel, public concerns about travel safety related
    primarily to terrorism and related concerns, and other operating
    risks described under the caption, Risk
    FactorsOperating Risks in Item 1 of our Annual
    Report on Form 10-K for the year ended December 31,
    2002;

19



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##### 





| |   |                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Factors that affect our access to bank financing
    and the capital markets, including operational risks, high
    leverage, interest rate fluctuations, and other risks described
    under the caption Risk FactorsFinancing Risks
    in Item 1 of our Annual Report on Form 10-K for the
    year ended December 31, 2002; and
|
| |  | Other factors described previously under the
    caption, Cautionary Statement Regarding Forward-Looking
    Statements.                                                                                                                                                                                                            

We continue to take steps to strengthen our
balance sheet and to maintain financial flexibility and
liquidity. On July 1, 2003, we completed an offering of
$170 million of 9.5% convertible subordinated notes due
2010, which securities rank pari passuwith the 4.75%
convertible subordinated notes. The proceeds from the issuance
were mainly used to repurchase substantially all of our 4.75%
convertible notes due 2004 and $22.6 million of our
$205 million senior subordinated notes due in 2007. We
currently have less than $4 million of the 2004 convertible
notes outstanding and no significant maturities until 2007.

We sold two non-core hotel assets in the first
half of 2003 for an aggregate of approximately
$15.7 million in cash. We ended the second quarter of 2003
with cash and marketable securities balances of approximately
$104.5 million, of which $74.4 million was unrestricted.
These cash and marketable securities balances are higher than we
have historically carried prior to this year. We intend to carry
higher than historical levels of unrestricted cash on our
balance sheet for the foreseeable future, as we believe this
cash reserve should be adequate to provide for our working
capital needs and protect us from a potential downturn in our
business. In July 2003, we sold two additional non-core hotel
assets for an aggregate of approximately $17.3 million in
cash.

We currently have 38 hotels (after the July 2003
sales of two hotels) planned for disposition, from which we
expect to generate proceeds of approximately $330 million
to $400 million. Our ability to realize these estimated
proceeds is, however, dependent upon finding qualified buyers
willing to pay a purchase price that we consider reasonable. We
intend to use a majority of the proceeds from any asset sales to
reinvest in our core assets and to repurchase our senior debt.

Sources and Uses of Cash

We generated a total of $11.8 million of
cash from operations during the first half of 2003 compared with
$66.9 million generated in the first half of 2002. Our
operating results and the amount of cash generated by our hotel
operations have been adversely affected by the events of
September 11, 2001, the continuing sluggish economy, the
threat of further terrorist attacks, and other factors affecting
business and leisure travel. Cash flow from operations also
decreased in 2003 due to the timing of interest payments and
higher interest rates on our senior unsecured notes issued in
February 2002. Partially offsetting this increase in interest
was savings of approximately $2.8 million in interest on
our previous revolving credit facility, which was repaid with
the net proceeds from the February 2002 senior unsecured notes
issuance.

Included in our operating results is our 16%
cumulative preferred return on our partnership interest in MIP.
As of June 30, 2003, approximately $15 million of
cumulative preferred returns remained unpaid. We expect that any
cumulative unpaid preferred returns would be paid in the future
from excess cash flow above our current return and from
potential disposition proceeds in excess of debt allocated to
individual assets. Given the current economic environment, we do
not expect MIPs operations to provide adequate cash flow
in the near term for significant payment of our current returns
or repayments of our cumulative unpaid preferred returns.

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



| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | $42.1 million from Interstate Hotels for the
    repayment of their note receivable; and     
|
| |  | $15.8 million in proceeds from the sale of
    two non-core hotel assets; partially offset by
|
| |  | $18.1 million investment in marketable
    securities;                                       

20



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##### 





| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | $14.5 million in capital expenditures
    (including $1.6 million of capitalized interest); and
|
| |  | $9.7 million increase in restricted cash.                                                      

We used $4.4 million of cash in financing
activities during the first half of 2003 due mainly to the
repayment of our long-term debt obligations.

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

Long-Term Debt

New convertible notes.On July 1, 2003, we completed an
offering of $170 million aggregate principal amount of 9.5%
convertible subordinated notes due 2010. The convertible notes
are unsecured obligations and provide for semi-annual payments
of interest on October 1 and April 1. We incurred approximately
$6.5 million in debt issuance costs, which will be
capitalized and amortized over the life of the new notes.

The proceeds from the new issuance were used to
repurchase $150.6 million of the $154.3 million 4.75%
convertible notes due 2004, at varying prices, resulting in an
aggregate discount of approximately $1.4 million. During
the third quarter, we will recognize this gain and write off
approximately $0.6 million of deferred financing costs on the
transaction. The proceeds from the issuance were also used to
repurchase $22.6 million of our $205 million senior
subordinated notes due in 2007, at varying prices, resulting in
an aggregate discount of approximately $2.0 million. During
the third quarter, we will recognize this gain and write off
approximately $0.2 million of deferred financing costs
related to the repurchases.

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

This facility contains customary financial
compliance measures, which became more stringent on a quarterly
basis beginning in the first quarter of 2003. The sale of two
hotels during the fourth quarter of 2002, one in January 2003,
and one in April 2003, as well as the settlement of our note
receivable with Interstate Hotels, impacted our leverage
covenant due to the loss of trailing 12-month EBITDA (as defined
in the credit agreement) on a pro forma basis. If we are not in
compliance with the leverage covenant or any other financial
covenants at the end of a quarterly measuring period, we will be
in default under the credit facility and will not be permitted
to borrow under the credit facility. We have obtained a waiver
of compliance with this leverage covenant from our lending
group, which was extended through August 20, 2003. Because
we do not anticipate needing to draw under the bank line or
having borrowing capacity to do so in the near term, we expect
to terminate the facility in late 2003. We have approximately
$0.6 million of unamortized capitalized financing costs
related to this facility as of June 30, 2003, which would
be written off should we decide to terminate the facility.

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

21



---



##### 



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


There are certain exceptions, however, with
respect to the incurrence of additional debt and early repayment
of debt features in the indentures. We currently have the
ability to incur $300 million of secured financing within
restricted subsidiaries. We also have a general carve-out to
incur $50 million of unspecified borrowings within a
restricted subsidiary. Additionally, we are permitted to repay
subordinated debt prior to its maturity from the proceeds of a
pari passuor junior financing with a longer term than
the debt refinanced, an equity offering, or a financing within
an unrestricted subsidiary. We are permitted to invest five
percent of consolidated net tangible assets (as defined in the
indentures) in an unrestricted subsidiary. We would then be able
to mortgage the properties contributed to the unrestricted
subsidiary.

We expect to enter into a new commercial
mortgaged-backed security facility, which would be secured by
four hotel properties, in the third quarter of 2003. We intend
to use the expected proceeds of approximately $100 million
to selectively redeem more expensive debt.

Senior subordinated notes.As of June 30, 2003, we had
outstanding $205 million aggregate principal amount of 8.75%
senior subordinated notes due 2007. The related indenture
contains various restrictive covenants, which are similar to
those in our senior unsecured notes. These notes are unsecured
obligations and provide for semi-annual payments of interest
each February 15 and August 15. We used proceeds from our
July 2003 issuance of new convertible notes to repurchase
$22.6 million aggregate principal amount of these notes.

Secured facility.We
completed a $330 million, 10-year, non-recourse financing
during 1999. The facility is secured by a portfolio of 19 hotels
and contains standard provisions that require the servicer to
maintain in escrow cash balances for certain items such as
property taxes and insurance. In addition, the facility contains
a provision that requires our mortgage servicer to retain in
escrow the excess cash from the encumbered hotels after payment
of debt service (Excess Cash), if net hotel
operating income (NOI) for the trailing twelve
months declines below $57 million. This provision was
triggered in October 2002 and will be effective until the hotels
generate the minimum cash flow required for two consecutive
quarters, at which time the cash being held in escrow will be
released to us. Approximately $14.5 million of cash was
held in escrow under this provision as of June 30, 2003. In
July 2003, we signed an amendment to the loan agreement that
permits the release of cash placed in escrow for all capital
expenditures incurred on the 19 encumbered properties on or
after April 1, 2003 (approximately one million as of
June 30, 2003). Although the servicer will continue to
retain in escrow any excess cash from the encumbered hotels,
they will release cash for all capital expenditures we have
incurred from April 1, 2003 through the date of the
amendment and future capital expenditures we incur on the 19
properties.

Asset Dispositions

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



| |   |                                                             
| | - | ------------------------------------------------------------
| |  | limited future growth potential;                            
|
| |  | secondary market location;                                  
|
| |  | secondary brand affiliation;                                
|
| |  | higher than average capital expenditure
    requirements; or
|
| |  | our portfolio is over-weighted in its market.               

22



---



##### 



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



| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | improve the overall quality of the hotel assets
    remaining in our portfolio;       
|
| |  | enhance the ability of our portfolio to perform
    well in all cycles of the economy;
|
| |  | enhance future growth prospects when strength
    returns to the economy;             
|
| |  | reduce future capital requirements on a relative
    basis; and                       
|
| |  | reduce our leverage and requirements on our
    liquidity resources.                  

We are aided in our disposition program by the
fact that we can terminate any management agreement of any hotel
we sell, in some cases, subject to the payment of a fee as
discussed below, as well as the fact that 80 of our current 103
assets are unencumbered and only 13 of those assets are subject
to ground leases. Excluding the assets included in our asset
disposition program and our contemplated CMBS financing, we
would have 42 unencumbered assets.

We recognized an impairment loss in 2002 on
certain non-core assets we were then actively marketing. We sold
one hotel in January 2003 for $12.7 million. Late in the first
quarter of 2003, we expanded our asset disposition program to
include a total of 16 non-core assets and recorded an impairment
charge in the first quarter of $56.7 million. In April
2003, we sold one of these hotels for $3.1 million. In July
2003, we sold two more of these hotels for $17.3 million.
During the second quarter of 2003, we made the determination to
dispose of an additional 19 non-core assets. Also, due to the
market interest in certain of our other hotel assets, we decided
to add an additional six assets to our disposition program. We
recognized an additional impairment loss of $208 million
related to our asset disposition program during the three months
ended June 30, 2003.

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

As we dispose of these assets, we may incur
termination obligations due to Interstate Hotels of up to a
maximum of $26 million, calculated assuming the immediate
sale of the properties and assuming buyers of our hotel
properties elect to have the properties managed by third-parties
other than Interstate Hotels. Any such obligation would affect
the calculation of the final gain or loss on the sale of a
particular asset, since in accordance with current accounting
guidance, the obligation is not recognized until such time as
the asset disposition is complete and a termination notice is
provided to Interstate Hotels. At that time, the recognition of
any termination obligation will be included in discontinued
operations. Payment of any obligation due under termination
provisions of the contract is payable over a period of 30
months. This amount may be reduced by replacement management
contracts.

In addition, we may from time to time receive
offers on assets which we might consider selling. Any additional
sales of assets may result in additional impairment charges in
future periods, if and when such transactions might be
undertaken. While we always consider any opportunities that may
improve our financial condition or results of operations, we are
not actively marketing any other assets than the 38 properties
previously discussed. The properties we are disposing of
represent approximately one-third of our total properties, but a
much smaller portion of our cash flow.

Capital Expenditures

We make ongoing capital expenditures in order to
keep our hotels competitive in their markets and to comply with
franchise obligations, as described further in Operating
Risks (the potential adverse impact of our failure to meet
the requirements contained in our franchise and licensing
agreements) included in Item 1  Risk Factors of
our Annual Report on Form 10-K for the year ended
December 31, 2002. We fund our capital expenditures
primarily from cash generated from operations and existing cash
on hand, and intend to use a portion of the proceeds from the
sales of non-core assets to provide capital for renovation work.
We

23



---



##### 



invested $14.5 million (including $1.6
million of capitalized interest) for ongoing capital
expenditures during the first half of 2003, and we anticipate
investing a total of $30 million to $35 million on capital
expenditure programs during second half of 2003. These ongoing
programs will include room and facilities refurbishments,
renovations, and furniture and equipment replacements. The
deferral of capital spending to date has not significantly
affected our business as, generally in the past, we acquired
good quality assets and spent a relatively high level of capital
in the early years of ownership. We believe the properties we
are now marketing for sale typically have higher per room
capital expenditure requirements than our core assets. Sales of
these properties will allow us to focus our capital spending
dollars in the future on our core portfolio.


OTHER FINANCIAL INFORMATION

Critical Accounting Policies

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

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

Accounting for the impairment or disposal of
long-lived assets

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

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

We adopted the provisions of SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, on January 1, 2003. SFAS No. 146
requires that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at fair
value only when the liability is incurred. Our strategy includes
the disposition of certain hotel assets, all of which are
managed under agreements which typically include termination
penalty clauses with Interstate Hotels. As a result, we may
incur termination obligations related to our asset dispositions.
Any such liability will be recognized at the time the asset
disposition is complete and a termination notice is provided to
Interstate Hotels. At that time, the recognition

24



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of the termination obligation will be included in
the calculation of the final gain or loss on sale and will be
included in discontinued operations.


Classification of properties as held for
sale

Held-for-sale classification requires that the
sale be probable and that the transfer of the asset is expected
to be completed within one year, among other criteria. Assessing
the probability of the sale requires significant judgment due to
the uncertainty surrounding completing the transaction. As a
result, we have the following policy in aiding in assessing
probability. We classify the properties we are actively
marketing as held for sale once all of these conditions are met.



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

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

Off-Balance Sheet Arrangements and Aggregate
Contractual Obligations

We have future long-term debt and ground lease
obligations related to our consolidated entities and properties.
As of June 30, 2003, we were not involved in any
off-balance sheet arrangements with MIP.

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

|                                                    |                           |       |           |           |  |             |       |            |  |            |         |         |     |   |         |         |     |   |         |         |    
|--------------------------------------------------- | ------------------------- | ----- | --------- | --------- |  | ----------- | ----- | ---------- |  | ---------- | ------- | ------- | --- | - | ------- | ------- | --- | - | ------- | ------- | ---
|                                                    |                           |       |           | Less than |  | One to      |       | Three to   |  |           
|                                                    |                           | Total |           | One Year  |  | Three Years |       | Five Years |  | Thereafter
|                                                    |                           |       |           |           |  |             |       |            |  |           
|Long-term debt, net of unamortized
    discount(a): |                           |       |           |           |  |             |       |            |  |            |         |         |     |   |         |         |     |   |         |        
|                                                    | Senior unsecured notes    |       | $         | 944,340   |  |             | $     |           |  |            | $       |        |     |   | $       | 548,135 |     |   | $       | 396,205 |    
|                                                    | Secured facility          |       |           | 311,886   |  |             |       | 5,316      |  |            |         | 13,631  |     |   |         | 24,074  |     |   |         | 268,865 |    
|                                                    | Senior subordinated notes |       |           | 203,399   |  |             |       |           |  |            |         |        |     |   |         | 203,399 | (c) |   |         |        |    
|                                                    | Convertible notes         |       |           | 154,300   |  |             |       |           |  |            |         | 154,300 | (b) |   |         |        |     |   |         |        |    
|                                                    | Mortgage debt and other   |       |           | 36,562    |  |             |       | 2,061      |  |            |         | 12,645  |     |   |         | 7,932   |     |   |         | 13,924  |    
|                                                    |                           |       |           |           |  |             |       |            |  |            |         |         |     |   |         |         |     |   |         |        
|                                                    | Total long-term debt      |       |           | 1,650,487 |  |             |       | 7,377      |  |            |         | 180,576 |     |   |         | 783,540 |     |   |         | 678,994 | (d)
|                                                    |                           |       |           |           |  |             |       |            |  |            |         |         |     |   |         |         |     |   |         |        
|Ground lease obligations                            |                           |       | 62,818    |           |  |             | 1,318 |            |  |            | 2,992   |         |     |   | 4,288   |         |     |   | 54,220  |        
|                                                    |                           |       |           |           |  |             |       |            |  |            |         |         |     |   |         |         |     |   |         |        
|Aggregate contractual obligations                   |                           | $     | 1,713,305 |           |  | $           | 8,695 |            |  | $          | 183,568 |         |     | $ | 787,828 |         |     | $ | 733,214 |        
|                                                    |                           |       |           |           |  |             |       |            |  |            |         |         |     |   |         |         |     |   |         |        



---



|    |                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | For a description of the material terms of our
    long-term debt, see Financial Condition, Liquidity, and
    Capital Resources  Long-Term Debt.                                                                                                         
|   
|(b) | Repurchased $150.6 million face amount in
    July 2003 with the proceeds from the issuance of our new 9.5%
    convertible subordinated notes. See Financial Condition,
    Liquidity, and Capital Resources  Long-Term
    Debt  New Convertible Notes.
|   
|(c) | Repurchased $22.6 million face amount in
    July 2003 with the proceeds from the issuance of our new 9.5%
    convertible subordinated notes. See Financial Condition,
    Liquidity, and Capital Resources  Long-Term
    Debt  New Convertible Notes. 
|   
|(d) | In July 2003, we issued $170 million of
    9.5% convertible subordinated notes due 2010, which are not
    reflected on this table. See Financial Condition,
    Liquidity, and Capital Resources  Long-Term
    Debt  New Convertible Notes.           

Our taxable subsidiaries are parties to
management agreements with a subsidiary of Interstate Hotels to
manage all of our hotels. Under these management agreements, the
taxable subsidiaries pay a management fee to a subsidiary of
Interstate Hotels for each property. The taxable subsidiaries in
turn make rental

25



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payments to us under the participating leases.
Under the management agreements, the base management fee is 2.5%
of total hotel revenue, plus incentive payments based on meeting
performance thresholds that could total up to an additional 1.5%
of total hotel revenue. All of the agreements expire in 2010 and
have three renewal periods of five years each at the option of
Interstate Hotels, subject to some exceptions.




|        |                                                               
|------- | --------------------------------------------------------------
|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK

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



|        |                        
|------- | -----------------------
|ITEM 4. | CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and
Procedures

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

As of June 30, 2003, we carried out an
evaluation, under the supervision and with the participation of
our management, including our chief executive officer and our
chief financial and chief accounting officer of the
effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, we concluded
that our disclosure controls and procedures were effective.

Changes in Internal Controls

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

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##### 



PART II. OTHER INFORMATION

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

Our annual meeting of the stockholders was held
on June 9, 2003. At that meeting, the following matters
were submitted to a vote of our stockholders:

Item No. 1

To elect members of the Board of Directors to
serve three-year terms expiring on the date of the annual
meeting in 2006, and until their successors are duly elected and
qualified.

|                   |  |          |  |           
|------------------ |  | -------- |  | ----------
|J. Taylor Crandall |  | For      |  | 36,377,785
|                   |  | Withheld |  | 460,811   
|William S. Janes   |  | For      |  | 36,479,757
|                   |  | Against  |  | 358,839   
|Steven D. Jorns    |  | For      |  | 36,536,607
|                   |  | Against  |  | 301,989   

Item No. 2

To ratify the appointment of KPMG LLP as
independent auditors for the Company for the fiscal year ending
December 31, 2003.

| |  |         |  |           
| |  | ------- |  | ----------
| |  | For     |  | 36,720,829
| |  | Against |  | 89,395    
| |  | Abstain |  | 28,372    

Item No. 3

To consider ratification of a 200,000 share
increase in the annual limit on individual employee stock awards.

| |  |         |  |           
| |  | ------- |  | ----------
| |  | For     |  | 33,863,103
| |  | Against |  | 2,926,701 
| |  | Abstain |  | 48,792    

Item No. 4

To consider a stockholder proposal, if properly
presented at the annual meeting, to declassify the Board of
Directors and establish annual elections of its members.

The proponent of this proposal did not present at
the annual meeting, and as such the proposal was not considered.
Therefore, there was no vote on the matter at the annual meeting.

27



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##### 



ITEM
6.          EXHIBITS
AND REPORTS ON FORM 8-K

(a.) Exhibits

|        |    |                         |  |                                                                                                                                             
|------- | -- | ----------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                        
|No.     |    | Description of Document
|        |    |                        
|        | 13 |                         |  | Financial Statements of MeriStar Hospitality
    Operating Partnership, L.P. as of and for the three and six
    months ended June 30, 2003.
|        | 31 | .1                      |  | Sarbanes-Oxley Act Section 302 Certification of
    Chief Executive Officer.                                                                
|        | 31 | .2                      |  | Sarbanes-Oxley Act Section 302 Certification of
    Chief Financial Officer.                                                                
|        | 32 | .1                      |  | Sarbanes-Oxley Act Section 906 Certifications of
    Chief Executive Officer and Chief Financial Officer.                                   
|        | 99 | .1                      |  | Consolidating Financial Information of MeriStar
    Hospitality Operating Partnership, L.P.                                                 

(b.) Reports on Form 8-K

On May 8, 2003, we filed a current report on
Form 8-K (Item 9) announcing the financial results for
the first quarter ended March 31, 2003.

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SIGNATURES

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



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



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

| |                                 
| | --------------------------------
| | Paul W.
    Whetsell            
| | Chief
    Executive Officer     
| | (Principal Executive Officer and
| | Duly Authorized Officer)        

Dated: August 12, 2003

29