##### 









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, D.C. 20549


Form 10-Q

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | For the quarterly period ended September 30,
    2003                                       
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission file number 1-14331

Interstate Hotels & Resorts,
Inc.

(Exact name of registrant as specified in its
charter)


|                                                                                    |  |                                  
|----------------------------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                                            |  | 52-2101815                       
|(State of Incorporation)                                                            |  | (IRS Employer Identification No.)
|                                                                                   
|4501 N. Fairfax Drive
    Arlington, VA(Address of Principal Executive
    Offices) |  | 22203(Zip Code)                  

www.ihrco.com

This Form 10-Q can be accessed at no charge
through above website.


(Registrants Telephone Number, Including
Area Code)

(703) 387-3100


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

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Securities Exchange Act of
1934).     Yes þ          No o

The number of shares of Common Stock, par value
$0.01 per share, outstanding at November 3, 2003 was
20,711,068.



---






---



##### 



INTERSTATE HOTELS & RESORTS,
INC.



INDEX


|                              |  |                                                                                                                                                                |  |      |    | 
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                              |  |                                                                                                                                                                |  | Page
|                              |  |                                                                                                                                                                |  |     
|PART I. FINANCIAL INFORMATION
|                             
|Item 1:                       |  | Financial Statements (unaudited)                                                                                                                               |  |      |    | 
|                              |  | Condensed Consolidated Balance Sheets 
    September 30, 2003 and December 31, 2002                                                                           |  |      | 2  | 
|                              |  | Condensed Consolidated Statements of Operations
    and Other Comprehensive Income (Loss)  Three months
    and nine months ended September 30, 2003 and 2002 |  |      | 3  | 
|                              |  | Condensed Consolidated Statements of Cash
    Flows  Nine months ended September 30, 2003 and
    2002                                                        |  |      | 4  | 
|                              |  | Notes to Condensed Consolidated Financial
    Statements                                                                                                       |  |      | 5  | 
|                             
|Item 2:                       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                                                                      |  |      | 15 | 
|                             
|Item 3:                       |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                                                                 |  |      | 29 | 
|                             
|Item 4:                       |  | Controls and Procedures                                                                                                                                        |  |      | 30 | 
|PART II. OTHER INFORMATION   
|                             
|Item 1:                       |  | Legal Proceedings                                                                                                                                              |  |      | 32 | 
|                             
|Item 2:                       |  | Changes in Securities and Use of Proceeds                                                                                                                      |  |      | 32 | 
|                             
|Item 3:                       |  | Defaults Upon Senior Securities                                                                                                                                |  |      | 32 | 
|                             
|Item 4:                       |  | Submission of Matters to a Vote of Security
    Holders                                                                                                        |  |      | 32 | 
|                             
|Item 5:                       |  | Other Information                                                                                                                                              |  |      | 32 | 
|                             
|Item 6:                       |  | Exhibits and Reports on Form 8-K                                                                                                                               |  |      | 33 | 

1



---



##### 



PART I. FINANCIAL INFORMATION

Item
1:     Financial
Statements

INTERSTATE HOTELS & RESORTS,
INC.

CONDENSED CONSOLIDATED BALANCE
SHEETS


(in thousands, except per share
amounts)


|                                                                                        |                                                                                                                                                                           |                                                                    |         |              |         |  |         |         |         | 
|--------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | ------- | ------------ | ------- |  | ------- | ------- | ------- | 
|                                                                                        |                                                                                                                                                                           | September 30,                                                      |         | December 31,
|                                                                                        |                                                                                                                                                                           | 2003                                                               |         | 2002        
|                                                                                        |                                                                                                                                                                           |                                                                    |         |             
|                                                                                        |                                                                                                                                                                           | (unaudited)                                                        |         |             
|ASSETS                                                                                 
|Current assets:                                                                         |                                                                                                                                                                           |                                                                    |         |              |         |  |         |        
|                                                                                        | Cash and cash equivalents                                                                                                                                                 |                                                                    | $       | 20,672       |         |  | $       | 7,054   |        
|                                                                                        | Restricted cash                                                                                                                                                           |                                                                    |         | 3,213        |         |  |         | 1,366   |        
|                                                                                        | Accounts receivable, net of allowance for
    doubtful accounts of $4,891 at September 30, 2003 and
    $4,125 at December 31, 2002.                                      |                                                                    |         | 20,342       |         |  |         | 11,986  |        
|                                                                                        | Insurance premiums receivable                                                                                                                                             |                                                                    |         | 6,463        |         |  |         | 5,638   |        
|                                                                                        | Due from related parties                                                                                                                                                  |                                                                    |         | 9,740        |         |  |         | 12,046  |        
|                                                                                        | Prepaid expenses and other current assets                                                                                                                                 |                                                                    |         | 7,458        |         |  |         | 11,783  |        
|                                                                                        |                                                                                                                                                                           |                                                                    |         |              |         |  |         |        
|                                                                                        |                                                                                                                                                                           | Total current assets                                               |         |              | 67,888  |  |         |         | 49,873  | 
|Marketable securities                                                                   |                                                                                                                                                                           |                                                                    | 1,093   |              |         |  | 2,413   |        
|Property and equipment, net                                                             |                                                                                                                                                                           |                                                                    | 27,476  |              |         |  | 24,894  |        
|Officers and employees notes receivable                                                 |                                                                                                                                                                           |                                                                    | 346     |              |         |  | 373     |        
|Investments in and advances to affiliates                                               |                                                                                                                                                                           |                                                                    | 28,259  |              |         |  | 25,199  |        
|Deferred income taxes                                                                   |                                                                                                                                                                           |                                                                    | 18,566  |              |         |  | 20,174  |        
|Goodwill                                                                                |                                                                                                                                                                           |                                                                    | 92,117  |              |         |  | 91,960  |        
|Intangible assets, net                                                                  |                                                                                                                                                                           |                                                                    | 58,285  |              |         |  | 65,795  |        
|                                                                                        |                                                                                                                                                                           |                                                                    |         |              |         |  |         |        
|                                                                                        |                                                                                                                                                                           | Total assets                                                       |         | $            | 294,030 |  |         | $       | 280,681 | 
|                                                                                        |                                                                                                                                                                           |                                                                    |         |              |         |  |         |        
|LIABILITIES, MINORITY INTERESTS AND
    STOCKHOLDERS EQUITY                           
|Current liabilities:                                                                    |                                                                                                                                                                           |                                                                    |         |              |         |  |         |        
|                                                                                        | Accounts payable and accrued expenses                                                                                                                                     |                                                                    | $       | 75,219       |         |  | $       | 60,363  |        
|                                                                                        | Income taxes payable                                                                                                                                                      |                                                                    |         | 1,356        |         |  |         | 1,000   |        
|                                                                                        | Current portion of long-term debt                                                                                                                                         |                                                                    |         | 1,625        |         |  |         | 1,625   |        
|                                                                                        |                                                                                                                                                                           |                                                                    |         |              |         |  |         |        
|                                                                                        |                                                                                                                                                                           | Total current liabilities                                          |         |              | 78,200  |  |         |         | 62,988  | 
|Deferred compensation                                                                   |                                                                                                                                                                           |                                                                    | 1,093   |              |         |  | 2,413   |        
|Long-term debt, including $56,069 term loan from
    related party at December 31, 2002 |                                                                                                                                                                           |                                                                    | 129,379 |              |         |  | 132,614 |        
|                                                                                        |                                                                                                                                                                           |                                                                    |         |              |         |  |         |        
|                                                                                        |                                                                                                                                                                           | Total liabilities                                                  |         |              | 208,672 |  |         |         | 198,015 | 
|Minority interests                                                                      |                                                                                                                                                                           |                                                                    | 3,468   |              |         |  | 6,242   |        
|Commitments and contingencies                                                           |                                                                                                                                                                           |                                                                    |         |              |         |  |         |        
|Stockholders equity:                                                                   |                                                                                                                                                                           |                                                                    |         |              |         |  |         |        
|                                                                                        | Common stock, $.01 par value; 50,000 shares
    authorized; 20,702 and 20,557 shares issued and outstanding at
    September 30, 2003 and December 31, 2002, respectively |                                                                    |         | 207          |         |  |         | 205     |        
|                                                                                        | Treasury stock                                                                                                                                                            |                                                                    |         | (69          | )       |  |         | (46     | )      
|                                                                                        | Paid-in capital                                                                                                                                                           |                                                                    |         | 139,332      |         |  |         | 138,268 |        
|                                                                                        | Accumulated other comprehensive loss                                                                                                                                      |                                                                    |         | 609          |         |  |         | (249    | )      
|                                                                                        | Accumulated deficit                                                                                                                                                       |                                                                    |         | (58,189      | )       |  |         | (61,754 | )      
|                                                                                        |                                                                                                                                                                           |                                                                    |         |              |         |  |         |        
|                                                                                        |                                                                                                                                                                           | Total stockholders equity                                         |         |              | 81,890  |  |         |         | 76,424  | 
|                                                                                        |                                                                                                                                                                           |                                                                    |         |              |         |  |         |        
|                                                                                        |                                                                                                                                                                           | Total liabilities, minority interests and
    stockholders equity |         | $            | 294,030 |  |         | $       | 280,681 | 
|                                                                                        |                                                                                                                                                                           |                                                                    |         |              |         |  |         |        

The accompanying notes are an integral part of
the consolidated financial statements.

2



---



##### 



INTERSTATE HOTELS & RESORTS,
INC.

CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


AND OTHER COMPREHENSIVE INCOME
(LOSS)


(Unaudited, in thousands, except per share
amounts)


|                                                            |                                                                          |                    |         |                   |   |      |         |         |   |   |         |         |  |   |         |         |  
|----------------------------------------------------------- | ------------------------------------------------------------------------ | ------------------ | ------- | ----------------- | - | ---- | ------- | ------- | - | - | ------- | ------- |  | - | ------- | ------- | -
|                                                            |                                                                          |                    |         |                  
|                                                            |                                                                          | Three months ended |         | Nine months ended
|                                                            |                                                                          | September 30,      |         | September 30,    
|                                                            |                                                                          |                    |         |                  
|                                                            |                                                                          | 2003               |         | 2002              |   | 2003 |         | 2002   
|                                                            |                                                                          |                    |         |                   |   |      |         |        
|Revenue:                                                    |                                                                          |                    |         |                   |   |      |         |         |   |   |         |         |  |   |         |        
|                                                            | Lodging revenues                                                         |                    | $       | 929               |   |      | $       | 832     |   |   | $       | 2,697   |  |   | $       | 2,287   |  
|                                                            | Management fees                                                          |                    |         | 8,610             |   |      |         | 6,020   |   |   |         | 22,425  |  |   |         | 11,356  |  
|                                                            | Management fees-related parties                                          |                    |         | 7,152             |   |      |         | 5,048   |   |   |         | 22,793  |  |   |         | 6,713   |  
|                                                            | Corporate housing                                                        |                    |         | 29,245            |   |      |         | 19,779  |   |   |         | 83,456  |  |   |         | 19,779  |  
|                                                            | Other revenue                                                            |                    |         | 3,778             |   |      |         | 4,620   |   |   |         | 10,607  |  |   |         | 16,026  |  
|                                                            |                                                                          |                    |         |                   |   |      |         |         |   |   |         |         |  |   |         |        
|                                                            |                                                                          |                    | 49,714  |                   |   |      | 36,299  |         |   |   | 141,978 |         |  |   | 56,161  |        
|                                                            | Other revenue from managed properties                                    |                    |         | 217,654           |   |      |         | 163,347 |   |   |         | 642,256 |  |   |         | 297,662 |  
|                                                            |                                                                          |                    |         |                   |   |      |         |         |   |   |         |         |  |   |         |        
|Total revenue                                               |                                                                          |                    | 267,368 |                   |   |      | 199,646 |         |   |   | 784,234 |         |  |   | 353,823 |        
|Operating expenses by department:                           |                                                                          |                    |         |                   |   |      |         |         |   |   |         |         |  |   |         |        
|                                                            | Lodging expenses                                                         |                    |         | 585               |   |      |         | 575     |   |   |         | 1,869   |  |   |         | 1,606   |  
|                                                            | Corporate housing                                                        |                    |         | 24,171            |   |      |         | 15,327  |   |   |         | 69,804  |  |   |         | 15,327  |  
|Undistributed operating expenses:                           |                                                                          |                    |         |                   |   |      |         |         |   |   |         |         |  |   |         |        
|                                                            | Administrative and general                                               |                    |         | 19,082            |   |      |         | 14,803  |   |   |         | 55,117  |  |   |         | 30,010  |  
|                                                            | Depreciation and amortization                                            |                    |         | 2,646             |   |      |         | 4,024   |   |   |         | 10,994  |  |   |         | 9,133   |  
|                                                            | Merger and integration costs                                             |                    |         | 874               |   |      |         | 3,430   |   |   |         | 3,344   |  |   |         | 5,653   |  
|                                                            | Restructuring expenses                                                   |                    |         |                  |   |      |         | 12,820  |   |   |         |        |  |   |         | 12,820  |  
|                                                            | Tender offer costs                                                       |                    |         |                  |   |      |         |        |   |   |         |        |  |   |         | 1,000   |  
|                                                            | Asset impairment and write offs                                          |                    |         | 312               |   |      |         |        |   |   |         | 312     |  |   |         |        |  
|                                                            |                                                                          |                    |         |                   |   |      |         |         |   |   |         |         |  |   |         |        
|                                                            |                                                                          |                    | 47,670  |                   |   |      | 50,979  |         |   |   | 141,440 |         |  |   | 75,549  |        
|                                                            | Other expenses from managed properties                                   |                    |         | 217,654           |   |      |         | 163,347 |   |   |         | 642,256 |  |   |         | 297,662 |  
|                                                            |                                                                          |                    |         |                   |   |      |         |         |   |   |         |         |  |   |         |        
|Total operating expenses                                    |                                                                          |                    | 265,324 |                   |   |      | 214,326 |         |   |   | 783,696 |         |  |   | 373,211 |        
|                                                            |                                                                          |                    |         |                   |   |      |         |         |   |   |         |         |  |   |         |        
|Net operating income (loss)                                 |                                                                          |                    | 2,044   |                   |   |      | (14,680 | )       |   |   | 538     |         |  |   | (19,388 | )      
|Interest income                                             |                                                                          |                    | (1,270  | )                 |   |      | (277    | )       |   |   | (2,618  | )       |  |   | (702    | )      
|Interest expense                                            |                                                                          |                    | 3,629   |                   |   |      | 1,839   |         |   |   | 9,805   |         |  |   | 4,176   |        
|Equity in losses of affiliates                              |                                                                          |                    | 292     |                   |   |      | 1,074   |         |   |   | 858     |         |  |   | 1,670   |        
|Conversion incentive payment-convertible notes              |                                                                          |                    |        |                   |   |      |        |         |   |   |        |         |  |   | 7,307   |        
|Gain on refinancing term loan from related party            |                                                                          |                    |        |                   |   |      |        |         |   |   | (13,629 | )       |  |   |        |        
|                                                            |                                                                          |                    |         |                   |   |      |         |         |   |   |         |         |  |   |         |        
|Income (loss) before minority interest and
    income taxes |                                                                          |                    | (607    | )                 |   |      | (17,316 | )       |   |   | 6,122   |         |  |   | (31,839 | )      
|Minority interest expense                                   |                                                                          |                    | 23      |                   |   |      | 243     |         |   |   | 184     |         |  |   | 295     |        
|Income tax expense (benefit)                                |                                                                          |                    | (252    | )                 |   |      | 1,818   |         |   |   | 2,375   |         |  |   | 641     |        
|                                                            |                                                                          |                    |         |                   |   |      |         |         |   |   |         |         |  |   |         |        
|Net income (loss)                                           |                                                                          |                    | (378    | )                 |   |      | (19,377 | )       |   |   | 3,563   |         |  |   | (32,775 | )      
|Mandatorily redeemable preferred stock:                     |                                                                          |                    |         |                   |   |      |         |         |   |   |         |         |  |   |         |        
|                                                            | Dividends                                                                |                    |         |                  |   |      |         |        |   |   |         |        |  |   |         | 307     |  
|                                                            | Accretion                                                                |                    |         |                  |   |      |         |        |   |   |         |        |  |   |         | 356     |  
|                                                            | Conversion incentive payment-preferred stock                             |                    |         |                  |   |      |         |        |   |   |         |        |  |   |         | 1,943   |  
|                                                            |                                                                          |                    |         |                   |   |      |         |         |   |   |         |         |  |   |         |        
|Net income (loss) available to common
    shareholders      |                                                                          |                    | (378    | )                 |   |      | (19,377 | )       |   |   | 3,563   |         |  |   | (35,381 | )      
|Other comprehensive income (loss), net of tax:              |                                                                          |                    |         |                   |   |      |         |         |   |   |         |         |  |   |         |        
|                                                            | Foreign currency translation gain (loss)                                 |                    |         | (70               | ) |      |         | 33      |   |   |         | 164     |  |   |         | 33      |  
|                                                            | Unrealized gain on investments and other                                 |                    |         | 396               |   |      |         | 1       |   |   |         | 350     |  |   |         | 1       |  
|                                                            |                                                                          |                    |         |                   |   |      |         |         |   |   |         |         |  |   |         |        
|Comprehensive income (loss)                                 |                                                                          | $                  | (52     | )                 |   | $    | (19,343 | )       |   | $ | 4,077   |         |  | $ | (35,347 | )      
|                                                            |                                                                          |                    |         |                   |   |      |         |         |   |   |         |         |  |   |         |        
|Weighted average number of:                                 |                                                                          |                    |         |                   |   |      |         |         |   |   |         |         |  |   |         |        
|                                                            | Basic shares outstanding                                                 |                    |         | 20,649            |   |      |         | 17,270  |   |   |         | 20,612  |  |   |         | 11,277  |  
|                                                            | Diluted shares outstanding                                               |                    |         | 20,649            |   |      |         | 17,270  |   |   |         | 20,891  |  |   |         | 11,277  |  
|                                                            | Net income (loss) available to common
    shareholders per basic share   |                    | $       | (0.02             | ) |      | $       | (1.12   | ) |   | $       | 0.17    |  |   | $       | (3.14   | )
|                                                            |                                                                          |                    |         |                   |   |      |         |         |   |   |         |         |  |   |         |        
|                                                            | Net income (loss) available to common
    shareholders per diluted share |                    | $       | (0.02             | ) |      | $       | (1.12   | ) |   | $       | 0.17    |  |   | $       | (3.14   | )
|                                                            |                                                                          |                    |         |                   |   |      |         |         |   |   |         |         |  |   |         |        

The accompanying notes are an integral part of
the consolidated financial statements.

3



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##### 



INTERSTATE HOTELS & RESORTS,
INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


(Unaudited, in thousands)


|                                                         |                                                                                                            |                                           |         |               |        |   |         |         |        |  
|-------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | ----------------------------------------- | ------- | ------------- | ------ | - | ------- | ------- | ------ | -
|                                                         |                                                                                                            |                                          
|                                                         |                                                                                                            | Nine months ended                        
|                                                         |                                                                                                            | September 30,                            
|                                                         |                                                                                                            |                                          
|                                                         |                                                                                                            | 2003                                      |         | 2002         
|                                                         |                                                                                                            |                                           |         |              
|                                                         |                                                                                                            |                                           |         | (as restated)
|Cash flows from operating activities:                    |                                                                                                            |                                           |         |               |        |   |         |        
|                                                         | Net income (loss)                                                                                          |                                           | $       | 3,563         |        |   | $       | (32,775 | )     
|                                                         | Adjustments to reconcile net income
    (loss) to net cash provided by (used in) operating
    activities: |                                           |         |               |        |   |         |         |       
|                                                         | Depreciation and amortization                                                                              |                                           |         | 10,994        |        |   |         | 9,133   |       
|                                                         | Gain on refinancing                                                                                        |                                           |         | (13,629       | )      |   |         |        |       
|                                                         | Equity in loss of affiliates                                                                               |                                           |         | 858           |        |   |         | 1,670   |       
|                                                         | Minority interest                                                                                          |                                           |         | 133           |        |   |         | 295     |       
|                                                         | Deferred income taxes                                                                                      |                                           |         | 1,608         |        |   |         | 2,119   |       
|                                                         | Write-off of assets                                                                                        |                                           |         | 3,755         |        |   |         | 4,331   |       
|                                                         | Amortization of mandatorily redeemable preferred
    stock                                                 |                                           |         |              |        |   |         | 1,375   |       
|                                                         | Other                                                                                                      |                                           |         | 448           |        |   |         | 1,830   |       
|                                                         | Changes in assets and liabilities:                                                                         |                                           |         |               |        |   |         |         |       
|                                                         |                                                                                                            | Accounts receivable, net                  |         |               | (7,089 | ) |         |         | (1,530 | )
|                                                         |                                                                                                            | Prepaid expenses and other current assets |         |               | 2,825  |   |         |         | 1,137  |  
|                                                         |                                                                                                            | Accounts payable and accrued expenses     |         |               | 14,658 |   |         |         | (3,126 | )
|                                                         |                                                                                                            |                                           |         |               |        |   |         |        
|Net cash provided by (used in) operating
    activities  |                                                                                                            |                                           | 18,124  |               |        |   | (15,541 | )      
|                                                         |                                                                                                            |                                           |         |               |        |   |         |        
|Cash flows from investing activities:                    |                                                                                                            |                                           |         |               |        |   |         |        
|                                                         | Change in restricted cash                                                                                  |                                           |         | (1,847        | )      |   |         | 299     |       
|                                                         | Purchases of property and equipment, net                                                                   |                                           |         | (7,726        | )      |   |         | (528    | )     
|                                                         | Purchases of intangible assets                                                                             |                                           |         | (707          | )      |   |         | (483    | )     
|                                                         | Purchases of marketable securities                                                                         |                                           |         |              |        |   |         | (2,080  | )     
|                                                         | Proceeds from sale of marketable securities                                                                |                                           |         |              |        |   |         | 1,911   |       
|                                                         | Net cash invested for equity investments in hotel
    real estate                                          |                                           |         | (1,817        | )      |   |         | (1,360  | )     
|                                                         | Change in officers and employees notes
    receivable, net                                                 |                                           |         | 27            |        |   |         | (145    | )     
|                                                         | Change in advances to affiliates, net                                                                      |                                           |         | (1,613        | )      |   |         | 217     |       
|                                                         | Cash acquired in merger transaction                                                                        |                                           |         |              |        |   |         | 1,766   |       
|                                                         | Merger-related acquisition costs                                                                           |                                           |         |              |        |   |         | (3,486  | )     
|                                                         | Deposits and other                                                                                         |                                           |         |              |        |   |         | 110     |       
|                                                         |                                                                                                            |                                           |         |               |        |   |         |        
|Net cash used in investing activities                    |                                                                                                            |                                           | (13,683 | )             |        |   | (3,779  | )      
|                                                         |                                                                                                            |                                           |         |               |        |   |         |        
|Cash flows from financing activities:                    |                                                                                                            |                                           |         |               |        |   |         |        
|                                                         | Borrowings under subordinated term loan                                                                    |                                           |         | 40,000        |        |   |         |        |       
|                                                         | Borrowings under other long-term debt                                                                      |                                           |         | 52,500        |        |   |         | 22,000  |       
|                                                         | Repayment of term loan                                                                                     |                                           |         | (42,052       | )      |   |         |        |       
|                                                         | Repayments on other long-term dent                                                                         |                                           |         | (39,666       | )      |   |         | (26,811 | )     
|                                                         | Proceeds from issuance of common stock                                                                     |                                           |         | 177           |        |   |         | 320     |       
|                                                         | Dividends paid on mandatorily redeemable
    preferred stock                                               |                                           |         |              |        |   |         | (307    | )     
|                                                         | Financing fees paid                                                                                        |                                           |         | (1,918        | )      |   |         | (42     | )     
|                                                         | Common stock repurchased                                                                                   |                                           |         | (23           | )      |   |         |        |       
|                                                         | Conversion incentive payment-preferred stock                                                               |                                           |         |              |        |   |         | (1,943  | )     
|                                                         | Other                                                                                                      |                                           |         |              |        |   |         |        |       
|                                                         |                                                                                                            |                                           |         |               |        |   |         |        
|Net cash provided by (used in) financing
    activities  |                                                                                                            |                                           | 9,018   |               |        |   | (6,783  | )      
|                                                         |                                                                                                            |                                           |         |               |        |   |         |        
|Effect of exchange rate on cash                          |                                                                                                            |                                           | 159     |               |        |   |        |        
|                                                         |                                                                                                            |                                           |         |               |        |   |         |        
|Net increase (decrease) in cash and cash
    equivalents |                                                                                                            |                                           | 13,618  |               |        |   | (26,103 | )      
|Cash and cash equivalents at beginning of period         |                                                                                                            |                                           | 7,054   |               |        |   | 39,040  |        
|                                                         |                                                                                                            |                                           |         |               |        |   |         |        
|Cash and cash equivalents at end of period               |                                                                                                            | $                                         | 20,672  |               |        | $ | 12,937  |        
|                                                         |                                                                                                            |                                           |         |               |        |   |         |        

The accompanying notes are an integral part of
the consolidated financial statements.

4



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##### 



INTERSTATE HOTELS & RESORTS,
INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


(Unaudited, dollars in thousands, except per
share amounts)


1.     ORGANIZATION

Formation of Interstate Hotels &
Resorts

On July 31, 2002, MeriStar Hotels &
Resorts, or MeriStar, and Interstate Hotels Corporation, or
Interstate, merged, and MeriStar changed its name to
Interstate Hotels & Resorts, Inc. The
transaction was a stock-for-stock merger of Interstate into
MeriStar in which Interstate stockholders received 4.6 shares of
MeriStar common stock for each share of Interstate stock
outstanding. Holders of MeriStar common stock and partnership
units in its operating partnership continued to hold their stock
and units following the merger. In connection with the merger,
the holders of Interstates convertible debt and preferred
stock converted those instruments into shares of MeriStar common
stock. Immediately following the merger, we effected a
one-for-five reverse stock split.

In accordance with accounting principles
generally accepted in the United States of America, we treated
the merger as a purchase for financial reporting purposes. In
accordance with the provisions of Statement of Financial
Accounting Standards No. 141, Business
Combinations, Interstate was considered the acquiring
enterprise for financial reporting purposes. Interstate
established a new accounting basis for MeriStars assets
and liabilities based upon their fair values as of July 31,
2002, the effective date of the merger. We accounted for the
merger as a reverse acquisition, with Interstate as the
accounting acquiror and MeriStar as the surviving company for
legal purposes.

The consolidated interim financial statements for
the nine-month period ended September 30, 2002 reflect the
historical results of operations of Interstate for the period
from January 1, 2002 through July 31, 2002. After the
merger on July 31, 2002, the financial statements include
the operating results of the combined entity, Interstate Hotels
& Resorts, Inc.

Business Summary

We are the largest U.S. hotel management company
not affiliated with a hotel brand, measured by number of rooms
under management. In our hotel management business, we generate
revenues from fees we receive for managing a portfolio of
upscale, full-service and premium limited-service hospitality
properties. We own one hotel property and hold non-controlling
joint venture equity interests in 28 of our managed properties.
We also generate revenue from providing ancillary services in
the hotel, resort, conference center and golf markets. The
ancillary services we provide include insurance and risk
management services, purchasing and project management services,
information technology and telecommunications services and
centralized accounting services. Through our BridgeStreet
corporate housing division, we also generate revenues from the
leasing of corporate long-term stay apartments.

As of September 30, 2003, we managed 329
hotel properties, with 70,300 rooms in 44 states, the District
of Columbia, Canada and Russia. As of September 30, 2003,
we had 3,273 apartments under lease or management through our
BridgeStreet corporate housing division in the United States,
Canada, France and the United Kingdom.

Our subsidiary operating partnership indirectly
holds substantially all of our assets. We are the sole general
partner of that operating partnership. We and certain
independent third parties are limited partners of the
partnership. The interests of those third parties are reflected
in minority interests on our balance sheet. The partnership
agreement gives the general partners full control over the
business and affairs of the partnership.

We manage all of the properties owned by MeriStar
Hospitality Corporation, a real estate investment trust, or
REIT. As of September 30, 2003, MeriStar Hospitality owned
101 hotels. Our relationship with MeriStar Hospitality is
governed in part by an intercompany agreement. That agreement
provides each of us the right to participate in certain
transactions entered into by the other company. The intercompany

5



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##### 



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


agreement provides MeriStar Hospitality with the
right of first refusal with respect to some of our hotel real
estate opportunities and it also provides us with a right of
first refusal with respect to some of MeriStar
Hospitalitys hotel management opportunities, excluding
hotels that MeriStar Hospitality elects to have managed by a
hotel brand. Historically, we have had close operating,
management and governance relationships with MeriStar
Hospitality. We manage all of MeriStar Hospitalitys hotel
properties under long-term management contracts and have, in the
past, shared several key management personnel and board members
with MeriStar Hospitality. Due to the merger between MeriStar
and Interstate and our resulting increased scale, we and
MeriStar Hospitality have split the management teams of the two
companies, although Paul W. Whetsell continues as the Chairman
of both companies and is the Chief Executive Officer of MeriStar
Hospitality.

2.     SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

General

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

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

Stock-Based Compensation

In December 2002, the Financial Accounting
Standards Board, or FASB, issued Statement of Financial
Accounting Standards (SFAS) No. 148, Accounting
for Stock-Based Compensation-Transition and Disclosure, to
provide alternative methods of transition for a voluntary change
to the expense recognition provisions of the fair value based
method of accounting for stock-based employee compensation.
Effective January 1, 2003, we have elected to adopt the
fair-value method of accounting for stock options under SFAS
No. 148, using the prospective method. We have recorded in
our statement of operations the expense related to stock options
issued after January 1, 2003.

Through December 31, 2002, we had followed
the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation.
Accordingly, when we initially issued options, we accounted for
them under the provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for
Stock Issued to Employees. We accounted for our repriced
options under variable plan accounting in accordance with FASB
Interpretation No. 44, Accounting for Certain
Transactions Including Stock Compensation.

Pro forma information regarding net income and
earnings per share has been determined as if we had accounted
for all of our employee stock options using the fair value
method. Had compensation cost for all stock options been
determined based on the fair value at the grant date for awards
under our plans, our

6



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##### 



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


operating results and per share amounts would
have been adjusted to the pro forma amounts indicated as follows:

|                                                                    |                                                                                                                     |                      |      |                   |       |      |         |      |       |   |       |      |      |   |         |     |       |  
|------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | -------------------- | ---- | ----------------- | ----- | ---- | ------- | ---- | ----- | - | ----- | ---- | ---- | - | ------- | --- | ----- | -
|                                                                    |                                                                                                                     |                      |      |                  
|                                                                    |                                                                                                                     | Three months ended   |      | Nine months ended
|                                                                    |                                                                                                                     | September 30,        |      | September 30,    
|                                                                    |                                                                                                                     |                      |      |                  
|                                                                    |                                                                                                                     | 2003                 |      | 2002              |       | 2003 |         | 2002
|                                                                    |                                                                                                                     |                      |      |                   |       |      |         |     
|Net income (loss) available to common
    shareholders, as reported |                                                                                                                     | $                    | (378 | )                 |       | $    | (19,377 | )    |       | $ | 3,563 |      |      | $ | (35,381 | )  
|                                                                    | Add: Stock-based employee compensation expense
    included in reported net income                                  |                      |      | 197               |       |      |         |     |       |   |       | 228  |      |   |         |    |      
|                                                                    | Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards |                      |      | (189              | )     |      |         | (18  | )     |   |       | (581 | )    |   |         | (33 | )    
|                                                                    |                                                                                                                     |                      |      |                   |       |      |         |      |       |   |       |      |      |   |         |    
|Net income (loss) available to common
    shareholders, pro forma   |                                                                                                                     | $                    | (370 | )                 |       | $    | (19,395 | )    |       | $ | 3,210 |      |      | $ | (35,414 | )  
|                                                                    |                                                                                                                     |                      |      |                   |       |      |         |      |       |   |       |      |      |   |         |    
|Earnings per share:                                                 |                                                                                                                     |                      |      |                   |       |      |         |      |       |   |       |      |      |   |         |    
|                                                                    |                                                                                                                     | Basic, as reported   |      | $                 | (0.02 | )    |         | $    | (1.12 | ) |       | $    | 0.17 |   |         | $   | (3.14 | )
|                                                                    |                                                                                                                     | Basic, pro forma     |      | $                 | (0.02 | )    |         | $    | (1.12 | ) |       | $    | 0.16 |   |         | $   | (3.14 | )
|                                                                    |                                                                                                                     | Diluted, as reported |      | $                 | (0.02 | )    |         | $    | (1.12 | ) |       | $    | 0.17 |   |         | $   | (3.14 | )
|                                                                    |                                                                                                                     | Diluted, pro forma   |      | $                 | (0.02 | )    |         | $    | (1.12 | ) |       | $    | 0.15 |   |         | $   | (3.14 | )

The effects of applying Statement SFAS
No. 123 for disclosing compensation costs may not be
representative of the effects on reported net income (loss)
available to common shareholders and earnings (loss) per
share for future years.

Recent Accounting Pronouncements

In April 2002, the FASB issued SFAS No. 145
Rescission of FASB Statements No. 4, 44 and 64, Amendment
of SFAS No. 13, Technical Corrections. This statement
rescinds FASB Statement No. 4, Reporting Gains and
Losses from Extinguishment of Debt, and also amends other
existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability
under changed conditions. We adopted this amendment during 2002.
In accordance with the guidelines, we accounted for our gain on
debt refinancing in 2003 in income (loss) before minority
interests and income taxes, rather than as an extraordinary item.

FASB Interpretation No. 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,
was issued in November 2002. FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a
guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of FIN 45 are applicable on a
prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantors
fiscal year-end. The disclosure requirements in FIN 45 are
effective for financial statements of interim or annual periods
ending after December 15, 2002. The adoption of FIN 45 did
not have a material impact on our financial position or results
of operations.

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities, an interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial
Statements. FIN 46 explains how to identify variable
interest entities and how an enterprise assesses its interests
in a variable interest entity to decide whether to consolidate
the entity. This Interpretation requires existing unconsolidated
variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks
among parties involved. FIN 46 is effective immediately for
variable interest entities

7



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##### 



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an
interest after that date. The Interpretation applies in the
first fiscal year or interim period after December 15,
2003, to variable interest entities in which an enterprise holds
a variable interest that it acquired before February 1,
2003. We do not expect that the adoption of FIN 46 will impact
our financial position or results of operations although we
continue to evaluate our joint ventures and management
relationships to determine the applicability of this standard.

In April 2003, the FASB issued SFAS No. 149
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. This Statement amends and clarifies
financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other
contracts and for hedging activities under FASB Statement
No. 133, Accounting for Derivative Instruments and
Hedging Activities. The changes in this Statement improve
financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. This Statement is
effective for contracts entered into or modified after
June 30, 2003, with certain exceptions, and for hedging
relationships designated after June 30, 2003. If we enter
into contracts of this nature after June 30, 2003, we will
comply with SFAS No. 149.

In May 2003, the FASB issued SFAS No. 150
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify
a financial instrument that is within its scope as a liability
(or an asset in some circumstances). Many of those instruments
were previously classified as equity. This Statement is
effective for financial instruments issued or modified after
May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003.

3.     EARNINGS PER
SHARE

We calculate our basic earnings per common share
by dividing net income (loss) available to common stockholders
by the weighted average number of shares of common stock
outstanding. Our diluted earnings per common share assumes the
issuance of common stock for all potentially dilutive stock
equivalents outstanding.

On July 31, 2002, in connection with the
merger of Interstate and MeriStar, the Interstate shareholders
received 4.6 shares of common stock for each share of Interstate
stock outstanding. MeriStar stockholders continued to hold their
existing stock. On August 1, 2002, we effected a
one-for-five reverse stock split of all outstanding shares of
common stock. The weighted average number of common shares
outstanding used in the table below is presented assuming the
conversion of Interstate stock and the reverse stock split
occurred on January 1, 2002.

The details of basic and diluted earnings
(loss) per common share for the three and nine month
periods ended September 30, 2003 and 2002 were as follows:

|                                                                        |  |                    |        |                   |  |      |         |      |  |   |        |  |  |   |         |  
|----------------------------------------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------- | ---- |  | - | ------ |  |  | - | ------- | -
|                                                                        |  |                    |        |                  
|                                                                        |  | Three months ended |        | Nine months ended
|                                                                        |  | September 30,      |        | September 30,    
|                                                                        |  |                    |        |                  
|                                                                        |  | 2003               |        | 2002              |  | 2003 |         | 2002
|                                                                        |  |                    |        |                   |  |      |         |     
|Net income (loss) available to common
    stockholders                  |  | $                  | (378   | )                 |  | $    | (19,377 | )    |  | $ | 3,563  |  |  | $ | (35,381 | )
|Weighted average number of common shares
    outstanding (in thousands) |  |                    | 20,649 |                   |  |      | 17,270  |      |  |   | 20,612 |  |  |   | 11,277  |  
|Basic earnings (loss) per share                                         |  | $                  | (0.02  | )                 |  | $    | (1.12   | )    |  | $ | 0.17   |  |  | $ | (3.14   | )
|                                                                        |  |                    |        |                   |  |      |         |      |  |   |        |  |  |   |         |  
|Weighted number of diluted shares outstanding (in
    thousands)        |  |                    | 20,649 |                   |  |      | 17,270  |      |  |   | 20,891 |  |  |   | 11,277  |  
|Diluted earnings (loss) per share                                       |  | $                  | (0.02  | )                 |  | $    | (1.12   | )    |  | $ | 0.17   |  |  | $ | (3.14   | )
|                                                                        |  |                    |        |                   |  |      |         |      |  |   |        |  |  |   |         |  

8



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##### 



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


4.     INTANGIBLE
ASSETS

Intangible assets consist of the following:

|                              |  |               |        |              |  |   |         |  
|----------------------------- |  | ------------- | ------ | ------------ |  | - | ------- | -
|                              |  | September 30, |        | December 31,
|                              |  | 2003          |        | 2002        
|                              |  |               |        |             
|Management contracts          |  | $             | 58,676 |              |  | $ | 84,163  |  
|Franchise fees                |  |               | 1,945  |              |  |   | 1,945   |  
|Deferred financing fees       |  |               | 3,493  |              |  |   | 2,882   |  
|Other                         |  |               | 400    |              |  |   | 586     |  
|                              |  |               |        |              |  |   |         |  
|                              |  |               | 64,514 |              |  |   | 89,576  |  
|Less accumulated amortization |  |               | (6,229 | )            |  |   | (23,781 | )
|                              |  |               |        |              |  |   |         |  
|                              |  | $             | 58,285 |              |  | $ | 65,795  |  
|                              |  |               |        |              |  |   |         |  

We amortize the value of the above-listed
intangible assets over their useful lives, which generally equal
the terms of the relevant management, franchise, or financing
agreements.

During the third quarter of 2003, MeriStar
Hospitality disposed of four hotels, one of which we are
continuing to manage for the new owner. In connection with the
asset dispositions, we expect to receive approximately $2,323 in
termination payments. We wrote off $1,494 of unamortized
management contract costs associated with the four disposed
hotels. This amount is included in administrative and general
expense in our statement of operations.

In addition, during the third quarter:



| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | we wrote off $172 relating to unamortized
    management contract costs for other properties terminated during
    the quarter;
|
| |  | we wrote off $265 relating to costs associated
    with management contracts that were not completed; and                      
|
| |  | we recorded $378 of new management contract costs.                                                                             

We incurred amortization expense of $1,153 and
$3,017 on our intangible assets for the three months ended
September 30, 2003 and 2002, respectively. We incurred
amortization expense of $6,965 and $7,941 on these assets for
the nine months ended September 30, 2003 and 2002,
respectively.

Our estimated amortization expense for the next
five years is as follows:

|                              |  |   |       | 
|----------------------------- |  | - | ----- | 
|Year ending December 31, 2003 |  | $ | 7,911 | 
|Year ending December 31, 2004 |  |   | 4,122 | 
|Year ending December 31, 2005 |  |   | 3,787 | 
|Year ending December 31, 2006 |  |   | 3,494 | 
|Year ending December 31, 2007 |  |   | 2,789 | 

5.     GOODWILL

The carrying amount of goodwill by reportable
segment as of September 30, 2003 is as follows:

|                  |  |   |        | 
|----------------- |  | - | ------ | 
|Hotel Management  |  | $ | 82,916 | 
|Corporate Housing |  |   | 9,201  | 
|                  |  |   |        | 
|Total             |  | $ | 92,117 | 
|                  |  |   |        | 

Acquisition accounting related to the
MeriStar-Interstate merger has been completed.

9



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##### 



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


6.     INVESTMENTS
AND ADVANCES TO AFFILIATES

We periodically make equity investments in
entities that own hotel properties we manage. We evaluate these
investment opportunities based on financial and strategic
factors such as the estimated potential value of the underlying
hotel properties and the management fee revenues we can obtain
from the investment. In May 2003, we formed a joint venture with
Northridge Capital, a privately owned real estate investment
company, to acquire up to $400,000 of hotel assets. The joint
venture will be funded with approximately 50% equity and the
balance in secured debt. Northridge Capital will contribute up
to $45,000 in equity, we will contribute up to $5,000, and we
will seek up to an additional $200,000 of debt financing and
$150,000 of equity financing from outside investors. In August
2003, we contributed $1,130 as our initial investment in this
joint venture, and the joint venture acquired its first hotel,
the Sheraton Smithtown, located in Long Island, New York. This
amount is included in Investments and Advances to Affiliates on
our consolidated balance sheet as of September 30, 2003.

Also in August 2003, we contributed $600 as a
preferred equity investment to an existing partnership that owns
and operates the Sawgrass Marriott Resort and Beach Club in
Ponte Vedra Beach, Florida. This amount is included in
Investments and Advances to Affiliates on our consolidated
balance sheet as of September 30, 2003.

7.     LONG-TERM
DEBT

|                               |                      |               |         |              |   |   |         |        |  
|------------------------------ | -------------------- | ------------- | ------- | ------------ | - | - | ------- | ------ | -
|                               |                      | September 30, |         | December 31,
|                               |                      | 2003          |         | 2002        
|                               |                      |               |         |             
|Senior credit agreement        |                      | $             | 87,281  |              |   | $ | 74,000  |       
|Promissory note                |                      |               | 3,723   |              |   |   | 4,170   |       
|MeriStar Hospitality term loan |                      |               |        |              |   |   | 56,069  |       
|Subordinated term loan         |                      |               | 40,000  |              |   |   |        |       
|                               |                      |               |         |              |   |   |         |       
|                               |                      |               | 131,004 |              |   |   | 134,239 |       
|                               | Less current portion |               |         | (1,625       | ) |   |         | (1,625 | )
|                               |                      |               |         |              |   |   |         |       
|                               |                      | $             | 129,379 |              |   | $ | 132,614 |       
|                               |                      |               |         |              |   |   |         |       

Senior credit agreement Effective July 31, 2002, in
connection with the closing of the MeriStar-Interstate merger,
we entered into a $113,000 senior credit agreement with a group
of banks. The senior credit agreement consists of a $65,000 term
loan and a $48,000 revolving credit facility. The term loan is
payable in quarterly installments of $406 beginning
January 1, 2003, with the balance due on July 28,
2005. The revolving credit facility is due on July 28, 2005
(with a one-year extension at our option). The interest rate on
the senior credit agreement is LIBOR plus 3.00% to 4.50%,
depending upon our meeting certain financial tests. The senior
credit facility contains certain covenants, including
maintenance of financial ratios at the end of each quarter,
compliance reporting requirements and other customary
restrictions. The senior credit agreement also includes pledges
of collateral, including the following:



| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Ownership interests of all existing subsidiaries
    and unconsolidated entities as well as any future material
    subsidiary or unconsolidated entity;
|
| |  | Owned hospitality properties; and                                                                                                                       
|
| |  | Other collateral that is not previously
    prohibited from being pledged by any of our existing
    contracts/agreements.                              

At September 30, 2003, borrowings under the
senior credit agreement bore interest at a rate of 5.17% per
annum. We incurred $1,107 and $3,377 of interest expense on the
senior credit agreement for the three and nine months ended
September 30, 2003, respectively. We incurred $798 of
interest expense for the three and nine months ended
September 30, 2002.

10



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##### 



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Promissory note In March 2001, we entered into a
promissory note in the amount of $4,170 with FelCor Lodging
Trust Incorporated (FelCor) to fund the acquisition
of a 50% non-controlling equity interest in two partnerships
that own eight mid-scale hotels. Interest on the note is payable
monthly at the rate of 12% per annum and the outstanding
principal balance is due and payable on December 31, 2010.
For the three months ended September 30, 2003 and 2002, we
incurred $118 and $125 of interest expense on the promissory
note, respectively. For the nine months ended September 30,
2003 and 2002, we incurred $368 and $375 of interest expense on
the promissory note, respectively.

In June and August 2003, we made principal
payments of $150 and $297, respectively, on the promissory note.
As of September 30, 2003, the remaining balance on the
promissory note is $3,723. In connection with the June payment,
our ownership interest in the partnership was reduced from 50%
to 49.5%.

MeriStar Hospitality term loan In connection with the closing of the
merger, effective July 31, 2002, we converted a $75,000
unsecured credit facility between MeriStar and MeriStar
Hospitality to a $56,069 term loan due July 31, 2007. The
term loan was subordinated to borrowings under our senior credit
agreement. The MeriStar Hospitality term loan contained certain
covenants, including maintenance of financial ratios at the end
of each quarter, compliance reporting requirements and other
customary restrictions. In January 2003, we completed a
negotiated discounted repayment of the MeriStar Hospitality term
loan for $42,052. We financed part of the repayment with
proceeds from a new $40,000 subordinated term loan and funded
the remainder of the repayment out of available cash. The
refinancing resulted in a gain of $13,629. That gain is included
in our statement of operations for the nine months ended
September 30, 2003.

Subordinated term
loan In January 2003, in
connection with the discounted repayment of the MeriStar
Hospitality term loan, we entered into a $40,000 subordinated
term loan that carries a variable interest rate based on the
30-day LIBOR plus a spread of 8.50%. The subordinated term loan
matures on January 31, 2006, but if the revolving portion
of our senior credit facility is extended for an additional
year, the maturity of the subordinated term loan will also be
automatically extended by one year to January 31, 2007.
This term loan is subordinated to borrowings under the senior
credit agreement and contains certain covenants, including
maintenance of financial ratios at the end of each quarter,
compliance reporting requirements and other customary
restrictions. At September 30, 2003, borrowings under the
subordinated term loan bore interest at a rate of 9.63% per
annum. We incurred $984 and $2,871 of interest expense on the
subordinated term loan for the three and nine months ended
September 30, 2003.

Fair
Value Approximately 97% of
our outstanding long-term debt is based on LIBOR rates plus an
appropriate spread. We have determined that the fair value of
our outstanding borrowings on our senior credit facility,
promissory note and subordinated term loan approximate their
carrying value at September 30, 2003.

8.     SEGMENT
INFORMATION

We are organized into two operating divisions:
hotel management and corporate housing. Both of these divisions
are reportable operating segments. Each division is managed
separately because of its distinctive products and services. We
evaluate the performance of each division based on earnings
before interest, taxes, depreciation and amortization, and
equity in earnings (losses) of affiliates (Adjusted
EBITDA).

Prior to the merger between MeriStar and
Interstate on July 31, 2002, we operated in two reportable
segments: (1) operations of luxury and upscale hotels and
(2) operations of mid-scale, upper economy and budget
hotels. Following the merger, we operated in the segments shown
in the table below. The other items in the tables below
represent operating segment activity and assets for the
non-reportable segments. Adjusted EBITDA from other activities
includes merger costs, restructuring expenses, tender offer
costs, asset impairment and write-offs, conversion incentive
payments for convertible notes, and gain on refinancing. Other
assets include deferred tax assets and net deferred financing
costs. For periods prior to the merger, we have combined our two
previously reportable segments into the hotel management
operating segment for presentation in the table shown below.

11



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##### 



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


A significant portion of our assets consist of
intangible assets. Of those intangible assets, our management
contracts are amortized over their remaining terms, and, in
accordance with accounting principles generally accepted in the
United States of America, those assets are subject to
straight-line amortization. Because depreciation and
amortization are non-cash items, we believe that presentation of
Adjusted EBITDA is more useful. Adjusted EBITDA represents
consolidated earnings before interest expense, income taxes,
depreciation and amortization, and equity in earnings (losses)
of affiliates. We believe Adjusted EBITDA provides useful
information regarding our financial condition and results of
operations because it is useful for evaluating our operating
performance and our capacity to incur and service debt, fund
capital expenditures and expand our business. We also use
Adjusted EBITDA as one measure in determining the value of other
acquisitions and dispositions. This financial measure, however,
should be considered in addition to, not as a substitute for or
as being superior to, operating losses, cash flows, or other
measures of financial performance prepared in accordance with
accounting principles generally accepted in the United States of
America.

The following table reconciles net income
(loss) to Adjusted EBITDA:

|                                          |                                     |            |        |           |   |       |      |            |   |   |         |       |   |   |         |       |  
|----------------------------------------- | ----------------------------------- | ---------- | ------ | --------- | - | ----- | ---- | ---------- | - | - | ------- | ----- | - | - | ------- | ----- | -
|                                          |                                     | Hotel      |        | Corporate |   |       |      | Financial 
|                                          |                                     | Management |        | Housing   |   | Other |      | Statements
|                                          |                                     |            |        |           |   |       |      |           
|Three months ended September 30,
    2003 |                                     |            |        |           |   |       |      |            |   |   |         |       |   |   |         |      
|Net income (loss)                         |                                     | $          | 894    |           |   | $     | (533 | )          |   | $ | (739    | )     |   | $ | (378    | )    
|Adjustments:                              |                                     |            |        |           |   |       |      |            |   |   |         |       |   |   |         |      
|                                          | Depreciation and amortization       |            |        | 2,217     |   |       |      | 429        |   |   |         |      |   |   |         | 2,646 |  
|                                          | Interest expense, net               |            |        | 2,123     |   |       |      | 236        |   |   |         |      |   |   |         | 2,359 |  
|                                          | Equity in losses of affiliates      |            |        | 292       |   |       |      |           |   |   |         |      |   |   |         | 292   |  
|                                          | Minority interest expense (benefit) |            |        | (54       | ) |       |      | 32         |   |   |         | 45    |   |   |         | 23    |  
|                                          | Income tax expense (benefit)        |            |        | 595       |   |       |      | (355       | ) |   |         | (492  | ) |   |         | (252  | )
|                                          |                                     |            |        |           |   |       |      |            |   |   |         |       |   |   |         |      
|Adjusted EBITDA                           |                                     | $          | 6,067  |           |   | $     | (191 | )          |   | $ | (1,186  | )     |   | $ | 4,690   |      
|                                          |                                     |            |        |           |   |       |      |            |   |   |         |       |   |   |         |      
|Three months ended September 30,
    2002 |                                     |            |        |           |   |       |      |            |   |   |         |       |   |   |         |      
|Net income (loss)                         |                                     | $          | (1,359 | )         |   | $     | 513  |            |   | $ | (18,531 | )     |   | $ | (19,377 | )    
|Adjustments:                              |                                     |            |        |           |   |       |      |            |   |   |         |       |   |   |         |      
|                                          | Depreciation and amortization       |            |        | 3,740     |   |       |      | 284        |   |   |         |       |   |   |         | 4,024 |  
|                                          | Interest expense, net               |            |        | 1,406     |   |       |      | 156        |   |   |         |       |   |   |         | 1,562 |  
|                                          | Equity in losses of affiliates      |            |        | 1,074     |   |       |      |           |   |   |         |       |   |   |         | 1,074 |  
|                                          | Minority interest expense (benefit) |            |        | (19       | ) |       |      | (7         | ) |   |         | 269   |   |   |         | 243   |  
|                                          | Income tax expense (benefit)        |            |        | (138      | ) |       |      | (56        | ) |   |         | 2,012 |   |   |         | 1,818 |  
|                                          |                                     |            |        |           |   |       |      |            |   |   |         |       |   |   |         |      
|Adjusted EBITDA                           |                                     | $          | 4,704  |           |   | $     | 890  |            |   | $ | (16,250 | )     |   | $ | (10,656 | )    
|                                          |                                     |            |        |           |   |       |      |            |   |   |         |       |   |   |         |      

12



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##### 



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                     |                                     |            |        |           |  |       |        |            |   |   |        |         |   |   |        |         |  
|------------------------------------ | ----------------------------------- | ---------- | ------ | --------- |  | ----- | ------ | ---------- | - | - | ------ | ------- | - | - | ------ | ------- | -
|                                     |                                     | Hotel      |        | Corporate |  |       |        | Financial 
|                                     |                                     | Management |        | Housing   |  | Other |        | Statements
|                                     |                                     |            |        |           |  |       |        |           
|Nine months ended September 30, 2003 |                                     |            |        |           |  |       |        |            |   |   |        |         |   |   |        |        
|Net Income (loss)                    |                                     | $          | 344    |           |  | $     | (2,585 | )          |   | $ | 5,804  |         |   | $ | 3,563  |        
|Adjustments:                         |                                     |            |        |           |  |       |        |            |   |   |        |         |   |   |        |        
|                                     | Depreciation and amortization       |            |        | 9,748     |  |       |        | 1,246      |   |   |        |        |   |   |        | 10,994  |  
|                                     | Interest expense, net               |            |        | 6,468     |  |       |        | 719        |   |   |        |        |   |   |        | 7,187   |  
|                                     | Equity in loss of affiliates        |            |        | 858       |  |       |        |           |   |   |        |        |   |   |        | 858     |  
|                                     | Gain on refinancing                 |            |        |          |  |       |        |           |   |   |        | (13,629 | ) |   |        | (13,629 | )
|                                     | Minority interest expense (benefit) |            |        | 17        |  |       |        | (133       | ) |   |        | 300     |   |   |        | 184     |  
|                                     | Income tax expense (benefit)        |            |        | 229       |  |       |        | (1,723     | ) |   |        | 3,869   |   |   |        | 2,375   |  
|                                     |                                     |            |        |           |  |       |        |            |   |   |        |         |   |   |        |        
|Adjusted EBITDA                      |                                     | $          | 17,664 |           |  | $     | (2,476 | )          |   | $ | (3,656 | )       |   | $ | 11,532 |        
|                                     |                                     |            |        |           |  |       |        |            |   |   |        |         |   |   |        |        

|                                     |                                                      |   |        |       |  |   |     |     |   |   |         |       |  |   |         |       | 
|------------------------------------ | ---------------------------------------------------- | - | ------ | ----- |  | - | --- | --- | - | - | ------- | ----- |  | - | ------- | ----- | 
|Nine months ended September 30, 2002 |                                                      |   |        |       |  |   |     |     |   |   |         |       |  |   |         |      
|Net income (loss)                    |                                                      | $ | (5,721 | )     |  | $ | 513 |     |   | $ | (27,567 | )     |  | $ | (32,775 | )    
|Adjustments:                         |                                                      |   |        |       |  |   |     |     |   |   |         |       |  |   |         |      
|                                     | Depreciation and amortization                        |   |        | 8,849 |  |   |     | 284 |   |   |         |      |  |   |         | 9,133 | 
|                                     | Interest expense, net                                |   |        | 3,318 |  |   |     | 156 |   |   |         |      |  |   |         | 3,474 | 
|                                     | Equity in losses of affiliates                       |   |        | 1,670 |  |   |     |    |   |   |         |      |  |   |         | 1,670 | 
|                                     | Conversion incentive payment 
    convertible notes |   |        |      |  |   |     |    |   |   |         | 7,307 |  |   |         | 7,307 | 
|                                     | Minority interest expense (benefit)                  |   |        | 54    |  |   |     | (7  | ) |   |         | 248   |  |   |         | 295   | 
|                                     | Income tax expense (benefit)                         |   |        | 158   |  |   |     | (56 | ) |   |         | 539   |  |   |         | 641   | 
|                                     |                                                      |   |        |       |  |   |     |     |   |   |         |       |  |   |         |      
|Adjusted EBITDA                      |                                                      | $ | 8,328  |       |  | $ | 890 |     |   | $ | (19,473 | )     |  | $ | (10,255 | )    
|                                     |                                                      |   |        |       |  |   |     |     |   |   |         |       |  |   |         |      

Segment information:

|                                          |  |   |         |  |  |   |        |   |  |   |         |   |  |   |         |  
|----------------------------------------- |  | - | ------- |  |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|Three months ended September 30,
    2003 |  |   |         |  |  |   |        |   |  |   |         |   |  |   |         |  
|Revenue                                   |  | $ | 238,124 |  |  | $ | 29,244 |   |  | $ |        |   |  | $ | 267,368 |  
|Adjusted EBITDA                           |  | $ | 6,067   |  |  | $ | (191   | ) |  | $ | (1,186  | ) |  | $ | 4,690   |  
|Three months ended September 30,
    2002 |  |   |         |  |  |   |        |   |  |   |         |   |  |   |         |  
|Revenue                                   |  | $ | 179,867 |  |  | $ | 19,779 |   |  | $ |        |   |  | $ | 199,646 |  
|Adjusted EBITDA                           |  | $ | 4,704   |  |  | $ | 890    |   |  | $ | (16,250 | ) |  | $ | (10,656 | )
|Nine months ended September 30,
    2003  |  |   |         |  |  |   |        |   |  |   |         |   |  |   |         |  
|Revenue                                   |  | $ | 700,778 |  |  | $ | 83,456 |   |  | $ |        |   |  | $ | 784,234 |  
|Adjusted EBITDA                           |  | $ | 17,664  |  |  | $ | (2,476 | ) |  | $ | (3,656  | ) |  | $ | 11,532  |  
|Total assets                              |  | $ | 260,252 |  |  | $ | 12,506 |   |  | $ | 21,272  |   |  | $ | 294,030 |  
|Nine months ended September 30,
    2002  |  |   |         |  |  |   |        |   |  |   |         |   |  |   |         |  
|Revenue                                   |  | $ | 334,044 |  |  | $ | 19,779 |   |  | $ |        |   |  | $ | 353,823 |  
|Adjusted EBITDA                           |  | $ | 8,328   |  |  | $ | 890    |   |  | $ | (19,473 | ) |  | $ | (10,255 | )
|Total assets                              |  | $ | 259,164 |  |  | $ | 17,371 |   |  | $ | 16,675  |   |  | $ | 293,210 |  

13



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Revenues from foreign operations were as follows:

|               |  |                    |       |                   |  |      |       |      |  |   |        |  |  |   |       | 
|-------------- |  | ------------------ | ----- | ----------------- |  | ---- | ----- | ---- |  | - | ------ |  |  | - | ----- | 
|               |  |                    |       |                  
|               |  | Three months ended |       | Nine months ended
|               |  | September 30,      |       | September 30,    
|               |  |                    |       |                  
|               |  | 2003               |       | 2002              |  | 2003 |       | 2002
|               |  |                    |       |                   |  |      |       |     
|Canada         |  | $                  | 2,407 |                   |  | $    | 1,984 |      |  | $ | 6,842  |  |  | $ | 2,407 | 
|United Kingdom |  |                    | 5,792 |                   |  |      | 4,418 |      |  |   | 17,851 |  |  |   | 4,418 | 
|France         |  |                    | 388   |                   |  |      | 129   |      |  |   | 1,080  |  |  |   | 129   | 
|Russia         |  |                    | 302   |                   |  |      | 151   |      |  |   | 744    |  |  |   | 494   | 

9.     SUPPLEMENTAL
CASH FLOW INFORMATION

|               |              |                    |   |                   |  |      |   |       |  |  |   |       |  |  |   |       | 
|-------------- | ------------ | ------------------ | - | ----------------- |  | ---- | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|               |              |                    |   |                  
|               |              | Three months ended |   | Nine months ended
|               |              | September 30,      |   | September 30,    
|               |              |                    |   |                  
|               |              | 2003               |   | 2002              |  | 2003 |   | 2002 
|               |              |                    |   |                   |  |      |   |      
|Cash paid for: |              |                    |   |                   |  |      |   |       |  |  |   |       |  |  |   |      
|               | Interest     |                    | $ | 2,397             |  |      | $ | 1,345 |  |  | $ | 6,741 |  |  | $ | 4,036 | 
|               | Income taxes |                    |   | 196               |  |      |   | 169   |  |  |   | 440   |  |  |   | 508   | 

10.     MERGER AND
INTEGRATION COSTS

Merger and integration costs for the three and
nine months ended September 30, 2003, were $874 and $3,344,
respectively, compared to $3,430 and $5,653 for the same periods
of 2002. These costs represent integration expenses, including
professional fees, travel, and other transition costs associated
with the merger of Interstate and MeriStar on July 31,
2002. This amount is included in our statement of operations as
merger and integration costs.

11.     SUBSEQUENT
EVENTS

Proposed equity
offering On
October 29, 2003, we filed a Form S-3 registration
statement with the Securities and Exchange Commission,
registering the public offering of 9,500,000 shares of common
stock, including 1,000,000 shares being offered by our principal
investor group. For more information, please refer to the
registration statement, which is available free of charge on the
SECs website, www.sec.gov.

14



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##### 



Item
2.     Managements Discussion
and Analysis of Financial Condition and Results of
Operations

Background

Formation of Interstate Hotels &
Resorts

On July 31, 2002, MeriStar Hotels &
Resorts, or MeriStar, and Interstate Hotels Corporation, or
Interstate, merged, and MeriStar changed its name to
Interstate Hotels & Resorts, Inc. The
transaction was a stock-for-stock merger of Interstate into
MeriStar in which Interstate stockholders received 4.6 shares of
MeriStar common stock for each share of Interstate stock
outstanding. Holders of MeriStar common stock and partnership
units in its operating partnership continued to hold their stock
and units following the merger. In connection with the merger,
the holders of Interstates convertible debt and preferred
stock converted those instruments into shares of MeriStar common
stock. Immediately following the merger, we effected a
one-for-five reverse stock split.

In accordance with accounting principles
generally accepted in the United States of America, we treated
the merger as a purchase for financial reporting purposes. In
accordance with the provisions of Statement of Financial
Accounting Standards No. 141, Business
Combinations, Interstate was considered the acquiring
enterprise for financial reporting purposes. Interstate
established a new accounting basis for MeriStars assets
and liabilities based upon their fair values as of July 31,
2002, the effective date of the merger. We accounted for the
merger as a reverse acquisition, with Interstate as the
accounting acquiror and MeriStar as the surviving company for
legal purposes.

The consolidated interim financial statements for
the nine-month period ended September 30, 2002 reflect the
historical results of operations of Interstate for the period
from January 1, 2002 through July 31, 2002. After the
merger on July 31, 2002, the financial statements include
the operating results of the combined entity, Interstate Hotels
& Resorts, Inc.

Business Summary

Overview
We are the largest U.S. hotel management company not affiliated
with a hotel brand, measured by number of rooms under
management. In our hotel management business, we generate
revenues from fees we receive for managing a portfolio of
upscale, full-service and premium limited-service hospitality
properties. We own one hotel property and hold non-controlling
joint venture equity interests in 28 of our managed properties.
We also generate revenue from providing ancillary services in
the hotel, resort, conference center and golf markets. The
ancillary services we provide include insurance and risk
management services, purchasing and project management services,
information technology and telecommunications services and
centralized accounting services. Through our BridgeStreet
corporate housing division, we also generate revenues from the
leasing of corporate long-term stay apartments. As of
September 30, 2003, we managed 329 hotel properties, with
70,300 rooms in 44 states, the District of Columbia, Canada and
Russia. As of September 30, 2003, we had 3,273 apartments
under lease or management through our BridgeStreet corporate
housing division in the United States, Canada, France and the
United Kingdom.

Our subsidiary operating partnership indirectly
holds substantially all of our assets. We are the sole general
partner of that operating partnership. We and certain
independent third parties are limited partners of the
partnership. The interests of those third parties are reflected
in minority interests on our balance sheet. The partnership
agreement gives the general partners full control over the
business and affairs of the partnership.

We manage all of the properties owned by MeriStar
Hospitality Corporation, a real estate investment trust, or
REIT. As of September 30, 2003, MeriStar Hospitality owned
101 hotels. Our relationship with MeriStar Hospitality is
governed in part by an intercompany agreement. That agreement
provides each of us the right to participate in certain
transactions entered into by the other company. The intercompany
agreement provides MeriStar Hospitality with the right of first
refusal with respect to some of our hotel real estate
opportunities and it also provides us with a right of first
refusal with respect to some of MeriStar Hospitalitys
hotel management opportunities, excluding hotels that MeriStar
Hospitality elects to have managed by a hotel brand.
Historically, we have had close operating, management and
governance

15



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##### 



relationships with MeriStar Hospitality. We
manage all of MeriStar Hospitalitys hotel properties under
long-term management contracts and have, in the past, shared
several key management personnel and board members with MeriStar
Hospitality. Due to the merger between MeriStar and Interstate
and our resulting increased scale, we and MeriStar Hospitality
have split the management teams of the two companies although
Paul W. Whetsell continues as the Chairman of both companies and
is the Chief Executive Officer of MeriStar Hospitality.


Outlook
Several factors, most notably the sluggish domestic and
international economies, the war in Iraq, traveler health
concerns as a result of the SARS outbreak in 2003, and delays
and difficulties in travel due to heightened security measures
at airports continue to have a major impact on our operating
results. Because of the significant slowdown of the economy over
the past three years, our managed hotels have generally
experienced significant declines in occupancy and average rates
charged. Weaker hotel performance has reduced our base and
incentive management fees, and also gives rise to additional
losses under minority investments we have made in connection
with some of the hotels that we manage.

In addition, the factors that have negatively
affected hotel performance impact the demand for corporate
relocations and long-term assignments, two primary drivers of
our corporate housing operations. Geopolitical difficulties and
traveler health concerns have significantly affected our
European and Canadian operations. We expect those operations to
continue to be impacted until business travel patterns are
stabilized.

These events have had and are expected to
continue to have an adverse impact on our financial performance.
In response to this current operating environment, we are
continuing to work with the owners of our managed hotel
properties to implement cost reduction and control measures to
improve those properties operating results. We are also
seeking to closely monitor and control our commitments for
leased rental units in our BridgeStreet corporate housing
division, in order to minimize our exposure to further declines
in demand for corporate housing units. We have significantly
reduced the number of our leased units in corporate housing
markets with the greatest impact from the economic and traveler
health issues.

Terminations of Management
Agreements In conjunction
with recording the merger of MeriStar with Interstate in 2002,
we assigned estimated fair values to each of the management
agreements considered purchased by Interstate, the accounting
acquiror in the merger. These assigned fair values are included
as intangible assets on our balance sheet. We are amortizing
these intangible assets over the terms of the management
agreements. If one of these management agreements is terminated
prior to its full term, we will record a loss on the write-off
of the unamortized intangible asset value.

The weaker hotel operating environment has caused
some owners of our managed hotels to sell hotels to provide the
owners with additional liquidity. When a hotel is sold, we are
usually replaced as the hotels manager. As of September
30, 2003, MeriStar Hospitality has sold five hotels during 2003,
four of which we no longer manage for the subsequent owner.
MeriStar Hospitality has announced plans to sell a further 35 of
its 101 hotels, all of which we currently manage. Those 35
hotels, together with the four sold hotels we no longer manage,
accounted for $2.3 million, or 5.7%, of our total
management fees for the year ended December 31, 2002 and
$4.3 million, or 9.5%, of our total management fees for the
nine months ended September 30, 2003. Other owners may also
dispose of hotels we currently manage.

Except with respect to five hotels owned by
MeriStar Hospitality, if we are terminated as manager upon the
sale of one of MeriStar Hospitalitys hotels, we will
generally receive a termination fee equal to the remaining
payments, discounted using a 10% rate, under the then-existing
term of the management agreement. Any termination fee will be
paid in thirty equal monthly installments, without interest,
commencing the month following the termination. MeriStar
Hospitality will be able to credit against any termination
payments the present value of projected fees, discounted using a
10% rate, under any management agreements or leases entered into
between MeriStar Hospitality and us since August 3, 1998;
including, without limitation, the present value of any
projected fees of any management agreements executed during the
thirty-month period over which payments for terminated contracts
are due. Net of such offsets, as of September 30, 2003, we
would be entitled to receive approximately $25.4 million of
total termination fees with respect to the termination of
management agreements for the four hotels sold by MeriStar
Hospitality that we no longer manage and the 35 remaining hotels
MeriStar Hospitality intends to sell. Our management agreements
with

16



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##### 



other owners generally have more limited or no
termination fees due to us if our management agreement is
terminated upon the sale of the hotel. We record termination
fees as management fee revenue as they are earned.


During the third quarter of 2003, MeriStar
Hospitality disposed of four hotels, one of which we are
continuing to manage for the new owner, and we wrote off
$1.5 million of unamortized management contract costs
associated with these hotels. Assuming no offsets occur, we
expect to receive approximately $2.3 million in termination
payments. Assuming that all 35 remaining hotels are sold by the
end of 2003, we would write-off an additional $10.7 million
in intangible assets relating to those management contracts.

On July 10, 2003, CNL Hospitality
Properties, Inc. acquired RFS Hotel Investors, Inc. Flagstone
Hospitality Management, our wholly owned subsidiary, managed 50
of the 57 former RFS hotel properties. In October 2003, we
entered into an agreement with CNL to manage 22 of these
properties. The contracts for properties we will not continue to
manage will terminate by December 31, 2003. Total
management fees from these properties totaled $3.9 million
for the nine months ended September 30, 2003. We expect to
incur approximately $0.2 million for the write-off of
tangible and intangible assets, and incur approximately
$0.1 million of restructuring costs related to this
transaction. We expect substantially all of these costs will be
recorded in the 2003 fourth quarter.

On July 1, 2002, MeriStar assigned the
leases of 47 hotels to a subsidiary of Winston Hotels, Inc.
under a provision of the REIT Modernization Act that allows
REITs to recognize the revenues and expenses of their hotels
through taxable subsidiaries or lease them to taxable
subsidiaries. As part of this agreement, we had continued to
operate 33 of Winstons properties. After one year, Winston
had the option to terminate the management contracts and during
April 2003 notified us of its intention to do so. These
contracts accounted for approximately $0.9 million of
revenue, or 2.1% of our total revenues, in the year ended
December 31, 2002 and $1.0 million of revenue, or 2.2%
of our total revenues in the nine months ended
September 30, 2003. In connection with the termination of
the Winston contracts, we wrote off $0.6 million of
unamortized management contract costs during June 2003. This
amount is included in administrative and general expense in our
statement of operations.

Also, our management agreements with MeriStar
Hospitality and many other owners contain performance standards.
Those standards generally require the hotel to meet certain
relative or absolute financial performance levels, often in
comparison to budgeted amounts. We generally have a period to
cure any performance standards we do not meet. In the event the
hotel does not meet those performance standards and we do not
cure within the period specified in the management contract, the
hotels owner may have a right to terminate our management
contract. The termination of management contracts as a result of
hotel dispositions or our failure to meet performance standards
would have an adverse effect on our revenues. Based on current
projections, we expect approximately six hotels that are not
part of MeriStar Hospitalitys announced asset disposition
program may be at issue with regard to performance standards in
calendar year 2003; we are currently in discussions with
MeriStar Hospitality regarding these hotels.

Insurance
Matters As part of our
management agreement services to a hotel owner, we generally
obtain casualty (workers compensation and liability) insurance
coverages for the hotel. In December 2002, one of the carriers
we used to obtain casualty insurance coverages was downgraded
significantly by rating agencies. In January 2003, we negotiated
a transfer of that carriers current policies to a new
carrier. We are working with the prior carrier to facilitate a
timely and efficient close-out of the claims outstanding under
the prior carriers casualty policies. The prior carrier
has primary responsibility for settling those claims from its
assets. If the prior carriers assets are not sufficient to
settle these outstanding claims, and the claims exceed amounts
available under state guaranty funds, we may be required to
settle those claims. Although we are indemnified under our
management agreements for such amounts, we would be responsible
contractually for claims in historical periods when we leased
(in addition to managed) certain hotels. Based on the
information currently available, we believe the ultimate
resolution of this situation will not have a material adverse
effect on our consolidated financial position, results of
operations or liquidity.

17



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##### 



Related Party Transactions

Our related parties, as defined in SFAS
No. 57 Related Party Disclosures, include
MeriStar Hospitality, and those hotels in which we have equity
investments. Management fees from related parties amounted to
$7.2 million and $22.8 million for the three and nine
months ended September 30, 2003, respectively.

Critical Accounting Policies and
Estimates

Accounting estimates are an integral part of the
preparation of our consolidated financial statements and our
financial reporting process and are based on our current
judgments. Certain accounting estimates are particularly
sensitive because of their significance to our consolidated
financial statements and because of the possibility that future
events affecting them may differ markedly from our current
judgments.

The most significant accounting policies
affecting our consolidated financial statements relate to:



| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | the evaluation of impairment of certain
    long-lived assets and intangible assets with determinable lives;                   
|
| |  | the evaluation of impairment of goodwill;                                                                                      
|
| |  | estimation of valuation allowances, specifically
    those related to income taxes and allowance for doubtful
    accounts; and
|
| |  | revenue recognition.                                                                                                           

Impairment of long-lived
assets In accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long Lived Assets, whenever events or changes
in circumstances indicate that the carrying values of long-lived
assets (which include our intangible assets with definite useful
lives) may be impaired, we perform an analysis to determine the
recoverability of the assets carrying value. We make
estimates of the undiscounted cash flows from the expected
future operations of the asset. If the analysis indicates that
the carrying value is not recoverable from future cash flows,
the asset is written down to estimated fair value and an
impairment loss is recognized. Any impairment losses are
recorded as operating expenses.

We review long-lived assets for impairment when
one or more of the following events have occurred:



| |   |                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | current or immediate short-term (future twelve
    months) projected cash flows are significantly less than the
    most recent historical cash flows;                                 
|
| |  | a significant loss of management contracts
    without the realistic expectation of a replacement;                                                                                     
|
| |  | the unplanned departure of an executive officer
    or other key personnel, which could adversely affect our ability
    to maintain our competitive position and manage future growth;
|
| |  | a significant adverse change in legal factors or
    an adverse action or assessment by a regulator, which could
    affect the value of the goodwill or other long-lived assets; or   
|
| |  | events that could cause significant adverse
    changes and uncertainty in business and leisure travel patterns.                                                                       

During the third quarter of 2003, we wrote off
$1.7 million of unamortized management contract costs
relating to terminated contracts. Of this, $1.5 million
relates to properties sold by MeriStar Hospitality, and
$0.2 million relates to other terminated contracts during
the quarter.

Impairment of
goodwill In accordance
with SFAS No. 142, at least annually, we perform an
analysis to determine the impairment of goodwill carrying
values. To test goodwill for impairment, we perform an analysis
to compare the fair value of the reporting unit to which the
goodwill is assigned to the carrying value of the reporting
unit. We make estimates of the discounted cash flows from the
expected future operations of the reporting unit. If the
analysis indicates that the fair value of the reporting unit is
less than its carrying value, we do an analysis to compare the
implied fair value of the reporting unit goodwill with the
carrying amount of that goodwill. The implied fair value of the
goodwill is determined by allocating the fair value of the
reporting unit to all the assets and liabilities of that unit as
if the reporting unit had been acquired in a business
combination. The excess of the fair value of reporting unit over
the amounts assigned to its assets and

18



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##### 



liabilities is the implied fair value of the
goodwill. If the implied fair value of the goodwill is less than
the carrying value, an impairment loss shall be recognized in an
amount equal to that excess. Any impairment losses are recorded
as operating expenses. We have not recognized any impairment
losses for goodwill in 2003 or 2002. We will complete our annual
goodwill impairment analysis in the fourth quarter of 2003.


Valuation
Allowances We use our
judgment in determining our provision for income taxes, our
deferred tax assets and liabilities, and any valuation allowance
recorded against our deferred tax assets. At September 30,
2003, we have recorded a $10.8 million valuation allowance
to reduce our deferred tax assets to the amount that we believe
is more likely than not to be realized. This is an allowance
against some, but not all, of our recorded deferred tax assets.
We have considered estimated future taxable income and prudent
and feasible ongoing tax planning strategies in assessing the
need for a valuation allowance. Our estimates of taxable income
require us to make assumptions about various factors that affect
our operating results, such as economic conditions, consumer
demand, competition and other factors. Our actual results may
differ from these estimates. Based on actual results or a
revision in future estimates, we might determine that we would
not be able to realize additional portions of our net deferred
tax assets in the future; if that occurred, we would record a
charge to the income tax provision in that period.

The utilization of our net operating loss
carryforwards will be limited by the tax provisions of the
Internal Revenue Code. The valuation allowance we recorded
included the effect of the limitations on our deferred tax
assets arising from net operating loss carryforwards.

We record an allowance for doubtful accounts
receivable based on our judgment in determining the ability and
willingness of hotel owners to make required payments. Our
judgments in determining customer ability and willingness to pay
are based on past experience with hotel owners and our
assessment of the current and future operating environments for
hotel owners. If a customers financial condition
deteriorates or a management contract is terminated in the
future, this could decrease a hotel owners ability or
obligation to make payments. If that occurred, we might have to
make additional allowances, which could reduce our earnings.

Revenue
Recognition We earn
revenue from hotel management contracts and related services,
corporate housing operations and operations from our wholly
owned hotel. Our management and other fees consist of base and
incentive management fees received from third-party owners of
hotel properties and fees for other related services we provide.

Through the second quarter of 2002, we had
recorded incentive management fees in accordance with Staff
Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements, and Method No. 2 of Emerging
Issues Task Force or EITF Topic No. D-96, Accounting
for Management Fees Based on a Formula in which incentive
management fees are accrued as earned based on the profitability
of the hotel, subject to the specific terms of each individual
management agreement. The application of Method No. 2
resulted in the accrual of incentive management fees during
interim reporting periods throughout the annual measurement
period. The accrual would be reduced or eliminated in subsequent
interim reporting periods if the profitability of the hotel
missed performance thresholds later in the annual measurement
period.

In the third quarter of 2002, with an effective
date of January 1, 2002, we began recording the incentive
management fees in the period that it is certain the incentive
management fees are earned, which for annual incentive fee
measurements is typically in the last month of the annual
contract period. This newly adopted accounting principle is
preferable because the new method eliminates the potential that
incentive management fee revenue will be recognized in one
interim reporting period and reduced or eliminated in a future
interim reporting period. This methodology is designated as
Method No. 1 in EITF Topic No. D-96. Method No. 1
is the Securities and Exchange Commission Staffs preferred
method of accounting for incentive management fees.

This change in accounting method has no effect on
the total annual management fees earned or amount of cash we are
paid, but did affect the timing of recognizing the revenue from
these fees. However, the effect of this change in accounting
method for interim periods resulted in an adjustment of $3.1
million that reduced incentive management fees recognized during
the first and second quarter of 2002.

19



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##### 



Results of Operations

Three Months
Ended September 30, 2003 Compared with Three Months Ended
September 30, 2002

Revenues

We earn revenue from hotel management contracts
and related services, corporate housing operations and
operations from our wholly owned hotel.

The following table shows the operating
statistics for our managed hotels on a same store basis for the
three months ended September 30, (dollars not in thousands):

|                           |  |      |       |      |  |        |       |   |  |  |      |   
|-------------------------- |  | ---- | ----- | ---- |  | ------ | ----- | - |  |  | ---- | --
|                           |  | 2003 |       | 2002 |  | Change
|                           |  |      |       |      |  |       
|Revenue per available room |  | $    | 65.26 |      |  | $      | 66.17 |   |  |  | (1.4 | %)
|Average daily rate         |  | $    | 95.15 |      |  | $      | 98.10 |   |  |  | (3.0 | %)
|Occupancy                  |  |      | 68.6  | %    |  |        | 67.5  | % |  |  | 1.6  | % 

Prior to the merger on July 31, 2002,
Interstate managed 141 hotels with 29,752 rooms. On
September 30, 2003 we managed 329 properties with 70,300
rooms.

Our total revenue increased $67.7 million to
$267.4 million for the three months ended
September 30, 2003 compared to $199.7 million in the
same period of 2002. Major components of this increase were:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue from management fees, which consists of
    fees received under our management agreements and includes
    termination fees as they are earned, increased
    $4.7 million, or 42%, from $11.1 million for the three
    months ended September 30, 2002 to $15.8 million for the
    three months ended September 30, 2003. The primary reason
    for the increase is the increase in number of managed hotels
    resulting from the merger on July 31, 2002, and additional
    contracts acquired since the merger. This increase was partially
    offset by a decrease in management fee revenues resulting from
    the loss of certain contracts, and the decrease in revenues at
    the managed hotels, due to the continued weakness in the U.S.
    economy and the impact of the war on travel.                                                                                                                                                                               
|
| |  | Other revenue consists of insurance revenue from
    Northridge Insurance Company, purchasing revenue, accounting
    fees, technical services revenues, information technology
    support fees, renovation fees, and other fees. Other revenues
    decreased $0.8 million, or 18%, from $4.6 million for
    the three months ended September 30, 2002 to
    $3.8 million for the three months ended September 30,
    2003. The majority of this decrease was due to an overall
    decrease in the other fees mentioned above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Corporate housing revenue, which consists of
    revenues from our Bridgestreet Corporate Housing division, was
    $29.2 million for the three months ended September 30,
    2003, compared with $19.8 million for the same period in
    2002. Corporate Housing revenue is included in our results of
    operations beginning August 1, 2002 as a result of the
    MeriStar-Interstate merger, therefore the 2002 period only has
    two months of revenue included in the quarter. Corporate housing
    revenue for August to September 30, 2002 was fairly
    consistent for the same period in 2003.                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | We employ the staff at our managed properties.
    Under our management agreements, the hotel owners reimburse us
    for payroll, benefits, and certain other costs related to the
    operations of the managed properties. EITF No. 01-14,
    Income Statement Characteristics of Reimbursements of Out
    of Pocket Expenses establishes standards for accounting
    for reimbursable expenses in the income statement. Under this
    pronouncement, the reimbursement of these costs is recorded as
    revenue with a corresponding expense recorded as other
    expenses from managed properties in our statement of
    operations. Reimbursable costs increased by $54.4 million,
    or 33%, to $217.7 million for the three months ended
    September 30, 2003, from $163.3 for the same period in
    2002. Substantially all of this increase is due to the increase
    in the number of employees and managed properties resulting from
    the MeriStar-Interstate merger.

20



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##### 



Operating
expenses by department

Total operating expenses by department increased
$8.9 million to $24.8 for the three months ended
September 30, 2003 compared to $15.9 million for the
three months ended September 30, 2002. Factors primarily
affecting the increase were:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Corporate housing expenses were $24.1 million for
    the three months ended September 30, 2003, compared to
    $15.3 million for the same period 2002. Corporate housing
    expenses are included in our results of operations beginning
    August 1, 2002 as a result of the MeriStar-Interstate merger,
    therefore the 2002 period only has two months of expenses
    included in the quarter. Corporate housing expenses for August
    to September 30, 2002 were fairly consistent for the same
    period in 2002.

Undistributed
operating expenses

Undistributed operating expenses include the
following items:



| |   |                                 
| | - | --------------------------------
| |  | administrative and general;     
|
| |  | depreciation and amortization;  
|
| |  | merger and integration costs;   
|
| |  | restructuring expenses;         
|
| |  | asset impairment and write offs.

Total undistributed operating expenses decreased
$12.2 million, or 35%, to $22.9 million for the three
months ended September 30, 2003, compared to $35.1 million
for the three months ended September 30, 2002. Factors
primarily affecting the increase were:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Administrative and general expenses are
    associated with the management of hotels and corporate housing
    facilities and consist primarily of expenses such as corporate
    payroll and related benefits, operations management, sales and
    marketing, finance, legal, information technology support, human
    resources and other support services, as well as general
    corporate expenses. Administrative and general expenses
    increased by $4.3 million, or 29%, from $14.8 million
    for the three months ended September 30, 2002 to
    $19.1 million for the three months ended September 30,
    2003. The primary reason for this increase was the increase in
    expenses in all of the above departments resulting from the
    merger on July 31, 2002.
|
| |  | Depreciation and amortization expense decreased
    by $1.3 million, or 34%, from $4.0 million for the
    three months ended September 30, 2002, to $2.7 million
    for the three months ended September 30, 2003. This
    decrease was primarily due to the elimination of amortization
    relating to management contracts that were fully amortized
    during the first half of 2003. The amortization associated with
    those contracts was approximately $0.6 million per month.                                                                                                                                                                                                                                                                                            
|
| |  | Merger and integration costs were
    $0.9 million for the three months ended September 30,
    2003, compared to $3.4 million for the same period 2002.
    These costs included professional fees, travel, relocation costs
    and other transition costs. The majority of these costs were
    incurred following the merger, in the second half of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Restructuring expenses were $0 for the three
    months ended September 30, 2003, compared to
    $12.8 million for the three months ended September 30,
    2002. Restructuring expenses were incurred in connection with
    the merger of Interstate and MeriStar in 2002, and primarily
    consisted of severance costs for personnel changes and non-
    cancelable lease costs.                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Asset impairment and write offs are
    $0.3 million for the three months ended September 30,
    2003, compared to $0 for the same period 2002. Of this, almost
    $0.3 million represented the write off of leasehold
    improvements relating to our former corporate office in
    Washington, DC, as a result of our relocation in July of 2003 to
    Arlington, Virginia.                                                                                                                                                                                                                                                                                                                                                                                                      

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Under EITF 01-14, the reimbursement of payroll,
benefits, and certain other costs is recorded as revenue with a
corresponding expense recorded as other expenses from
managed properties in our statement of operations.
Reimbursable costs increased by $54.4 million, or 33%, to
$217.7 million for the three months ended
September 30, 2003, from $163.3 for the same period in
2002. Substantially all of this increase was due to the increase
in the number of employees and managed properties resulting from
the merger between MeriStar and Interstate.

Net
income (loss) available to common shareholders

Net income (loss) available to common
shareholders increased $19.0 million to $(0.4) million for
the three months ended September 30, 2003, from $(19.4)
million for the three months ended September 30, 2002. This
increase was due to the increase in revenues partially offset by
the increase in expenses, as discussed above, as well as the
following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Net interest expense increased $0.8 million,
    or 51%, to $2.3 million for the three months ended
    September 30, 2003, from $1.6 million for the three
    months ended September 30, 2002. This increase was
    primarily due to the increase in outstanding debt following the
    MeriStar-Interstate merger, the increase in the amortization of
    deferred financing fees associated with the merger and the
    increase in interest payments resulting from the repayment of
    $42.1 million under a term loan to MeriStar Hospitality in
    January 2003, which was financed in part with the proceeds from
    a $40.0 million subordinated term loan. The amortization of
    deferred financing fees is included in interest expense on our
    statement of operations.             
|
| |  | Equity in loss of affiliates decreased
    $0.8 million, or 73%, to $0.3 million for the three
    months ended September 30, 2003, from $1.1 million for the
    same period in 2002. These losses consisted of our proportionate
    share of the losses incurred through our non-controlling equity
    investments in various hotels. Losses were incurred by the
    hotels owned by our equity investees due to the weakness
    in the U.S. economy during 2002 and the continued weakness into
    2003, followed by the impact of the war in 2003. Future adverse
    changes in the hospitality industry market conditions or poor
    operating results of the underlying investments could result in
    future losses or an inability to recover the carrying value of
    these investments.
|
| |  | Income tax expense decreased by $2.1 million
    to a benefit of $0.3 million for the three months ended
    September 30, 2003, from $1.8 million for the same period
    2002. In 2003, our effective tax rate has been approximately
    40%. In 2002, we recorded a valuation allowance against certain
    deferred tax assets in connection with the MeriStar-Interstate
    merger on July 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                

Adjusted
Earnings (loss) before interest, taxes, depreciation and
amortization

A significant portion of our assets consists of
intangible assets. Of those intangible assets, our management
contracts are amortized over their remaining terms, and, in
accordance with generally accepted accounting principles, those
assets are subject to straight-line amortization. Because
depreciation and amortization are non-cash items, we believe
that presentation of earnings before interest, taxes,
depreciation and amortization, or Adjusted EBITDA, is useful.
Adjusted EBITDA represents consolidated earnings before interest
expense, income taxes, depreciation and amortization. We believe
Adjusted EBITDA provides useful information regarding our
financial condition and results of operations because it is
useful for evaluating our operating performance and our capacity
to incur and service debt, fund capital expenditures and expand
our business. We also use Adjusted EBITDA as one measure in
determining the value of other acquisitions and dispositions.
This financial measure, however, should be considered in
addition to, not as a substitute for or as being superior to,
operating losses, cash flows, or other measures of financial
performance prepared in accordance with accounting principles
generally accepted in the United States of America.

22



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Adjusted EBITDA increased $15.4 million, to
$4.7 million for the three months ended September 30,
2003, from $(10.7) million for the three months ended September
30, 2002. Major components of this increase were:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Hotel managements net income
    (loss) increased $2.3 million, to $0.9 million for the
    three months ended September 30, 2003, from $(1.4) million
    for the same period 2002. Hotel management segments
    Adjusted EBITDA increased by $1.4 million to
    $6.0 million for the three months ended September 30,
    2003, from $4.7 million for the three months ended
    September 30, 2002. This increase was due to the increase
    in hotel management operations subsequent to our merger with
    Interstate on July 31, 2002, and the increase in net income.                                        
|
| |  | Corporate housings net income
    (loss) decreased $1.0 million, to $(0.5) million for
    the three months ended September 30, 2003, from
    $0.5 million for the same period 2002. Corporate
    housings Adjusted EBITDA decreased $1.1 million, to
    $(0.2) million for the three months ended September 30,
    2003, from $0.9 million for the same period 2002. Corporate
    housing operations were included in the results of operations
    beginning on August 1, 2002, after the merger between
    Interstate and MeriStar on July 31, 2002.                                                           
|
| |  | Net income (loss) from other activities
    increased $17.8 million, to $(0.7) million for the three
    months ended September 30, 2003, from $(18.5) million for
    the same period 2002. Adjusted EBITDA from other activities
    increased by $15.1 million, to $(1.2) million for the three
    months ended September 30, 2003, from $(16.3) million for
    the same period 2002. The 2002 amount includes merger and
    integration costs, and restructuring expenses included in net
    operating income, and the 2003 amount includes merger and
    integration costs, and asset impairment and write offs.

Nine Months
Ended September 30, 2003 Compared with Nine Months Ended
September 30, 2002

Revenues

The following table shows the operating
statistics for our managed hotels on a same store basis for the
nine months ended September 30, (dollars not in thousands):

|                           |  |      |       |      |  |        |        |   |  |  |       |  
|-------------------------- |  | ---- | ----- | ---- |  | ------ | ------ | - |  |  | ----- | -
|                           |  | 2003 |       | 2002 |  | Change
|                           |  |      |       |      |  |       
|Revenue per available room |  | $    | 65.46 |      |  | $      | 67.55  |   |  |  | (3.1% | )
|Average daily rate         |  | $    | 98.27 |      |  | $      | 101.16 |   |  |  | (2.9% | )
|Occupancy                  |  |      | 66.6  | %    |  |        | 66.8   | % |  |  | (0.3% | )

Our total revenue increased $430.4 million
to $784.2 million for the nine months ended
September 30, 2003 compared to $353.8 million in the
same period of 2002. Major components of this increase were:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue from management fees increased
    $27.1 million, or 150%, from $18.1 million for the
    nine months ended September 30, 2002 to $45.2 million for
    the nine months ended September 30, 2003. The primary
    reason for the increase was the increase in number of managed
    hotels resulting from the MeriStar-Interstate merger on
    July 31, 2002, and additional contracts acquired since
    then. This increase was partially offset by a decrease in
    management fee revenues resulting from the loss of management
    agreements, and a decrease in revenues at our managed hotels due
    to the continued weakness in the U.S. economy.
|
| |  | Other revenue decreased $5.4 million, or
    34%, from $16.0 million for the nine months ended
    September 30, 2002 to $10.6 million for the nine
    months ended September 30, 2003. The majority of this
    decrease was due to an overall decrease in the Other revenues
    described above.                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Corporate housing revenue increased by
    $63.7 million, or 322%, from $19.8 million for the
    nine months ended September 30, 2002 to $83.5 million for
    the nine months ended September 30, 2003. Corporate housing
    revenue was included in our results of operations beginning
    August 1, 2002 as a result of the merger of MeriStar with
    Interstate. Only two months of revenue were included in the nine
    months ended September 30, 2002 as compared with the same
    period in 2003.                                                                                                                                                      

23



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##### 





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Reimbursable payroll, benefits and other costs,
    which we recorded as revenue under EITF 01-14, increased by
    $344.5 million or 116%, to $642.3 million for the nine
    months ended September 30, 2003, from $297.7 million
    for the same period in 2002. Substantially all of this increase
    was due to the increase in the number of employees and managed
    properties resulting from the merger of MeriStar with Interstate.

Operating
expenses by department

Total operating expenses by department increased
$54.8 million to $71.7 million for the nine months
ended September 30, 2003 compared to $16.9 million for
the nine months ended September 30, 2002. Factors primarily
affecting the increase were:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Corporate housing expenses increased by
    $54.5 million, or 355%, from $15.3 million for the
    nine months ended September 30, 2002 to $69.8 million
    for the nine months ended September 30, 2003. Corporate
    housing expenses are included in the results of operations
    beginning on August 1, 2002 after the merger of MeriStar with
    Interstate. Only two months of expenses are included in 2002 as
    compared with nine months in 2003.

Undistributed
operating expenses

Undistributed operating expenses include the
following items:



| |   |                                 
| | - | --------------------------------
| |  | administrative and general;     
|
| |  | depreciation and amortization;  
|
| |  | merger and integration costs;   
|
| |  | restructuring expenses;         
|
| |  | tender offer costs; and         
|
| |  | asset impairment and write offs.

Total undistributed operating expenses increased
$11.2 million, or 19%, to $69.8 million for the nine months
ended September 30, 2003, compared to $58.6 million
for the nine months ended September 30, 2002. Factors
primarily affecting the increase were:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Administrative and general expenses increased by
    $25.1 million, or 84%, from $30.0 million for the nine
    months ended September 30, 2002 to $55.1 million for
    the nine months ended September 30, 2003. The primary
    reason for this increase is attributable to the increase in
    expenses in all of the above departments resulting from the
    merger of MeriStar with Interstate on July 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Depreciation and amortization expense increased
    by $1.9 million, or 20%, from $9.1 million for the
    nine months ended September 30, 2002, to $11.0 million
    for the nine months ended September 30, 2003. Depreciation
    and amortization expense increased due to the acquisition of
    certain depreciable and amortizable assets in conjunction with
    the merger of MeriStar with Interstate on July 31, 2002.
    These assets include management contracts and franchise fees.
    The amortization of deferred financing fees is included in
    interest expense on our statement of operations. This increase
    was partially offset by certain management contracts that were
    fully amortized during the first half of 2003, therefore the
    amortization expense related to those assets are not present for
    the full nine months of 2003. The amortization associated with
    those contracts was approximately $0.6 million per month.
|
| |  | Merger and integration costs were
    $3.3 million for the nine months ended September 30,
    2003, compared to $5.7 for the same period 2002. These include
    professional fees, travel, relocation costs and other transition
    costs associated with the merger of MeriStar with Interstate on
    July 31, 2002. The majority of these costs were incurred
    following the merger, in the second half of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Restructuring expenses were $12.8 million
    for the nine months ended September 30, 2002, compared to
    $0 for the nine months ended September 30, 2003. Restructuring
    expenses were incurred in                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | connection with the merger of Interstate and
    MeriStar in 2002, and primarily consist of severance costs for
    personnel changes and non-cancelable lease costs.                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Tender offer costs were $0 for the nine months
    ended September 30, 2003, compared to $1.0 million for
    the nine months ended September 30, 2002. These costs
    related to a partial tender offer to purchase shares of
    Interstates Class A Common Stock by Shaner Hotel
    Group Limited Partnership and Shaners unsolicited
    proposals to combine the operations of Interstate with Shaner.
    These costs were incurred for legal and professional fees. The
    tender offer expired May 31, 2002.
|
| |  | Asset impairment and write offs are
    $0.3 million for the nine months ended September 30,
    2003, compared to $0 for the same period 2002. Of this, almost
    $0.3 million represents the write off of leasehold
    improvements relating to our former corporate office in
    Washington, DC, before relocating in July of 2003 to Arlington,
    Virginia.                                                                                                                                                     

Reimbursable payroll, benefits and other costs,
which we recorded as expense under EITF 01-14, increased by
$344.5 million, or 116%, to $642.3 million for the
nine months ended September 30, 2003, from
$297.7 million for the same period in 2002. Substantially
all of this increase was due to the increase in the number of
employees and managed properties resulting from the merger of
MeriStar with Interstate.

Net
income (loss) available to common shareholders

Net income (loss) available to common
stockholders increased $39.0 million to $3.6 million
for the nine months ended September 30, 2003, from $(35.4)
million for the nine months ended September 30, 2002. This
increase is due to the increase in revenues partially offset by
the increase in expenses, as discussed above, as well as the
following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Net interest expense increased $3.7 million,
    or 107%, to $7.2 million for the nine months ended
    September 30, 2003, from $3.5 million for the nine
    months ended September 30, 2002. This increase is primarily
    due to the increase in outstanding debt following the merger of
    MeriStar and Interstate, the increase in the amortization of
    deferred financing fees associated with the merger and the debt
    refinancing in January 2003. The amortization of deferred
    financing fees is included in interest expense.                                                                                                                                                                                                                                                  
|
| |  | Equity in loss of affiliates decreased
    $0.8 million, or 49%, to $0.9 million for the nine months
    ended September 30, 2003, from $1.7 million for the same
    period in 2002. These losses consist of our proportionate share
    of the losses incurred through our non-controlling equity
    investees in various hotels. Losses were incurred by the hotels
    owned by our equity investments due to the weakness in the U.S.
    economy during 2002 and the continued weakness into 2003,
    followed by the impact of the war in 2003. Future adverse
    changes in the hospitality industry market conditions or poor
    operating results of the underlying investments could result in
    future losses or an inability to recover the carrying value of
    these investments.
|
| |  | Conversion incentive payment 
    convertible notes was a one-time payment to our principal
    investor group of $7.3 million in 2002, made in connection
    with the merger of MeriStar and Interstate on July 31,
    2002. There were no similar payments made in 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Gain on refinancing was $13.6 million for
    the nine months ended September 30, 2003, compared to $0
    for the same period 2002. At December 31, 2002, we had
    $56.1 million of long-term debt under a term loan due to
    MeriStar Hospitality, which was due to mature on July 31,
    2007. MeriStar Hospitality, seeking additional liquidity,
    approached us in late 2002 regarding a negotiated discounted
    repayment of the MeriStar Hospitality term loan. The repayment
    of $42.1 million was completed in January 2003. We financed
    part of the repayment with the proceeds from a
    $40.0 million subordinated term loan and realized a gain of
    $13.6 million.                                                                                                   
|
| |  | Income tax expense increased by $1.8 million
    to $2.4 million for the nine months ended
    September 30, 2003, from $0.6 million for the same
    period 2002. In 2003, our effective tax rate is approximately
    40%. In 2002, we recorded a valuation allowance against certain
    deferred tax assets in connection with the merger on
    July 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                    

25



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Adjusted
EBITDA

Adjusted EBITDA increased $21.8 million, to
$11.5 million for the nine months ended September 30,
2003, from $(10.3) million for the nine months ended September
30, 2002. Major components of this increase were:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Hotel managements net income
    (loss) increased $6.1 million, to $0.3 million for the
    nine months ended September 30, 2003, from (5.7) million
    for the same period 2002. Hotel Management segments
    Adjusted EBITDA increased by $9.3 to $17.7 million for the
    nine months ended September 30, 2003, from $8.3 million for
    the nine months ended September 30, 2002. This increase is
    due to the increase in hotel management operations subsequent to
    our merger with Interstate on July 31, 2002, and the
    increase in net income.                                                                                                                          
|
| |  | Corporate housings net income
    (loss) decreased $3.1 million, to $(2.6) million for
    the nine months ended September 30, 2003, from $0.5 million
    for the same period 2002. Corporate housings Adjusted
    EBITDA decreased $3.4 million, from $0.9 million for
    the nine months ended September 30, 2002 to $(2.5) million
    for the nine months ended September 30, 2003. Corporate
    housing operations are included in the results of operations
    beginning on August 1, 2002, after the merger on
    July 31, 2002. Therefore only two months of Corporate
    housing operations are included in the 2002 period as compared
    to nine months in the 2003 period.
|
| |  | Net income (loss) from other activities
    increased $33.4 million, to $5.8 million for the nine
    months ended September 30, 2003, from $(27.6) million for
    the same period 2002. Adjusted EBITDA from other activities
    increased by $15.8 million, to $(3.7) million for the
    nine months ended September 30, 2003, from $(19.5) million
    for the same period 2002. The 2002 amount includes merger and
    integration costs, restructuring expenses, and tender offer
    costs included in net operating income, and the 2003 amount
    includes merger and integration costs, and asset impairment and
    write offs.                                                  

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Working Capital We had $20.7 million of cash and
cash equivalents at September 30, 2003, compared to
$7.1 million at December 31, 2002, and working capital
deficit (current assets less current liabilities) of
$10.3 million at September 30, 2003 compared to a
working capital deficit of $13.1 million at
December 31, 2002. This improvement in working capital of
$2.8 million resulted primarily from the increase in net
income and accounts receivable, partially offset by the timing
of accounts payable.

Operating Activities Net cash provided by operating
activities was $17.9 million for the nine months ended
September 30, 2003, compared to net cash used in operating
activities of $(15.5) million for the nine months ended
September 30, 2002. The increase in cash of
$33.4 million resulted primarily from changes in the
accounts payable and accrued liabilities balances, a one time
$7.3 million payment in 2002 to induce conversion of our
convertible notes by our principal investor group, and an
increase in operating income (adjusted for non-cash items).

If the weak economy continues to negatively
impact the financial results of our managed hotels and corporate
housing operations, our management fee and corporate housing
revenues could decrease, and we may incur additional losses from
our minority investments. These events and factors could
negatively impact our cash flows from operating activities and
net income.

We are required to distribute 1.6627% of cash
flows from the operations of Interstate Hotels, LLC, one of
our operating subsidiaries, to Wyndham International, Inc.,
based on Wyndhams common interest in that entity. The net
distribution payable to Wyndham from January 1, 2003
through September 30, 2003 was approximately
$0.3 million.

26



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Investing Activities Net cash used in investing activities
was $13.9 million for the nine months ended
September 30, 2003, compared to net cash used in investing
activities of $3.8 million for the nine months ended
September 30, 2002. This increase in use of cash was due to
an increase in expenditures for property and equipment and
management contract costs of $8.3 million combined for the
nine months ended September 30, 2003 compared to the same
period 2002. The increase in property and equipment was
primarily due to construction expenses associated with in the
build-out and furnishing of our new corporate headquarters in
Arlington, Virginia in 2003. The increase was also due to an
increase in restricted cash of $1.8 million from two of our
consolidated subsidiaries. The increases were partially offset
by merger-related costs of approximately $1.7 million paid
during the first half of 2002 that did not occur in 2003.

We formerly participated in the ownership of the
Renaissance Worldgate Hotel in Kissimmee, Florida. The majority
owners and the principal lender for the hotel are affiliated
with our principal investor group. In conjunction with a
restructuring of the ownership and financing of this property in
2002, the hotel owner issued a promissory note of
$0.3 million to us. The note bears interest at nine percent
per annum and is payable in equal quarterly installments
beginning January 1, 2003. The hotel owner has not paid the
first three installments due in 2003. Additionally, we are owed
approximately $1.4 million from the hotel as of
September 30, 2003. This balance represents management fees
and amounts for unpaid certain reimbursable costs under our
management contract for the hotel. As of August 2003, we no
longer manage this hotel. We are currently engaged in
discussions with the hotels owner regarding the payment of
these amounts due to us.

We periodically make equity investments in
entities that own certain hotel properties we manage. We
evaluate these investment opportunities based on financial and
strategic factors such as the estimated potential value of the
underlying hotel properties and the management fee revenues we
can obtain from the investment. In May 2003, we formed a joint
venture with Northridge Capital, a privately owned real estate
investment company, to acquire up to $400.0 million of
hotel assets. The joint venture will be funded with
approximately 50% equity and the balance in secured debt.
Northridge Capital will contribute up to $45.0 million in
equity, we will contribute up to $5.0 million, and we will
seek up to an additional $200.0 million of debt financing
and $150.0 million of equity financing from outside
investors. The joint venture acquired its first hotel in August
2003.

Financing Activities Net cash provided by (used in)
financing activities was $9.2 million for the nine months
ended September 30, 2003, compared to $(6.8) million
for the nine months ended September 30, 2002. This increase
in cash was due primarily to the following:



| |   |                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | debt repayments of $81.8 million, including
    $42.1 associated with the repayment of the MeriStar
    Hospitality term loan, and $39.7 million associated with
    repayments of our revolving credit facility and note payable;
    offset by
|
| |  | borrowings of $92.5 million, consisting of
    $40.0 million associated with a new subordinated term loan,
    and $52.5 million of borrowings under our senior credit
    facility; and                                                        
|
| |  | financing fees paid of $1.9 million, the
    majority associated with the new subordinated term loan.                                                                                                                                           

Senior Credit Agreement Effective July 31, 2002, in
connection with the closing with the merger between MeriStar and
Interstate, we entered into a $113.0 million senior credit
agreement with a group of banks. The senior credit agreement
consists of a $65.0 million term loan due on July 28,
2005 and a $48.0 million revolving credit facility due on
July 28, 2005, with a one-year extension at our option. We
are required to make quarterly amortization payments on the term
loan of $0.4 million each. The interest rate on the senior
credit agreement is the 30-day London Interbank Offered Rate, or
LIBOR, plus 3.50%, depending upon our meeting certain financial
tests. The senior credit facility contains covenants, including
maintenance of financial ratios at the end of each quarter,
compliance reporting requirements and other customary
restrictions. At September 30, 2003, we were in compliance
with these covenants. At September 30, 2003, borrowings
under the senior credit agreement bore interest at a rate of
5.17% per annum, which is the 30-day LIBOR  4.0%. We
incurred $1.1 million and $3.4 million of interest
expense on the senior credit agreement for the three and nine
months ended September 30, 2003, respectively. As of
November 3, 2003, the total availability under our senior
credit agreement was $22.5 million.

27



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MeriStar Hospitality Term Loan MeriStar Hospitality, seeking
additional liquidity, approached us in late 2002 regarding a
negotiated discounted repayment of the MeriStar Hospitality term
loan. The repayment of $42.1 million was completed in
January 2003. We financed the repayment with proceeds from a
$40.0 million subordinated term loan and cash on hand and
realized a gain of $13.6 million. The remainder of the
repayment was funded out of available cash.

Subordinated Term Loan In January 2003, we entered into a
$40.0 million subordinated term loan with Lehman Brothers
Holdings, Inc. that carries a variable interest rate based on
the 30-day LIBOR plus a spread of 8.50%. The subordinated term
loan matures on January 31, 2006, but if the revolving
portion of our senior credit facility is extended for an
additional year, the maturity of the subordinated term loan will
also be automatically extended by one year to January 31,
2007. This term loan is subordinated to borrowings under our
senior credit agreement and contains certain covenants,
including maintenance of financial ratios at the end of each
quarter, compliance reporting requirements and other customary
restrictions. At September 30, 2003, we were in compliance
with these covenants. At September 30, 2003, borrowings
under the subordinated term loan bore interest at a rate of
9.63% per annum. We incurred $1.0 million and
$2.9 million of interest expense on the subordinated term
loan for the three and nine months ended September 30,
2003, respectively.

Promissory Note In March 2001, we entered into a
promissory note in the amount of $4.2 million with FelCor
to fund the acquisition of a 50% non-controlling equity interest
in two partnerships that own eight mid-scale hotels. Interest on
the note is payable monthly at the rate of 12% per annum and the
outstanding principal balance is due and payable on
December 31, 2010. For the three and nine months ended
September 30, 2003, we incurred $0.1 million and
$0.4 million of interest expense on the promissory note,
respectively. In June 2003, in connection with a repayment under
the note and an investment in the partnerships of the amount
repaid by FelCor, our ownership interest in the partnerships was
reduced from 50% to 49.5%. We do not expect any further
reductions in our interest in the partnerships.

In June and August 2003, we made principal
payments of $0.2 million and $0.3 million respectively
on the promissory note. As of September 30, 2003, the
remaining balance on the promissory note is $3.7 million.
In connection with the June payment, our ownership interest in
the partnership was reduced from 50% to 49.5%.

Liquidity In 2003, we expect to incur additional
merger-related costs (primarily related to relocation of
employees and other business integration costs) and to make
payments on merger-related restructuring accruals we established
in 2002. We estimate the total cash outlay for restructuring and
merger and integration-related costs in 2003 to be approximately
$4.5 million.

We believe that cash generated by our operations,
together with borrowing capacity under our senior credit
agreement, will be sufficient to fund our requirements for
working capital, capital expenditures and debt service for the
next twelve months. We expect to continue to seek acquisitions
of hotel management businesses and management contracts, and
joint venture opportunities where we can participate in the
ownership of hotels we manage. We expect to finance future
acquisitions through a combination of additional borrowings
under our credit facility and the issuance of equity
instruments, including common stock or operating partnership
units, or additional/replacement debt, if market conditions
permit. We believe these sources of capital will be sufficient
to provide for our long-term capital needs.

28



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Contractual Obligations and Maturities of
Indebtedness

The following table summarizes our contractual
obligations at September 30, 2003, and the effect that
those obligations are expected to have on our liquidity and cash
flows in future periods (amounts in thousands):

|           |  |               |        |            |  |              |       |                |  |             |        |       |  |   |        |  |  |   |       |  |  |   |         | 
|---------- |  | ------------- | ------ | ---------- |  | ------------ | ----- | -------------- |  | ----------- | ------ | ----- |  | - | ------ |  |  | - | ----- |  |  | - | ------- | 
|           |  |               |        |            |  |              |       |                |  | Redeemable  |        |      
|           |  |               |        |            |  |              |       |                |  | Operating   |        |      
|           |  | Senior credit |        | Promissory |  | Subordinated |       | Non-cancelable |  | Partnership |        |      
|           |  | facility      |        | note       |  | Term loan    |       | leases         |  | units       |        | Total
|           |  |               |        |            |  |              |       |                |  |             |        |      
|2003       |  | $             | 406    |            |  | $            |      |                |  | $           |       |       |  | $ | 19,608 |  |  | $ |      |  |  | $ | 20,014  | 
|2004       |  |               | 1,625  |            |  |              |      |                |  |             |       |       |  |   | 14,501 |  |  |   | 1,310 |  |  |   | 17,436  | 
|2005       |  |               | 61,750 |            |  |              |      |                |  |             |       |       |  |   | 10,097 |  |  |   |      |  |  |   | 71,847  | 
|2006       |  |               | 23,500 |            |  |              |      |                |  |             |       |       |  |   | 8,355  |  |  |   |      |  |  |   | 31,855  | 
|2007       |  |               |       |            |  |              |      |                |  |             | 40,000 |       |  |   | 6,265  |  |  |   |      |  |  |   | 46,265  | 
|thereafter |  |               |       |            |  |              | 3,723 |                |  |             |       |       |  |   | 29,034 |  |  |   |      |  |  |   | 32,757  | 
|           |  |               |        |            |  |              |       |                |  |             |        |       |  |   |        |  |  |   |       |  |  |   |         | 
|Total      |  | $             | 87,281 |            |  | $            | 3,723 |                |  | $           | 40,000 |       |  | $ | 87,860 |  |  | $ | 1,310 |  |  | $ | 220,174 | 
|           |  |               |        |            |  |              |       |                |  |             |        |       |  |   |        |  |  |   |       |  |  |   |         | 

Long-Term Debt:For
principal repayment and debt service obligations with respect to
our long-term debt, see note 6 to our condensed
consolidated financial statements.

Lease Commitments:We lease apartments for our Corporate Housing division and
office space for our corporate offices. The leases terminate at
various times up and through 2014.

Management Agreement
Commitments:Under the provisions of
management agreements with certain hotel owners, we had
outstanding commitments as of September 30, 2003, to
provide an aggregate of $5.0 million to these hotel owners
in the form of investments or working capital loans. The loans
may be forgiven or repaid based upon the specific terms of each
management agreement. The timing of future investments or
working capital loans to hotel owners is currently unknown and
is therefore not reflected in the chart set forth above.

Equity Investment
Funding:In connection with our equity
investments in hotel real estate, we are party to various
unconsolidated partnerships or limited liability companies. The
terms of such partnership or limited liability company
agreements provide that we contribute capital as specified. The
timing and amount of such contributions of capital, if any, is
currently unknown and is therefore not reflected in the chart
set forth above. We have non-controlling equity interests in
nine hotel real estate limited partnerships and limited
liability companies. We do not guarantee the debt or other
obligations of any of these investments.

Redeemable Operating Partnership Units-After April 1, 2004, the holders
of Preferred units of our subsidiary operating partnership may
require the partnership to redeem these units for cash at a
price of $16.70 per unit or, at the holders option, shares of
our common stock having equivalent aggregate value. As of
September 30, 2003, other limited partners owned 78,431
Preferred units.

Item 3.     Quantitative
and Qualitative Disclosures About Market Risk

We are exposed to market risk from changes in
interest rates on our credit facilities. Our interest rate risk
management objective is to limit the impact of interest rate
changes on earnings and cash flows and to lower our overall
borrowing costs.

Our senior secured credit facility matures
July 31, 2005, with a one year extension of the revolving
portion at our option. At September 30, 2003, we had
borrowings of $87.3 million outstanding on the facility.
Interest on the debt is variable, based on the 30-day LIBOR plus
a spread of 3.0% to 4.5% depending on our meeting certain
financial covenants. The weighted average effective interest
rate was 5.17% at September 30, 2003. We have determined
that the fair value of the debt approximates its carrying value.

At December 31, 2002, we had
$56.1 million of long-term debt under a term loan due to
MeriStar Hospitality, which was due to mature on July 31,
2007. MeriStar Hospitality, seeking additional liquidity,

29



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approached us in late 2002 regarding a negotiated
discounted repayment of the MeriStar term loan. The repayment of
$42.1 million was completed in January 2003. We refinanced
the repayment with the proceeds from a $40.0 million
subordinated term loan and cash on hand and realized a gain of
$13.6 million. The subordinated term loan carries a
variable interest rate, based on the 30-day LIBOR plus a spread
of 8.50%. The subordinated term loan matures on January 31,
2006, but if the revolving portion of our senior credit facility
is extended for an additional year, the maturity of the
subordinated term loan will also be automatically extended by
one year to January 31, 2007. The remainder of the
repayment was funded out of available cash. We have determined
that the fair value of the debt approximates its carrying value.


A 1.0% change in the 30-day London Interbank
Offered Rate would have changed our interest expense by
approximately $0.2 million and $0.7 million for the
three and nine months ended September 30, 2003,
respectively.

In October 2002, we entered into a
$30.0 million, two-year interest rate swap agreement with a
financial institution in order to hedge against the effect
future interest rate fluctuations may have on our floating rate
debt. The swap agreement effectively fixes the 30-day London
Interbank Offered Rate at 2.50%. The fair value of the swap
agreement was a liability of $0.4 million at
September 30, 2003.

In March 2003, we entered into a
$35.0 million, twenty-two month interest rate cap agreement
with a financial institution in order to hedge against the
effect future interest rate fluctuations may have on our
floating rate debt. The interest rate agreement caps the 30-day
London Interbank Offered Rate at 4.50%. At September 30,
2003, the fair value of this cap agreement was insignificant.

Our international operations are subject to
foreign exchange rate fluctuations. We derived approximately
3.3% of our revenue for both three month periods ended
September 30, 2003 and 2002, and 3.4% and 2.1% for the nine
month periods ended September 30, 2003 and 2002,
respectively, from services performed in Canada, the United
Kingdom, France, and Russia. Our foreign currency transaction
gains and losses were $(0.4) million for the nine months ended
September 30, 2003 and is included in accumulated
comprehensive income (loss) on our statement of operations.
to date, since most of our foreign operations have been largely
self-contained or dollar-denominated, we have not been exposed
to material foreign exchange risk. Therefore, we have not
entered into any foreign currency exchange contracts or other
derivative financial instruments to hedge the effects of adverse
fluctuations in foreign currency exchange rates. In the event
that we have large transactions requiring currency conversion we
would reevaluate whether we should engage in hedging activities.

Item 4.     Controls
and Procedures

Evaluation of Disclosure Controls and
Procedures

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

We carried out an evaluation, under the
supervision and with the participation of our management,
including our chief executive officer and our chief financial
officer of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on this evaluation, it
was concluded that as of September 30, 2003, our disclosure
controls and procedures were effective.

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Changes in Internal Controls

There were no significant changes in our internal
controls or in other factors that could significantly affect
these controls during the quarter ended September 30, 2003.

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PART II. OTHER INFORMATION

Item 1.     Legal
Proceedings

In the course of 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 pending or
asserted will not have a material adverse effect on our
consolidated financial position, results of operations or
liquidity.

Item 2.     Changes
in Securities and Use of Proceeds

None.

Item 3.     Defaults
Upon Senior Securities

None.

Item 4.     Submission
of Matters to a Vote of Security Holders

None.

Item 5.     Other
Information

Forward-Looking Information

Information both included in and incorporated by
reference in this quarterly report on Form 10-Q may contain
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, and may involve known
and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements of our
company to be materially different from future results,
performance or achievements expressed or implied by such
forward-looking statements. Forward-looking statements, which
are based on certain assumptions and describe our future plans,
strategies and expectations, are generally identifiable by use
of the words may, will,
should, expect, anticipate,
estimate, believe, intend,
or project or the negative thereof or other
variations thereon or comparable terminology. Factors which
could have a material adverse effect on our operations and
future prospectus 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 and actual or threatened future terrorist
    incidents or hostilities;                                                                                                                                        
|
| |  | the war with Iraq, continuing conflicts in that
    geographic region and related ongoing U.S. involvement;                                                                                                                                                               
|
| |  | international geopolitical difficulties or health
    concerns;                                                                                                                                                                                                           
|
| |  | uncertainties associated with obtaining
    additional financing for future real estate projects and to
    undertake future capital improvements;                                                                                                                        
|
| |  | demand for, and costs associated with, real
    estate development and hotel rooms, market conditions affecting
    the real estate industry, seasonality of resort and hotel
    revenues and fluctuations in operating results;                                         
|
| |  | changes in laws and regulations applicable us,
    including federal, state or local hotel, resort, restaurant or
    land use regulations, employment, labor or disability laws and
    regulations and laws governing the taxation of real estate
    investment trusts;
|
| |  | legislative/regulatory changes, including changes
    to laws governing the taxation of REITs;                                                                                                                                                                            
|
| |  | failure to renew management contracts or business
    leases;                                                                                                                                                                                                             

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| |   |                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------
| |  | competition from other hospitality companies,
    pricing pressures and variations in lease and room rental rates;
|
| |  | litigation involving antitrust, consumer and
    other issues; and                                                
|
| |  | loss of any executive officer or failure to hire
    and retain highly qualified employees.                       

These factors and the risk factors referred to
above could cause actual results or outcomes to differ
materially from those expressed in any forward-looking
statements made or incorporated by reference in this
registration statement. You should not place undue reliance on
any of these forward-looking statements. Further, any
forward-looking statement speaks only as of the date on which it
is made and we do not undertake any forward-looking statement or
statements to reflect events or circumstances after the date on
which the statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time, and
it is not possible to predict which will arise. In addition, we
cannot assess the impact of each factor on our business or the
extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any
forward-looking statements.

These risks and uncertainties, along with the
risk factors set forth in our Annual Report on Form 10-K
for the year ended December 31, 2002, should be considered
in evaluating any forward-looking statements in this quarterly
report on Form 10-Q.



|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

(a) Exhibits

|            |       |                         |  |                                                                                                                                                                                                                                                                                                                                                    
|----------- | ----- | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |       | Description of Document
|            |       |                        
|            | 3.1   |                         |  | Amended and Restated Certificate of Incorporation
    of the Company, formerly MeriStar Hotels & Resorts,
    Inc. (incorporated by reference to Exhibit 3.1 to the
    Companys Form S-1/ A filed with the Securities and
    Exchange Commission on July 23, 1998 (Registration
    No. 333-49881)).                                            
|            | 3.1.1 |                         |  | Certificate of Amendment of the Restated
    Certificate of Incorporation of the Company dated June 30,
    2001 (incorporated by reference to Exhibit 3.1.1 to the
    Companys Form 10-K filed with the Securities and
    Exchange Commission on April 15, 2002).                                                                              
|            | 3.1.2 |                         |  | Certificate of Merger of Interstate Hotels
    Corporation into MeriStar Hotels & Resorts, Inc.
    (incorporated by reference to Exhibit 3.1.2 to the
    Companys Form 8-A/ A filed with the Securities and
    Exchange Commission on August 2, 2002).                                                                                         
|            | 3.1.3 |                         |  | Certificate of Amendment of the Restated
    Certificate of Incorporation of the Company dated July 31,
    2002 (incorporated by reference to Exhibit 3.1.3 to the
    Companys Form 8-A/ A filed with the Securities and
    Exchange Commission on August 2, 2002).                                                                            
|            | 3.2   |                         |  | By-laws of the Company, formerly MeriStar
    Hotels & Resorts, Inc. (incorporated by reference to
    Exhibit 3.2 to the Companys Form S-1/ A filed
    with the Securities and Exchange Commission on July 23,
    1998 (Registration No. 333-49881)).                                                                                          
|            | 3.2.1 |                         |  | Amendment to the By-laws of the Company
    (incorporated by reference to Exhibit 3.3 to the
    Companys Form 8-A/ A filed with the Securities and
    Exchange Commission on August 2, 2002).                                                                                                                                                   
|            | 4.1   |                         |  | Form of Common Stock Certificate of the Company
    (incorporated by reference to Exhibit 4.1 to the
    Companys Form 8-A/ A filed with the Securities and
    Exchange Commission on August 2, 2002).                                                                                                                                           
|            | 4.2   |                         |  | Preferred Share Purchase Rights Agreement, dated
    July 23, 1998, between the Company, formerly MeriStar
    Hotels & Resorts, Inc., and the Rights Agent
    (incorporated by reference to Exhibit 4.4 to the
    Companys Form S-1/ A filed with the Securities and
    Exchange Commission on July 23, 1998(Registration
    No. 333-49881)).
|            | 4.2.1 |                         |  | Amendment to Rights Agreement, dated
    December 8, 2000, between the Company, formerly MeriStar
    Hotels & Resorts, Inc., and the Rights Agent
    (incorporated by reference to Exhibit 4.1 to the
    Companys Form 8-K filed with the Securities and
    Exchange Commission on December 12, 2000).                                        

33



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##### 



|            |        |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                   
|----------- | ------ | ----------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |        | Description of Document
|            |        |                        
|            | 4.2.2  |                         |  | Second Amendment to Rights Agreement, dated
    May 1, 2002, between the Company, formerly MeriStar
    Hotels & Resorts, Inc., and the Rights Agent
    (incorporated by reference to Exhibit 4.1 to the
    Companys Form 8-K filed with the Securities and
    Exchange Commission on May 3, 2002).                                                                                           
|            | 4.3    |                         |  | Form of Rights Certificate (incorporated by
    reference to Exhibit 4.3 to the Companys
    Form S-1/ A filed with the Securities and Exchange
    Commission on July 23, 1998 (Registration
    No. 333-49881)).                                                                                                                                                                               
|            | 4.4    |                         |  | Registration Rights Agreement, dated
    March 31, 1999, between the Company (formerly MeriStar
    Hotels & Resorts, Inc.), Oak Hill Capital Partners,
    L.P. and Oak Hill Capital Management Partners, L.P.
    (incorporated by reference to Exhibit 4.7 to the
    Companys Form 10-Q filed with the Securities and
    Exchange Commission for the three months ended March 31,
    1999).
|            | 9.1    |                         |  | Board Composition Agreement, dated as of
    July 31, 2002, among the Company. and certain stockholders
    of the Registrant specified therein (incorporated by reference
    to Exhibit 9.1 to the Companys Form 8-K filed
    with the Securities and Exchange Commission on August 7,
    2002).                                                                                             
|            | 10.2.3 |                         |  | Third amendment to Senior Secured Credit
    Agreement, dated as of July 31, 2003.                                                                                                                                                                                                                                                                                                                
|            | 10.2.4 |                         |  | Fourth amendment to Senior Secured Credit
    Agreement, dated as of October 22, 2003.                                                                                                                                                                                                                                                                                                            
|            | 10.6.1 |                         |  | First amendment to Subordinate Unsecured Term
    Loan Agreement, dated as of July 31, 2003.                                                                                                                                                                                                                                                                                                      
|            | 10.6.2 |                         |  | Second amendment to Subordinate Unsecured Term
    Loan Agreement, dated as of October 22, 2003.                                                                                                                                                                                                                                                                                                  
|            | 31.1   |                         |  | Sarbanes-Oxley Act Section 302
    Certifications of the Chief Executive Officer.                                                                                                                                                                                                                                                                                                                 
|            | 31.2   |                         |  | Sarbanes-Oxley Act Section 302
    Certifications of the Chief Financial Officer.                                                                                                                                                                                                                                                                                                                 
|            | 32.1   |                         |  | Sarbanes-Oxley Act Section 906
    Certifications of Chief Executive Officer.                                                                                                                                                                                                                                                                                                                     
|            | 32.2   |                         |  | Sarbanes-Oxley Act Section 906
    Certifications of Chief Financial Officer.                                                                                                                                                                                                                                                                                                                     

(b) Reports on Form 8-K

Current report on Form 8-K (Item 12)
dated and filed July 30, 2003, regarding the second quarter
earnings press release.

Current report on Form 8-K (Item 5)
dated and filed August 5, 2003, regarding reconciliation
from net income (loss) to EBITDA for the three months ended
March 31, 2003 and 2002, pursuant to Regulation G, in
connection with the filing of a Registration Statement on
Form S-3.

Current report on Form 8-K (Item 5)
dated and filed August 5, 2003, regarding reconciliation
from net income (loss) to EBITDA for the years ended
December 31, 2002, 2001 and 2000, pursuant to
Regulation G, in connection with the filing of a
Registration Statement on Form S-3.

Current report on Form 8-K (Items 5 and
7) dated and filed October 23, 2003, regarding announcement
of Steven D. Jorns as Chief Executive Officer.

Current report on Form 8-K (Item 12)
dated and filed October 29, 2003, regarding the third
quarter earnings press release.

34



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##### 



SIGNATURE

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.



| |                                  
| | ---------------------------------
| | INTERSTATE HOTELS & RESORTS, INC.
|
| | /s/ JAMES A. CALDER              
| |                                  
| | James A. Calder                  
| | Chief Financial Officer          
| | (Duly authorized officer)        
| | (Principal financial officer)    

Dated: November 6, 2003

35