##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2002 or _______

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

COMMISSION FILE NUMBER 1-14331

Interstate Hotels & Resorts, Inc.
(Exact name of Registrant as specified in its Charter)

|                         |  |                                  
|------------------------ |  | ---------------------------------
|DELAWARE                 |  | 52-2101815                       
|(State of Incorporation) |  | (IRS Employer Identification No.)

202-965-4455
(Registrants Telephone Number, Including Area Code)

MeriStar Hotels & Resorts, Inc.
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)

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

Yes [X] No

The number of shares of Common Stock, par value $0.01 per share, outstanding at
August 13, 2002 was 20,198,336.





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##### 



EXPLANATORY NOTE

Interstate Hotels & Resorts, Inc., a Delaware corporation (formerly known as
MeriStar Hotels & Resorts, Inc.) (the Registrant), and Interstate Hotels
Corporation (the Company) entered into an Agreement and Plan of Merger, dated
May 1, 2002 and as amended on June 3, 2002 (the Merger Agreement), pursuant
to which the Company merged with and into the Registrant (the Merger). On
July 31, 2002, after receiving the required stockholder approvals, pursuant to
the Merger Agreement, the Registrant and the Company completed the Merger. As a
result of the Merger and in accordance with the provisions of Statement of
Financial Accounting Standards No. 141, Business Combinations, the Company
will be considered the acquiring enterprise for financial reporting purposes.
Accordingly, this Form 10-Q for the quarter ended June 30, 2002 presents the
Companys historical financial information for that period.

INDEX

|        |  |                                                                                                                     |  |         
|------- |  | ------------------------------------------------------------------------------------------------------------------- |  | --------
|        |  |                                                                                                                     |  | Page No.
|        |  |                                                                                                                     |  |         
|PART I  |  | FINANCIAL INFORMATION                                                                                               |  |         
|        |  |                                                                                                                     |  |         
|Item 1. |  | Financial Statements (Unaudited)                                                                                    |  | 2       
|        |  | Condensed Consolidated Balance Sheets  December 31, 2001 and
June 30, 2002                                         |  | 2       
|        |  | Condensed Consolidated Statements of Operations  Three Months and Six Months
Ended June 30, 2001 and June 30, 2002 |  | 3       
|        |  | Condensed Consolidated Statements of Cash Flows
 Six Months Ended June 30, 2001 and June 30, 2002                  |  | 4       
|        |  | Notes to Condensed Consolidated Financial Statements                                                                |  | 5       
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                               |  | 11      
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                                          |  | 19      
|        |  |                                                                                                                     |  |         
|PART II |  | OTHER INFORMATION                                                                                                   |  |         
|        |  |                                                                                                                     |  |         
|Item 1. |  | Legal Proceedings                                                                                                   |  | 20      
|Item 5. |  | Forward Looking Information                                                                                         |  | 20      
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                                    |  | 20      





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##### 



PART IFINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).

INTERSTATE HOTELS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)

|                                                                                       |                                                                                                                                                                                                                           |                                            |        |         |              |  |             |         |        |  | 
|-------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------- | ------------ |  | ----------- | ------- | ------ |  | 
|                                                                                       |                                                                                                                                                                                                                           |                                            |        |         | December 31, |  | June 30,   
|                                                                                       |                                                                                                                                                                                                                           |                                            |        |         | 2001         |  | 2002       
|                                                                                       |                                                                                                                                                                                                                           |                                            |        |         |              |  |            
|                                                                                       |                                                                                                                                                                                                                           |                                            |        |         | (A)          |  | (Unaudited)
|ASSETS                                                                                
|Current assets:                                                                        |                                                                                                                                                                                                                           |                                            |        |         |              |  |             |        
|                                                                                       | Cash and cash equivalents                                                                                                                                                                                                 |                                            | $      | 39,040  |              |  | $           | 24,372  |       
|                                                                                       | Accounts receivable, net of allowance for doubtful accounts of $227 in 2001 and
$260 in 2002                                                                                                                              |                                            |        | 9,080   |              |  |             | 16,126  |       
|                                                                                       | Deferred income taxes                                                                                                                                                                                                     |                                            |        | 2,204   |              |  |             | 2,907   |       
|                                                                                       | Prepaid expenses and other assets                                                                                                                                                                                         |                                            |        | 1,941   |              |  |             | 1,845   |       
|                                                                                       |                                                                                                                                                                                                                           |                                            |        |         |              |  |             |        
|                                                                                       |                                                                                                                                                                                                                           | Total current assets                       |        |         | 52,265       |  |             |         | 45,250 | 
|Restricted cash                                                                        |                                                                                                                                                                                                                           |                                            | 1,348  |         |              |  | 1,376       |        
|Marketable securities                                                                  |                                                                                                                                                                                                                           |                                            | 2,548  |         |              |  | 2,518       |        
|Property and equipment, net                                                            |                                                                                                                                                                                                                           |                                            | 14,390 |         |              |  | 13,854      |        
|Officers and employees notes receivable                                                |                                                                                                                                                                                                                           |                                            | 2,028  |         |              |  | 2,114       |        
|Affiliates notes receivable, net of reserve for uncollectible notes receivable of $666 |                                                                                                                                                                                                                           |                                            | 1,718  |         |              |  | 2,119       |        
|Equity investments in hotel real estate                                                |                                                                                                                                                                                                                           |                                            | 11,220 |         |              |  | 9,490       |        
|Deferred income taxes                                                                  |                                                                                                                                                                                                                           |                                            | 5,479  |         |              |  | 6,133       |        
|Intangible and other assets                                                            |                                                                                                                                                                                                                           |                                            | 17,673 |         |              |  | 14,619      |        
|                                                                                       |                                                                                                                                                                                                                           |                                            |        |         |              |  |             |        
|                                                                                       |                                                                                                                                                                                                                           | Total assets                               |        | $       | 108,669      |  |             | $       | 97,473 | 
|                                                                                       |                                                                                                                                                                                                                           |                                            |        |         |              |  |             |        
|                                                                                      
|LIABILITIES AND STOCKHOLDERS EQUITY                                                  
|Current liabilities:                                                                   |                                                                                                                                                                                                                           |                                            |        |         |              |  |             |        
|                                                                                       | Accounts payabletrade                                                                                                                                                                                                    |                                            | $      | 1,038   |              |  | $           | 314     |       
|                                                                                       | Accounts payablehealth trust                                                                                                                                                                                             |                                            |        | 4,424   |              |  |             | 4,711   |       
|                                                                                       | Accrued payroll and related benefits                                                                                                                                                                                      |                                            |        | 5,092   |              |  |             | 2,687   |       
|                                                                                       | Other accrued liabilities                                                                                                                                                                                                 |                                            |        | 7,048   |              |  |             | 10,632  |       
|                                                                                       | Current portion of long-term debt                                                                                                                                                                                         |                                            |        | 1,601   |              |  |             | 6,575   |       
|                                                                                       |                                                                                                                                                                                                                           |                                            |        |         |              |  |             |        
|                                                                                       |                                                                                                                                                                                                                           | Total current liabilities                  |        |         | 19,203       |  |             |         | 24,919 | 
|Deferred compensation                                                                  |                                                                                                                                                                                                                           |                                            | 2,548  |         |              |  | 2,518       |        
|Long-term debt                                                                         |                                                                                                                                                                                                                           |                                            | 39,380 |         |              |  | 14,095      |        
|                                                                                       |                                                                                                                                                                                                                           |                                            |        |         |              |  |             |        
|                                                                                       |                                                                                                                                                                                                                           | Total liabilities                          |        |         | 61,131       |  |             |         | 41,532 | 
|Minority interest                                                                      |                                                                                                                                                                                                                           |                                            | 433    |         |              |  | 433         |        
|Mandatorily redeemable preferred stock                                                 |                                                                                                                                                                                                                           |                                            | 5,070  |         |              |  |            |        
|Commitments and contingencies                                                          |                                                                                                                                                                                                                           |                                            |       |         |              |  |            |        
|Stockholders equity:                                                                  |                                                                                                                                                                                                                           |                                            |        |         |              |  |             |        
|                                                                                       | Preferred stock, $.01 par value; 10,000,000 shares authorized; 725,000 and 10 shares issued
and outstanding and classified as mandatorily redeemable preferred stock at
December 31, 2001 and June 30, 2002, respectively |                                            |        |        |              |  |             |        |       
|                                                                                       | Common stock, $.01 par value; 64,939,361 shares authorized; 5,730,440 and 12,271,780 shares issued
and outstanding at December 31, 2001 and June 30, 2002, respectively                                                   |                                            |        | 57      |              |  |             | 123     |       
|                                                                                       | Common stock options/warrants                                                                                                                                                                                             |                                            |        |        |              |  |             | 790     |       
|                                                                                       | Paid-in capital                                                                                                                                                                                                           |                                            |        | 64,955  |              |  |             | 90,525  |       
|                                                                                       | Retained deficit                                                                                                                                                                                                          |                                            |        | (22,977 | )            |  |             | (35,930 | )     
|                                                                                       |                                                                                                                                                                                                                           |                                            |        |         |              |  |             |        
|                                                                                       |                                                                                                                                                                                                                           | Total stockholders equity                 |        |         | 42,035       |  |             |         | 55,508 | 
|                                                                                       |                                                                                                                                                                                                                           |                                            |        |         |              |  |             |        
|                                                                                       |                                                                                                                                                                                                                           | Total liabilities and stockholders equity |        | $       | 108,669      |  |             | $       | 97,473 | 
|                                                                                       |                                                                                                                                                                                                                           |                                            |        |         |              |  |             |        



|   
|---
|(A)

See accompanying notes to condensed consolidated financial statements.

2



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##### 



INTERSTATE HOTELS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, dollars in thousands, except per share amounts)

|                                                                                  |                                                                |   |                    |           |                  |   |         |           |      |   |         |           |   |   |         |           |  
|--------------------------------------------------------------------------------- | -------------------------------------------------------------- | - | ------------------ | --------- | ---------------- | - | ------- | --------- | ---- | - | ------- | --------- | - | - | ------- | --------- | -
|                                                                                  |                                                                |   | Three Months Ended |           | Six Months Ended
|                                                                                  |                                                                |   | June 30,           |           | June 30,        
|                                                                                  |                                                                |   | 2001               |           | 2002             |   | 2001    |           | 2002
|                                                                                  |                                                                |   |                    |           |                  |   |         |           |     
|Lodging revenues                                                                  |                                                                | $ | 1,423              |           |                  | $ | 779     |           |      | $ | 2,524   |           |   | $ | 1,455   |          
|Net management fees                                                               |                                                                |   | 6,404              |           |                  |   | 6,336   |           |      |   | 12,880  |           |   |   | 11,994  |          
|Other fees                                                                        |                                                                |   | 4,437              |           |                  |   | 5,451   |           |      |   | 7,945   |           |   |   | 9,464   |          
|                                                                                  |                                                                |   |                    |           |                  |   |         |           |      |   |         |           |   |   |         |          
|                                                                                  |                                                                |   | 12,264             |           |                  |   | 12,566  |           |      |   | 23,349  |           |   |   | 22,913  |          
|Other revenues from managed hotels                                                |                                                                |   | 70,454             |           |                  |   | 71,874  |           |      |   | 139,859 |           |   |   | 134,315 |          
|                                                                                  |                                                                |   |                    |           |                  |   |         |           |      |   |         |           |   |   |         |          
|                                                                                  |                                                                |   | 82,718             |           |                  |   | 84,440  |           |      |   | 163,208 |           |   |   | 157,228 |          
|                                                                                  |                                                                |   |                    |           |                  |   |         |           |      |   |         |           |   |   |         |          
|Lodging expenses                                                                  |                                                                |   | 939                |           |                  |   | 549     |           |      |   | 1,718   |           |   |   | 1,030   |          
|General and administrative                                                        |                                                                |   | 2,911              |           |                  |   | 3,742   |           |      |   | 5,748   |           |   |   | 5,685   |          
|Payroll and related benefits                                                      |                                                                |   | 5,461              |           |                  |   | 6,279   |           |      |   | 10,818  |           |   |   | 10,522  |          
|Tender Offer costs (Note 6)                                                       |                                                                |   |                   |           |                  |   | 881     |           |      |   |        |           |   |   | 1,000   |          
|Depreciation and amortization                                                     |                                                                |   | 2,694              |           |                  |   | 2,582   |           |      |   | 5,400   |           |   |   | 5,110   |          
|                                                                                  |                                                                |   |                    |           |                  |   |         |           |      |   |         |           |   |   |         |          
|                                                                                  |                                                                |   | 12,005             |           |                  |   | 14,033  |           |      |   | 23,684  |           |   |   | 23,347  |          
|Other expenses from managed hotels                                                |                                                                |   | 70,454             |           |                  |   | 71,874  |           |      |   | 139,859 |           |   |   | 134,315 |          
|                                                                                  |                                                                |   |                    |           |                  |   |         |           |      |   |         |           |   |   |         |          
|                                                                                  |                                                                |   | 82,459             |           |                  |   | 85,907  |           |      |   | 163,543 |           |   |   | 157,662 |          
|                                                                                  |                                                                |   |                    |           |                  |   |         |           |      |   |         |           |   |   |         |          
|Operating income (loss)                                                           |                                                                |   | 259                |           |                  |   | (1,467  | )         |      |   | (335    | )         |   |   | (434    | )        
|Other (expense) income:                                                           |                                                                |   |                    |           |                  |   |         |           |      |   |         |           |   |   |         |          
|                                                                                  | Interest, net                                                  |   |                    | (165      | )                |   |         | (2,160    | )    |   |         | (232      | ) |   |         | (3,135    | )
|                                                                                  | Other, net                                                     |   |                    | 16        |                  |   |         |          |      |   |         | 16        |   |   |         |          |  
|                                                                                  | Earnings (losses) from equity investments in hotel real estate |   |                    | 141       |                  |   |         | (416      | )    |   |         | 318       |   |   |         | (596      | )
|                                                                                  |                                                                |   |                    |           |                  |   |         |           |      |   |         |           |   |   |         |          
|Income (loss) before income tax expense (benefit)                                 |                                                                |   | 251                |           |                  |   | (4,043  | )         |      |   | (233    | )         |   |   | (4,165  | )        
|Income tax expense (benefit)                                                      |                                                                |   | 79                 |           |                  |   | (1,105  | )         |      |   | (129    | )         |   |   | (1,176  | )        
|                                                                                  |                                                                |   |                    |           |                  |   |         |           |      |   |         |           |   |   |         |          
|Income (loss) before minority interest                                            |                                                                |   | 172                |           |                  |   | (2,938  | )         |      |   | (104    | )         |   |   | (2,989  | )        
|Minority interest                                                                 |                                                                |   | 54                 |           |                  |   | (12     | )         |      |   | 90      |           |   |   | 52      |          
|                                                                                  |                                                                |   |                    |           |                  |   |         |           |      |   |         |           |   |   |         |          
|Net income (loss)                                                                 |                                                                |   | 118                |           |                  |   | (2,926  | )         |      |   | (194    | )         |   |   | (3,041  | )        
|Mandatorily redeemable preferred stock:                                           |                                                                |   |                    |           |                  |   |         |           |      |   |         |           |   |   |         |          
|                                                                                  | Dividends                                                      |   |                    | 159       |                  |   |         | 148       |      |   |         | 318       |   |   |         | 307       |  
|                                                                                  | Accretion                                                      |   |                    | 15        |                  |   |         | 340       |      |   |         | 30        |   |   |         | 355       |  
|                                                                                  | Conversion incentive payment                                   |   |                    |          |                  |   |         | 9,250     |      |   |         |          |   |   |         | 9,250     |  
|                                                                                  |                                                                |   |                    |           |                  |   |         |           |      |   |         |           |   |   |         |          
|Net loss available to common stockholders                                         |                                                                | $ | (56                | )         |                  | $ | (12,664 | )         |      | $ | (542    | )         |   | $ | (12,953 | )        
|                                                                                  |                                                                |   |                    |           |                  |   |         |           |      |   |         |           |   |   |         |          
|Earnings per common share and common share equivalent:                            |                                                                |   |                    |           |                  |   |         |           |      |   |         |           |   |   |         |          
|                                                                                  | Basic                                                          |   | $                  | (.01      | )                |   | $       | (2.08     | )    |   | $       | (0.08     | ) |   | $       | (2.19     | )
|                                                                                  |                                                                |   |                    |           |                  |   |         |           |      |   |         |           |   |   |         |          
|                                                                                  | Diluted                                                        |   | $                  | (.01      | )                |   | $       | (2.08     | )    |   | $       | (0.08     | ) |   | $       | (2.19     | )
|                                                                                  |                                                                |   |                    |           |                  |   |         |           |      |   |         |           |   |   |         |          
|Weighted average number of common share and common share
equivalents outstanding: |                                                                |   |                    |           |                  |   |         |           |      |   |         |           |   |   |         |          
|                                                                                  | Basic                                                          |   |                    | 6,538,917 |                  |   |         | 6,094,217 |      |   |         | 6,510,209 |   |   |         | 5,913,333 |  
|                                                                                  |                                                                |   |                    |           |                  |   |         |           |      |   |         |           |   |   |         |          
|                                                                                  | Diluted                                                        |   |                    | 6,538,917 |                  |   |         | 6,094,217 |      |   |         | 6,510,209 |   |   |         | 5,913,333 |  
|                                                                                  |                                                                |   |                    |           |                  |   |         |           |      |   |         |           |   |   |         |          

See accompanying notes to condensed consolidated financial statements.

3



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##### 



INTERSTATE HOTELS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

|                                                 |                                                                                   |                                                                |                                                     |        |                  |        |         |        |        |         |  
|------------------------------------------------ | --------------------------------------------------------------------------------- | -------------------------------------------------------------- | --------------------------------------------------- | ------ | ---------------- | ------ | ------- | ------ | ------ | ------- | -
|                                                 |                                                                                   |                                                                |                                                     |        | Six Months Ended
|                                                 |                                                                                   |                                                                |                                                     |        | June 30,        
|                                                 |                                                                                   |                                                                |                                                     |        |                 
|                                                 |                                                                                   |                                                                |                                                     |        | 2001             |        | 2002   
|                                                 |                                                                                   |                                                                |                                                     |        |                  |        |        
|Operating activities:                            |                                                                                   |                                                                |                                                     |        |                  |        |         |       
|                                                 | Net loss                                                                          |                                                                | $                                                   | (194   | )                |        | $       | (3,041 | )     
|                                                 | Adjustments to reconcile net loss to net cash used in operating activities:       |                                                                |                                                     |        |                  |        |         |        |       
|                                                 |                                                                                   | Depreciation and amortization                                  |                                                     |        | 5,400            |        |         |        | 5,110  |        
|                                                 |                                                                                   | (Earnings) losses from equity investments in hotel real estate |                                                     |        | (318             | )      |         |        | 596    |        
|                                                 |                                                                                   | Minority interest                                              |                                                     |        | 90               |        |         |        | 52     |        
|                                                 |                                                                                   | Deferred income taxes                                          |                                                     |        | (793             | )      |         |        | (1,357 | )      
|                                                 |                                                                                   | Amortization of mandatorily redeemable preferred stock         |                                                     |        | 376              |        |         |        | 1,375  |        
|                                                 |                                                                                   | Stock option expense                                           |                                                     |        | 287              |        |         |        | 790    |        
|                                                 |                                                                                   | Other                                                          |                                                     |        | 174              |        |         |        | 2,082  |        
|                                                 | Changes in operating assets and liabilities:                                      |                                                                |                                                     |        |                  |        |         |        |       
|                                                 |                                                                                   | Accounts receivable, net                                       |                                                     |        | 1,711            |        |         |        | (7,448 | )      
|                                                 |                                                                                   | Prepaid expenses and other assets                              |                                                     |        | 555              |        |         |        | 51     |        
|                                                 |                                                                                   | Accounts payable                                               |                                                     |        | (8,618           | )      |         |        | (2,842 | )      
|                                                 |                                                                                   | Accrued liabilities                                            |                                                     |        | (7,441           | )      |         |        | 3,072  |        
|                                                 |                                                                                   |                                                                |                                                     |        |                  |        |         |       
|                                                 |                                                                                   |                                                                | Net cash used in operating activities               |        |                  | (8,771 | )       |        |        | (1,560  | )
|                                                 |                                                                                   |                                                                |                                                     |        |                  |        |         |       
|Investing activities:                            |                                                                                   |                                                                |                                                     |        |                  |        |         |       
|                                                 | Change in restricted cash                                                         |                                                                |                                                     | 892    |                  |        |         | (28    | )     
|                                                 | Purchases of property and equipment, net                                          |                                                                |                                                     | (388   | )                |        |         | (44    | )     
|                                                 | Purchases of marketable securities                                                |                                                                |                                                     | (2,921 | )                |        |         | (1,061 | )     
|                                                 | Proceeds from sale of marketable securities                                       |                                                                |                                                     | 2,394  |                  |        |         | 795    |       
|                                                 | Net cash (invested for) received from equity investments in hotel and
real estate |                                                                |                                                     | (8,179 | )                |        |         | 134    |       
|                                                 | Change in officers and employees notes receivable, net                            |                                                                |                                                     | 1,078  |                  |        |         | (176   | )     
|                                                 | Net investment in management agreements                                           |                                                                |                                                     | (471   | )                |        |         |       |       
|                                                 | Change in affiliates notes receivable, net                                        |                                                                |                                                     | (154   | )                |        |         | 1      |       
|                                                 | Merger-related acquisition costs                                                  |                                                                |                                                     |       |                  |        |         | (1,729 | )     
|                                                 | Deposits and other                                                                |                                                                |                                                     | (229   | )                |        |         | 64     |       
|                                                 |                                                                                   |                                                                |                                                     |        |                  |        |         |       
|                                                 |                                                                                   |                                                                | Net cash used in investing activities               |        |                  | (7,978 | )       |        |        | (2,044  | )
|                                                 |                                                                                   |                                                                |                                                     |        |                  |        |         |       
|Financing activities:                            |                                                                                   |                                                                |                                                     |        |                  |        |         |       
|                                                 | Proceeds from long-term debt                                                      |                                                                |                                                     | 4,169  |                  |        |         |       |       
|                                                 | Repayment of long-term debt                                                       |                                                                |                                                     | (49    | )                |        |         | (1,555 | )     
|                                                 | Financing fees paid                                                               |                                                                |                                                     | (262   | )                |        |         | (42    | )     
|                                                 | Proceeds from issuance of common stock                                            |                                                                |                                                     | 215    |                  |        |         | 80     |       
|                                                 | Dividends paid on mandatorily redeemable preferred stock                          |                                                                |                                                     | (318   | )                |        |         | (307   | )     
|                                                 | Common stock repurchased and retired                                              |                                                                |                                                     | (71    | )                |        |         |       |       
|                                                 | Conversion incentive payment                                                      |                                                                |                                                     |       |                  |        |         | (9,250 | )     
|                                                 | Other                                                                             |                                                                |                                                     | (1     | )                |        |         | 10     |       
|                                                 |                                                                                   |                                                                |                                                     |        |                  |        |         |       
|                                                 |                                                                                   |                                                                | Net cash provided by (used in) financing activities |        |                  | 3,683  |         |        |        | (11,064 | )
|                                                 |                                                                                   |                                                                |                                                     |        |                  |        |         |       
|Net decrease in cash and cash equivalents        |                                                                                   |                                                                | (13,066                                             | )      |                  |        | (14,668 | )     
|Cash and cash equivalents at beginning of period |                                                                                   |                                                                | 51,327                                              |        |                  |        | 39,040  |       
|                                                 |                                                                                   |                                                                |                                                     |        |                  |        |         |       
|Cash and cash equivalents at end of period       |                                                                                   | $                                                              | 38,261                                              |        |                  | $      | 24,372  |       
|                                                 |                                                                                   |                                                                |                                                     |        |                  |        |         |       

See accompanying notes to condensed consolidated financial statements.

4



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##### 



INTERSTATE HOTELS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands, except per share amounts)

1. Organization and Basis of Presentation:

Interstate Hotels Corporation and its subsidiaries (the Company) is one of
the largest independent hotel management companies in the United States based
on number of properties, number of rooms and total revenues produced for
owners. At June 30, 2002, the Company managed or performed related services
(including insurance and risk management services, purchasing and project
management services and centralized accounting services) for 136 hotels with a
total of 29,038 rooms in 36 states in the United States, the District of
Columbia, Canada and Russia. The Company wholly owns one of these properties,
the 156-suite Pittsburgh Airport Residence Inn by Marriott (the Owned Hotel),
which it acquired in 1999, and has non-controlling equity interests in 12 of
these hotels.

The Company, together with its subsidiaries and predecessors, was formed on
June 18, 1999, pursuant to a series of events culminating in the spin-off of
the Companys operations from Wyndham International, Inc. (Wyndham) (the
Spin-off).

The accompanying consolidated interim financial statements have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to
such rules and regulations. These consolidated interim financial statements
should be read in conjunction with the consolidated financial statements, notes
thereto and other information included in the Companys Annual Report on Form
10-K/A for the year ended December 31, 2001.

The accompanying consolidated interim financial statements reflect, in the
opinion of management, all adjustments necessary for a fair presentation, in
all material respects, of the financial position and results of operations for
the periods presented. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. 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.

2. Change in Accounting:

Effective January 1, 2002, the Company adopted the provisions of Emerging
Issues Task Force (EITF) Issue No. 01-14 Income Statement Characterization
of Reimbursements Received for Out-of-Pocket Expenses Incurred. This issue
establishes standards for accounting for reimbursements received for
out-of-pocket expenses incurred and the characterization as revenue and expense
in the statement of operations. In accordance with EITF Issue No. 01-14, the
Company has included in operating revenues and expenses the reimbursement of
costs incurred on behalf of the third-party owners of the Companys managed
hotels. These costs relate primarily to payroll and benefit costs at managed
hotels where the Company is the employer. These reimbursements are received
based upon the costs incurred by the Company with no added margin. Therefore,
the adoption of EITF Issue No. 01-14 did not impact operating income, earnings
per share, cash flows or the financial position of the Company.

The effect of adopting EITF Issue No. 01-14, which was retroactively applied
for all periods presented, was an increase in operating revenues and expenses
of $70,454 and $71,874 for the three-month periods ended June 30, 2001 and
2002, respectively, and $139,859 and $134,315 for the six-month periods ended
June 30, 2001 and 2002, respectively.

5



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##### 



3. Earnings Per Share:

Basic earnings per common share was calculated by dividing net loss available
to common stockholders by the weighted average number of shares of common stock
outstanding. Diluted earnings per common share assumes the issuance of common
stock for all potentially dilutive equivalents outstanding. The effect of the
conversion of the remaining Companys Subordinated Convertible Notes and the
Series B Convertible Preferred Stock into Class A Common Stock and the Class A
shares issuable upon the exercise of outstanding stock options are considered
to be anti-dilutive. The details of basic and diluted earnings per common share
for the three-month and six-month periods ended June 30, 2001 and 2002 were as
follows:

|                                                             |  |                    |           |                  |  |      |           |      |  |   |           |   |  |   |           |  
|------------------------------------------------------------ |  | ------------------ | --------- | ---------------- |  | ---- | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                             |  | Three Months Ended |           | Six Months Ended
|                                                             |  | June 30,           |           | June 30,        
|                                                             |  |                    |           |                 
|                                                             |  | 2001               |           | 2002             |  | 2001 |           | 2002
|                                                             |  |                    |           |                  |  |      |           |     
|Net loss available to common stockholders                    |  | $                  | (56       | )                |  | $    | (12,664   | )    |  | $ | (542      | ) |  | $ | (12,953   | )
|                                                             |  |                    |           |                  |  |      |           |      |  |   |           |   |  |   |           |  
|Weighted average number of common shares
outstanding         |  |                    | 6,538,917 |                  |  |      | 6,094,217 |      |  |   | 6,510,209 |   |  |   | 5,913,333 |  
|                                                             |  |                    |           |                  |  |      |           |      |  |   |           |   |  |   |           |  
|Basic earnings per common share                              |  | $                  | (0.01     | )                |  | $    | (2.08     | )    |  | $ | (0.08     | ) |  | $ | (2.19     | )
|                                                             |  |                    |           |                  |  |      |           |      |  |   |           |   |  |   |           |  
|Weighted average number of diluted common
shares outstanding |  |                    | 6,538,917 |                  |  |      | 6,094,217 |      |  |   | 6,510,209 |   |  |   | 5,913,333 |  
|                                                             |  |                    |           |                  |  |      |           |      |  |   |           |   |  |   |           |  
|Diluted earnings per common share                            |  | $                  | (.01      | )                |  | $    | (2.08     | )    |  | $ | (0.08     | ) |  | $ | (2.19     | )
|                                                             |  |                    |           |                  |  |      |           |      |  |   |           |   |  |   |           |  

The weighted average number of common and diluted common shares outstanding has
not been adjusted for the effects of the Merger or for the one-for-five reverse
stock split (see Note 7).

4. Conversion of Securities:

On October 20, 2000, the Company issued 500,000 shares of its Series B
Convertible Preferred Stock, par value $.01 per share, (the Preferred Stock)
for $5,000 and 8.75% Subordinated Convertible Notes (the Notes) for $25,000.
These securities were issued to CGLH Partners I LP and CGLH Partners II LP
(collectively, the Investor), entities affiliated with Lehman Brothers
Holdings Inc. In addition, 225,000 shares of the Companys Preferred Stock
were also issued to three members of senior management of the Company as
deferred compensation on October 20, 2000, subject to a three-year forfeiture
period. Initially, the Preferred Stock was mandatorily redeemable by the
Company on October 20, 2007 for $10 per share and the Notes matured on October
20, 2007. Each share of Preferred Stock was convertible into 2.5 shares of
Class A Common Stock of the Company, and the Notes were convertible into Class
A Common Stock of the Company at a rate of $4.00 per share.

In connection with the execution of the Companys merger (the Merger) with
and into Interstate Hotels & Resorts, Inc. (the Registrant) (see Note 7), the
Investor agreed to convert its Preferred Stock and Notes into Class A Common
Stock, subject to the restrictions on conversion set forth in the terms of
those securities and the agreements to convert those securities. In addition,
the three members of senior management also agreed to convert their Preferred
Stock into Class A Common Stock in connection with the Merger. Therefore, on
June 26, 2002, the Investor converted all but 10 shares of its Preferred Stock
into 1,249,975 shares of the Class A Common Stock and approximately $18,757 in
aggregate principal amount of the Notes into 4,689,165 shares of Class A Common
Stock. As an inducement to such conversion, the Company paid the Investor
$9,250. The payment of this conversion incentive was recorded as a charge to
the loss available to common stockholders in the second quarter of 2002. In
addition, the three members of senior management converted all of their
Preferred Stock into an aggregate 562,500 shares of Class A Common Stock. The
vesting of the Preferred Stock was recorded as a compensation charge of $1,188
in the second quarter of 2002.

On July 31, 2002, the Merger was completed, and the Registrant completed a
one-for-five reverse split of its common stock, par value $0.01 per share (the
Registrant Common Stock). On August 2, 2002, the Investor surrendered for
conversion the remaining 10 shares of its Preferred Stock and the remaining
$6,243 principal amount of Notes, along with its 5,939,140 shares of Class A
Common Stock, in exchange for 6,900,000 shares of post-split Registrant Common
Stock.

6



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##### 



5. Long Term Debt:

Long-term debt consisted of the following:

|                                     |                      |   |              |        |          |   |        |        |  
|------------------------------------ | -------------------- | - | ------------ | ------ | -------- | - | ------ | ------ | -
|                                     |                      |   | December 31, |        | June 30,
|                                     |                      |   | 2001         |        | 2002    
|                                     |                      |   |              |        |         
|8.75% Subordinated Convertible Notes |                      | $ | 25,000       |        |          | $ | 6,243  |       
|Wyndham Redemption Notes             |                      |   | 4,432        |        |          |   | 3,682  |       
|Limited Recourse Mortgage Note       |                      |   | 7,379        |        |          |   | 6,575  |       
|Promissory Note                      |                      |   | 4,170        |        |          |   | 4,170  |       
|                                     |                      |   |              |        |          |   |        |       
|                                     |                      |   | 40,981       |        |          |   | 20,670 |       
|                                     | Less Current Portion |   |              | (1,601 | )        |   |        | (6,575 | )
|                                     |                      |   |              |        |          |   |        |       
|                                     |                      | $ | 39,380       |        |          | $ | 14,095 |       
|                                     |                      |   |              |        |          |   |        |       

Wyndham Redemption NotesThe Wyndham Redemption Notes balance of $4,432 and
$3,682 at December 31, 2001 and June 30, 2002, respectively, bears interest at
a rate that is fixed at 9.75%. Initially, principal payments of $750 and
$3,682 were due on July 1, 2002 and July 1, 2004, respectively.

Prior to entering into the Merger Agreement, an affiliate of Wyndham
International, Inc., the holder of a 1.6627% non-controlling economic interest
in Interstate Hotels, LLC (IH LLC), the Companys principal operating
subsidiary, agreed to permit the Company to cause IH LLC, or its subsidiaries,
to provide a guaranty and pledge of assets of IH LLC, or its subsidiaries,
under the terms of the proposed senior secured credit facility for the
Registrant following the Merger. In consideration for this agreement, the
Company repaid a promissory note to Wyndham on May 2, 2002 in the outstanding
principal amount of $750 and agreed to pay to Wyndham the outstanding principal
amount of $3,682 under a second promissory note prior to IH LLC, or its
subsidiaries, providing such guarantee and pledge of any of its or their
assets. The Company repaid the second promissory note to Wyndham on July 30,
2002 in the outstanding principal amount of $3,682.

In addition, the Company accelerated the timing of Wyndhams right to require
the Company to redeem Wyndhams interest in IH LLC to be the earlier of (i) the
date on which the Company repays the second promissory note to Wyndham and (ii)
July 1, 2004.

Limited Recourse Mortgage NoteIn February 2000, a subsidiary of the Company
entered into a limited-recourse mortgage note with a bank. The proceeds from
the note, which originally was to mature February 2003, amounted to $7,560.
Monthly payments were due based on a 25-year amortization schedule for
principal, with interest based on variable rate options using the prime rate
for the LIBOR rate. The average effective interest rate for 2001 was 6.26%.
The note was collateralized by the Pittsburgh Airport Residence Inn by
Marriott, which was acquired by the Company on November 1, 1999.

In connection with the Merger, the remaining principal balance of the note in
the amount of $6,575 was repaid on July 31, 2002.

Promissory NoteIn March 2001, a subsidiary of the Company entered into a
promissory note in the amount of $4,170 with Felcor Lodging Trust Incorporated
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.

Senior Credit AgreementImmediately after the Merger, the Registrant, its
principal operating subsidiary, Meristar H & R Operating Company, L.P. (the
OP), and a group of lenders entered into a $113,000 Senior Credit Agreement,
dated as of July 31, 2002 (the Senior Credit Agreement), pursuant to which
the existing senior credit agreements of the Registrant and the Company were
refinanced. The Senior Credit Agreement consists of a $65,000 term loan due on
July 31, 2005 and a $48,000 revolving credit facility due on July 31, 2005
(with a one-year renewal at the Registrants option). The interest rate on the
Senior Credit Agreement will be LIBOR plus 3.00% to 4.50%, based on the
fulfillment of various financial tests by the Registrant. As of July 31, 2002,
approximately $65,000 was outstanding under the term loan and $5,000 was
outstanding under the revolving credit facility. These borrowings bore
interest at a rate of 5.8125% per annum.

7



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##### 



MHOP Term Loan The OP and MeriStar Hospitality Operating Partnership, L.P.
(MHOP) were parties to a Revolving Credit Agreement, dated as of August 3,
1998 and amended on February 29, 2000 and January 28, 2002 (as amended, the
MHOP Loan), pursuant to which MHOP provided a $50,000 revolving credit
facility to the OP. Immediately after the merger, the OP and MHOP entered into
the Third Amendment to Revolving Credit Agreement, dated as of July 31, 2002
pursuant to which:

| |  | An existing $13,069 term note issued by the OP and MHOP was retired, with the balance added to the MHOP Loan;
|- |  | -------------------------------------------------------------------------------------------------------------
| |  | The MHOP Loan became a term loan due on July 31, 2007; and                                                   
| |  | $3,000 of the outstanding principal amount under MHOP Loan was repaid.                                       

6. Segment Information:

The Companys reportable segments are: (i) operations of luxury and upscale
hotels, and (ii) operations of mid-scale, upper economy and budget hotels. The
luxury and upscale hotels segment derives revenues from management fees,
reimbursements received for out-of-pocket expenses incurred, and other services
(including insurance and risk management, purchasing and project management, IT
support, training and relocation programs, and equipment leasing) that directly
relate to providing management services. The mid-scale, upper economy and
budget hotels segment derives revenues from management fees, reimbursements
received for out-of-pocket expenses incurred, and certain specialized support
services (such as centralized accounting services), as well as the operating
revenues from the Pittsburgh Airport Residence Inn by Marriott.

The table below presents revenue and operating income (loss) information for
each reportable segment for the three-month and six-month periods ended June
30, 2001 and 2002.

|                                           |                     |   |                    |        |                  |   |        |        |      |   |         |         |   |   |         |         |  
|------------------------------------------ | ------------------- | - | ------------------ | ------ | ---------------- | - | ------ | ------ | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                           |                     |   | Three Months Ended |        | Six Months Ended
|                                           |                     |   | June 30,           |        | June 30,        
|                                           |                     |   |                    |        |                 
|                                           |                     |   | 2001               |        | 2002             |   | 2001   |        | 2002
|                                           |                     |   |                    |        |                  |   |        |        |     
|Revenues(1):                               |                     |   |                    |        |                  |   |        |        |      |   |         |         |   |   |         |        
|Luxury and Upscale Hotels                  |                     | $ | 61,880             |        |                  | $ | 64,783 |        |      | $ | 124,636 |         |   | $ | 120,265 |        
|Mid-Scale, Upper Economy and Budget Hotels |                     |   | 20,838             |        |                  |   | 19,657 |        |      |   | 38,572  |         |   |   | 36,963  |        
|                                           |                     |   |                    |        |                  |   |        |        |      |   |         |         |   |   |         |        
|                                           | Consolidated totals |   | $                  | 82,718 |                  |   | $      | 84,440 |      |   | $       | 163,208 |   |   | $       | 157,228 |  
|                                           |                     |   |                    |        |                  |   |        |        |      |   |         |         |   |   |         |        
|Operating income (loss):                   |                     |   |                    |        |                  |   |        |        |      |   |         |         |   |   |         |        
|Luxury and Upscale Hotels                  |                     | $ | 53                 |        |                  | $ | (1,362 | )      |      | $ | (676    | )       |   | $ | (510    | )      
|Mid-Scale, Upper Economy and Budget Hotels |                     |   | 206                |        |                  |   | (105   | )      |      |   | 341     |         |   |   | 76      |        
|                                           |                     |   |                    |        |                  |   |        |        |      |   |         |         |   |   |         |        
|                                           | Consolidated totals |   | $                  | 259    |                  |   | $      | (1,467 | )    |   | $       | (335    | ) |   | $       | (434    | )
|                                           |                     |   |                    |        |                  |   |        |        |      |   |         |         |   |   |         |        



|   
|---
|(1)

Depreciation and amortization included in segment operating income (loss)
information for the three-month and six-month periods ended June 30, 2001 and 2002 were as
follows:

|                                           |                     |   |                    |       |                  |   |       |       |      |   |       |       |  |   |       |       | 
|------------------------------------------ | ------------------- | - | ------------------ | ----- | ---------------- | - | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                                           |                     |   | Three Months Ended |       | Six Months Ended
|                                           |                     |   | June 30,           |       | June 30,        
|                                           |                     |   |                    |       |                 
|                                           |                     |   | 2001               |       | 2002             |   | 2001  |       | 2002
|                                           |                     |   |                    |       |                  |   |       |       |     
|Luxury and Upscale Hotels                  |                     | $ | 2,196              |       |                  | $ | 2,069 |       |      | $ | 4,407 |       |  | $ | 4,084 |      
|Mid-Scale, Upper Economy and Budget Hotels |                     |   | 498                |       |                  |   | 513   |       |      |   | 993   |       |  |   | 1,026 |      
|                                           |                     |   |                    |       |                  |   |       |       |      |   |       |       |  |   |       |      
|                                           | Consolidated totals |   | $                  | 2,694 |                  |   | $     | 2,582 |      |   | $     | 5,400 |  |   | $     | 5,110 | 
|                                           |                     |   |                    |       |                  |   |       |       |      |   |       |       |  |   |       |      

The net book value of intangible and other assets and equity investments in
hotel real estate by segment consisted of the following as of December 31, 2001
and June 30, 2002:

8



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##### 



|                                           |                     |   |              |        |          |   |        |        | 
|------------------------------------------ | ------------------- | - | ------------ | ------ | -------- | - | ------ | ------ | 
|                                           |                     |   | December 31, |        | June 30,
|                                           |                     |   | 2001         |        | 2002    
|                                           |                     |   |              |        |         
|Luxury and Upscale Hotels                  |                     | $ | 14,383       |        |          | $ | 10,891 |       
|Mid-Scale, Upper Economy and Budget Hotels |                     |   | 14,510       |        |          |   | 13,218 |       
|                                           |                     |   |              |        |          |   |        |       
|                                           | Consolidated totals |   | $            | 28,893 |          |   | $      | 24,109 | 
|                                           |                     |   |              |        |          |   |        |       

The following table reconciles the Companys measure of operating income (loss)
to consolidated net income (loss) for the three-month and six-month periods ended June
30, 2001 and 2002.

|                                        |                                                                |   |                    |     |                  |   |        |        |      |   |      |      |   |   |        |        |  
|--------------------------------------- | -------------------------------------------------------------- | - | ------------------ | --- | ---------------- | - | ------ | ------ | ---- | - | ---- | ---- | - | - | ------ | ------ | -
|                                        |                                                                |   | Three Months Ended |     | Six Months Ended
|                                        |                                                                |   | June 30,           |     | June 30,        
|                                        |                                                                |   |                    |     |                 
|                                        |                                                                |   | 2001               |     | 2002             |   | 2001   |        | 2002
|                                        |                                                                |   |                    |     |                  |   |        |        |     
|Total after-tax operating income (loss) |                                                                | $ | 155                |     |                  | $ | (909   | )      |      | $ | (202 | )    |   | $ | (269   | )     
|Unallocated amounts, net of tax:        |                                                                |   |                    |     |                  |   |        |        |      |   |      |      |   |   |        |       
|                                        | Interest, net                                                  |   |                    | (99 | )                |   |        | (1,340 | )    |   |      | (139 | ) |   |        | (1,944 | )
|                                        | Other                                                          |   |                    | 9   |                  |   |        |       |      |   |      | 9    |   |   |        |       |  
|                                        | Earnings (losses) from equity investments in
hotel real estate |   |                    | 85  |                  |   |        | (684   | )    |   |      | 191  |   |   |        | (796   | )
|                                        | Minority interest                                              |   |                    | (32 | )                |   |        | 7      |      |   |      | (53  | ) |   |        | (32    | )
|                                        |                                                                |   |                    |     |                  |   |        |        |      |   |      |      |   |   |        |       
|Consolidated
net income (loss)          |                                                                | $ | 118                |     |                  | $ | (2,926 | )      |      | $ | (194 | )    |   | $ | (3,041 | )     
|                                        |                                                                |   |                    |     |                  |   |        |        |      |   |      |      |   |   |        |       

7. Merger:

The Registrant, a Delaware corporation (formerly known as MeriStar Hotels &
Resorts, Inc.) and the Company entered into an Agreement and Plan of Merger,
dated May 1, 2002 and as amended on June 3, 2002 (the Merger Agreement),
pursuant to which the Company merged with and into the Registrant (the
Merger). On July 31, 2002, after receiving the required stockholder
approvals, pursuant to the Merger Agreement, MeriStar Hotels & Resorts and the
Company completed the Merger. Pursuant to the Merger Agreement, each
outstanding share of the Companys common stock, par value $0.01 per share, was
converted into 4.6 shares of Registrant Common Stock and the Registrants name was changed
to Interstate Hotels & Resorts, Inc.

The Merger included the following significant related transactions:



| |  | the Investor agreed to convert its Preferred Stock and Notes into Class A Common Stock.                                                                                                                                  
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Company repaid its outstanding balance on its promissory notes held by Wyndham International, Inc on July 30, 2002 and
repaid the remaining principal balance of the limited recourse mortgage note on July 31, 2002;
| |  | the Registrant and the OP entered into the Senior Credit Agreement;                                                                                                                                                      
| |  | the Registrant and the OP
entered into and converted its loan with MHOP to a Term Loan and
repaid $3,000 under that
loan; and                                                                                            
| |  | the Registrant effected a
one-for-five reverse split of its Common Stock.                                                                                                                                                

In accordance with generally accepted accounting principles, the merger will be
treated as a purchase for financial reporting purposes. In accordance with the
provisions of Statement of Financial Accounting Standards No. 141, Business
Combinations, the Company will be considered the acquiring enterprise for
financial reporting purposes. The Company will establish a new accounting
basis for the Registrants assets and liabilities based upon the fair values
thereof as of July 31, 2002, the effective date of the Merger. For financial
reporting purposes, the results of operations of the Registrant will be
included in the Interstate Hotels & Resorts, Inc. statement of operations from
July 31, 2002. Costs incurred by the Company and related directly to the
acquisition of the Registrant will be included as part of the cost of acquiring
the Registrant.

The following unaudited pro forma summary results presents the information for
the Registrant and the Company as if the Merger

9



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##### 



and the one-for-five reverse stock split had been completed as of the beginning
of the periods presented:



| | Pro Forma Information (Unaudited)
| | ---------------------------------

|                                  |  |                           |         |      |  |   |         | 
|--------------------------------- |  | ------------------------- | ------- | ---- |  | - | ------- | 
|                                  |  | Six Months Ended June 30,
|                                  |  | 2001                      |         | 2002
|                                  |  |                           |         |     
|Total Revenue                     |  | $                         | 598,572 |      |  | $ | 567,066 | 
|Net income (loss)                 |  | $                         | (13,111 | )    |  | $ | 3,448   | 
|Diluted
earnings (loss) per share |  | $                         | (0.65   | )    |  | $ | 0.17    | 

For more information on the pro forma effects of the Merger on the periods
presented above, see the Registrant's Press Release issued on August 8, 2002 as filed with
the SEC on Form 8-K on August 8, 2002.

8. Tender Offer:

On April 11, 2002, Shaner Hotel Group Limited Partnership (Shaner) commenced
an unsolicited partial tender offer to purchase 2,465,322 shares of the
Companys Class A Common Stock for $3.00 per share (as subsequently amended,
the Tender Offer). The Tender Offer was subject to various conditions,
including the redemption of the Companys preferred stock purchase rights
pursuant to the Companys Shareholder Rights Agreement, or Shaner being
satisfied that those rights did not apply to the Tender Offer.

Prior to the commencement of the Tender Offer, the Company received unsolicited
proposals from Shaner to combine the operations of the Company with Shaner,
which proposals also provided for the purchase of a portion of shares of the
Companys common stock by Shaner. The board of directors unanimously voted to
reject the proposals.

On April 24, 2002, the Companys full board of directors and a Special
Committee of its independent directors concluded that the Tender Offer was
financially inadequate and was not in the best interests of the Companys
stockholders. Therefore, they unanimously recommended that the Companys
stockholders reject the Tender Offer and not tender their shares pursuant to
the Tender Offer. The Tender Offer expired on May 31, 2002.

The Company incurred approximately $881 and $1,000 of costs related to the
Tender Offer and the unsolicited proposals for the three and six months ended
June 30, 2002, respectively. These costs were incurred for legal and other
professional fees and are recorded in the accompanying consolidated statement
of operations.

10



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##### 



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

Background

Interstate Hotels & Resorts, Inc., a Delaware corporation (formerly known as
MeriStar Hotels & Resorts, Inc.) (the Registrant) and Interstate Hotels
Corporation, a Maryland corporation (the Company), entered into an Agreement
and Plan of Merger, dated May 1, 2002 and as amended on June 3, 2002 (the
Merger Agreement), pursuant to which the Company merged with and into
Interstate Hotels & Resorts (the Merger). On July 31, 2002, after receiving
the required stockholder approvals, pursuant to the Merger Agreement,
Interstate Hotels & Resorts and the Company completed the Merger. Upon
consummation of the Merger, pursuant to the Merger Agreement, each outstanding
share of the Companys common stock, par value $0.01 per share, was converted
into 4.6 shares of Interstate Hotels & Resorts common stock, $0.01 par value
per share (the  Registrant Common Stock) and MeriStar Hotels & Resorts,
Inc.s name was changed to Interstate Hotels & Resorts, Inc. Immediately
after the effective time of the Merger, the Registrant also effected a
one-for-five reverse split of the Registrant Common Stock.

In accordance with generally accepted accounting principles, the Merger will be
treated as a purchase for financial reporting purposes. In accordance with the
provisions of the Statement of Financial Accounting Standards No. 141,
Business Combinations, the Company will be considered the acquiring
enterprise for financial reporting purposes. The Company will establish a new
accounting basis for the Registrants assets and liabilities based upon the
fair values thereof as of July 31, 2002, the effective date of the Merger. For
financial reporting purposes, the results of operations of the Registrant will
be included in the Interstate Hotels & Resorts, Inc. statement of operations
from July 31, 2002. Costs incurred by the Company and related directly to the
acquisition of the Registrant will be included as part of the cost of acquiring
the Registrant.

The Merger included the following significant related transactions:



| |  | Conversion of Securities On October 20, 2000, the Company issued 500,000
shares of its Series B Convertible Preferred Stock, par value $.01 per
share, (the Preferred Stock) for $5 million and 8.75% Subordinated
Convertible Notes (the Notes) for $25 million. These securities were
issued to CGLH Partners I LP and CGLH Partners II LP (collectively, the
Investor), entities affiliated with Lehman Brothers Holdings Inc. In
addition, 225,000 shares of the Companys Preferred Stock were also issued
to three members of senior management of the Company as deferred
compensation on October 20, 2000, subject to a three-year forfeiture
period. Initially, the Preferred Stock was mandatorily redeemable by the
Company on October 20, 2007 for $10 per share and the Notes matured on
October 20, 2007. Each share of Preferred Stock was convertible into 2.5
shares of Class A Common Stock of the Company and the Notes were
convertible into Class A Common Stock of the Company at a rate of $4.00
per share.                                               
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|  |  | In connection with the execution of the Merger Agreement, the Investor
agreed to convert its Preferred Stock and Notes into Class A Common Stock,
subject to the restrictions on conversion set forth in the terms of those
securities and the agreements to convert those securities. In addition,
the three members of senior management also agreed to convert their
Preferred Stock into Class A Common Stock in connection with the Merger.
Therefore, on June 26, 2002, the Investor converted all but 10 shares of
its Preferred Stock into 1,249,975 shares of the Class A Common Stock and
approximately $18.8 million in aggregate principal amount of the Notes
into 4,689,165 shares of Class A Common Stock. As an inducement to such
conversion, the Company paid the Investor $9.25 million. In addition, the
three members of senior management converted all of their Preferred Stock
into an aggregate 562,500 shares of Class A Common Stock. The vesting of
the Preferred Stock was recorded as a compensation charge of $1.2 million
in the second quarter of 2002.
| 
|  |  | On July 31, 2002, the Merger was completed, and the Registrant completed a
one-for-five reverse split of the Registrant Common Stock, par value $0.01 per share
(the Registrant Common Stock). On August 2, 2002, the Investor
surrendered for conversion the remaining 10 shares of its Preferred Stock
and the remaining $6.2 million principal amount of Notes, along with its
5,939,140 shares of Class A Common Stock, in exchange for 6,900,000 shares
of post-split Registrant Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| 
| |  | Repayment of Wyndham Note Prior to entering into the Merger Agreement,
an affiliate of Wyndham International, Inc., the holder of a 1.6627%
non-controlling economic interest in Interstate Hotels, LLC (IH LLC),
the Companys principal                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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|  |  | operating subsidiary, agreed to permit the Company to cause IH LLC, or its
subsidiaries, to provide a guaranty and pledge of assets of IH LLC, or its
subsidiaries, under the terms of the proposed senior secured credit
facility for the combined company following the Merger. In consideration
for this agreement, the Company repaid a promissory note to Wyndham on May
2, 2002 in the outstanding principal amount of $0.8 million and agreed to
pay to Wyndham the outstanding principal amount of $3.7 million under a
second promissory note prior to IH LLC, or its subsidiaries, providing
such guarantee and pledge of any of its or their assets. The Company
repaid the second promissory note to Wyndham on July 30, 2002 in the
outstanding principal amount of $3.7 million. In addition, the Company
accelerated the timing of Wyndhams right to require the Company to redeem
Wyndhams interest in IH LLC to be the earlier of (i) the date on which
the second promissory note to Wyndham is repaid and (ii) July 1, 2004.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Repayment of Limited Recourse Mortgage Note In February 2000, a
subsidiary of the Company entered into a limited-recourse mortgage
note with a bank. The proceeds from the note, which originally was to
mature February 2003, amounted to $7.6 million. Monthly payments were
due based on a 25-year amortization schedule for principal, with
interest based on variable rate options using the prime rate for the
LIBOR rate. The average effective interest rate for 2001 was 6.26%.
The note was collateralized by the Pittsburgh Airport Residence Inn by
Marriott, which was acquired by the Company on November 1, 1999. In
connection with the Merger, the remaining principal balance of the
note in the amount of $6.6 million was repaid on July 31, 2002.                                                                                                                                                                                                                                                                          
| 
| |  | Senior Credit Agreement Immediately after the Merger, the Registrant,
its principal operating subsidiary, Meristar H & R Operating Company,
L.P. (the OP), and a group of lenders entered into a $113 million
Senior Secured Credit Agreement, dated as of July 31, 2002 (the
Senior Credit Agreement), pursuant to which the existing senior
credit agreements of the Registrant and the Company were refinanced.
The Senior Credit Agreement consists of a $65 million term loan due on
July 31, 2005 and a $48 million revolving credit facility due on July
31, 2005 (with a one-year renewal at the Registrants option). The
interest rate on the Senior Credit Facility will be LIBOR plus 3.00%
to 4.50%, based on the fulfillment of various financial tests by the
Registrant. As of August 12, 2002, approximately $65 million was
outstanding under the term loan and $9 million was outstanding under
the revolving credit facility. These borrowings bore interest at a
rate of 5.8125% per annum as of July 31, 2002.        
| 
| |  | MHOP Term Loan The OP and MeriStar Hospitality Operating Partnership,
L.P. (MHOP) were parties to a Revolving Credit Agreement, dated as of
August 3, 1998 and amended on February 29, 2000 and January 28, 2002 (as
amended, the MHOP Loan), pursuant to which MHOP provided a $50 million
revolving credit facility to the OP. Immediately after the merger, the OP
and MHOP entered into the Third Amendment to Revolving Credit Agreement,
dated as of July 31, 2002 pursuant
to which:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

| |  |  | An existing $13.1 million
term note issued by the OP to MHOP
was retired, with the balance added to the MHOP Loan;
| | - |  | ------------------------------------------------------------------------------------------------------------------
| |  |  | The MHOP Loan became a term loan due on July 31, 2007; and                                                        
| |  |  | $3.0 million of the outstanding principal amount under MHOP Loan was repaid.                                      



| |  | Forgiveness of Officers Notes Receivable Pursuant to agreements entered into upon the closing of the Merger, notes
receivable of certain officers will be forgiven at future dates specified in each agreement. These notes receivable are
carried at $0.8 million on the condensed consolidated balance sheet at June 30, 2002.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Business Summary

The sluggish economy and delays and difficulties in travel due to heightened
security measures at airports continue to have a major impact on our operating
results. Since the slowdown of the economy over the past 18 months,
accelerated by the terrorist attacks on September 11th, the Companys managed
hotels have experienced significant short-term declines in occupancy. Weaker
hotel performance reduces management fees and gives rise to additional losses
under minority investments that were made in connection with hotels that the
Company manages. These events have had and continue to have an adverse impact
on the Companys financial performance. In response to this current operating
environment, the Company is continuing to work with the owners of its managed
hotel properties to implement cost reduction and control measures to improve
those properties operating results.

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Three and Six Months Ended June 30, 2002 Compared to Three and Six Months Ended June 30, 2001

Lodging revenues consist of rooms, food and beverage and other departmental
revenues from the Pittsburgh Airport Residence Inn by Marriott. Lodging
revenues decreased by $0.6 million, or 45.3%, from $1.4 million in the three
months ended June 30, 2001 (the 2001 Three Months) to $0.8 million in the
three months ended June 30, 2002 (the 2002 Three Months) and by $1.0 million,
or 42.4%, from $2.5 million in the six months ended June 30, 2001 (the 2001
Six Months) to $1.5 million in the six months ended June 30, 2002 (the 2002
Six Months). The average daily room rate for this hotel decreased from $87.16
during the 2001 Three Months to $79.52 during the 2002 Three Months, and the
average occupancy rate decreased to 66.1% during the 2002 Three Months from
85.4% during the 2001 Three Months. This resulted in a decrease in revenue per
available room of 29.4% to $52.58 during the 2002 Three Months from $74.45
during the 2001 Three Months. During the six-month period, the average daily
room rate for this hotel decreased from $86.49 during 2001 to $74.73 during
2002, and the average occupancy rate decreased to 66.1% during 2002 from 79.4%
during 2001. This resulted in a decrease in revenue per available room of
28.1% to $49.42 during the 2002 Six Months from $68.69 during the 2001 Six
Months. These declines in revenues, ADR and RevPar all are results of the
sluggish economy, delays and difficulties in travel due to heightened security
measures at airports and increased competition in this market.

Net management fees decreased by $0.1 million,
or 1.1%, from $6.4 million in
the 2001 Three Months to $6.3 million in the 2002 Three Months and by $0.9
million, or 6.9%, from $12.9 million in the 2001 Six Months to $12.0 million in
the 2002 Six Months. During 2002, the Company earned lower base and incentive
management fee revenue on its hotels in the luxury and upscale hotels segment.
Net management fees earned from hotels in this segment decreased by $0.6
million during the 2002 Three Months as compared to the 2001 Three Months.
During the six-month period, net management fees earned from hotels in this
segment decreased by $1.3 million during 2002 as compared to 2001. Lower
incentive management fee revenue was earned from hotels in this segment due to
the weakness in the U.S. economy during 2001 and continuing into 2002 and
significant declines in occupancy following the events of September 11th.

Net management fees earned from hotels in the mid-scale, upper economy and
budget hotels segment increased by $0.5 million during the 2002 Three Months as
compared to the 2001 Three Months. During the six-month period, net management
fees earned from hotels in this segment increased by $0.4 million during 2002
as compared to 2001, due to an increase in incentive fees recorded in 2002
Three Months and 2002 Six Months compared to 2001 Three Months and 2001 Six
Months.

In accordance with Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements, and Securities and Exchange Commission (SEC) Topic No.
D-96, Accounting for Management Fees Based on a Formula (Method No. 2), base
and incentive management fees are accrued as earned based on the profitability
of the hotel, subject to the specific terms of each individual management
agreement.

Other fees increased by $1.1 million, or 22.9%, from $4.4 million in the 2001
Three Months to $5.5 million the 2002 Three Months and by $1.6 million, or
19.1%, from $7.9 million in the 2001 Six Months to $9.5 million in the 2002 Six
Months. This increase was due to an increase of $0.7 million in insurance
income during 2002 Six Months. In addition, income earned on national
purchasing contracts during the 2002 Three Months increased by $0.6 million
compared to the 2001 Three Months.

Lodging expenses consist of rooms, food and beverage, property costs and other
departmental expenses from the Pittsburgh Airport Residence Inn by Marriott.
Lodging expenses decreased by $0.4 million, or 41.5%, from $0.9 million in the
2001 Three Months to $0.5 million in the 2002 Three Months and by $0.7 million,
or 40.0%, from $1.7 million in the 2001 Six Months to $1.0 million in the 2002
Six Months. This decrease resulted primarily from the decrease in lodging
revenues described above as well as a reduction in hotel staff and other cost
containment measures in accordance with the Companys cost containment
initiatives.

Other revenues and expenses from managed hotels increased by $1.4 million, or
2.0%, from $70.5 million in the 2001 Three Months to $71.9 million in the 2002
Three Months and decreased by $5.6 million, or 4.0%, from $139.9 million in the
2001 Six Months to $134.3 million in the 2002 Six Months.

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General and administrative expenses are associated with the management of
hotels and consist primarily of centralized management expenses such as
operations management, sales and marketing, finance and other hotel support
services, as well as general corporate expenses. General and administrative
expenses increased by $0.8 million, or 28.5%, from $2.9 million in the 2001
Three Months to $3.7 million in the 2002 Three Months. This increase was due to
an increase in the Companys allowance for doubtful accounts of $0.2 million
and an increase in incurred insurance losses of $0.4 million. During the 2002 Six Months, general and administrative expenses
remained consistent at $5.7 million. Overall, as a result of cost containment
initiatives, the Company incurred lower general and administrative expenses
relating to business travel, relocation and development, which offset the
increases noted above. General and administrative expenses as a percentage of
revenues increased to 4.4% during the 2002 Three Months compared to 3.5% during
the 2001 Three Months and to 3.6% during the 2002 Six Months compared to 3.5%
during the 2001 Six Months.

Payroll and related benefits increased by $0.8 million, or 14.9%, from $5.5
million in the 2001 Three Months to $6.3 million in the 2002 Three Months.
During the 2002 Three Months, the Company recorded incremental compensation
charges of $1.0 million related to the preferred stock of three members of
senior management that became fully vested upon the conversion of such stock
into the Companys Class A Common Stock. In addition, the Company incurred
variable plan stock option expense of $0.7 million in the 2002 Three Months
compared to $0.2 million in the 2001 Three Months. During the six-month
period, payroll and related benefits decreased by $0.3 million, or 2.7%, from
$10.8 million in 2001 to $10.5 million in 2002. Overall, corporate salaries
and wages decreased due to temporary pay reductions and the elimination of
salaries and benefits of approximately 20 employees who were terminated
following the events of September 11th, as well as a wage freeze until the
fourth quarter of 2002, which offset the increases noted above. Payroll and related benefits as a percentage of revenues increased to
7.4% during the 2002 Three Months compared to 6.6% during the 2001 Three Months
and to 6.7% during the 2002 Six Months compared to 6.6% during the 2001 Six
Months.

Tender Offer costs represents costs related to the commencement of a partial
tender offer to purchase 2,465,322 shares of the Companys Class A Common Stock
by Shaner Hotel Group Limited Partnership (Shaner) and Shaners unsolicited
proposals to combine the operations of the Company with Shaner prior to the
commencement of the tender offer. These costs were incurred for legal and other
professional fees. The tender offer expired on May 31, 2002.

Depreciation and amortization decreased by $0.1 million, or 4.2%, from $2.7
million in the 2001 Three Months to $2.6 million in the 2002 Three Months and
by $0.3 million, or 5.4%, from $5.4 million in the 2001 Six Months to $5.1
million in the 2002 Six Months. Depreciation and amortization during the 2002
Six Months includes $4.2 million of amortization related to long-term
intangible assets that existed at the date of the Spin-off from Wyndham
International, Inc. (Wyndham) in 1999. These costs will be fully amortized in
the second quarter of 2003.

As a result of the changes noted above, an
operating loss of $1.5 million was
incurred in the 2002 Three Months compared to operating income of $0.3 million
in the 2001 Three Months. During the six-month period, an operating loss of
$0.4 million was incurred in 2002 compared to an operating loss of $0.3 million
in 2001.

Net interest expense increased by $2.0 million
from $0.2 million in the 2001
Three Months to $2.2 million in the 2002 Three Months and by $2.9 million from
$0.2 million in the 2001 Six Months to $3.1 million in the
2002 Six Months.
During the 2002 Three Months, the Companys incurred incremental amortization
related to financing fees in the amount of $1.2 million as a result of the
conversion of approximately $18.8 million of Notes into the Companys Class A
Common Stock. In addition, the Company had lower investment earnings
due to lower interest rates and decreased cash balances.

Earnings from equity investments in hotel real estate were $0.1 million in the
2001 Three Months compared to losses from equity investments in hotel real
estate of $0.4 million in the 2002 Three Months. Earnings of $0.3 million were
earned in the 2001 Six Months and losses of $0.6 million were incurred in the
2002 Six Months. These earnings (losses) consisted of the Companys
proportionate share of the losses incurred through four non-controlling equity
investments in 12 hotels. During 2002, these losses were incurred by the hotels
due to the weakness in the U.S. economy during 2001 and continuing into 2002,
and significant declines in occupancy following the events of September 11th.
Future adverse changes in the hospitality and lodging 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.

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Income tax benefit for the 2001 Three Months was computed based on an effective
tax rate of 40% after reduction of minority interest. Income tax benefit for
the 2002 Three Months was computed based on an effective tax rate of 38% after
reduction of minority interest.

As a result of the changes noted above, a net loss of $2.9 million was incurred
in the 2002 Three Months compared to net income of $0.1 million in the 2001
Three Months. During the six-month period, a net loss of $3.0 million was
incurred in 2002 compared to a net loss of $0.2 million in 2001.

In connection with the conversion of a portion of the Investors Notes and
Preferred Stock on June 26, 2002, the Company paid the Investor an incentive
payment of $9.25 million and issued the Investor an aggregate of 5,939,140
shares of Class A Common Stock. In addition, three members of senior
management converted their Preferred Stock into an aggregate of 562,500 shares
of Class A Common Stock.

Critical Accounting Policies and Estimates

Other than the adoption of EITF Issue No. 01-14 and other estimate changes
noted above, there have been no material changes in the Companys critical
accounting policies and estimates during the three and six months ended June
30, 2002. A complete description of the Companys critical accounting policies
and estimates is included in Part II, Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations, in the Companys
Annual Report on Form 10K/A for the year ended December 31, 2001.

In conjunction with The Merger, the Registrant will change its
accounting method for accounting for incentive management fees. The Company
records incentive management fees as earned based on current profitability of
the hotel and management agreement termination clauses. The Registrant will
record the incentive management fees in the period it is certain they are
earned, which for annual incentive fee measurements is typically the last
month of the annual contract period. The effect of this change in accounting
method would be to reduce management fee revenues by $1.7 million and $1.5 million during the 2001 Three
Months and 2002 Three Months, respectively and $3.3 million and $2.8 million
during the 2001 Six Months and 2002 Six Months, respectively.

Also in conjunction with the Merger, the Registrant will record a
valuation allowance on certain of the Companys and the Registrants tax
attributes. The Registrants utilization of its net operating loss
carryforwards will be limited by the tax provisions of the Internal Revenue
Code. The valuation allowance adjustment that will be recorded will include
the effect of the limitations on the Registrants deferred tax assets arising
from net operating loss carryforwards.

Liquidity and Capital Resources

The Companys cash and cash equivalent assets were $24.4 million at June 30,
2002 compared to $39.0 million at December 31, 2001, and current assets
exceeded current liabilities by $20.3 million at June 30, 2002, compared to
$33.1 million at December 31, 2001. This decrease in working capital of $12.8
million resulted from the payment of the $9.25 million conversion incentive to
the Investor and the re-classification of the $6.6 million mortgage note to
current portion of long-term debt, as discussed below.

Net cash used in operating activities was $1.6 million during the 2002 Six
Months compared to net cash used in operating activities of $8.8 million during
the 2001 Six Months. The increase of $7.2 million during the 2002 Six Months
resulted primarily from an increase in operating income (adjusted for non-cash
items) of $0.6 million and an increase of $6.6 million in cash used in changes
in assets and liabilities, primarily as a result of the payment of accrued rent
and other current liabilities in the 2001 Six Months associated with 75 hotels
that were previously leased from Equity Inns, Inc. and terminated on January 1,
2001.

If the Companys managed hotels continue to experience declines in occupancy
and weaker hotel operating performance in the future, the Companys management
fee revenues could decrease, and additional losses from the Companys minority
investments may arise. These events could negatively impact the Companys cash
flows from operations and net income.

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Net cash used in investing activities was $2.0 million during the 2002 Six
Months compared to net cash used in investing activities of $8.0 million during
the 2001 Six Months. During the 2002 Six Months, the Company paid
merger-related acquisition costs of approximately $1.7 million. During the 2001
Six Months, the Company invested $8.7 million for a 50% non-controlling equity
interest in eight hotels.

The Companys capital expenditure budget for the year ending December 31, 2002
is approximately $0.5 million, consisting primarily of expenditures for
information technology equipment.

On February 21, 2002, the ownership and financing for the Renaissance Worldgate
Hotel in Kissimmee, Florida were restructured in order to address financial
difficulties of the hotel. As part of this restructuring, the Companys 20%
non-controlling equity interest was redeemed in exchange for mutual releases
with respect to the obligations of the hotel, and the Company received a $0.9
million cash payment towards the accounts receivable owed to the Company by the
hotel. The hotel owner also issued a promissory note to the Company in the
amount of approximately $0.3 million for the remaining accounts receivable,
which note bears interest at the rate of nine percent per annum and is payable
in equal quarterly installments beginning January 1, 2003 and ending December
31, 2003. In addition, the hotel owner and the Company amended the management
agreement for the hotel, pursuant to which, among other things, the Company
waived its management fees for the period from July 1, 2001 through February
21, 2002 and agreed to reduce its base management fee for periods following
February 21, 2002. The majority owners and the principal lender for the hotel
are affiliated with the Investor, which have designees on the Companys board
of directors.

The Companys management currently believes that the remaining accounts and
note receivable from the Renaissance Worldgate Hotel in Kissimmee, Florida will
be collected, however, there can be no assurance that the amounts will be
collected or, if so, the timing of terms of those collections. The Companys
management will continue to evaluate the collectibility of the accounts
receivable on a quarterly basis.

Net cash used in financing activities was $11.1 million during the 2002 Six
Months compared to net cash provided by financing activities of $3.7 million
during the 2001 Six Months. This decline was due primarily to the $9.25
million payment to induce conversion of the Preferred Stock and the notes and $1.6 million of
repayments of long-term debt to Wyndham ($0.75 million) and the limited
recourse mortgage note to the Pittsburgh Airport Residence Inn by Marriott
($0.8 million). Additionally, in conjunction with the closing of the Merger,
in July 2002, the Company made additional payments to Wyndham ($3.7 million)
and repaid the limited recourse mortgage note ($6.6 million).

The Company is required to distribute 1.6627% of cash flows from the operations
of IH LLC to Wyndham based on Wyndhams common interest in IH LLC. The net
distribution payable to Wyndham through June 30, 2002 approximated $89
thousand.

Immediately after the Merger, the Registrant entered into a $113 million Senior
Credit Agreement, retired a $13.1 million note payable from the OP to
MHOP and added the balance to the MHOP loan, converted the MHOP loan into a term loan, and repaid $3.0
million of outstanding principal amount under the term loan.

As of June 30, 2002, on a pro forma basis (as if the merger occurred on June 30, 2002), the Registrant had the following:

| |  | total assets of $294.2 million     
|- |  | -----------------------------------
| |  | total liabilities of $208.4 million
| |  | total cash of
$16.1 million, and   
| |  | total debt of $130.2 million       

As of August 12, 2002, the total availability
under the Registrant's Senior Credit Agreement
was $39 million.

The Registrant believes cash generated by its operations, together with
anticipated borrowing capacity under its Senior Credit Agreement resulting in
connection with the Merger, will be sufficient to fund its requirements for
working capital, capital expenditures and debt service. The Registrant expects
to continue to seek acquisitions of hotel management businesses and management
contracts. The Registrant expects to finance future acquisitions through a
combination of additional borrowings under its credit facility and
the issuance of partnership interests and/or its common stock. The Registrant
believes these sources of capital will be sufficient to provide for
its
long-term capital needs.

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Contractual Obligations and Maturities of Indebtedness

The following table summarizes the Companys contractual obligations at June
30, 2002 and the effect that those obligations are expected to have on the
Companys liquidity and cash flows in future periods.

|                                 |                      |       |       |          |  |       |           |            |           |   |       |       |  |   |       |        | 
|-------------------------------- | -------------------- | ----- | ----- | -------- |  | ----- | --------- | ---------- | --------- | - | ----- | ----- |  | - | ----- | ------ | 
|                                 |                      |       |       |          |  |       | Less than |            | One-Three |   |       |       | 
|(in thousands)                   |                      | Total |       | One Year |  | Years |           | Thereafter
|                                 |                      |       |       |          |  |       |           |           
|Long-Term Debt:                  |                      |       |       |          |  |       |           |            |           |   |       |       |  |   |       |       
|Investor Notes                   |                      | $     | 6,243 |          |  | $     |          |            |           | $ |      |       |  | $ | 6,243 |       
|Wyndham Notes                    |                      |       | 3,682 |          |  |       |          |            |           |   | 3,682 |       |  |   |      |       
|Mortgage Note                    |                      |       | 6,575 |          |  |       | 6,575     |            |           |   |      |       |  |   |      |       
|Promissory Note                  |                      |       | 4,170 |          |  |       |          |            |           |   |      |       |  |   | 4,170 |       
|                                 |                      |       |       |          |  |       |           |            |           |   |       |       |  |   |       |       
|                                 | Total Long-Term Debt |       |       | 20,670   |  |       |           | 6,575      |           |   |       | 3,682 |  |   |       | 10,413 | 
|Lease commitments                |                      |       | 4,414 |          |  |       | 2,126     |            |           |   | 2,288 |       |  |   |      |       
|Joint venture commitment         |                      |       |      |          |  |       |          |            |           |   |      |       |  |   |      |       
|Management agreement commitments |                      |       | 4,050 |          |  |       |          |            |           |   |      |       |  |   |      |       
|Equity investment funding        |                      |       |      |          |  |       |          |            |           |   |      |       |  |   |      |       

Long-Term Debt: For principal repayment and debt service obligations with
respect to the Companys long-term debt, see Note 5 to the Companys Condensed
Consolidated Financial Statements.

Lease Commitments: The Company has entered into leases of office space and
various pieces of equipment. The leases expire at varying times through 2005.

Joint Venture Commitment: The Company had committed to invest $25.0 million
into a joint venture. Prior to the Merger, the Company was required to
maintain sufficient liquidity for this investment, which could have been
accomplished through lines of credit or other means. The Company had not
invested any funds into the joint venture. As a result of the Merger, the
Company is no longer required to comply with the covenant to maintain $25.0
million in liquid assets in order to fund its capital obligations under the
joint venture.

Management Agreement Commitments: Under the provisions of various management
agreements between the Company and hotel owners, the Company has outstanding
commitments to provide an aggregate of $4.1 million to these hotel owners in
the form of investments or working capital loans, which 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 unknown.

Equity Investment Funding: In connection with the Companys equity investments
in hotel real estate, the Company is party to various unconsolidated
partnerships or limited liability companies. The terms of such partnership or
limited liability company agreements provide that the Company contributes
capital as specified. The timing and amount of such contributions of capital
is unknown. Currently, the Company has non-controlling equity interests in
five hotel real estate limited partnerships and limited liability companies.

17



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##### 



The following table summarizes the Companys contractual obligations at June
30, 2002 (as if the merger occurred on June 30, 2002) and the effect that those
obligations are expected to have on the Companys liquidity and cash flows in
future periods.



|                          |                      |       |        |          |  |       |           |            |           |   |        |   |  |   |        |         | 
|------------------------- | -------------------- | ----- | ------ | -------- |  | ----- | --------- | ---------- | --------- | - | ------ | - |  | - | ------ | ------- | 
|                          |                      |       |        |          |  |       | Less than |            | One-Three |   |        |   | 
|(in thousands)            |                      | Total |        | One Year |  | Years |           | Thereafter
|                          |                      |       |        |          |  |       |           |           
|Long-Term Debt:           |                      |       |        |          |  |       |           |            |           |   |        |   |  |   |        |        
|Senior
Credit Agreement   |                      | $     | 70,000 |          |  | $     |          |            |           | $ |       |   |  | $ | 70,000 |        
|MHOP Term Loan            |                      |       | 56,069 |          |  |       |          |            |           |   |       |   |  |   | 56,069 |        
|Promissory Note           |                      |       | 4,170  |          |  |       |          |            |           |   |       |   |  |   | 4,170  |        
|                          |                      |       |        |          |  |       |           |            |           |   |        |   |  |   |        |        
|                          | Total Long-Term Debt |       |        | 130,239  |  |       |           |           |           |   |        |  |  |   |        | 130,239 | 
|Lease commitments         |                      |       | 65,366 |          |  |       | 24,326    |            |           |   | 18,884 |   |  |   | 22,156 |        
|Joint venture commitment  |                      |       |       |          |  |       |          |            |           |   |       |   |  |   |       |        
|Management agreement      |                      |       | 4,050  |          |  |       |          |            |           |   |       |   |  |   |       |        
|Equity investment funding |                      |       |       |          |  |       |          |            |           |   |       |   |  |   |       |        

18



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##### 



Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The quantitative and qualitative disclosures required by this item and by Rule
305 of SEC Regulation S-K are not material to the Company at this time. The
Company does not have any foreign currency or commodities contracts. Interest
rates governing the majority of the Companys debt are fixed and therefore not
subject to market risk.

The Companys current investment policy is to invest in highly liquid
investments with a maturity of 90 days or less. Such financial instruments
consist of cash and cash equivalents, individual municipal bonds and corporate
government bonds. The Company believes it minimizes its risk through proper
diversification along with the requirements that the securities must be of
investment grade with an average rating of A or better by Standard and
Poors. The Company believes that earnings and cash flows are not materially
affected by changes in interest rates, due to the nature and short-term
investment horizon for which these securities are invested.

19



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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 the Company. Based on
currently available facts, the Company believes that the disposition of matters pending
or asserted will not have a material adverse effect on its consolidated
financial position, results of operations or liquidity.

Item 5. Forward-Looking Information

Information both included in and incorporated by reference in this Form 10-Q
may contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
and as such may involve known and unknown risks, uncertainties and other
factors which may cause 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
described our future plans, strategies and expectations, are generally
identifiable by use of the words may, will, should, expect,
anticipate, estimate, believe, intent,: 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, changes in:

| |  |  | slowdown of national economy;                                                                                     
| | - |  | ------------------------------------------------------------------------------------------------------------------
| |  |  | economic conditions generally and the real estate market specifically;                                            
| |  |  | the impact of the September 11, 2001 terrorist attacks or other terrorist attacks;                                
| |  |  | legislative/regulatory changes, including changes to laws governing the taxation of real estate investment trusts;
| |  |  | disruptions to or restrictions on air travel;                                                                     
| |  |  | the ability of the Registrant to integrate the business
of Interstate and MeriStar;                               
| |  |  | availability of capital;                                                                                          
| |  |  | interest rates;                                                                                                   
| |  |  | competition;                                                                                                      
| |  |  | supply and demand for lodging facilities in our current and proposed market areas;                                
| |  |  | general accounting principles, policies and guidelines applicable to real estate investment trusts; and           
| |  |  | potential de-listing of Interstate Hotels & Resorts, Inc. by the NYSE.                                            

These risks and uncertainties, along with the risk factors set forth in
the Companys Annual Report on Form 10-K for the year ended December 31, 2001
and the Registrants joint proxy statement and prospectus filed on July 2,
2002, should be considered in evaluating any forward-looking statements
contained in this Form 10-Q.

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



| | (a) |  | Exhibits
| | --- |  | --------

|        |  |                                                                                                                                                                                                                                                                                                        
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                        
|2.4     |  | Agreement and Plan of Merger, dated May 1, 2002, by and between
the Company and the Registrant, dated May 1, 2002 (incorporated by
reference to Exhibit 2.1 to the Registrants Form S-4 filed on June
4, 2002 (Registration No. 333-89740))                                                           
|        |  |                                                                                                                                                                                                                                                                                                        
|2.4.1   |  | Amendment No. 1 to Agreement and Plan of Merger, dated June 3,
2002, by and between the Company and the Registrant (incorporated by
reference to Exhibit 2.1.1 to the Registrants Form S-4 filed on June
4, 2002 (Registration No. 333-89740))                                                        
|        |  |                                                                                                                                                                                                                                                                                                        
|2.5     |  | Interstate Hotels Corporation Stockholder Voting and Conversion
Agreement, dated as of May 1, 2002, among the Registrant, the Company
and certain stockholders named therein (incorporated by reference to
Exhibit 2.2 to the Registrants Form S-4 filed on June 4, 2002
(Registration No. 333-89740))

20



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##### 



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                              
|2.5.1   |  | Amendment No. 1 to the Interstate Hotels Corporation
Stockholder Voting and Conversion Agreement, dated June 3, 2002,
among the Registrant, the Company and certain stockholders named
therein (incorporated by reference to Exhibit 2.2.1 to the
Registrants Form S-4 filed on June 4, 2002 (Registration No.
333-89740))                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                              
|2.6     |  | Conversion Incentive Agreement, dated as of May 1, 2002, among
the Company and holders of the Companys Preferred Stock and Notes
(incorporated by reference to Exhibit 2.3 to the Registrants Form
S-4 filed on June 4, 2002 (Registration No. 333-89740))                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                              
|2.6.1   |  | Letter Agreement among the Company, the Registrant and holders
of the Companys convertible securities, dated June 3, 2002, amending
and clarifying the Conversion Incentive Agreement (incorporated by
reference to Exhibit 2.3.1 to the Registrants Form S-4 filed on June
4, 2002 (Registration No. 333-89740))                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                              
|3.3     |  | Certificate of Merger, dated July 31, 2002 (incorporated by
reference to Exhibit 3.1.2 to the Registrants Form 8-A/A filed with
the Securities and Exchange Commission on August 2, 2002)                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                              
|3.4     |  | Certificate of Amendment of Restated Certificate of
Incorporation of the Registrant, dated July 31, 2002 (incorporated
by reference to Exhibit 3.1.3 to the Registrants, Inc. Form 8-A/A
filed with the Securities and Exchange Commission on August 2, 2002)                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                              
|3.5     |  | Amendment to the By-laws of the Registrant (incorporated by
reference to Exhibit 3.3 to the Registrants Form 8-A/A filed with
the Securities and Exchange Commission on August 2, 2002)                                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                              
|4.5     |  | Form of Interstate Hotels & Resorts Common Stock Certificate
(incorporated by reference to Exhibit 4.1 to the Registrants Form
8-A/A filed with the Securities and Exchange Commission on August 2,
2002)                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                              
|9.1     |  | Board Composition Agreement, dated as of July 31, 2002, among
the Registrant and certain stockholders of the Registrant specified
therein (incorporated by reference to Exhibit 9.1 to the Registrants
Form 8-K filed with the Securities and Exchange Commission on August
7, 2002)                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.16   |  | Registration Rights Agreement, dated as of July 31, 2002,
among the Registrant and certain stockholders of the Registrant
specified therein (incorporated by reference to Exhibit 10.1 to the
Registrants Form 8-K filed with the Securities and Exchange
Commission on August 7, 2002)                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.17   |  | Second Amended and Restated Employment Agreement, dated as of
July 30, 2002, between the Registrant and Thomas F. Hewitt
(incorporated by reference to Exhibit 10.2 to the Registrants Form
8-K filed with the Securities and Exchange Commission on August 7,
2002)                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.18   |  | Senior Credit Agreement, dated as of July 31, 2002, among the
Registrant, MeriStar H & R Operating Company, L.P., Societe Generale,
SG Cowen Securities Corporation, Salomon Smith Barney Inc., Lehman
Brothers, Inc., Credit Lyonnais New York Branch and various other
lenders (incorporated by reference to Exhibit 10.3 to the
Registrants Form 8-K filed with the Securities and Exchange
Commission on August 7, 2002)
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.19   |  | Third Amendment to Revolving Credit Agreement, dated as of
July 31, 2002, by and between MeriStar H&R Operating Company, L.P.
and MeriStar Hospitality Operating Partnership, L.P. (incorporated
by reference to Exhibit 10.4 to the Registrants Form 8-K filed with
the Securities and Exchange Commission on August 7, 2002)                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.20   |  | Amended and Restated Incentive Plan (incorporated by reference
to Exhibit 10.5 to the Registrants Form 8-K filed with the
Securities and Exchange Commission on August 7, 2002)                                                                                                                                                                                                                                             

21



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##### 



|        |  |                                                                                                                                                                                                                    
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                    
|10.21   |  | Amendments to the Registrants Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.6 to the Registrants Form
8-K filed with the Securities and Exchange Commission on August 7,
2002)           
|        |  |                                                                                                                                                                                                                    
|10.22   |  | Amendments to the Registrants Non-Employee Directors
Incentive Plan. (incorporated by reference to
Exhibit 10.7 to the Registrants Form 8-K filed with the
Securities and Exchange Commission on August 7, 2002)
|        |  |                                                                                                                                                                                                                    
|99.1    |  | Press Release, dated as of July 31, 2002 (incorporated by
reference to Exhibit 99.1 to Interstate Hotels & Resorts, Inc. Form
8-K filed with the Securities and Exchange Commission on August 7,
2002)             
|        |  |                                                                                                                                                                                                                    
|99.2    |  | Certification of Chief Executive Officer.                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                    
|99.3    |  | Certification of Chief Accounting Officer.                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                    



| | (b) |  | Reports on Form 8-K                                                                                                                                   
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Current report on Form 8-K dated and filed May 6, 2002 regarding
the merger between MeriStar Hotels & Resorts, Inc. and Interstate
Hotels Corporation.
|
| |     |  | Current report on Form 8-K dated and filed May 8, 2002 regarding the first
quarter earnings press release.                                            

22



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##### 



SIGNATURES

Pursuant to the requirements of Section 13 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.

|                      |  |     |  |                                  
|--------------------- |  | --- |  | ---------------------------------
|Date: August 14, 2002 |  |     |  | INTERSTATE HOTELS & RESORTS, INC.
|                      |  |     |  |                                  
|                      |  | By: |  | /s/       JAMES A. CALDER        
|                      |  |     |  |                                  
|                      |  |     |  | James A. Calder                  
|                      |  |     |  | Chief Financial Officer          

23