##### 









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-Q


|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934 
|  
|   |  | For the quarterly period ended September 30, 2005                                           
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from           to                                             

Commission File Number 1-14331


Interstate Hotels & Resorts, Inc.


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

www.ihrco.com




(703) 387-3100


(Registrants Telephone Number, Including Area Code)


þ


þ


o þ












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##### 










INTERSTATE HOTELS & RESORTS, INC.


INDEX


|                                  |  |                                                                                                                                         |  |      |    | 
|--------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                  |  |                                                                                                                                         |  | Page |   
|                                  |  |                                                                                                                                         |  |      |   
|PART I. FINANCIAL
    INFORMATION
|                                 
|Item 1:                           |  | Financial Statements (Unaudited)                                                                                                        |  |      | 2  | 
|                                  |  | Consolidated Balance Sheets 
    September 30, 2005 and December 31, 2004                                                              |  |      | 2  | 
|                                  |  | Consolidated Statements of Operations and
    Comprehensive Income (Loss)  Three and nine months
    ended September 30, 2005 and 2004 |  |      | 3  | 
|                                  |  | Consolidated Statements of Cash
    Flows  Nine months ended September 30, 2005 and
    2004                                           |  |      | 4  | 
|                                  |  | Notes to Consolidated Financial
    Statements                                                                                          |  |      | 5  | 
|                                 
|Item 2:                           |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                                               |  |      | 17 | 
|                                 
|Item 3:                           |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                                          |  |      | 27 | 
|                                 
|Item 4:                           |  | Controls and Procedures                                                                                                                 |  |      | 28 | 
|PART II. OTHER INFORMATION       
|                                 
|Item 1:                           |  | Legal Proceedings                                                                                                                       |  |      | 29 | 
|                                 
|Item 6:                           |  | Exhibits                                                                                                                                |  |      | 29 | 



1



---



##### 






PART I. FINANCIAL INFORMATION





Item 1:     Financial
Statements


INTERSTATE HOTELS & RESORTS, INC.





CONSOLIDATED BALANCE SHEETS


(In thousands, except share amounts)


|                                                            |                                                                                                                                                                                             |                                                                   |        |         |              |  |        |         |         | 
|----------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ------ | ------- | ------------ |  | ------ | ------- | ------- | 
|                                                            |                                                                                                                                                                                             | September 30,                                                     |        |         | December 31, | 
|                                                            |                                                                                                                                                                                             | 2005                                                              |        |         | 2004         | 
|                                                            |                                                                                                                                                                                             |                                                                   |        |         |              | 
|                                                            |                                                                                                                                                                                             | (Unaudited)                                                       |        |         |             
|ASSETS                                                     
|Current assets:                                             |                                                                                                                                                                                             |                                                                   |        |         |              |  |        |        
|                                                            | Cash and cash equivalents                                                                                                                                                                   |                                                                   | $      | 17,806  |              |  | $      | 16,481  |        
|                                                            | Restricted cash                                                                                                                                                                             |                                                                   |        | 3,894   |              |  |        | 690     |        
|                                                            | Accounts receivable, net of allowance for doubtful accounts of
    $2,758 at September 30, 2005 and $3,090 at
    December 31, 2004                                                         |                                                                   |        | 30,365  |              |  |        | 32,765  |        
|                                                            | Due from related parties, net of allowance for doubtful accounts
    of $1,611 at September 30, 2005 and $836 at
    December 31, 2004                                                      |                                                                   |        | 5,960   |              |  |        | 12,368  |        
|                                                            | Prepaid expenses and other current assets                                                                                                                                                   |                                                                   |        | 10,111  |              |  |        | 9,012   |        
|                                                            |                                                                                                                                                                                             |                                                                   |        |         |              | 
|                                                            |                                                                                                                                                                                             | Total current assets                                              |        |         | 68,136       |  |        |         | 71,316  | 
|Marketable securities                                       |                                                                                                                                                                                             |                                                                   | 1,598  |         |              |  | 2,320  |        
|Property and equipment, net                                 |                                                                                                                                                                                             |                                                                   | 39,366 |         |              |  | 19,981 |        
|Investments in and advances to affiliates                   |                                                                                                                                                                                             |                                                                   | 8,090  |         |              |  | 11,541 |        
|Notes receivable                                            |                                                                                                                                                                                             |                                                                   | 6,476  |         |              |  | 5,180  |        
|Deferred income taxes                                       |                                                                                                                                                                                             |                                                                   | 15,909 |         |              |  | 18,312 |        
|Goodwill                                                    |                                                                                                                                                                                             |                                                                   | 96,809 |         |              |  | 96,802 |        
|Intangible assets, net                                      |                                                                                                                                                                                             |                                                                   | 48,163 |         |              |  | 51,162 |        
|                                                            |                                                                                                                                                                                             |                                                                   |        |         |              | 
|                                                            |                                                                                                                                                                                             | Total assets                                                      |        | $       | 284,547      |  |        | $       | 276,614 | 
|                                                            |                                                                                                                                                                                             |                                                                   |        |         |              | 
|                                                           
|LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS
    EQUITY
|Current liabilities:                                        |                                                                                                                                                                                             |                                                                   |        |         |              |  |        |        
|                                                            | Accounts payable                                                                                                                                                                            |                                                                   | $      | 5,581   |              |  | $      | 5,651   |        
|                                                            | Accrued expenses                                                                                                                                                                            |                                                                   |        | 66,298  |              |  |        | 61,003  |        
|                                                            | Current portion of long-term debt                                                                                                                                                           |                                                                   |        | 5,750   |              |  |        | 5,750   |        
|                                                            |                                                                                                                                                                                             |                                                                   |        |         |              | 
|                                                            |                                                                                                                                                                                             | Total current liabilities                                         |        |         | 77,629       |  |        |         | 72,404  | 
|Deferred compensation                                       |                                                                                                                                                                                             |                                                                   | 1,526  |         |              |  | 1,706  |        
|Long-term debt                                              |                                                                                                                                                                                             |                                                                   | 80,552 |         |              |  | 83,447 |        
|                                                            |                                                                                                                                                                                             |                                                                   |        |         |              | 
|                                                            |                                                                                                                                                                                             | Total liabilities                                                 |        |         | 159,707      |  |        |         | 157,557 | 
|Minority interest                                           |                                                                                                                                                                                             |                                                                   | 953    |         |              |  | 930    |        
|Commitments and contingencies                               |                                                                                                                                                                                             |                                                                   |        |         |              |  |        |        
|Stockholders equity:                                       |                                                                                                                                                                                             |                                                                   |        |         |              |  |        |        
|                                                            | Preferred stock, $.01 par value; 5,000,000 shares
    authorized, no shares issued                                                                                                          |                                                                   |        |        |              |  |        |        |        
|                                                            | Common stock, $.01 par value; 250,000,000 shares
    authorized; 30,719,072, and 30,629,519 shares issued and
    outstanding at September 30, 2005 and December 31,
    2004, respectively |                                                                   |        | 307     |              |  |        | 307     |        
|                                                            | Treasury stock                                                                                                                                                                              |                                                                   |        | (69     | )            |  |        | (69     | )      
|                                                            | Paid-in capital                                                                                                                                                                             |                                                                   |        | 189,714 |              |  |        | 188,865 |        
|                                                            | Accumulated other comprehensive income                                                                                                                                                      |                                                                   |        | 93      |              |  |        | 892     |        
|                                                            | Accumulated deficit                                                                                                                                                                         |                                                                   |        | (66,158 | )            |  |        | (71,868 | )      
|                                                            |                                                                                                                                                                                             |                                                                   |        |         |              | 
|                                                            |                                                                                                                                                                                             | Total stockholders equity                                        |        |         | 123,887      |  |        |         | 118,127 | 
|                                                            |                                                                                                                                                                                             |                                                                   |        |         |              | 
|                                                            |                                                                                                                                                                                             | Total liabilities, minority interest and stockholders
    equity |        | $       | 284,547      |  |        | $       | 276,614 | 
|                                                            |                                                                                                                                                                                             |                                                                   |        |         |              | 

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


2



---



##### 



INTERSTATE HOTELS & RESORTS, INC.





CONSOLIDATED STATEMENTS OF OPERATIONS


AND COMPREHENSIVE INCOME (LOSS)


(Unaudited, in thousands, except per share amounts)


|                                                        |                                          |                          |        |         |                   |   |        |         |         |   |         |         |         |   |         |         |         | 
|------------------------------------------------------- | ---------------------------------------- | ------------------------ | ------ | ------- | ----------------- | - | ------ | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                        |                                          | Three months ended       |        |         | Nine months ended |  
|                                                        |                                          | September 30,            |        |         | September 30,     |  
|                                                        |                                          |                          |        |         |                   |  
|                                                        |                                          | 2005                     |        |         | 2004              |   |        | 2005    |         |   | 2004    |        
|                                                        |                                          |                          |        |         |                   |   |        |         |         |   |         |        
|Revenue:                                                |                                          |                          |        |         |                   |   |        |         |         |   |         |         |         |   |         |        
|                                                        | Lodging revenues                         |                          | $      | 3,403   |                   |   | $      |        |         |   | $       | 8,511   |         |   | $       |        |        
|                                                        | Management fees                          |                          |        | 9,008   |                   |   |        | 5,453   |         |   |         | 25,601  |         |   |         | 17,414  |        
|                                                        | Management fees-related parties          |                          |        | 6,505   |                   |   |        | 6,660   |         |   |         | 20,264  |         |   |         | 23,345  |        
|                                                        | Corporate housing                        |                          |        | 33,267  |                   |   |        | 31,701  |         |   |         | 91,792  |         |   |         | 83,506  |        
|                                                        | Other revenue                            |                          |        | 3,125   |                   |   |        | 4,245   |         |   |         | 9,583   |         |   |         | 10,599  |        
|                                                        |                                          |                          |        |         |                   |   |        |         |         |   |         |        
|                                                        |                                          |                          | 55,308 |         |                   |   | 48,059 |         |         |   | 155,751 |         |         |   | 134,864 |        
|                                                        | Other revenue from managed properties    |                          |        | 247,745 |                   |   |        | 190,865 |         |   |         | 681,449 |         |   |         | 564,739 |        
|                                                        |                                          |                          |        |         |                   |   |        |         |         |   |         |        
|                                                        |                                          | Total revenue            |        |         | 303,053           |   |        |         | 238,924 |   |         |         | 837,200 |   |         |         | 699,603 | 
|Operating expenses by department:                       |                                          |                          |        |         |                   |   |        |         |         |   |         |         |         |   |         |        
|                                                        | Lodging expenses                         |                          |        | 2,487   |                   |   |        |        |         |   |         | 6,491   |         |   |         |        |        
|                                                        | Corporate housing                        |                          |        | 25,894  |                   |   |        | 25,836  |         |   |         | 73,923  |         |   |         | 68,121  |        
|Undistributed operating expenses:                       |                                          |                          |        |         |                   |   |        |         |         |   |         |         |         |   |         |        
|                                                        | Administrative and general               |                          |        | 19,317  |                   |   |        | 16,593  |         |   |         | 56,961  |         |   |         | 51,699  |        
|                                                        | Depreciation and amortization            |                          |        | 2,474   |                   |   |        | 2,127   |         |   |         | 6,830   |         |   |         | 6,640   |        
|                                                        | Restructuring and severance expenses     |                          |        |        |                   |   |        | 42      |         |   |         | 2,043   |         |   |         | 3,481   |        
|                                                        | Asset impairments and write-offs         |                          |        | 1,046   |                   |   |        | 1,601   |         |   |         | 2,957   |         |   |         | 7,792   |        
|                                                        |                                          |                          |        |         |                   |   |        |         |         |   |         |        
|                                                        |                                          |                          | 51,218 |         |                   |   | 46,199 |         |         |   | 149,205 |         |         |   | 137,733 |        
|                                                        | Other expenses from managed properties   |                          |        | 247,745 |                   |   |        | 190,865 |         |   |         | 681,449 |         |   |         | 564,739 |        
|                                                        |                                          |                          |        |         |                   |   |        |         |         |   |         |        
|                                                        |                                          | Total operating expenses |        |         | 298,963           |   |        |         | 237,064 |   |         |         | 830,654 |   |         |         | 702,472 | 
|                                                        |                                          |                          |        |         |                   |   |        |         |         |   |         |        
|OPERATING INCOME (LOSS)                                 |                                          |                          | 4,090  |         |                   |   | 1,860  |         |         |   | 6,546   |         |         |   | (2,869  | )      
|Interest income                                         |                                          |                          | 288    |         |                   |   | 111    |         |         |   | 658     |         |         |   | 801     |        
|Interest expense                                        |                                          |                          | (1,965 | )       |                   |   | (2,113 | )       |         |   | (8,218  | )       |         |   | (6,093  | )      
|Equity in earnings (loss) of affiliates                 |                                          |                          | (381   | )       |                   |   | (5     | )       |         |   | 2,811   |         |         |   | (946    | )      
|Gain on sale of investments and extinguishment of debt  |                                          |                          | 4,326  |         |                   |   |       |         |         |   | 4,711   |         |         |   |        |        
|                                                        |                                          |                          |        |         |                   |   |        |         |         |   |         |        
|INCOME (LOSS) BEFORE MINORITY INTEREST AND INCOME TAXES |                                          |                          | 6,358  |         |                   |   | (147   | )       |         |   | 6,508   |         |         |   | (9,107  | )      
|Income tax (expense) benefit                            |                                          |                          | (2,585 | )       |                   |   | (279   | )       |         |   | (2,647  | )       |         |   | 3,264   |        
|Minority interest (expense) benefit                     |                                          |                          | (38    | )       |                   |   | (7     | )       |         |   | (49     | )       |         |   | 68      |        
|                                                        |                                          |                          |        |         |                   |   |        |         |         |   |         |        
|INCOME (LOSS) FROM CONTINUING OPERATIONS                |                                          |                          | 3,735  |         |                   |   | (433   | )       |         |   | 3,812   |         |         |   | (5,775  | )      
|Income (loss) from discontinued operations, net of tax  |                                          |                          | 1,656  |         |                   |   | 133    |         |         |   | 1,898   |         |         |   | (920    | )      
|                                                        |                                          |                          |        |         |                   |   |        |         |         |   |         |        
|NET INCOME (LOSS)                                       |                                          | $                        | 5,391  |         |                   | $ | (300   | )       |         | $ | 5,710   |         |         | $ | (6,695  | )      
|                                                        |                                          |                          |        |         |                   |   |        |         |         |   |         |        
|Other comprehensive loss, net of tax:                   |                                          |                          |        |         |                   |   |        |         |         |   |         |         |         |   |         |        
|                                                        | Foreign currency translation loss        |                          |        | (281    | )                 |   |        | (104    | )       |   |         | (314    | )       |   |         | (209    | )      
|                                                        | Unrealized loss on investments and other |                          |        | (27     | )                 |   |        | (84     | )       |   |         | (485    | )       |   |         | (28     | )      
|                                                        |                                          |                          |        |         |                   |   |        |         |         |   |         |        
|                                                        | COMPREHENSIVE INCOME (LOSS)              |                          | $      | 5,083   |                   |   | $      | (488    | )       |   | $       | 4,911   |         |   | $       | (6,932  | )      
|                                                        |                                          |                          |        |         |                   |   |        |         |         |   |         |        
|BASIC EARNINGS (LOSS) PER SHARE:                        |                                          |                          |        |         |                   |   |        |         |         |   |         |         |         |   |         |        
|                                                        | Continuing operations                    |                          | $      | 0.12    |                   |   | $      | (0.01   | )       |   | $       | 0.13    |         |   | $       | (0.19   | )      
|                                                        | Discontinued operations                  |                          |        | 0.06    |                   |   |        |        |         |   |         | 0.06    |         |   |         | (0.03   | )      
|                                                        |                                          |                          |        |         |                   |   |        |         |         |   |         |        
|                                                        | Basic earnings (loss) per share          |                          | $      | 0.18    |                   |   | $      | (0.01   | )       |   | $       | 0.19    |         |   | $       | (0.22   | )      
|                                                        |                                          |                          |        |         |                   |   |        |         |         |   |         |        
|DILUTED EARNINGS (LOSS) PER SHARE:                      |                                          |                          |        |         |                   |   |        |         |         |   |         |         |         |   |         |        
|                                                        | Continuing operations                    |                          | $      | 0.12    |                   |   | $      | (0.01   | )       |   | $       | 0.12    |         |   | $       | (0.19   | )      
|                                                        | Discontinued operations                  |                          |        | 0.05    |                   |   |        |        |         |   |         | 0.06    |         |   |         | (0.03   | )      
|                                                        |                                          |                          |        |         |                   |   |        |         |         |   |         |        
|                                                        | Diluted earnings (loss) per share        |                          | $      | 0.17    |                   |   | $      | (0.01   | )       |   | $       | 0.18    |         |   | $       | (0.22   | )      
|                                                        |                                          |                          |        |         |                   |   |        |         |         |   |         |        

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


3



---



##### 



INTERSTATE HOTELS & RESORTS, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited, in thousands)


|                                               |                                                                   |                                                        |                                               |                                                 |        |        |         |         |        |        |       | 
|---------------------------------------------- | ----------------------------------------------------------------- | ------------------------------------------------------ | --------------------------------------------- | ----------------------------------------------- | ------ | ------ | ------- | ------- | ------ | ------ | ----- | 
|                                               |                                                                   | Nine months ended                                      |                                              
|                                               |                                                                   | September 30,                                          |                                              
|                                               |                                                                   |                                                        |                                              
|                                               |                                                                   | 2005                                                   |                                               |                                                 | 2004   |       
|                                               |                                                                   |                                                        |                                               |                                                 |        |       
|OPERATING ACTIVITIES:                          |                                                                   |                                                        |                                               |                                                 |        |        |         |        
|                                               | Net income (loss)                                                 |                                                        | $                                             | 5,710                                           |        |        | $       | (6,695  | )     
|                                               | Adjustments to reconcile to cash provided by operations:          |                                                        |                                               |                                                 |        |        |         |         |       
|                                               |                                                                   | Depreciation and amortization                          |                                               |                                                 | 6,830  |        |         |         | 6,640  |       
|                                               |                                                                   | Amortization and write-off of deferred financing fees  |                                               |                                                 | 2,403  |        |         |         | 462    |       
|                                               |                                                                   | Equity in (earnings) loss of affiliates                |                                               |                                                 | (2,811 | )      |         |         | 946    |       
|                                               |                                                                   | Asset impairments and write-offs                       |                                               |                                                 | 2,957  |        |         |         | 7,792  |       
|                                               |                                                                   | Minority interest                                      |                                               |                                                 | 49     |        |         |         | (68    | )     
|                                               |                                                                   | Deferred income taxes                                  |                                               |                                                 | 2,403  |        |         |         | (3,368 | )     
|                                               |                                                                   | Gain on sale of investments and extinguishment of debt |                                               |                                                 | (4,711 | )      |         |         |       |       
|                                               |                                                                   | Grant of stock for payment of severance                |                                               |                                                 |       |        |         |         | 3,181  |       
|                                               |                                                                   | Discontinued operations:                               |                                               |                                                 |        |        |         |         |        |       
|                                               |                                                                   |                                                        | Depreciation                                  |                                                 |        | 155    |         |         |        | 384    |      
|                                               |                                                                   |                                                        | (Gain) loss on sale                           |                                                 |        | (2,605 | )       |         |        | 376    |      
|                                               |                                                                   | Changes in assets and liabilities:                     |                                               |                                                 |        |        |         |         |        |       
|                                               |                                                                   |                                                        | Accounts receivable, net                      |                                                 |        | 3,296  |         |         |        | (5,785 | )    
|                                               |                                                                   |                                                        | Prepaid expenses and other current assets     |                                                 |        | (663   | )       |         |        | (915   | )    
|                                               |                                                                   |                                                        | Accounts payable and accrued expenses         |                                                 |        | 6,418  |         |         |        | (8,383 | )    
|                                               |                                                                   |                                                        | Due from related parties                      |                                                 |        | 6,408  |         |         |        | 6,379  |      
|                                               |                                                                   |                                                        | Other changes in asset and liability accounts |                                                 |        | 264    |         |         |        | (732   | )    
|                                               |                                                                   |                                                        |                                               |                                                 |        |       
|                                               |                                                                   |                                                        |                                               | Cash provided by operations                     |        |        | 26,103  |         |        |        | 214   | 
|                                               |                                                                   |                                                        |                                               |                                                 |        |       
|INVESTING ACTIVITIES:                          |                                                                   |                                                        |                                               |                                                 |        |        |         |        
|                                               | Proceeds from the sale of investments and hotels                  |                                                        |                                               | 10,971                                          |        |        |         | 522     |       
|                                               | Change in restricted cash                                         |                                                        |                                               | (3,204                                          | )      |        |         | 1,364   |       
|                                               | Purchases of property and equipment, net                          |                                                        |                                               | (31,752                                         | )      |        |         | (2,061  | )     
|                                               | Purchases of intangible assets                                    |                                                        |                                               | (1,660                                          | )      |        |         | (1,109  | )     
|                                               | (Contributions) distributions to/from affiliates, net             |                                                        |                                               | 4,475                                           |        |        |         | (424    | )     
|                                               | Change in notes receivable                                        |                                                        |                                               | (531                                            | )      |        |         | 2,553   |       
|                                               |                                                                   |                                                        |                                               |                                                 |        |       
|                                               |                                                                   |                                                        |                                               | Cash provided by (used in) investing activities |        |        | (21,701 | )       |        |        | 845   | 
|                                               |                                                                   |                                                        |                                               |                                                 |        |       
|FINANCING ACTIVITIES:                          |                                                                   |                                                        |                                               |                                                 |        |        |         |        
|                                               | Proceeds from borrowings                                          |                                                        |                                               | 106,200                                         |        |        |         | 34,000  |       
|                                               | Repayment of borrowings                                           |                                                        |                                               | (105,372                                        | )      |        |         | (32,719 | )     
|                                               | Proceeds from issuance of common stock                            |                                                        |                                               | 40                                              |        |        |         | 735     |       
|                                               | Cash paid for redemption of preferred operating partnership units |                                                        |                                               |                                                |        |        |         | (1,310  | )     
|                                               | Financing fees paid                                               |                                                        |                                               | (3,641                                          | )      |        |         | (114    | )     
|                                               |                                                                   |                                                        |                                               |                                                 |        |       
|                                               |                                                                   |                                                        |                                               | Cash provided by (used in) financing activities |        |        | (2,773  | )       |        |        | 592   | 
|                                               |                                                                   |                                                        |                                               |                                                 |        |       
|Effect of exchange rate on cash                |                                                                   |                                                        | (304                                          | )                                               |        |        | 626     |        
|Increase in cash and cash equivalents          |                                                                   |                                                        | 1,325                                         |                                                 |        |        | 2,277   |        
|CASH AND CASH EQUIVALENTS, beginning of period |                                                                   |                                                        | 16,481                                        |                                                 |        |        | 7,450   |        
|                                               |                                                                   |                                                        |                                               |                                                 |        |       
|CASH AND CASH EQUIVALENTS, end of period       |                                                                   | $                                                      | 17,806                                        |                                                 |        | $      | 9,727   |        
|                                               |                                                                   |                                                        |                                               |                                                 |        |       
|SUPPLEMENTAL CASH FLOW INFORMATION             |                                                                   |                                                        |                                               |                                                 |        |        |         |        
|Cash paid for interest and income taxes:       |                                                                   |                                                        |                                               |                                                 |        |        |         |        
|                                               |                                                                   |                                                        |                                               | Interest                                        |        | $      | 5,349   |         |        | $      | 5,209 | 
|                                               |                                                                   |                                                        |                                               | Income taxes                                    |        |        | 1,094   |         |        |        | 1,138 | 

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


4



---



##### 



INTERSTATE HOTELS & RESORTS, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|   |                 
|-- | ----------------
|1. | BUSINESS SUMMARY











|   |                                           
|-- | ------------------------------------------
|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General








5



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Stock-Based Compensation




|                                                                                                                                    |                      |                    |       |      |                   |   |      |       |   |   |       |      |  |   |        |       |  
|----------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ------------------ | ----- | ---- | ----------------- | - | ---- | ----- | - | - | ----- | ---- |  | - | ------ | ----- | -
|                                                                                                                                    |                      | Three months ended |       |      | Nine months ended |  
|                                                                                                                                    |                      | September 30,      |       |      | September 30,     |  
|                                                                                                                                    |                      |                    |       |      |                   |  
|                                                                                                                                    |                      | 2005               |       |      | 2004              |   |      | 2005  |   |   | 2004  |     
|                                                                                                                                    |                      |                    |       |      |                   |   |      |       |   |   |       |     
|Net income (loss), as reported                                                                                                      |                      | $                  | 5,391 |      |                   | $ | (300 | )     |   | $ | 5,710 |      |  | $ | (6,695 | )    
|Add: Stock-based employee compensation expense included in
    reported net income (loss), net of tax                               |                      |                    | 15    |      |                   |   | 50   |       |   |   | 163   |      |  |   | 182    |      
|Deduct: Total stock-based employee compensation expense
    determined under fair value based method for all awards, net of
    tax |                      |                    | (22   | )    |                   |   | (52  | )     |   |   | (185  | )    |  |   | (257   | )    
|                                                                                                                                    |                      |                    |       |      |                   |   |      |       |   |   |       |     
|Net income (loss), pro forma                                                                                                        |                      | $                  | 5,384 |      |                   | $ | (302 | )     |   | $ | 5,688 |      |  | $ | (6,770 | )    
|                                                                                                                                    |                      |                    |       |      |                   |   |      |       |   |   |       |     
|Earnings per share:                                                                                                                 |                      |                    |       |      |                   |   |      |       |   |   |       |      |  |   |        |      
|                                                                                                                                    | Basic, as reported   |                    | $     | 0.18 |                   |   | $    | (0.01 | ) |   | $     | 0.19 |  |   | $      | (0.22 | )
|                                                                                                                                    |                      |                    |       |      |                   |   |      |       |   |   |       |     
|                                                                                                                                    | Basic, pro forma     |                    | $     | 0.18 |                   |   | $    | (0.01 | ) |   | $     | 0.19 |  |   | $      | (0.22 | )
|                                                                                                                                    |                      |                    |       |      |                   |   |      |       |   |   |       |     
|                                                                                                                                    | Diluted, as reported |                    | $     | 0.17 |                   |   | $    | (0.01 | ) |   | $     | 0.18 |  |   | $      | (0.22 | )
|                                                                                                                                    |                      |                    |       |      |                   |   |      |       |   |   |       |     
|                                                                                                                                    | Diluted, pro forma   |                    | $     | 0.17 |                   |   | $    | (0.01 | ) |   | $     | 0.18 |  |   | $      | (0.22 | )
|                                                                                                                                    |                      |                    |       |      |                   |   |      |       |   |   |       |     



Recent Accounting Pronouncements






6



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |                   
|-- | ------------------
|3. | EARNINGS PER SHARE



|                                                                                                                |  |                                        |       |  |                    |  |           |        |  |         |        |   |  |        |           |   |        |  |        |  |  |   |       |  
|--------------------------------------------------------------------------------------------------------------- |  | -------------------------------------- | ----- |  | ------------------ |  | --------- | ------ |  | ------- | ------ | - |  | ------ | --------- | - | ------ |  | ------ |  |  | - | ----- | -
|                                                                                                                |  | Quarter Ended                          |      
|                                                                                                                |  |                                        |      
|                                                                                                                |  | September 30, 2005                     |       |  | September 30, 2004 | 
|                                                                                                                |  |                                        |       |  |                    | 
|                                                                                                                |  | Income/                                |       |  |                    |  | Per Share |        |  | Income/ |        |   |  |        | Per Share |  
|                                                                                                                |  | (Loss)                                 |       |  | Shares             |  |           | Amount |  |         | (Loss) |   |  | Shares |           |   | Amount | 
|                                                                                                                |  |                                        |       |  |                    |  |           |        |  |         |        |   |  |        |           |   |        | 
|                                                                                                                |  | In thousands, except per share amounts |      
|Income (loss) from continuing operations                                                                        |  | $                                      | 3,735 |  |                    |  | 30,717    |        |  | $       | 0.12   |   |  | $      | (428      | ) |        |  | 30,637 |  |  | $ | (0.01 | )
|Income from discontinued operations, net of tax                                                                 |  |                                        | 1,656 |  |                    |  |          |        |  |         | 0.06   |   |  |        | 128       |   |        |  |       |  |  |   |      |  
|                                                                                                                |  |                                        |       |  |                    |  |           |        |  |         |        |   |  |        |           |   |        | 
|Basic net income (loss)                                                                                         |  | $                                      | 5,391 |  |                    |  | 30,717    |        |  | $       | 0.18   |   |  | $      | (300      | ) |        |  | 30,637 |  |  | $ | (0.01 | )
|Assuming exercise of all outstanding employee stock options less
    shares repurchased at average market price |  |                                        |      |  |                    |  | 132       |        |  |         |       |   |  |        |          |   |        |  |       |  |  |   |      |  
|Assuming vesting of all outstanding restricted stock                                                            |  |                                        |      |  |                    |  | 134       |        |  |         | (0.01  | ) |  |        |          |   |        |  |       |  |  |   |      |  
|                                                                                                                |  |                                        |       |  |                    |  |           |        |  |         |        |   |  |        |           |   |        | 
|Diluted net income (loss)                                                                                       |  | $                                      | 5,391 |  |                    |  | 30,983    |        |  | $       | 0.17   |   |  | $      | (300      | ) |        |  | 30,637 |  |  | $ | (0.01 | )
|                                                                                                                |  |                                        |       |  |                    |  |           |        |  |         |        |   |  |        |           |   |        | 

|                                                                                                                |  |                                        |       |  |                    |  |           |        |  |         |        |   |  |        |           |   |        |  |        |  |  |   |       |  
|--------------------------------------------------------------------------------------------------------------- |  | -------------------------------------- | ----- |  | ------------------ |  | --------- | ------ |  | ------- | ------ | - |  | ------ | --------- | - | ------ |  | ------ |  |  | - | ----- | -
|                                                                                                                |  | Year-to-Date Ended                     |      
|                                                                                                                |  |                                        |      
|                                                                                                                |  | September 30, 2005                     |       |  | September 30, 2004 | 
|                                                                                                                |  |                                        |       |  |                    | 
|                                                                                                                |  | Income/                                |       |  |                    |  | Per Share |        |  | Income/ |        |   |  |        | Per Share |  
|                                                                                                                |  | (Loss)                                 |       |  | Shares             |  |           | Amount |  |         | (Loss) |   |  | Shares |           |   | Amount | 
|                                                                                                                |  |                                        |       |  |                    |  |           |        |  |         |        |   |  |        |           |   |        | 
|                                                                                                                |  | In thousands, except per share amounts |      
|Income (loss) from continuing operations                                                                        |  | $                                      | 3,812 |  |                    |  | 30,696    |        |  | $       | 0.13   |   |  | $      | (5,760    | ) |        |  | 30,431 |  |  | $ | (0.19 | )
|Income (loss) from discontinued operations, net of tax                                                          |  |                                        | 1,898 |  |                    |  |          |        |  |         | 0.06   |   |  |        | (935      | ) |        |  |       |  |  |   | (0.03 | )
|                                                                                                                |  |                                        |       |  |                    |  |           |        |  |         |        |   |  |        |           |   |        | 
|Basic net income (loss)                                                                                         |  | $                                      | 5,710 |  |                    |  | 30,696    |        |  | $       | 0.19   |   |  | $      | (6,695    | ) |        |  | 30,431 |  |  | $ | (0.22 | )
|Assuming exercise of all outstanding employee stock options less
    shares repurchased at average market price |  |                                        |      |  |                    |  | 130       |        |  |         |       |   |  |        |          |   |        |  |       |  |  |   |      |  
|Assuming vesting of all outstanding restricted stock                                                            |  |                                        |      |  |                    |  | 156       |        |  |         | (0.01  | ) |  |        |          |   |        |  |       |  |  |   |      |  
|                                                                                                                |  |                                        |       |  |                    |  |           |        |  |         |        |   |  |        |           |   |        | 
|Diluted net income (loss)                                                                                       |  | $                                      | 5,710 |  |                    |  | 30,982    |        |  | $       | 0.18   |   |  | $      | (6,695    | ) |        |  | 30,431 |  |  | $ | (0.22 | )
|                                                                                                                |  |                                        |       |  |                    |  |           |        |  |         |        |   |  |        |           |   |        | 

7



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                                       
|-- | --------------------------------------
|4. | INVESTMENTS AND ADVANCES TO AFFILIATES



|                                      |       |               |       |       |              |   |       |        | 
|------------------------------------- | ----- | ------------- | ----- | ----- | ------------ | - | ----- | ------ | 
|                                      |       | September 30, |       |       | December 31, |  
|                                      |       | 2005          |       |       | 2004         |  
|                                      |       |               |       |       |              |  
|MIP Lessee, L.P.                      |       | $             | 2,403 |       |              | $ | 4,856 |       
|S.D. Bridgeworks, LLC                 |       |               |      |       |              |   | 253   |       
|CNL/ IHC Partners, L.P.               |       |               | 2,565 |       |              |   | 2,477 |       
|Interconn Ponte Vedra Company, L.L.C. |       |               | 2,668 |       |              |   | 2,334 |       
|Other                                 |       |               | 454   |       |              |   | 1,621 |       
|                                      |       |               |       |       |              |  
|                                      | Total |               | $     | 8,090 |              |   | $     | 11,541 | 
|                                      |       |               |       |       |              |  











|                                     |  |                    |        |  |                    |   |        |  
|------------------------------------ |  | ------------------ | ------ |  | ------------------ | - | ------ | -
|                                     |  | Nine months ended, |        |  | Nine months ended, |  
|                                     |  | September 30, 2005 |        |  | September 30, 2004 |  
|                                     |  |                    |        |  |                    |  
|Revenue                              |  | $                  | 71,469 |  |                    | $ | 94,356 |  
|Operating expenses                   |  | $                  | 51,166 |  |                    | $ | 64,663 |  
|Net income (loss)                    |  | $                  | 17,712 |  |                    | $ | (7,171 | )
|Our share of the net income (losses) |  | $                  | 2,863  |  |                    | $ | (939   | )

8



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                  
|-- | -----------------
|5. | INTANGIBLE ASSETS



|                                |                               |               |        |        |              |   |        |        |  
|------------------------------- | ----------------------------- | ------------- | ------ | ------ | ------------ | - | ------ | ------ | -
|                                |                               | September 30, |        |        | December 31, |  
|                                |                               | 2005          |        |        | 2004         |  
|                                |                               |               |        |        |              |  
|Management contracts            |                               | $             | 51,176 |        |              | $ | 53,186 |       
|Franchise fees                  |                               |               | 1,221  |        |              |   | 1,945  |       
|Deferred financing fees         |                               |               | 2,003  |        |              |   | 2,676  |       
|Management contracts in process |                               |               | 2,521  |        |              |   | 2,018  |       
|                                |                               |               |        |        |              |  
|                                | Total cost                    |               |        | 56,921 |              |   |        | 59,825 |  
|                                | Less accumulated amortization |               |        | (8,758 | )            |   |        | (8,663 | )
|                                |                               |               |        |        |              |  
|Intangible assets, net          |                               | $             | 48,163 |        |              | $ | 51,162 |       
|                                |                               |               |        |        |              |  





|                  |                |               |        |        |              |   |        |        | 
|----------------- | -------------- | ------------- | ------ | ------ | ------------ | - | ------ | ------ | 
|                  |                | September 30, |        |        | December 31, |  
|                  |                | 2005          |        |        | 2004         |  
|                  |                |               |        |        |              |  
|Hotel management  |                | $             | 87,603 |        |              | $ | 87,596 |       
|Corporate housing |                |               | 9,206  |        |              |   | 9,206  |       
|                  |                |               |        |        |              |  
|                  | Total goodwill |               | $      | 96,809 |              |   | $      | 96,802 | 
|                  |                |               |        |        |              |  





|   |               
|-- | --------------
|6. | LONG-TERM DEBT



|                                      |                                        |               |        |        |              |   |        |        | 
|------------------------------------- | -------------------------------------- | ------------- | ------ | ------ | ------------ | - | ------ | ------ | 
|                                      |                                        | September 30, |        |        | December 31, |  
|                                      |                                        | 2005          |        |        | 2004         |  
|                                      |                                        |               |        |        |              |  
|Senior credit facility-revolving loan |                                        | $             | 18,526 |        |              | $ | 27,000 |       
|Senior credit facility-term loan      |                                        |               | 46,776 |        |              |   | 16,474 |       
|Non-recourse promissory note          |                                        |               |       |        |              |   | 3,723  |       
|Sunstone promissory note              |                                        |               | 2,000  |        |              |   | 2,000  |       
|Subordinated term loan                |                                        |               |       |        |              |   | 40,000 |       
|Mortgage debt                         |                                        |               | 19,000 |        |              |   |       |       
|                                      |                                        |               |        |        |              |  
|                                      | Total long-term debt                   |               |        | 86,302 |              |   |        | 89,197 | 
|Less current portion                  |                                        |               | (5,750 | )      |              |   | (5,750 | )     
|                                      |                                        |               |        |        |              |  
|                                      | Long-term debt, net of current portion |               | $      | 80,552 |              |   | $      | 83,447 | 
|                                      |                                        |               |        |        |              |  

9



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Senior Credit Facility-Revolving Loan and Term
Loan








Non Recourse Promissory Note




Sunstone Promissory Note


Subordinated Term Loan


10



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Mortgage Debt


Interest Rate Caps




|   |                    
|-- | -------------------
|7. | SEGMENT INFORMATION



|                                      |  |            |         |   |           |   |        |       |  |           |            |  |  |   |         |  
|------------------------------------- |  | ---------- | ------- | - | --------- | - | ------ | ----- |  | --------- | ---------- |  |  | - | ------- | -
|                                      |  | Hotel      |         |   | Corporate |   |        |       |  | Financial |           
|                                      |  | Management |         |   | Housing   |   |        | Other |  |           | Statements | 
|                                      |  |            |         |   |           |   |        |       |  |           |            | 
|Three months ended September 30, 2005 |  |            |         |   |           |   |        |       |  |           |            |  |  |   |         |  
|Revenue                               |  | $          | 269,786 |   |           | $ | 33,267 |       |  | $         |           |  |  | $ | 303,053 |  
|Net income                            |  | $          | 4,313   |   |           | $ | 1,078  |       |  | $         |           |  |  | $ | 5,391   |  
|Three months ended September 30, 2004 |  |            |         |   |           |   |        |       |  |           |            |  |  |   |         |  
|Revenue                               |  | $          | 207,223 |   |           | $ | 31,701 |       |  | $         |           |  |  | $ | 238,924 |  
|Net income (loss)                     |  | $          | (42     | ) |           | $ | (258   | )     |  | $         |           |  |  | $ | (300    | )
|Nine months ended September 30, 2005  |  |            |         |   |           |   |        |       |  |           |            |  |  |   |         |  
|Revenue                               |  | $          | 745,408 |   |           | $ | 91,792 |       |  | $         |           |  |  | $ | 837,200 |  
|Net income (loss)                     |  | $          | 4,959   |   |           | $ | 751    |       |  | $         |           |  |  | $ | 5,710   |  
|Total assets                          |  | $          | 249,619 |   |           | $ | 17,509 |       |  | $         | 17,419     |  |  | $ | 284,547 |  
|Nine months ended September 30, 2004  |  |            |         |   |           |   |        |       |  |           |            |  |  |   |         |  
|Revenue                               |  | $          | 616,097 |   |           | $ | 83,506 |       |  | $         |           |  |  | $ | 699,603 |  
|Net income (loss)                     |  | $          | (5,364  | ) |           | $ | (1,331 | )     |  | $         |           |  |  | $ | (6,695  | )
|Total assets                          |  | $          | 222,780 |   |           | $ | 18,877 |       |  | $         | 23,587     |  |  | $ | 265,244 |  

11



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|               |  |               |       |  |               |   |       |      |  |   |        |  |  |   |        | 
|-------------- |  | ------------- | ----- |  | ------------- | - | ----- | ---- |  | - | ------ |  |  | - | ------ | 
|               |  | Three months  |       |  | Nine months   |  
|               |  | ended         |       |  | ended         |  
|               |  | September 30, |       |  | September 30, |  
|               |  |               |       |  |               |  
|               |  | 2005          |       |  | 2004          |   |       | 2005 |  |   | 2004   | 
|               |  |               |       |  |               |   |       |      |  |   |        | 
|United Kingdom |  | $             | 7,764 |  |               | $ | 6,645 |      |  | $ | 22,322 |  |  | $ | 17,744 | 
|France         |  |               | 544   |  |               |   | 539   |      |  |   | 1,599  |  |  |   | 1,333  | 
|Russia         |  |               | 914   |  |               |   | 616   |      |  |   | 2,682  |  |  |   | 2,104  | 
|Canada         |  |               | 1,197 |  |               |   | 1,172 |      |  |   | 3,362  |  |  |   | 2,503  | 
|Portugal       |  |               |      |  |               |   | 76    |      |  |   | 27     |  |  |   | 315    | 





|   |                                     
|-- | ------------------------------------
|8. | RESTRUCTURING AND SEVERANCE EXPENSES





|                                                       |       |               |   |      |               |   |      |    |  |      |       |       |  |   |       |       | 
|------------------------------------------------------ | ----- | ------------- | - | ---- | ------------- | - | ---- | -- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|                                                       |       | Three months  |   |      | Nine months   |  
|                                                       |       | ended         |   |      | ended         |  
|                                                       |       | September 30, |   |      | September 30, |  
|                                                       |       |               |   |      |               |  
|                                                       |       | 2005          |   | 2004 |               |   | 2005 |    |  | 2004 |      
|                                                       |       |               |   |      |               |   |      |    |  |      |      
|Severance to former CEOs and other corporate personnel |       | $             |  |      |               | $ |     |    |  | $    | 1,952 |       |  | $ | 3,312 |      
|Severance to former corporate housing personnel        |       |               |  |      |               |   | 42   |    |  |      | 91    |       |  |   | 169   |      
|                                                       |       |               |   |      |               |   |      |    |  |      |       |      
|                                                       | Total |               | $ |     |               |   | $    | 42 |  |      | $     | 2,043 |  |   | $     | 3,481 | 
|                                                       |       |               |   |      |               |   |      |    |  |      |       |      

Severance to Former CEOs and other Corporate
Personnel


Severance to Former Corporate Housing
Personnel




|   |                                       
|-- | --------------------------------------
|9. | ASSET IMPAIRMENTS AND OTHER WRITE-OFFS



|                                         |       |               |       |       |               |   |       |       |  |   |       |       |  |   |       |       | 
|---------------------------------------- | ----- | ------------- | ----- | ----- | ------------- | - | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                                         |       | Three Months  |       |       | Nine Months   |  
|                                         |       | Ended         |       |       | Ended         |  
|                                         |       | September 30, |       |       | September 30, |  
|                                         |       |               |       |       |               |  
|                                         |       | 2005          |       |       | 2004          |   |       | 2005  |  |   | 2004  |      
|                                         |       |               |       |       |               |   |       |       |  |   |       |      
|Management contract losses               |       | $             | 1,046 |       |               | $ | 1,601 |       |  | $ | 2,094 |       |  | $ | 5,989 |      
|Investment in and advances to affiliates |       |               |      |       |               |   |      |       |  |   |      |       |  |   | 1,101 |      
|Hotel real estate investment fund costs  |       |               |      |       |               |   |      |       |  |   | 863   |       |  |   |      |      
|Cost of uncompleted merger               |       |               |      |       |               |   |      |       |  |   |      |       |  |   | 606   |      
|Other                                    |       |               |      |       |               |   |      |       |  |   |      |       |  |   | 96    |      
|                                         |       |               |       |       |               |   |       |       |  |   |       |      
|                                         | Total |               | $     | 1,046 |               |   | $     | 1,601 |  |   | $     | 2,957 |  |   | $     | 7,792 | 
|                                         |       |               |       |       |               |   |       |       |  |   |       |      

12



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Management contract losses


Investment in and advances to affiliates


Hotel real estate investment fund costs


Cost of uncompleted merger




|    |                                                                    
|--- | -------------------------------------------------------------------
|10. | GAIN AND LOSS ON SALE OF INVESTMENTS AND EXTINGUISHMENT OF
    DEBT







|    |                              
|--- | -----------------------------
|11. | COMMITMENTS AND CONTINGENCIES

Insurance Matters




13



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


th


Leases 


|           |       |   |        |         | 
|---------- | ----- | - | ------ | ------- | 
|2005       |       | $ | 22,764 |        
|2006       |       |   | 33,283 |        
|2007       |       |   | 13,702 |        
|2008       |       |   | 9,714  |        
|2009       |       |   | 8,281  |        
|Thereafter |       |   | 22,204 |        
|           |       |   |       
|           | Total |   | $      | 109,948 | 
|           |       |   |       

Management Agreement Commitments


Termination Fees


Contingent Liabilities Related to
Partnership Interests




14



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                             
|--- | ----------------------------
|12. | ACQUISITION AND DISPOSITIONS

Acquisition




|                                     |       |   |        |        | 
|------------------------------------ | ----- | - | ------ | ------ | 
|Cash and restricted cash             |       | $ | 1,739  |       
|Accounts receivable and other assets |       |   | 105    |       
|Property and equipment               |       |   | 29,935 |       
|                                     |       |   |       
|                                     | Total |   | $      | 31,779 | 
|                                     |       |   |       



|                                   |  |                    |       | 
|---------------------------------- |  | ------------------ | ----- | 
|                                   |  | Nine months ended  |      
|                                   |  | September 30, 2005 |      
|                                   |  |                    |      
|Pro Forma Total Lodging Revenues   |  | $                  | 9,637 | 
|Pro Forma Net Income               |  | $                  | 163   | 
|Pro Forma Diluted Income per share |  | $                  | 0.01  | 



Dispositions Accounting for the Impairment or Disposal
of Long-Lived Assets


|                                                  |  |                    |       |  |                    |   |       |                    |  |   |                    |  |  |   |       | 
|------------------------------------------------- |  | ------------------ | ----- |  | ------------------ | - | ----- | ------------------ |  | - | ------------------ |  |  | - | ----- | 
|                                                  |  | Three months ended |       |  | Nine months ended  |   |       | Three months ended |  |   | Nine months ended  | 
|                                                  |  | September 30, 2005 |       |  | September 30, 2005 |   |       | September 30, 2004 |  |   | September 30, 2004 | 
|                                                  |  |                    |       |  |                    |   |       |                    |  |   |                    | 
|Revenues                                          |  | $                  | 656   |  |                    | $ | 2,345 |                    |  | $ | 905                |  |  | $ | 2,476 | 
|Income before Taxes                               |  |                    | 2,805 |  |                    |   | 3,217 |                    |  |   | 205                |  |  |   | 488   | 
|Income from discontinued operations, net of taxes |  |                    | 1,656 |  |                    |   | 1,898 |                    |  |   | 133                |  |  |   | 317   | 



|                                                |  |                    |   |                    |  |   |        |  
|----------------------------------------------- |  | ------------------ | - | ------------------ |  | - | ------ | -
|                                                |  | Three months ended |   | Nine months ended  | 
|                                                |  | September 30, 2004 |   | September 30, 2004 | 
|                                                |  |                    |   |                    | 
|Revenues                                        |  | $                  |  |                    |  | $ | 2,233  |  
|Loss before taxes                               |  |                    |  |                    |  |   | (1,237 | )
|Loss from discontinued operations, net of taxes |  |                    |  |                    |  |   | (1237  | )

15



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                  
|--- | -----------------
|13. | SUBSEQUENT EVENTS

Subleases of Corporate Office Space 


Hotel Acquisition 


16



---



##### 








|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 2: | Managements Discussion and Analysis of Financial
    Condition and Results of Operations (dollars in
    thousands)

Forward-Looking Statements






| |   |                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | economic conditions generally, and the real estate market
    specifically;                                                                                                                                                                                                  
|
| |  | the impact of actual or threatened future terrorist incidents or
    hostilities;                                                                                                                                                                                            
|
| |  | the war in Iraq, continuing conflicts in that geographic region
    and related ongoing U.S. involvement;                                                                                                                                                                    
|
| |  | international geopolitical difficulties or health concerns;                                                                                                                                                                                                                  
|
| |  | uncertainties associated with obtaining additional financing for
    future real estate projects and to undertake future capital
    improvements;                                                                                                                           
|
| |  | demand for, and costs associated with, real estate development
    and hotel rooms, market conditions affecting the real estate
    industry, seasonality of resort and hotel revenues and
    fluctuations in operating results;                                            
|
| |  | changes in laws and regulations applicable to us, including
    federal, state or local hotel, resort, restaurant or land use
    regulations, employment, labor or disability laws and
    regulations and laws governing the taxation of real estate
    investment trusts;
|
| |  | the impact of weather-related events or other calamities;                                                                                                                                                                                                                    
|
| |  | legislative/regulatory changes, including changes to laws
    governing the taxation of REITs;                                                                                                                                                                               
|
| |  | failure to renew essential management contracts or business
    leases;                                                                                                                                                                                                      
|
| |  | competition from other hospitality companies, pricing pressures;                                                                                                                                                                                                             
|
| |  | variations in lease and room rental rates;                                                                                                                                                                                                                                   
|
| |  | litigation involving antitrust, consumer and other issues;                                                                                                                                                                                                                   
|
| |  | loss of any executive officer or failure to hire and retain
    highly qualified employees; and                                                                                                                                                                              
|
| |  | other factors discussed under the heading Risk
    Factors in our annual report on Form 10-K.                                                                                                                                                                              



17



---



##### 







| |                  
| | -----------------
| | Quarterly Summary

Overview 










| |   |                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In March 2005, we began operating 22 upscale hotels owned by a
    partnership consisting of a private investment fund managed by
    affiliates of Goldman Sachs and Highgate Holdings. During the
    nine months ended September 30 2005, five of these
    properties were sold and we no longer manage the hotel.                                                                                   
|
| |  | In connection with our purchase of Sunstone, we acquired
    management contracts for 54 properties, during the fourth
    quarter of 2004. During the nine months ended September 30,
    2005, we added one property and four properties were
    transitioned our of our system.                                                                                                                      
|
| |  | From September 30, 2004 to September 30, 2005,
    MeriStar sold seven properties, six of which we no longer
    manage. In addition, 33 other properties were transitioned out
    of our system, including the eight properties that were owned by
    our joint venture with FelCor, which have been foreclosed upon
    by the lender, and added 10 properties to our system from
    various owners.

Our Outlook 




18



---



##### 







Recent events




| |                  
| | -----------------
| | Hotel Acquisition





| |           
| | ----------
| | Hurricanes







Critical Accounting Policies and Estimates




19



---



##### 







Results of Operations




| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | Three months ended September 30, 2005 compared with
    three months ended September 30, 2004



| |        
| | -------
| | Revenue



|                                    |  |      |        |   |      |   |        |        |  |  |      |  
|----------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ------ |  |  | ---- | -
|                                    |  | 2005 |        |   | 2004 |   |        | Change | 
|                                    |  |      |        |   |      |   |        |        | 
|Number of rooms at September 30     |  |      | 60,024 |   |      |   | 60,024 |        |  |  |     |  
|Number of hotels at September 30    |  |      | 268    |   |      |   | 268    |        |  |  |     |  
|Revenue per available room (RevPAR) |  | $    | 83.37  |   |      | $ | 75.26  |        |  |  | 10.8 | %
|Average daily rate (ADR)            |  | $    | 110.34 |   |      | $ | 101.62 |        |  |  | 8.6  | %
|Occupancy                           |  |      | 75.6   | % |      |   | 74.1   | %      |  |  | 2.0  | %



|                         |  |      |        |   |      |   |        |        |  |  |      |   
|------------------------ |  | ---- | ------ | - | ---- | - | ------ | ------ |  |  | ---- | --
|                         |  | 2005 |        |   | 2004 |   |        | Change | 
|                         |  |      |        |   |      |   |        |        | 
|Number of markets        |  |      | 17     |   |      |   | 18     |        |  |  | (5.5 | )%
|Average number of units  |  |      | 3,336  |   |      |   | 3,493  |        |  |  | (4.5 | )%
|Average daily rate (ADR) |  | $    | 111.71 |   |      | $ | 107.31 |        |  |  | 4.1  | % 
|Occupancy                |  |      | 94.1   | % |      |   | 91.1   | %      |  |  | 3.3  | % 





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue from lodging is $3,403 for the three months ended
    September 30, 2005, due to the acquisition of the Hilton
    Concord hotel in February 2005. Lodging revenue from the
    Residence Inn Pittsburgh, which was sold in September 2005, for
    the three months ended September 30, 2005 and 2004 has been
    reclassified as discontinued operations in both periods.                                                           
|
| |  | Revenue from management fees increased $3,400, or 28.1%, to
    $15,513 for the three months ended September 30, 2005, from
    $12,113 for the three months ended September 30, 2004. Our
    RevPAR, ADR and occupancy have improved year over year due to
    the significant improvements in market conditions, and the net
    increase of 39 hotels under management. Included in revenue from
    management fees is termination fees of
|
| |  | Revenue from our corporate housing operations has increased
    $1,566, or 4.9%, to $33,267 for the three months ended
    September 30, 2005, from $31,701 for the three months ended
    September 30, 2004. This increase in revenue is partially
    attributable to an increase in ADR by approximately 4.1%, to
    $111.71 from $107.31, and an increase in occupancy to 94.1% from
    91.1%.                                          

20



---



##### 





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Reimbursable expenses, which we record as other revenue and
    other expenses from managed properties, increased by $56,880, or
    29.8%, to $247,745 for the three months ended September 30,
    2005, from $190,865 for the three months ended
    September 30, 2004. The primary reason for this increase is
    the increase in the number of managed hotels, directly resulting
    in an increase in the number of hotel employees and in related
    reimbursable salaries and other expenses. In addition, other
    revenue from managed properties has been revised and reduced for
    the three months ended September 30, 2004 by $9,449. Our
    statements of operations include an equal and offsetting
    amount  Other expenses from managed
    properties  which has also been revised by the
    same amount. These amounts represent the payroll and related
    costs, and certain other costs of the hotels operations
    that are contractually reimbursed to us by the hotel owners. The
    revisions have no impact on operating income (loss), net income
    (loss), or earnings (loss) per share, or our balance sheet or
    cash flows.



| |                                 
| | --------------------------------
| | Operating Expenses by Department





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lodging expenses are $2,487 for the three months ended
    September 30, 2005, due to the acquisition of the Hilton
    Concord hotel in February 2005. Lodging expenses from the
    Residence Inn Pittsburgh for the three months ended
    September 30, 2005 and 2004 have been reclassified as
    discontinued operations in both periods.                                                                                         
|
| |  | Corporate housing expenses increased $58 to $25,894, for the
    three months ended September 30, 2005, compared to $25,836
    for the three months ended September 30, 2004. As our
    revenue growth was driven by an increase in yield management
    (higher ADR and occupancy % with a lower unit count) rather than
    expansion into new markets, expenses remained consistent across
    periods in spite of growing revenues.



| |                                 
| | --------------------------------
| | Undistributed Operating Expenses





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Administrative and general expenses increased $2,724, or 16.4%,
    to $19,317 for the three months ended September 30, 2005,
    from $16,593 for the three months ended September 30, 2004.
    The majority of this increase is due to a $1,834 increase in
    administrative and general costs from the Sunstone operations
    that we acquired in October 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Asset impairments and other write-offs decreased $555, to $1,046
    for the three months ended September 30, 2005, from $1,601
    for the same period last year. These expenses relate to
    terminations of various management contracts. For additional
    information on these expenses, see Note 9 in the
    consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Reimbursable expenses, which we record as other revenue and
    other expenses from managed properties, increased by $56,880, or
    29.8%, to $247,745 for the three months ended September 30,
    2005, from $190,865 for the three months ended
    September 30, 2004. The primary reason for this is the
    increase in the number of managed hotels, directly resulting in
    an increased number of hotel employees and related reimbursable
    salaries and other expenses. In addition, other expenses from
    managed properties has been revised and reduced for the three
    months ending September 30, 2004 by $9,449. Our statements
    of operations include an equal and offsetting amount 
    Other revenue from managed properties 
    which has also been revised by the same amount. These amounts
    represent the payroll and related costs, and certain other costs
    of the hotels operations that are contractually reimbursed
    to us by the hotel owners. The revisions have no impact on
    operating income (loss), net income (loss), or earnings (loss)
    per share, or our balance sheet or cash flows.

21



---



##### 





| |                  
| | -----------------
| | Net Income (Loss)





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our gain on the extinguishment of debt of $4,326 related to the
    FelCor promissory note. As we no longer have an obligation to
    make payments on the note, we derecognized the liability and
    recorded a corresponding gain.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Net interest expense decreased $325, to $1,677, for the three
    months ended September 30, 2005, from $2,002 for the same
    period in 2004. In the third quarter of 2005 we had a higher
    average cash balance compared to the third quarter of 2004, as a
    result of improved operations. This along with higher interest
    rates on our cash accounts generated higher interest income
    compared to the third quarter of 2004. This was partially offset
    by a slightly higher average debt balance and slightly higher
    interest rates during the third quarter of 2005 compared to the
    third quarter of 2004, resulting from the debt incurred with the
    purchase of Sunstone and the Hilton Concord, as well as the
    refinancing of our line of credit.
|
| |  | Our equity in losses of affiliates increased $376, to $381, for
    the three months ended September 30, 2005, compared to $5
    for the same period in 2004. The majority of the increase is
    attributable to a $350 loss on our investment in the Radisson
    St. Louis hotel as we do not expect to receive any
    distributions.                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Income tax expense was $2,585 for the three months ended
    September 30, 2005, compared to $282 for the three months
    ended September 30, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | Nine months ended September 30, 2005 compared with
    nine months ended September 30, 2004



| |        
| | -------
| | Revenue



|                                    |  |      |        |   |      |   |        |        |  |  |      |  
|----------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ------ |  |  | ---- | -
|                                    |  | 2005 |        |   | 2004 |   |        | Change | 
|                                    |  |      |        |   |      |   |        |        | 
|Number of rooms at September 30     |  |      | 60,024 |   |      |   | 60,024 |        |  |  |     |  
|Number of hotels at September 30    |  |      | 268    |   |      |   | 268    |        |  |  |     |  
|Revenue per available room (RevPAR) |  | $    | 79.38  |   |      | $ | 71.88  |        |  |  | 10.4 | %
|Average daily rate (ADR)            |  | $    | 109.62 |   |      | $ | 101.23 |        |  |  | 8.3  | %
|Occupancy                           |  |      | 72.4   | % |      |   | 71.0   | %      |  |  | 2.0  | %



|                         |  |      |        |   |      |   |        |        |  |  |      |   
|------------------------ |  | ---- | ------ | - | ---- | - | ------ | ------ |  |  | ---- | --
|                         |  | 2005 |        |   | 2004 |   |        | Change | 
|                         |  |      |        |   |      |   |        |        | 
|Number of markets        |  |      | 18     |   |      |   | 20     |        |  |  | (10  | )%
|Average number of units  |  |      | 3,214  |   |      |   | 3,367  |        |  |  | (4.5 | )%
|Average daily rate (ADR) |  | $    | 109.28 |   |      | $ | 100.85 |        |  |  | 8.4  | % 
|Occupancy                |  |      | 92.5   | % |      |   | 89.9   | %      |  |  | 2.9  | % 





| |   |                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue from lodging is $8,511 for the nine months ended
    September 30, 2005, due to the acquisition of the Hilton
    Concord hotel in February 2005. Lodging revenue from the
    Residence Inn Pittsburgh,

22



---



##### 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | which was sold in September 2005, has been reclassified as
    discontinued operations for the nine months ended
    September 30, 2005 and 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Revenue from management fees increased $5,106, or 12.5%, to
    $45,865 for the nine months ended September 30, 2005, from
    $40,759 for the nine months ended September 30, 2004. Our
    RevPAR, ADR and occupancy have improved year over year, due to
    the significant improvement in market conditions and the net
    increase of 39 hotels under management.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Revenue from our corporate housing operations increased $8,286,
    or 9.9%, to $91,792, for the nine months ended
    September 30, 2005, from $83,506 for the nine months ended
    September 30, 2004. This increase in revenue is
    attributable to an increase in ADR of approximately 8.4%, to
    $109.28 from $100.85, and an increase in occupancy to 92.5% from
    89.9% partially offset by a decrease in average number of units.
    Also, revenue from BridgeStreets network partner business
    increased for the nine months ended September 30, 2005 as
    compared to the nine months ended September 30, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Reimbursable expenses, which we record as other revenue and
    other expenses from managed properties, increased by $116,710,
    or 20.7%, to $681,449 for the nine months ended
    September 30, 2005, from $564,739 for the nine months ended
    September 30, 2004. The primary reason for this increase is
    the increase in the number of managed hotels resulting in an
    increase in the number of hotel employees and in related
    reimbursable salaries and other expenses. In addition, other
    revenue from managed properties has been revised and reduced for
    the nine months ending September 30, 2004 by $36,556. Our
    statements of operations include an equal and offsetting
    amount  Other expenses from managed
    properties  which has also been revised by the
    same amount. These amounts represent the payroll and related
    costs, and certain other costs of the hotels operations
    that are contractually reimbursed to us by the hotel owners. The
    revisions have no impact on operating income (loss), net income
    (loss), or earnings (loss) per share, or our balance sheet or
    cash flows.



| |                                 
| | --------------------------------
| | Operating Expenses by Department





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lodging expenses are $6,491 for the nine months ended
    September 30, 2005, due to the acquisition of the Hilton
    Concord hotel in February 2005. Lodging expenses from the
    Residence Inn Pittsburgh have been reclassified as discontinued
    operations for the nine months ended September 30, 2004 and
    2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Corporate housing expenses increased $5,802, or 8.5%, to
    $73,923, for the nine months ended September 30, 2005,
    compared to $68,121 for the nine months ended September 30,
    2004. The increase in corporate housing expenses is primarily
    due to an increase in apartment rental expenses. The mix of
    rental units has increased in our metropolitan regions of
    Chicago and London, which have higher per unit costs compared to
    the markets we exited in 2004, Detroit and Toronto. Finally,
    costs from BridgeStreets network partner business
    increased in direct relationship with the revenue increase. The
    unit growth for the network partner business also carries a
    higher cost per unit versus the standard BridgeStreet leased
    apartment.



| |                                 
| | --------------------------------
| | Undistributed Operating Expenses





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Restructuring and severance charges were $2,043 and $3,481 for
    the nine months ended September 30, 2005, and 2004,
    respectively. The decrease is primarily due to the decrease in
    severance costs as approximately $1,800 of severance was paid
    for our former CEO, Steve Jorns, in 2005, while in 2004 we
    incurred approximately $3,312 in severance costs for our former
    CEO, Paul Whetsell.

23



---



##### 





| |   |                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Asset impairments and other write-offs decreased $4,835, from
    $7,792, for the nine months ended September 30, 2004, to
    $2,957 for the same period of this year. These expenses are
    detailed as follows:

|                                        |       |                   |       |       |      |   |       |       | 
|--------------------------------------- | ----- | ----------------- | ----- | ----- | ---- | - | ----- | ----- | 
|                                        |       | Nine Months Ended |      
|                                        |       | September 30,     |      
|                                        |       |                   |      
|                                        |       | 2005              |       |       | 2004 |  
|                                        |       |                   |       |       |      |  
|Management contract costs               |       | $                 | 2,094 |       |      | $ | 5,989 |      
|Investment impairments                  |       |                   |      |       |      |   | 1,101 |      
|Hotel real estate investment fund costs |       |                   | 863   |       |      |   |      |      
|Cost of uncompleted merger              |       |                   |      |       |      |   | 606   |      
|Other                                   |       |                   |      |       |      |   | 96    |      
|                                        |       |                   |       |       |      |  
|                                        | Total |                   | $     | 2,957 |      |   | $     | 7,792 | 
|                                        |       |                   |       |       |      |  





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Administrative and general expenses increased $5,262, or 10.2%,
    to $56,961, for the nine months ended September 30, 2005,
    compared to $51,699 for the nine months ended September 30,
    2004. The majority of this increase is due to $5,522 in
    administrative and general costs from the Sunstone operations
    that we acquired in October 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Reimbursable expenses, which we record as other revenue and
    other expenses, increased by $116,710, or 20.7%, to $681,449 for
    the nine months ended September 30, 2005, from $564,739 for
    the nine months ended September 30, 2004. The primary
    reason for this is the increase in the number of managed hotels
    directly resulting in an increased number of hotel employees and
    related reimbursable salaries and other expenses. In addition,
    other expenses from managed properties has been revised and
    reduced for the nine months ending September 30, 2004 by
    $36,556. Our statements of operations include an equal and
    offsetting amount  Other revenue from managed
    properties  which has also been revised by the
    same amount. These amounts represent the payroll and related
    costs, and certain other costs of the hotels operations
    that are contractually reimbursed to us by the hotel owners. The
    revisions have no impact on operating income (loss), net income
    (loss), or earnings (loss) per share, or our balance sheet or
    cash flows.



| |                  
| | -----------------
| | Net Income (Loss)





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our gain on the extinguishment of debt of $4,326 related to the
    FelCor promissory note. As we no longer have an obligation to
    make payments on the note, we derecognized the liability and
    recorded a corresponding gain. We also recognized a gain of $385
    from the exercise of stock warrants for stock in an unaffiliated
    company and subsequent sale of that stock, which we had held as
    an investment.                                                                                                                                                                                         
|
| |  | Our equity in earnings (losses) of affiliates increased $3,757,
    or 397.2%, to $2,811 for the nine months ended
    September 30, 2005, compared to $(946) for the same period
    in 2004. The majority of this increase is attributable to the
    recognition of our share of the gain on sale of the Hilton
    San Diego Gaslamp Hotel sold by our joint venture S.D.
    Bridgeworks, L.L.C. which totaled approximately $4,200. This
    gain was partially offset by losses in our MIP joint ventures,
    which were $1,443 and $1,111 for the nine months ending
    September 30, 2005 and 2004, respectively.
|
| |  | Net interest expense increased $2,268, or 42.9%, to $7,560 for
    the nine months ended September 30, 2005, from $5,292 for
    the same period in 2004. Included in interest expense is $1,847
    of unamortized deferred financing fees written off in connection
    with the repayment of our old subordinated term loan. In
    addition, we have incurred additional interest expense directly
    associated with the increase in our average debt balance as well
    as an increase in our interest rates with our Credit Facility.                                                                              

24



---



##### 





| |   |                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Income tax expense (benefit) was $2,647 for the nine months
    ended September 30, 2005, compared to ($3,255) for the nine
    months ended September 30, 2004. Our effective tax rate is
    approximately 41% in the 2005 period and was approximately 36%
    in the 2004 period.

Liquidity and Capital Resources


Working Capital


Operating Activities


Investing Activities


Financing Activities


DEBT


Senior Credit Facility-Revolving Loan and Term
Loan






25



---



##### 







Mortgage Debt


Non-Recourse Promissory Note




Interest Rate Caps


Sunstone Promissory Note


Liquidity


26



---



##### 










|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures About Market
    Risk

Interest Rate Risk














Exchange Rate Risk




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|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

Disclosure Controls and Procedures






Changes in Internal Controls








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PART II. OTHER INFORMATION







|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings








|        |         
|------- | --------
|Item 6. | Exhibits

Exhibits


|            |      |                         |  |                                                                                                                                                                                                                                                                                                                                                
|----------- | ---- | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |      | Description of Document
|            |      |                        
|            | 3.1  |                         |  | Amended and Restated Certificate of Incorporation of the
    Company, formerly MeriStar Hotels & Resorts, Inc.
    (incorporated by reference to Exhibit 3.1 to the
    Companys Form S-1/ A filed with the Securities and
    Exchange Commission on July 23, 1998 (Registration
    No. 333-49881)).                                        
|           
|            | 3.1. | 1                       |  | Certificate of Amendment of the Restated Certificate of
    Incorporation of the Company dated September 30, 2001
    (incorporated by reference to Exhibit 3.1.1 to the
    Companys Form 10-K filed with the Securities and
    Exchange Commission on April 15, 2002).                                                                     
|           
|            | 3.1. | 2                       |  | Certificate of Merger of Interstate Hotels Corporation into
    MeriStar Hotels & Resorts, Inc. (incorporated by
    reference to Exhibit 3.1.2 to the Companys
    Form 8-A/ A filed with the Securities and Exchange
    Commission on August 2, 2002).                                                                                     
|           
|            | 3.1. | 3                       |  | Certificate of Amendment of the Restated Certificate of
    Incorporation of the Company dated July 31, 2002
    (incorporated by reference to Exhibit 3.1.3 to the
    Companys Form 8-A/ A filed with the Securities and
    Exchange Commission on August 2, 2002).                                                                        
|           
|            | 3.2  |                         |  | By-laws of the Company, formerly MeriStar Hotels &
    Resorts, Inc. (incorporated by reference to Exhibit 3.2 to
    the Companys Form S-1/ A filed with the Securities
    and Exchange Commission on July 23, 1998 (Registration
    No. 333-49881)).                                                                                      
|           
|            | 3.2. | 1                       |  | Amendment to the By-laws of the Company (incorporated by
    reference to Exhibit 3.3 to the Companys
    Form 8-A/ A filed with the Securities and Exchange
    Commission on August 2, 2002).                                                                                                                                               
|           
|            | 4.1  |                         |  | Form of Common Stock Certificate of the Company (incorporated by
    reference to Exhibit 4.1 to the Companys
    Form 8-A/ A filed with the Securities and Exchange
    Commission on August 2, 2002).                                                                                                                                       
|           
|            | 4.2  |                         |  | Preferred Share Purchase Rights Agreement, dated July 23,
    1998, between the Company, formerly MeriStar Hotels &
    Resorts, Inc., and the Rights Agent (incorporated by reference
    to Exhibit 4.4 to the Companys Form S-1/ A filed
    with the Securities and Exchange Commission on July 23,
    1998(Registration No. 333-49881)).
|           
|            | 4.2. | 1                       |  | Amendment to Rights Agreement, dated December 8, 2000,
    between the Company, formerly MeriStar Hotels &
    Resorts, Inc., and the Rights Agent (incorporated by reference
    to Exhibit 4.1 to the Companys Form 8-K filed
    with the Securities and Exchange Commission on December 12,
    2000).                                    
|           
|            | 4.2. | 2                       |  | Second Amendment to Rights Agreement, dated May 1, 2002,
    between the Company, formerly MeriStar Hotels &
    Resorts, Inc., and the Rights Agent (incorporated by reference
    to Exhibit 4.1 to the Companys Form 8-K filed
    with the Securities and Exchange Commission on May 3, 2002).                                            
|           
|            | 4.3  |                         |  | Form of Rights Certificate (incorporated by reference to
    Exhibit 4.3 to the Companys Form S-1/ A filed
    with the Securities and Exchange Commission on July 23,
    1998 (Registration No. 333-49881)).                                                                                                                                

29



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##### 



|            |       |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                       
|----------- | ----- | ----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |       | Description of Document
|            |       |                        
|            | 4.4   |                         |  | Registration Rights Agreement, dated September 30, 1999,
    between the Company (formerly MeriStar Hotels &
    Resorts, Inc.), Oak Hill Capital Partners, L.P. and Oak Hill
    Capital Management Partners, L.P. (incorporated by reference to
    Exhibit 4.7 to the Companys Form 10-Q filed with
    the Securities and Exchange Commission for the three months
    ended September 30, 1999).
|           
|            | 10.2  |                         |  | Second Amendment to Amended and Restated Senior Secured Credit
    Agreement, dated as of May 2, 2005, among Interstate
    Operating Company, L.P., Societe Generale, SG Americas
    Securities, LLC, and various other lenders.                                                                                                                                                                    
|           
|            | 10.3* |                         |  | Employment Agreement, dated as of February 17, 2005, by and
    between Thomas F. Hewitt and the Company.                                                                                                                                                                                                                                                                                             
|           
|            | 10.4* |                         |  | Amended and Restated Employment Agreement, dated as of
    February 23, 2004, by and between J. William Richardson and
    the Company.                                                                                                                                                                                                                                                               
|           
|            | 31.1* |                         |  | Sarbanes-Oxley Act Section 302 Certifications of the Chief
    Executive Officer.                                                                                                                                                                                                                                                                                                                     
|           
|            | 31.2* |                         |  | Sarbanes-Oxley Act Section 302 Certifications of the Chief
    Financial Officer.                                                                                                                                                                                                                                                                                                                     
|           
|            | 32.*  |                         |  | Sarbanes-Oxley Act Section 906 Certifications of Chief
    Executive Officer and Chief Financial Officer.                                                                                                                                                                                                                                                                                             






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

30



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##### 



SIGNATURE






| |                                      
| | -------------------------------------
| | Interstate
    Hotels & Resorts, Inc.
|
| | /s/ J. William Richardson            
| |                                      
| | J. William Richardson                
| | Chief Financial Officer              



31