##### 



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
  Form 10-Q
   þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE
    SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended
    September 30, 2007oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  OF
    THE SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to    Commission File Number 1-14331
   Interstate Hotels &
    Resorts, Inc.
   Delaware(State of
    Incorporation)

52-2101815(IRS Employer Identification
    No.)4501 North Fairfax Drive, Ste 500
    Arlington, VA(Address of Principal
    Executive Offices)

22203(Zip
    Code)    www.ihrco.com This
    Form 10-Q
    can be accessed at no charge through above website.
   (703) 387-3100
 (Registrants Telephone
    Number, Including Area Code)
  þ o
  Rule 12b-2
 o þ o
  Rule 12b-2 o þ




---



##### 



INTERSTATE
    HOTELS & RESORTS, INC.
  INDEX
   PagePART I. FINANCIAL INFORMATIONItem 1:


Financial Statements (Unaudited):Consolidated Balance Sheets 
    September 30, 2007 and December 31, 2006


2Consolidated Statements of Operations and
    Comprehensive Income (Loss)  Three and nine months
    ended September 30, 2007 and 2006


3Consolidated Statements of Cash Flows 
    Nine months ended September 30, 2007 and 2006


4Notes to Consolidated Financial Statements


5Item 2:


Managements Discussion and Analysis of
    Financial Condition and Results of Operations


22Item 3:


Quantitative and Qualitative Disclosures About
    Market Risk


37Item 4:


Controls and Procedures


37PART II. OTHER INFORMATIONItem 1:


Legal Proceedings


39Item 6:


Exhibits


39   1




---



##### 



PART I.
    FINANCIAL INFORMATION
  Item 1:
    Financial
    Statements  INTERSTATE
    HOTELS & RESORTS, INC.
    CONSOLIDATED BALANCE SHEETS
    (In thousands, except share amounts)
  September 30,


December 31,2007


2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
21,576


$
25,308Restricted cash


7,332



6,485Accounts receivable, net of allowance for doubtful accounts of
    $375 and $253 respectively


22,039



31,511Due from related parties, net of allowance for doubtful accounts
    of $1,110 and $1,110, respectively


998



1,469Prepaid expenses and other current assets


7,423



2,592Assets held for sale






28,383Total current assets


59,368



95,748Marketable securities


1,772



1,610Property and equipment, net


229,693



103,895Investments in and advances to affiliates


18,662



11,144Notes receivable


6,935



4,962Deferred income taxes, net


13,467



12,451Goodwill


73,672



73,672Intangible assets, net


29,474



30,208Total assets

$
433,043


$
333,690LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS
    EQUITYCurrent liabilities:Accounts payable

$
2,202


$
2,053Accrued expenses


69,776



68,395Liabilities related to assets held for sale






10,263Current portion of long-term debt


862



3,750Total current liabilities


72,840



84,461Deferred compensation


1,712



1,541Long-term debt


171,088



80,476Total liabilities


245,640



166,478Minority interest


324



516Commitments and contingenciesStockholders equity:Preferred stock, $.01 par value; 5,000,000 shares
    authorized, no shares issued






Common stock, $.01 par value; 250,000,000 shares
    authorized; 31,718,817, and 31,540,926 shares issued and
    outstanding at September 30, 2007 and December 31,
    2006, respectively


317



316Treasury stock


(69
)


(69
)Paid-in capital


195,436



194,460Accumulated other comprehensive income (loss)


(226
)


1,201Accumulated deficit


(8,379
)


(29,212
)Total stockholders equity


187,079



166,696Total liabilities, minority interest and stockholders
    equity

$
433,043


$
333,690   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 EndedSeptember 30,


September 30,2007


2006


2007


2006Revenue:Lodging

$
20,628


$
7,154


$
52,325


$
18,609Management fees


8,487



12,761



29,837



34,386Management fees-related parties


1,147



1,305



2,846



12,030Termination fees


935



16,995



4,928



18,774Termination fees-related parties














6,117Other


2,506



2,688



7,538



9,11733,703



40,903



97,474



99,033Other revenue from managed properties


147,562



202,780



488,725



645,553Total revenue


181,265



243,683



586,199



744,586Expenses:Lodging


14,675



5,210



36,714



13,670Administrative and general


13,598



14,199



41,488



43,229Depreciation and amortization


4,137



1,626



11,114



4,715Asset impairments and write-offs


6



2,024



1,161



10,66632,416



23,059



90,477



72,280Other expenses from managed properties


147,562



202,780



488,725



645,553Total operating expenses


179,978



225,839



579,202



717,833OPERATING INCOME


1,287



17,844



6,997



26,753Interest income


515



514



1,672



1,445Interest expense


(3,825
)


(2,197
)


(9,834
)


(6,222
)Equity in earnings of affiliates


563



4,745



1,818



4,311(LOSS) INCOME BEFORE MINORITY INTEREST AND INCOME TAXES


(1,460
)


20,906



653



26,287Income tax benefit (expense)


654



(7,933
)


(201
)


(10,213
)Minority interest expense


(1
)


(122
)


(63
)


(171
)(LOSS) INCOME FROM CONTINUING OPERATIONS


(807
)


12,851



389



15,903Income from discontinued operations, net of tax


2,836



2,347



20,444



3,050NET INCOME

$
2,029


$
15,198


$
20,833


$
18,953Other comprehensive income, net of tax:Foreign currency translation (loss) gain


(219
)


66



(242
)


737Unrealized gain on investments


21



55



39



67COMPREHENSIVE INCOME

$
1,831


$
15,319


$
20,630


$
19,757BASIC EARNINGS PER SHARE:Continuing operations

$
(0.03
)

$
0.41


$
0.01


$
0.51Discontinued operations


0.09



0.07



0.65



0.10Basic earnings per share

$
0.06


$
0.48


$
0.66


$
0.61DILUTIVE EARNINGS PER SHARE:Continuing operations

$
(0.03
)

$
0.41


$
0.01


$
0.50Discontinued operations


0.09



0.07



0.64



0.10Dilutive earnings per share

$
0.06


$
0.48


$
0.65


$
0.60   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 EndedSeptember 30,2007


2006OPERATING ACTIVITIES:Net income

$
20,833


$
18,953Adjustments to reconcile net income to net cash provided by
    operating activities:Depreciation and amortization


11,114



4,715Amortization of deferred financing fees


1,419



573Stock compensation expense


863



788Bad debt expense


80



865Asset impairments and write-offs


1,161



10,666Equity in earnings of affiliates


(1,818
)


(4,311
)Operating distributions from unconsolidated affiliates


258



285Minority interest


63



171Deferred income taxes


(580
)


7,828Excess tax benefits from share-based payment arrangements


(87
)


(880
)Discontinued operations:Depreciation and amortization






1,192Gain on sale


(20,549
)


Changes in assets and liabilities:Accounts receivable


9,527



(14,994
)Due from related parties


471



4,503Prepaid expenses and other current assets


(2,456
)


(3,679
)Accounts payable and accrued expenses


1,178



2,527Changes in asset and liability accounts for sale


93



Other changes in asset and liability accounts


418



595Cash provided by operations


21,988



29,797INVESTING ACTIVITIES:Proceeds from the sale of discontinued operations


35,958



Change in restricted cash


(847
)


(972
)Acquisition of hotels


(129,958
)


(14,538
)Purchases related to discontinued operations


(68
)


(1,826
)Purchases of property and equipment


(6,083
)


(4,932
)Additions to intangible assets


(3,163
)


(1,417
)Contributions to unconsolidated affiliates


(8,721
)


(13,192
)Distributions from unconsolidated affiliates


3,187



15,754Changes in notes receivable


(473
)


596Cash used in investing activities


(110,168
)


(20,527
)FINANCING ACTIVITIES:Proceeds from borrowings


147,825



9,000Repayment of borrowings


(60,101
)


(22,750
)Excess tax benefits from share-based payment arrangements


87



880Proceeds from issuance of common stock


190



2,810Financing fees paid


(3,317
)


Cash provided by (used in) financing activities


84,684



(10,060
)Effect of exchange rate on cash


(236
)


181Net decrease in cash and cash equivalents


(3,732
)


(609
)CASH AND CASH EQUIVALENTS, beginning of period


25,308



12,929CASH AND CASH EQUIVALENTS, end of period

$
21,576


$
12,320SUPPLEMENTAL CASH FLOW INFORMATIONCash paid for interest and income taxes:Interest

$
8,185


$
5,564Income taxes


3,458



2,185   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
  Form 10-K,
   5




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Revenue
    Recognition Related to Termination Fees
  No. 04-1, (EITF 04-1) EITF 04-1
  Related
    Parties
        Stock-Based
    Compensation
    Accounting
    for Uncertainty in Income Taxes
   6




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Recently
    Issued Accounting Pronouncements
  No. 06-3, (EITF 06-3) EITF 06-3,
      3.
    EARNINGS
    PER SHARE    Three Months EndedSeptember 30, 2007


September 30, 2006Income/





Per Share


Income/





Per Share(Loss)


Shares


Amount


(Loss)


Shares


Amount(Loss) Income from continuing operations

$
(807
)


31,701


$
(0.03
)

$
12,851



31,368


$
0.41Income from discontinued operations, net of tax


2,836







0.09



2,347







0.07Basic net income

$
2,029



31,701


$
0.06


$
15,198



31,368


$
0.48Assuming exercise of outstanding employee stock options less
    shares repurchased at average market price






13











190



Assuming vesting of restricted stock grants






282











195



Diluted net income

$
2,029



31,996


$
0.06


$
15,198



31,753


$
0.48   7




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Nine Months EndedSeptember 30, 2007


September 30, 2006Income/





Per Share


Income/





Per Share(Loss)


Shares


Amount


(Loss)


Shares


AmountIncome from continuing operations

$
389



31,636


$
0.01


$
15,903



30,983


$
0.51Income from discontinued operations, net of tax


20,444







0.65



3,050







0.10Basic net income

$
20,833



31,636


$
0.66


$
18,953



30,983


$
0.61Assuming exercise of outstanding employee stock options less
    shares repurchased at average market price






43











282



Assuming vesting of restricted stock grants






248



(0.01
)






159



(0.01
)Diluted net income

$
20,833



31,927


$
0.65


$
18,953



31,424


$
0.60   4.
    INVESTMENTS
    IN AND ADVANCES TO AFFILIATES    Our Equity

September 30,


December 31,Joint Venture Investments

Number of Hotels


Participation

2007


2006CNL/IHC Partners, L.P.


3


15.0%

$
2,861


$
2,625True North Tesoro Property Partners, L.P.


1


15.9%






1,381Cameron S-Sixteen Hospitality, LLC


1


10.9%


467



487Amitel Holdings, LLC


6


15.0%


4,005



3,903RQB Resort/Development Investors, LLC


1


10.0%


1,145



447Cameron S-Sixteen Broadway, LLC


1


15.7%


1,050



1,136IHR Greenbuck Hotel Venture,
    LLC(1)





15.0%


1,573



362Interstate Cross Keys, LLC


1


15.0%


582



IHR/Steadfast Hospitality Management,
    LLC(2)





50.0%


510



Other


3


12.5%-50.0%


769



803Total


17




$
12,962


$
11,144Advances to AffiliatesSteadfast Mexico,
    LLC(3)


3





5,700



Total


20




$
18,662


$
11,144     (1)
    
    Hotel number is not listed since
    this joint venture is in the process of developing hotels.(2)
    
    Hotel number is not listed as this
    joint venture owns only a management company.(3)
    
    This investment was made through a
    convertible debt instrument expected to convert in the fourth
    quarter of 2007, see below for more information.     8




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      ® ®
  ®
      5.
    PROPERTY
    AND EQUIPMENT    September 30,


December 31,2007


2006Land

$
19,547


$
10,269Furniture and fixtures


26,350



17,437Building and improvements


188,274



75,566Leasehold improvements


5,695



5,889Computer equipment


6,505



4,978Software


12,336



12,244Total

$
258,707


$
126,383Less accumulated depreciation


(29,014
)


(22,488
)Property and equipment, net

$
229,693


$
103,895  9




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  6.
    INTANGIBLE
    ASSETS    September 30,


December 31,2007


2006Management contracts

$
36,771


$
35,940Franchise fees


1,814



1,620Deferred financing fees


3,629



2,538Total cost


42,214



40,098Less accumulated amortization


(12,740
)


(9,890
)Intangible assets, net

$
29,474


$
30,208            10




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    7.
    ACCRUED
    EXPENSES    September 30,


December 31,2007


2006Salaries and employee related benefits

$
22,323


$
24,895Deferred revenue


9,546



561Other


37,907



42,939Total

$
69,776


$
68,395     8.
    LONG-TERM
    DEBT    September 30,


December 31,2007


2006Senior credit facility  term loan

$
114,425


$
40,526Mortgage debt


57,525



43,700Total long-term debt


171,950



84,226Less current portion


(862
)


(3,750
)Long-term debt, net of current portion

$
171,088


$
80,476   Senior
    Credit Facility
  and/or
 11




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  30-day
    Mortgage
    Debt
    Interest Rate as ofPrincipal


Maturity


Spread over


September 30,Amount


Date(1)


30-Day LIBOR


2007Hilton Arlington

$
24.7 million



November 2009



135 bps



7.2
%Hilton Houston Westchase

$
32.8 million



February 2010



135 bps



7.2
%     (1)
    
    We are required to make
    interest-only payments until these loans mature, with two
    optional one-year extensions.      Interest
    Rate Caps
    Maturity


30-day LIBORAmount


Date


Cap RateMarch 2005 (Credit Facility)

$
55.0 million



January 2008



5.75
%October 2006 (Hilton Arlington mortgage loan)

$
24.7 million



November 2009



7.25
%February 2007 (Hilton Westchase mortgage loan)

$
32.8 million



February 2010



7.25
%    12




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  9.
    SEGMENT
    INFORMATION              13




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Hotel


HotelManagement


Ownership


Corporate


ConsolidatedThree months ended September 30, 2007Revenue

$
13,075


$
20,628


$



$
33,703Depreciation and amortization


1,879



2,243



15



4,137Operating expense


12,307



15,325



647



28,279Operating (loss) income


(1,111
)


3,060



(662
)


1,287Interest expense, net






(3,222
)


(88
)


(3,310
)Equity in earnings of affiliates






563







563(Loss) income before minority interests and income taxes

$
(1,111
)

$
401


$
(750
)

$
(1,460
)Capital expenditures

$
390


$
3,183


$



$
3,573Three months ended September 30, 2006Revenue

$
33,749


$
7,154


$



$
40,903Depreciation and amortization


929



582



115



1,626Operating expense


14,833



5,395



1,205



21,433Operating (loss) income


17,987



1,177



(1,320
)


17,844Interest expense, net






(991
)


(692
)


(1,683
)Equity in earnings of affiliates






4,745







4,745(Loss) income before minority interests and income taxes

$
17,987


$
4,931


$
(2,012
)

$
20,906Capital expenditures

$
315


$
1,662


$
18


$
1,995   14




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Hotel


HotelManagement


Ownership


Corporate


ConsolidatedNine months ended September 30, 2007Revenue

$
45,149


$
52,325


$



$
97,474Depreciation and amortization


5,424



5,459



231



11,114Operating expense


37,496



38,190



3,677



79,363Operating income (loss)


2,229



8,676



(3,908
)


6,997Interest expense, net






(8,160
)


(2
)


(8,162
)Equity in earnings of affiliates






1,818







1,818Income (loss) before minority interests and income taxes

$
2,229


$
2,334


$
(3,910
)

$
653Total assets

$
139,723


$
253,020


$
40,300


$
433,043Capital expenditures

$
1,023


$
134,860


$
158


$
136,041Nine months ended September 30, 2006Revenue

$
80,424


$
18,609


$



$
99,033Depreciation and amortization


2,896



1,481



338



4,715Operating expense


49,393



14,211



3,961



67,565Operating income (loss)


28,135



2,917



(4,299
)


26,753Interest expense, net






(2,367
)


(2,410
)


(4,777
)Equity in earnings of affiliates






4,311







4,311Income (loss) before minority interests and income taxes

$
28,135


$
4,861


$
(6,709
)

$
26,287Total assets

$
172,445


$
76,735


$
59,119


$
308,299Capital expenditures

$
1,709


$
17,346


$
415


$
19,470   (1)
    (2)
  Three Months


Nine MonthsEnded September 30,


Ended September 30,2007


2006


2007


2006Russia

$
179


$
375


$
539


$
1,125Other

$
192


$
158


$
430


$
416     (1)
    
    Revenues for the United Kingdom and
    France related solely to BridgeStreet operations have been
    reclassified as discontinued operations on the consolidated
    statement of operations for the related periods due to the sale
    of BridgeStreet during the first quarter of 2007 and therefore
    have not been included in the above table. There have been no
    revenues from either region during the three month period ended
    September 30, 2007. BridgeStreet revenues from the United
    Kingdom and France were $2.8 million and $0.2 million,
    respectively, for the nine month period ended September 30,
    2007. Revenues from the United Kingdom and France were
    $11.1 million and $0.8 million for the three months
    ended September 30, 2006, respectively, and
    $26.6 million and $1.9 million for the nine month
    period ended September 30, 2006, respectively.(2)
    
    Management fee revenues from our
    managed properties in Mexico are recorded through our joint
    venture, IHR/Steadfast Hospitality Management, LLC, and as such,
    are included in equity in earnings in our consolidated
    statements of operations for the three and nine months ended
    September 30, 2007.   15




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    10.
    OTHER
    TRANSACTIONS    11.
    COMMITMENTS
    AND CONTINGENCIES  Insurance
    Matters
     16




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Leases
    September 30,
    2007-2008

$
3,481September 30,
    2008-2009


3,427September 30,
    2009-2010


3,509September 30,
    2010-2011


3,593September 30,
    2011-2012


3,679Thereafter


4,091Total

$
21,780     September 30,
    2007-2008

$
1,122September 30,
    2008-2009


1,167September 30,
    2009-2010


1,214September 30,
    2010-2011


1,263September 30,
    2011-2012


1,313Thereafter


1,251Total

$
7,330   Commitments
    Related to Management Agreements and Hotel
    Ownership
      Letters
    of Credit
   17




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Contingent
    Liabilities Related to Partnership Interests
    12.
    ACQUISITIONS &
    DISPOSITIONS  Acquisitions
    Land

$
4,419Buildings and improvements


66,243Furniture and fixtures


4,945Working capital


474Total

$
76,081     Nine MonthsEnded September 30,2007


2006Pro forma lodging revenues

$
66,645


$
36,863Pro forma net income

$
22,033


$
21,020Pro forma diluted earnings per share

$
0.69


$
0.67     Land

$
4,860Buildings and improvements


43,422Furniture and fixtures


3,411Working capital


184Total

$
51,877  18




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Land

$
1,375Buildings and improvements


12,087Furniture and fixtures


1,022Working capital


44Total

$
14,528   Dispositions
    December 31,2006Accounts receivable, net

$
8,064Prepaid expenses and other current assets


8,247Property and equipment, net


2,214Goodwill


9,858Total assets held for sale

$
28,383Accounts payable

$
2,498Accrued expenses


7,765Total liabilities held for sale

$
10,263     Nine MonthsEnded September 30,2007


2006Revenue

$
8,500


$
101,066Depreciation and amortization






1,193Operating expense


8,969



95,403Operating (loss) income

$
(469
)

$
4,470Gain on sale


20,549



Interest expense






18Income before minority interest and taxes

$
20,080


$
4,452Income tax benefit (expense)


163



(1,402
)Income from discontinued operations, net of taxes

$
20,243


$
3,050  19




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      13.
    STOCK-BASED
    COMPENSATION  Share Based Payment
    AggregateNumber of


Weighted Average


IntrinsicShares


Exercise Price/Share


ValueOptions outstanding at December 31, 2006


495,413


$
6.81Granted


40,000


$
6.97Exercised


(48,141
)

$
3.94Forfeited


(35,850
)

$
15.23Options outstanding at September 30, 2007


451,422


$
6.46


$
119,662Options exercisable at September 30, 2007


350,596


$
6.56


$
119,662     WeightedNumber of


AverageRestricted


Grant-DateShares


Fair ValueUnvested at December 31, 2006


326,577


$
5.40Granted


279,200


$
6.05Vested


(141,246
)

$
5.30Unvested at September 30, 2007


464,531


$
5.82        20




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    14.
    INCOME
    TAX RATE CHANGE AND FIN 48  RECOGNITION AND
    MEASUREMENT OF TAX POSITIONS AND BENEFITS            15.
    SUBSEQUENT
    EVENT   21




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##### 



Item 2:
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations    Forward-Looking
    Statements
  Form 10-Q Form 10-K
  Form 10-Q, Form 10-K,
  Overview
    and Outlook
  Our Business
   22




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##### 



Industry Overview 
        Financial Highlights 
      Investments in and Acquisitions of Real Estate 
 23




---



##### 



full-service
  ® ® ®
  ® ®
        Increase in our Borrowing Capacity 
 24




---



##### 



and/or
  Turnover of Management Contracts 
      Number of


Number of


Nine Months


Nine MonthsOwner Group

Properties


Rooms


Ended 9/30/2007


Ended 9/30/2006Blackstone


18
(1)


5,122


$
2,091


$
4,262Sunstone REIT


7



1,492



382



738CNL


17



2,999



572



2,239Others


17



2,926



667



1,517Total


59



12,539


$
3,712


$
8,756     (1)
    
    As we will no longer be recording
    management fees for the 297-room Hilton Houston Westchase
    and the 495-room Westin Atlanta Airport, we have included
    them in this analysis. In 2007, there were 16 Blackstone
    properties sold which we no longer own or manage.       25




---



##### 



Critical
    Accounting Policies and Estimates
    Form 10-K,
  Accounting
    for Uncertainty in Income Taxes
    Revenue
    Recognition Related to Termination Fees
  No. 04-1, Accounting for Preexisting Relationships between the
    Parties to a Business Combination (EITF 04-1) EITF 04-1
  Results
    of Operations
  Operating
    Statistics
    As of September 30,


Percent Change2007


2006


07 vs. 06Hotel ManagementProperties managed


184



233



(21.0
)%Number of rooms


42,435



52,617



(19.4
)%Hotel OwnershipNumber of properties


6



3



100.0
%Number of rooms


1,755



655



167.9
%  26




---



##### 




    We acquired 19 additional management contracts from various
    owners.
    Blackstone/MeriStar sold 24 properties, seven properties of
    which we either purchased or were retained as manager by the new
    owners.
    CNL sold 22 properties, five of which we continue to manage for
    the new owner.
    Sunstone sold eight properties which we no longer manage.
    31 other properties were sold by various other owners, five of
    which we continue to manage for the new owners.  (1)
  Three MonthsEnded September 30,


Percent Change2007


2006


07 vs. 06Hotel ManagementRevPar

$
102.93


$
94.32



9.1
%ADR

$
133.30


$
123.97



7.5
%Occupancy


77.2
%


76.1
%


1.4
%   Nine MonthsEnded September 30,


Percent Change2007


2006


07 vs. 06Hotel ManagementRevPar

$
100.62


$
92.42



8.9
%ADR

$
133.20


$
123.95



7.5
%Occupancy


75.5
%


74.6
%


1.2
%     (1)
    
    We present these operating
    statistics for the periods included in this report on a
    same-store basis. We define our same-store hotels as those which
    (i) are managed or owned by us for the entirety of the
    reporting periods being compared or have been managed by us for
    part of the reporting periods compared and we have been able to
    obtain operating statistics for the period of time in which we
    did not manage the hotel and (ii) have not sustained
    substantial property damage, business interruption or undergone
    large-scale capital projects during the periods being reported.
    In addition, the operating results of hotels for which we no
    longer manage as of September 30, 2007, are not included in
    same-store hotel results for the periods presented herein. Of
    the 184 properties that we and our affiliates managed as of
    September 30, 2007, 178 properties have been classified as
    same-store hotels.  Three
    months ended September 30, 2007, compared to the three
    months ended September 30, 2006
  Revenues
    Three MonthsEnded September 30,


Percent Change2007


2006


07 vs. 06Lodging

$
20,628


$
7,154



>100
%Management fees


9,634



14,066



(31.5
)%Termination fees


935



16,995



(94.5
)%Other


2,506



2,688



(6.8
)%Other revenue from managed properties


147,562



202,780



(27.2
)%Total revenue

$
181,265


$
243,683



(25.6
)%  27




---



##### 



Lodging
   Management &
    termination fees
       Number ofProperties @


Three Months


Three MonthsOwner Group

9/30/2007


Ended 9/30/2007


Ended 9/30/2006MANAGEMENT
    FEES(1):Blackstone


17


$
1,518


$
1,581Sunstone REIT


30



2,304



2,083Equity Inns REIT


38



720



480CNL/Ashford


5



148



143International


8



333



434Other


77



4,502



4,769Owned
    Hotels(3)


6







306Hotels terminated during 2007






109



2,655Hotels terminated during 2006










1,615Total management fees


181
(2)

$
9,634


$
14,066TERMINATION FEES:Blackstone





$
935


$
16,217Other










778Total termination fees





$
935


$
16,995     (1)
    
    We also expect to earn incentive
    fees related to the management portfolio. We record incentive
    management fees in the period that it is certain these fees will
    be earned, which for annual incentive fee measurements is
    typically in the last month of the annual contract year. At
    September 30, 2007, we recorded deferred revenue of
    $7.3 million related to the international properties and
    $2.2 million related to our other managed properties.
    During the fourth quarter of 2007, we estimate that we will
    recognize in excess of $19 million in incentive management
    fee revenue assuming operation conditions remain as expected.(2)
    
    We have omitted three properties
    managed by one of our joint venture affiliates as we do not
    directly record management fee revenue. Our percentage of the
    earnings are recorded as equity in earnings in our consolidated
    statement of operations.(3)
    
    Management fees for Hilton
    Westchase, Hilton Arlington and Westin Atlanta Airport are
    eliminated in our consolidated statement of operations for the
    periods in which we own the hotels but are included for periods
    in which we managed these hotels for a third party prior to our
    acquisition. 28




---



##### 



Other
   Other
    revenue from managed properties
   Operating
    Expenses
    Three MonthsEnded September 30,


Percent Change2007


2006


07 vs. 06Lodging

$
14,675


$
5,210



>100
%Administrative and general


13,598



14,199



(4.2
)%Depreciation and amortization


4,137



1,626



>100
%Asset impairments and write-offs


6



2,024



(99.7
)%Other expenses from managed properties


147,562



202,780



(27.2
)%Total operating expenses

$
179,978


$
225,839



(20.3
)%   Lodging
   Administrative
    and general
   Depreciation
    and amortization
   Asset
    impairments and write-offs
  29




---



##### 



Other
    expenses from managed properties
   Other
    Income and Expenses
    Three MonthsEnded September 30,


Percent Change2007


2006


07 vs. 06Interest expense, net

$
3,310


$
1,683



96.7
%Equity in earnings of affiliates


563



4,745



(88.1
)%Income tax (benefit) expense


(654
)


7,933



>(100
)%Minority interest expense


1



122



(99.2
)%Income from discontinued operations, net of tax


2,836



2,347



20.8
%   Interest
    expense
   Equity in
    earnings of affiliates
   Income
    tax expense
   Income
    from discontinued operations, net of tax
  30




---



##### 



Nine
    months ended September 30, 2007, compared to nine months
    ended September 30, 2006
  Revenues
    Nine MonthsEnded September 30,


Percent Change2007


2006


07 vs. 06Lodging

$
52,325


$
18,609



>100
%Management fees


32,683



46,416



(29.6
)%Termination fees


4,928



24,891



(80.2
)%Other


7,538



9,117



(17.3
)%Other revenue from managed properties


488,725



645,553



(24.3
)%Total revenue

$
586,199


$
744,586



(21.3
)%   Lodging
   Management &
    termination fees
    31




---



##### 



Number ofProperties @


Nine Months


Nine MonthsOwner Group

9/30/2007


Ended 9/30/2007


Ended 9/30/2006MANAGEMENT
    FEES(1):Blackstone


17


$
4,891


$
4,882Sunstone REIT


30



6,575



5,888Equity Inns REIT


38



1,984



1,355CNL/Ashford


5



442



423International


8



910



1,290Other


77



14,169



13,002Owned
    Hotels(3)


6



300



992Hotels terminated during 2007






3,412



8,369Hotels terminated during 2006










7,020Business interruption proceeds










3,195Total management fees


181
(2)

$
32,683


$
46,416TERMINATION FEES:Blackstone





$
3,928


$
23,489Sunstone REIT






215



Other






785



1,402Total termination fees





$
4,928


$
24,891     (1)
    
    We also expect to earn incentive
    fees related to the management portfolio. We record incentive
    management fees in the period that it is certain these fees will
    be earned, which for annual incentive fee measurements is
    typically in the last month of the annual contract year. At
    September 30, 2007, we recorded deferred revenue of
    $7.3 million related to the international properties and
    $2.2 million related to our other managed properties.
    During the fourth quarter of 2007, we estimate that we will
    recognize in excess of $19 million in incentive management
    fee revenue assuming operation conditions remain as expected.(2)
    
    We have omitted three properties
    managed by one of our joint venture affiliates as we do not
    directly record management fee revenue. Our percentage of the
    earnings are recorded as equity in earnings in our consolidated
    statement of operations.(3)
    
    Management fees for Hilton
    Westchase, Hilton Arlington and Westin Atlanta Airport are
    eliminated in our consolidated statement of operations for the
    periods in which we own the hotels but are included for periods
    in which we managed these hotels for a third party prior to our
    acquisition.  Other
   Other
    revenue from managed properties
  32




---



##### 



Operating
    Expenses
    Nine monthsended September 30,


Percent Change2007


2006


07 vs. 06Lodging

$
36,714


$
13,670



>100
%Administrative and general


41,488



43,229



(4.0
)%Depreciation and amortization


11,114



4,715



>100
%Asset impairments and write-offs


1,161



10,666



(89.1
)%Other expenses from managed properties


488,725



645,553



(24.3
)%Total operating expenses

$
579,202


$
717,833



(19.3
)%   Lodging
   Administrative
    and general
   Depreciation
    and amortization
   Asset
    impairments and write-offs
   Other
    expenses from managed properties
  33




---



##### 



Other
    Income and Expenses
    Nine MonthsEnded September 30,


Percent Change2007


2006


07 vs. 06Interest expense, net

$
8,162


$
4,777



70.9
%Equity in earnings of affiliates


1,818



4,311



(57.8
)%Income tax expense


201



10,213



(98.0
)%Minority interest expense


63



171



(63.2
)%Income from discontinued operations, net of tax


20,444



3,050



>100
%   Interest expense
   Equity in
    earnings of affiliates
 true-ups
  Income
    tax expense
   Income
    from discontinued operations, net of tax
    34




---



##### 



Liquidity,
    Capital Resources and Financial Position
    Nine MonthsEnded September 30,


Percent Change2007


2006


07 vs. 06Cash provided by operating activities

$
21,988


$
29,797



(26.2
)%Cash used in investing activities


110,168



20,527



>100
%Cash provided by (used in) financing activities


84,684



(10,060
)


>100
%Working capital (deficit)


(13,472
)


3,543



>(100
)%Cash interest expense


8,185



5,564



47.1
%Debt balance


171,950



71,302



>100
%   Operating
    Activities
    Investing
    Activities
    
    The purchase of two wholly-owned properties in 2007 compared to
    one in 2006. In February 2007, we purchased the Hilton Houston
    Westchase for $51.9 million followed by the purchase of the
    Westin Atlanta Airport in May 2007 for $76.1 million and a
    $2.0 million deposit associated with the future purchase of
    the Sheraton Columbia. In 2006, we purchased the Hilton Garden
    Inn Baton Rouge for $14.5 million.
    In 2007, we invested a total of $3.0 million in joint
    ventures and advanced $5.7 million in the form of a
    convertible debt instrument in an entity owned by Steadfast to
    acquire a 15% interest in a joint venture. We received
    non-operating distributions totaling $3.2 million from four
    joint ventures. In 2006, we invested $13.0 million in four
    new joint ventures and made an additional contribution to
    existing joint ventures of $0.2 million. We received a
    distribution of $15.3 million from the sale of the Sawgrass
    Marriott Resort & Spa and $0.5 million from our
    Doral Tesoro joint venture. Distributions which are a return of
    our investment in the joint venture are recorded as investing
    cash flows while distributions which are a return on our
    investment are recorded as operating cash flows.
    We spent an additional $1.2 million on property and
    equipment during the nine month period ended September 30,
    2007, which is primarily related to improvements at our owned
    hotels and for general corporate purposes.
    The cash expenditures above were offset by proceeds of
    $36.0 million from the sale of our corporate housing
    subsidiary.  Financing
    Activities
   35




---



##### 



Liquidity
  Liquidity Requirements
      Senior Credit Facility and/or
  30-day
   36




---



##### 



Mortgage Debt
  Interest Rate as ofPrincipal


Maturity


Spread Over


September 30,Amount


Date(1)


30-Day LIBOR


2007Hilton Arlington

$
24.7 million



November 2009



135 bps



7.2
%Hilton Houston Westchase

$
32.8 million



February 2010



135 bps



7.2
%     (1)
    
    We are required to make
    interest-only payments until these loans mature, with two
    optional one-year extensions.      Item 3.
    Quantitative
    and Qualitative Disclosures About Market Risk  Interest
    Rate Risk
  30-day 30-day
  30-day
  Form 10-K
  Item 4.
    Controls
    and Procedures  Disclosure
    Controls and Procedures
  Rules 13a-15(e) 15-d 
   37




---



##### 



Changes
    in Internal Controls
     38




---



##### 



PART II.
    OTHER INFORMATION
  Item 1.
    Legal
    Proceedings    Item 6.
    Exhibits  Exhibits
  Exhibit No.

Description of Document3
.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-l/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-l/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-l/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-l/A
    filed with the Securities and Exchange Commission on
    July 23, 1998 (Registration
    No. 333-49881)).10
.8*

Agreement of Purchase and Sale between MeriStar Columbia Owner
    SPE, LLC, MeriStar Seelbach SPE, LLC, Madison Motel Associates,
    LLP, affiliates of The Blackstone Group, and Interstate
    Columbia, LLC, an affiliate of Interstate Hotels &
    Resorts, Inc., and IHR Invest Hospitality Holdings, LLC, dated
    September 12, 2007, for the purchase of the Sheraton
    Columbia, the Hilton Seelbach, and the Crowne Plaza Madison.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 39




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##### 



SIGNATURE
    Interstate
    Hotels & Resorts, Inc.
  By:
    /s/  Denis
    S. McCarthy      40