##### 









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 March 31,
    2004                                           
|  
|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   |  | 22203(Zip Code)                  
|(Address of Principal Executive
    Offices) |  |                                  

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)


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

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Securities Exchange Act of 1934).
o

The number of shares of Common Stock, par value
$0.01 per share, outstanding at May 10, 2004 was 30,575,588.



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##### 



INTERSTATE HOTELS & RESORTS,
INC.



INDEX


|                              |  |                                                                                                                            |  |      |    | 
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                              |  |                                                                                                                            |  | Page
|                              |  |                                                                                                                            |  |     
|PART I. FINANCIAL INFORMATION
|                             
|Item 1:                       |  | Financial Statements (unaudited)                                                                                           |  |      |    | 
|                              |  | Consolidated Balance Sheets 
    March 31, 2004 and December 31, 2003                                                     |  |      | 2  | 
|                              |  | Consolidated Statements of Operations and
    Comprehensive Income (Loss)  Three months ended
    March 31, 2004 and 2003 |  |      | 3  | 
|                              |  | Consolidated Statements of Cash Flows 
    Three months ended March 31, 2004 and 2003                                     |  |      | 4  | 
|                              |  | Notes to Consolidated Financial Statements                                                                                 |  |      | 5  | 
|                             
|Item 2:                       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                                  |  |      | 14 | 
|                             
|Item 3:                       |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                             |  |      | 27 | 
|                             
|Item 4:                       |  | Controls and Procedures                                                                                                    |  |      | 28 | 
|PART II. OTHER INFORMATION   
|                             
|Item 1:                       |  | Legal Proceedings                                                                                                          |  |      | 29 | 
|                             
|Item 2:                       |  | Changes in Securities and Use of Proceeds                                                                                  |  |      | 29 | 
|                             
|Item 3:                       |  | Defaults Upon Senior Securities                                                                                            |  |      | 29 | 
|                             
|Item 4:                       |  | Submission of Matters to a Vote of
    Security Holders                                                                    |  |      | 29 | 
|                             
|Item 5:                       |  | Other Information                                                                                                          |  |      | 29 | 
|                             
|Item 6:                       |  | Exhibits and Reports on Form 8-K                                                                                           |  |      | 30 | 

1



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##### 



PART I. FINANCIAL INFORMATION

Item
1:     Financial
Statements

INTERSTATE HOTELS & RESORTS,
INC.

CONSOLIDATED BALANCE SHEETS


(in thousands, except per share
amounts)


|                                                             |                                                                                                                                                                       |                                                                    |        |              |         |  |        |         |         | 
|------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | ------ | ------------ | ------- |  | ------ | ------- | ------- | 
|                                                             |                                                                                                                                                                       | March 31,                                                          |        | December 31,
|                                                             |                                                                                                                                                                       | 2004                                                               |        | 2003        
|                                                             |                                                                                                                                                                       |                                                                    |        |             
|                                                             |                                                                                                                                                                       | (unaudited)                                                        |        |             
|ASSETS                                                      
|Current assets:                                              |                                                                                                                                                                       |                                                                    |        |              |         |  |        |        
|                                                             | Cash and cash equivalents                                                                                                                                             |                                                                    | $      | 5,346        |         |  | $      | 7,450   |        
|                                                             | Restricted cash                                                                                                                                                       |                                                                    |        | 1,855        |         |  |        | 3,250   |        
|                                                             | Accounts receivable, net of allowance for
    doubtful accounts of $3,116 at March 31, 2004 and $3,529 at
    December 31, 2003                                       |                                                                    |        | 19,562       |         |  |        | 25,531  |        
|                                                             | Due from related parties                                                                                                                                              |                                                                    |        | 16,823       |         |  |        | 14,649  |        
|                                                             | Prepaid expenses and other current assets                                                                                                                             |                                                                    |        | 8,131        |         |  |        | 9,342   |        
|                                                             |                                                                                                                                                                       |                                                                    |        |              |         |  |        |        
|                                                             |                                                                                                                                                                       | Total current assets                                               |        |              | 51,717  |  |        |         | 60,222  | 
|Marketable securities                                        |                                                                                                                                                                       |                                                                    | 2,849  |              |         |  | 2,556  |        
|Property and equipment, net                                  |                                                                                                                                                                       |                                                                    | 26,037 |              |         |  | 27,056 |        
|Notes receivable                                             |                                                                                                                                                                       |                                                                    | 5,941  |              |         |  | 6,044  |        
|Officers and employees notes receivable                      |                                                                                                                                                                       |                                                                    | 90     |              |         |  | 86     |        
|Investments and advances to affiliates                       |                                                                                                                                                                       |                                                                    | 14,484 |              |         |  | 15,825 |        
|Deferred income taxes                                        |                                                                                                                                                                       |                                                                    | 21,106 |              |         |  | 18,673 |        
|Goodwill                                                     |                                                                                                                                                                       |                                                                    | 92,123 |              |         |  | 92,123 |        
|Intangible assets, net                                       |                                                                                                                                                                       |                                                                    | 50,453 |              |         |  | 55,338 |        
|                                                             |                                                                                                                                                                       |                                                                    |        |              |         |  |        |        
|                                                             |                                                                                                                                                                       | Total assets                                                       |        | $            | 264,800 |  |        | $       | 277,923 | 
|                                                             |                                                                                                                                                                       |                                                                    |        |              |         |  |        |        
|LIABILITIES, MINORITY INTERESTS AND
    STOCKHOLDERS EQUITY
|Current liabilities:                                         |                                                                                                                                                                       |                                                                    |        |              |         |  |        |        
|                                                             | Accounts payable and accrued expenses                                                                                                                                 |                                                                    | $      | 51,684       |         |  | $      | 66,080  |        
|                                                             | Accounts payable  related parties                                                                                                                                    |                                                                    |        | 874          |         |  |        | 866     |        
|                                                             | Current portion of long-term debt                                                                                                                                     |                                                                    |        | 1,625        |         |  |        | 1,625   |        
|                                                             |                                                                                                                                                                       |                                                                    |        |              |         |  |        |        
|                                                             |                                                                                                                                                                       | Total current liabilities                                          |        |              | 54,183  |  |        |         | 68,571  | 
|Deferred compensation                                        |                                                                                                                                                                       |                                                                    | 2,849  |              |         |  | 2,556  |        
|Long-term debt                                               |                                                                                                                                                                       |                                                                    | 88,790 |              |         |  | 84,696 |        
|                                                             |                                                                                                                                                                       |                                                                    |        |              |         |  |        |        
|                                                             |                                                                                                                                                                       | Total liabilities                                                  |        |              | 145,822 |  |        |         | 155,823 | 
|Minority interests                                           |                                                                                                                                                                       |                                                                    | 2,144  |              |         |  | 3,388  |        
|Commitments and contingencies                                |                                                                                                                                                                       |                                                                    |        |              |         |  |        |        
|Stockholders equity:                                        |                                                                                                                                                                       |                                                                    |        |              |         |  |        |        
|                                                             | Preferred stock, $0.01 par value; 1,000 shares
    authorized                                                                                                         |                                                                    |        |             |         |  |        |        |        
|                                                             | Common stock, $.01 par value; 50,000 shares
    authorized; 30,129 and 29,951 shares issued and outstanding at
    March 31, 2004 and December 31, 2003, respectively |                                                                    |        | 302          |         |  |        | 300     |        
|                                                             | Treasury stock                                                                                                                                                        |                                                                    |        | (69          | )       |  |        | (69     | )      
|                                                             | Paid-in capital                                                                                                                                                       |                                                                    |        | 185,798      |         |  |        | 183,849 |        
|                                                             | Accumulated other comprehensive income, net of tax                                                                                                                    |                                                                    |        | 752          |         |  |        | 837     |        
|                                                             | Accumulated deficit                                                                                                                                                   |                                                                    |        | (69,949      | )       |  |        | (66,205 | )      
|                                                             |                                                                                                                                                                       |                                                                    |        |              |         |  |        |        
|                                                             |                                                                                                                                                                       | Total stockholders equity                                         |        |              | 116,834 |  |        |         | 118,712 | 
|                                                             |                                                                                                                                                                       |                                                                    |        |              |         |  |        |        
|                                                             |                                                                                                                                                                       | Total liabilities, minority interests and
    stockholders equity |        | $            | 264,800 |  |        | $       | 277,923 | 
|                                                             |                                                                                                                                                                       |                                                                    |        |              |         |  |        |        

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

2



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##### 



INTERSTATE HOTELS & RESORTS,
INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS


AND COMPREHENSIVE INCOME (LOSS)


(Unaudited, in thousands, except per share
amounts)


|                                                            |                                                   |                    |         |         |   |   |         |         | 
|----------------------------------------------------------- | ------------------------------------------------- | ------------------ | ------- | ------- | - | - | ------- | ------- | 
|                                                            |                                                   |                   
|                                                            |                                                   | Three months ended
|                                                            |                                                   | March 31,         
|                                                            |                                                   |                   
|                                                            |                                                   | 2004               |         | 2003   
|                                                            |                                                   |                    |         |        
|Revenue:                                                    |                                                   |                    |         |         |   |   |         |        
|                                                            | Lodging revenue                                   |                    | $       | 723     |   |   | $       | 836     | 
|                                                            | Management fees                                   |                    |         | 5,713   |   |   |         | 6,886   | 
|                                                            | Management fees-related parties                   |                    |         | 7,965   |   |   |         | 7,482   | 
|                                                            | Corporate housing                                 |                    |         | 25,590  |   |   |         | 25,819  | 
|                                                            | Other revenue                                     |                    |         | 3,252   |   |   |         | 3,881   | 
|                                                            |                                                   |                    |         |         |   |   |         |        
|                                                            |                                                   |                    | 43,243  |         |   |   | 44,904  |        
|                                                            | Other revenue from managed properties             |                    |         | 194,150 |   |   |         | 212,497 | 
|                                                            |                                                   |                    |         |         |   |   |         |        
|Total revenue                                               |                                                   |                    | 237,393 |         |   |   | 257,401 |        
|Operating expenses by department:                           |                                                   |                    |         |         |   |   |         |        
|                                                            | Lodging expenses                                  |                    |         | 464     |   |   |         | 620     | 
|                                                            | Corporate housing                                 |                    |         | 21,635  |   |   |         | 22,122  | 
|Undistributed operating expenses:                           |                                                   |                    |         |         |   |   |         |        
|                                                            | Administrative and general                        |                    |         | 17,815  |   |   |         | 19,038  | 
|                                                            | Depreciation and amortization                     |                    |         | 2,424   |   |   |         | 4,682   | 
|                                                            | Merger and integration costs                      |                    |         |        |   |   |         | 1,865   | 
|                                                            | Restructuring charges                             |                    |         | 127     |   |   |         |        | 
|                                                            | Intangible asset write-offs and other impairments |                    |         | 4,493   |   |   |         |        | 
|                                                            |                                                   |                    |         |         |   |   |         |        
|                                                            |                                                   |                    | 46,958  |         |   |   | 48,327  |        
|                                                            | Other expenses from managed properties            |                    |         | 194,150 |   |   |         | 212,497 | 
|                                                            |                                                   |                    |         |         |   |   |         |        
|Total operating expenses                                    |                                                   |                    | 241,108 |         |   |   | 260,824 |        
|                                                            |                                                   |                    |         |         |   |   |         |        
|Net operating loss                                          |                                                   |                    | (3,715  | )       |   |   | (3,423  | )      
|Interest income                                             |                                                   |                    | (280    | )       |   |   | (213    | )      
|Interest expense                                            |                                                   |                    | 2,027   |         |   |   | 2,522   |        
|Equity in losses of affiliates                              |                                                   |                    | 776     |         |   |   | 348     |        
|Gain on refinancing term loan from related party            |                                                   |                    |        |         |   |   | (13,629 | )      
|                                                            |                                                   |                    |         |         |   |   |         |        
|Income (loss) before minority interest and income
    taxes |                                                   |                    | (6,238  | )       |   |   | 7,549   |        
|Income tax expense (benefit)                                |                                                   |                    | (2,448  | )       |   |   | 2,952   |        
|Minority interest expense (benefit)                         |                                                   |                    | (46     | )       |   |   | 168     |        
|                                                            |                                                   |                    |         |         |   |   |         |        
|Net income (loss)                                           |                                                   | $                  | (3,744  | )       |   | $ | 4,429   |        
|                                                            |                                                   |                    |         |         |   |   |         |        
|Other comprehensive income (loss), net of tax:              |                                                   |                    |         |         |   |   |         |        
|                                                            | Foreign currency translation gain (loss)          |                    |         | (85     | ) |   |         | 42      | 
|                                                            | Unrealized gain on investments and other          |                    |         |        |   |   |         | 15      | 
|                                                            |                                                   |                    |         |         |   |   |         |        
|Comprehensive income (loss)                                 |                                                   | $                  | (3,829  | )       |   | $ | 4,486   |        
|                                                            |                                                   |                    |         |         |   |   |         |        
|Weighted average number of:                                 |                                                   |                    |         |         |   |   |         |        
|                                                            | Basic shares outstanding                          |                    |         | 30,070  |   |   |         | 20,577  | 
|                                                            | Diluted shares outstanding                        |                    |         | 30,070  |   |   |         | 20,846  | 
|                                                            | Net income (loss) per basic share                 |                    | $       | (0.12   | ) |   | $       | 0.22    | 
|                                                            |                                                   |                    |         |         |   |   |         |        
|                                                            | Net income (loss) per diluted share               |                    | $       | (0.12   | ) |   | $       | 0.21    | 
|                                                            |                                                   |                    |         |         |   |   |         |        

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

3



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##### 



INTERSTATE HOTELS & RESORTS,
INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS


(Unaudited, in thousands)


|                                                         |                                                                                          |                                                   |                                           |         |        |         |        |         |         |        |  
|-------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------------------- | ----------------------------------------- | ------- | ------ | ------- | ------ | ------- | ------- | ------ | -
|                                                         |                                                                                          |                                                  
|                                                         |                                                                                          | Three months ended                               
|                                                         |                                                                                          | March 31,                                        
|                                                         |                                                                                          |                                                  
|                                                         |                                                                                          | 2004                                              |                                           | 2003   
|                                                         |                                                                                          |                                                   |                                           |        
|Cash flows from operating activities:                    |                                                                                          |                                                   |                                           |         |        |         |        |        
|                                                         | Net income (loss)                                                                        |                                                   | $                                         | (3,744  | )      |         | $      | 4,429   |        
|                                                         | Adjustments to reconcile net income (loss) to net
    cash used in operating activities: |                                                   |                                           |         |        |         |        |         |        
|                                                         |                                                                                          | Depreciation and amortization                     |                                           |         | 2,424  |         |        |         | 4,682   |       
|                                                         |                                                                                          | Intangible asset write-offs and other impairments |                                           |         | 4,493  |         |        |         |         |       
|                                                         |                                                                                          | Gain on refinancing                               |                                           |         |       |         |        |         | (13,629 | )     
|                                                         |                                                                                          | Equity in loss of affiliates                      |                                           |         | 776    |         |        |         | 348     |       
|                                                         |                                                                                          | Minority interest                                 |                                           |         | (46    | )       |        |         | 168     |       
|                                                         |                                                                                          | Deferred income taxes                             |                                           |         | (2,433 | )       |        |         | 2,984   |       
|                                                         |                                                                                          | Other                                             |                                           |         | 481    |         |        |         | 422     |       
|                                                         |                                                                                          | Changes in assets and liabilities:                |                                           |         |        |         |        |         |         |       
|                                                         |                                                                                          |                                                   | Accounts receivable, net                  |         |        | 5,991   |        |         |         | (6,349 | )
|                                                         |                                                                                          |                                                   | Due from related parties                  |         |        | (2,174  | )      |         |         | (1,186 | )
|                                                         |                                                                                          |                                                   | Prepaid expenses and other current assets |         |        | 1,211   |        |         |         | (498   | )
|                                                         |                                                                                          |                                                   | Accounts payable and accrued expenses     |         |        | (14,033 | )      |         |         | 7,867  |  
|                                                         |                                                                                          |                                                   |                                           |         |        |         |        |        
|Net cash used in operating activities                    |                                                                                          |                                                   | (7,054                                    | )       |        |         | (762   | )      
|                                                         |                                                                                          |                                                   |                                           |         |        |         |        |        
|Cash flows from investing activities:                    |                                                                                          |                                                   |                                           |         |        |         |        |        
|                                                         | Change in restricted cash                                                                |                                                   |                                           | 1,395   |        |         |        | (653    | )      
|                                                         | Purchases of property and equipment, net                                                 |                                                   |                                           | (662    | )      |         |        | (834    | )      
|                                                         | Purchases of intangible assets                                                           |                                                   |                                           | (162    | )      |         |        | (265    | )      
|                                                         | Net cash (invested in) received for equity
    investments in hotel real estate          |                                                   |                                           | (563    | )      |         |        | 6       |        
|                                                         | Change in officers and employees notes
    receivable, net                               |                                                   |                                           | (4      | )      |         |        | (47     | )      
|                                                         | Change in notes receivable, net                                                          |                                                   |                                           | 42      |        |         |        | 103     |        
|                                                         |                                                                                          |                                                   |                                           |         |        |         |        |        
|Net cash provided by (used in) investing
    activities  |                                                                                          |                                                   | 46                                        |         |        |         | (1,690 | )      
|                                                         |                                                                                          |                                                   |                                           |         |        |         |        |        
|Cash flows from financing activities:                    |                                                                                          |                                                   |                                           |         |        |         |        |        
|                                                         | Borrowings of long-term debt                                                             |                                                   |                                           | 20,000  |        |         |        | 68,000  |        
|                                                         | Repayments of long-term debt                                                             |                                                   |                                           | (15,906 | )      |         |        | (55,458 | )      
|                                                         | Proceeds from issuance of common stock                                                   |                                                   |                                           | 561     |        |         |        | 63      |        
|                                                         | Financing fees paid                                                                      |                                                   |                                           |        |        |         |        | (1,690  | )      
|                                                         | Common stock repurchased                                                                 |                                                   |                                           |        |        |         |        | (23     | )      
|                                                         |                                                                                          |                                                   |                                           |         |        |         |        |        
|Net cash provided by financing activities                |                                                                                          |                                                   | 4,655                                     |         |        |         | 10,892 |        
|                                                         |                                                                                          |                                                   |                                           |         |        |         |        |        
|Effect of exchange rate on cash                          |                                                                                          |                                                   | 249                                       |         |        |         | 5      |        
|                                                         |                                                                                          |                                                   |                                           |         |        |         |        |        
|Net increase (decrease) in cash and cash
    equivalents |                                                                                          |                                                   | (2,104                                    | )       |        |         | 8,445  |        
|Cash and cash equivalents at beginning of period         |                                                                                          |                                                   | 7,450                                     |         |        |         | 7,054  |        
|                                                         |                                                                                          |                                                   |                                           |         |        |         |        |        
|Cash and cash equivalents at end of period               |                                                                                          | $                                                 | 5,346                                     |         |        | $       | 15,499 |        
|                                                         |                                                                                          |                                                   |                                           |         |        |         |        |        

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

4



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##### 



INTERSTATE HOTELS & RESORTS,
INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


1.     ORGANIZATION

Background

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

In accordance with accounting principles
generally accepted in the United States of America, we treated
the merger as a purchase for financial reporting purposes, and
Interstate was considered the acquiring enterprise. Interstate
established a new accounting basis for MeriStars assets
and liabilities based upon their fair values as of July 31,
2002, the effective date of the merger. We accounted for the
merger as a reverse acquisition, with Interstate as the
accounting acquiror and MeriStar as the surviving company for
legal purposes.

Business Summary

We are the largest independent U.S. hotel
management company not affiliated with a hotel brand, measured
by number of rooms under management. We manage a portfolio of
hospitality properties and provide related services in the
hotel, corporate housing, resort, conference center and golf
markets. We also own one hotel property and hold non-controlling
joint venture equity interests in 29 of our managed properties.
Our portfolio is diversified by franchise and brand
affiliations. The related services we provide include insurance
and risk management services, purchasing and project management
services, information technology and telecommunications services
and centralized accounting services.

As of March 31, 2004, we managed 278
properties, with 62,049 rooms in 40 states, the District of
Columbia, Canada, Russia and Portugal. As of March 31,
2004, we had 2,964 apartments under lease or management through
our BridgeStreet corporate housing division in the United
States, Canada, France and the United Kingdom.

We have two operating divisions, hotel management
and corporate housing, both of which are reportable operating
segments. Each division is managed separately because of its
distinct products and services.

Our subsidiary operating partnership indirectly
holds substantially all of our assets. We are the sole general
partner of that operating partnership. We, one of our directors,
our chief accounting officer and certain independent third
parties are limited partners of the partnership. The interests
of those third parties are reflected in minority interests on
our balance sheet. The partnership agreements give the general
partners full control over the business and affairs of the
partnerships.

We manage all of the properties owned by MeriStar
Hospitality, a real estate investment trust, or REIT. As of
March 31, 2004, MeriStar Hospitality owned 82 properties,
eight of which MeriStar Hospitality has stated it intends to
dispose of. Our relationship with MeriStar Hospitality is
governed in part by an intercompany agreement. That agreement
provides each of us the right to participate in certain
transactions entered into by the other company. The intercompany
agreement provides MeriStar Hospitality with the right of first
refusal with respect to some of our hotel real estate investment
opportunities and it also provides us with a right of first
refusal with respect to management of some of MeriStar
Hospitalitys hotel investment opportunities, excluding
hotels that MeriStar Hospitality elects to have managed by a
hotel brand. Historically, we have had close operating,
management and governance relationships with MeriStar
Hospitality. We manage all of MeriStar Hospitalitys hotel
properties under long-term management contracts and

5



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##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


have, in the past, shared several key management
personnel and board members with MeriStar Hospitality. Due to
the merger between MeriStar and Interstate and our resulting
increased scale, we and MeriStar Hospitality have split the
management teams of the two companies, although Paul W. Whetsell
continues as the Chairman of both companies and is the Chief
Executive Officer of MeriStar Hospitality. In addition, our
board and MeriStar Hospitalitys board have each formed
special committees to explore further changes to the
relationship between the two companies, including possible
changes to or termination of the intercompany agreement and
certain changes to the management contracts.

2.     SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

General

We have prepared these unaudited interim
financial statements according to the rules and regulations of
the Securities and Exchange Commission. We have omitted certain
information and footnote disclosures that are normally included
in the financial statements prepared in accordance with
accounting principles generally accepted in the United States of
America. These interim financial statements should be read in
conjunction with the financial statements, accompanying notes
and other information included in our Annual Report on Form
10-K, as amended, for the year ended December 31, 2003.
Certain 2003 amounts have been reclassified to conform to the
2004 presentation.

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

Stock-Based Compensation

In December 2002, the Financial Accounting
Standards Board, or FASB, issued Statement of Financial
Accounting Standards (SFAS) No. 148, Accounting
for Stock-Based Compensation  Transition and
Disclosure, to provide alternative methods of transition
for a voluntary change to the expense recognition provisions of
the fair value based method of accounting for stock-based
employee compensation. Effective January 1, 2003, we have
elected to adopt the fair-value method of accounting for stock
options under SFAS No. 148, using the prospective method.
We have recorded in our statement of operations the expense
related to stock options issued after January 1, 2003,
which amounted to approximately $69 and $0 for the three months
ended March 31, 2004 and 2003, respectively.

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

Pro forma information regarding net income and
earnings per share has been determined as if we had accounted
for all of our employee stock options using the fair value
method. Had compensation cost for stock

6



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##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


options been determined based on the fair value
at the grant date for all awards under our plans, our net income
(loss) and per share amounts would have been the pro forma
amounts indicated as follows:

|                                                                                                                                    |                      |                    |        |       |   |   |       |      | 
|----------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ------------------ | ------ | ----- | - | - | ----- | ---- | 
|                                                                                                                                    |                      |                   
|                                                                                                                                    |                      | Three months ended
|                                                                                                                                    |                      | March 31,         
|                                                                                                                                    |                      |                   
|                                                                                                                                    |                      | 2004               |        | 2003 
|                                                                                                                                    |                      |                    |        |      
|Net income (loss), as reported                                                                                                      |                      | $                  | (3,744 | )     |   | $ | 4,429 |     
|Add: Stock-based employee compensation expense
    included in reported net income (loss), net of tax                               |                      |                    | 41     |       |   |   |      |     
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of tax |                      |                    | (66    | )     |   |   | (88   | )   
|                                                                                                                                    |                      |                    |        |       |   |   |       |     
|Net income (loss), pro forma                                                                                                        |                      | $                  | (3,769 | )     |   | $ | 4,341 |     
|                                                                                                                                    |                      |                    |        |       |   |   |       |     
|Earnings per share:                                                                                                                 |                      |                    |        |       |   |   |       |     
|                                                                                                                                    | Basic, as reported   |                    | $      | (0.12 | ) |   | $     | 0.22 | 
|                                                                                                                                    | Basic, pro forma     |                    | $      | (0.13 | ) |   | $     | 0.21 | 
|                                                                                                                                    | Diluted, as reported |                    | $      | (0.12 | ) |   | $     | 0.21 | 
|                                                                                                                                    | Diluted, pro forma   |                    | $      | (0.13 | ) |   | $     | 0.21 | 

The effects of applying Statement of Financial
Accounting Standards No. 123 for disclosing compensation
costs may not be representative of the effects on reported net
income (loss) and earnings (loss) per share for future years.

Recent Accounting Pronouncements

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

In December 2003, the FASB issued a revision of
FIN 46 (FIN 46R) to clarify some of its
provisions. The revision results in multiple effective dates
based on the nature as well as the creation date of the VIE.
VIEs created after January 31, 2003, but prior to
January 1, 2004, may be accounted for either based on the
original interpretations or the revised interpretations.
However, VIEs created after January 1, 2004 must be
accounted for under FIN 46R. FIN 46R is effective beginning in
the first quarter of 2004. We have evaluated our equity method
investees and concluded that these entities do not meet the
definition of a VIE.

In May 2003, the FASB issued SFAS No. 150
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify
a financial instrument that is within its scope as a liability
(or an asset in some circumstances). Many of those instruments
were previously classified as equity. This Statement is
effective for financial instruments issued or modified after
May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003.
However, implementation of certain of the provisions has been
delayed indefinitely. This statement did not have a significant
impact our financial position or results of operations.

3.     EARNINGS PER
SHARE

We calculate our basic earnings per common share
by dividing net income (loss) by the weighted average number of
shares of common stock outstanding. Our diluted earnings per
common share assumes the issuance

7



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##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


of common stock for all potentially dilutive
stock equivalents outstanding. In periods in which there is a
loss, diluted shares outstanding will equal basic shares
outstanding to avoid anti-dilution.

Basic and diluted earnings per common share for
the three months ended March 31 are as follows:

|                                                                         |  |      |        |      |  |   |        | 
|------------------------------------------------------------------------ |  | ---- | ------ | ---- |  | - | ------ | 
|                                                                         |  | 2004 |        | 2003
|                                                                         |  |      |        |     
|Net income (loss)                                                        |  | $    | (3,744 | )    |  | $ | 4,429  | 
|Weighted average number of common shares
    outstanding (in thousands)  |  |      | 30,070 |      |  |   | 20,577 | 
|Basic earnings per share                                                 |  | $    | (0.12  | )    |  | $ | 0.22   | 
|                                                                         |  |      |        |      |  |   |        | 
|Weighted average number of diluted shares
    outstanding (in thousands) |  |      | 30,070 |      |  |   | 20,846 | 
|Diluted earnings per share                                               |  | $    | (0.12  | )    |  | $ | 0.21   | 
|                                                                         |  |      |        |      |  |   |        | 

The number of potentially dilutive securities not
included in the above 2004 share count (in thousands) was 560 at
March 31, 2004. This amount includes options and all
operating partnership units.

4.     INVESTMENTS
AND ADVANCES TO AFFILIATES

Our investments and advances to our joint
ventures consist of the following:

|                                      |       |           |       |              |  |   |       |        | 
|------------------------------------- | ----- | --------- | ----- | ------------ |  | - | ----- | ------ | 
|                                      |       | March 31, |       | December 31,
|                                      |       | 2004      |       | 2003        
|                                      |       |           |       |             
|MIP Lessee, L.P.                      |       | $         | 4,427 |              |  | $ | 5,681 |       
|S.D. Bridgeworks, LLC                 |       |           | 3,497 |              |  |   | 3,389 |       
|CNL/ IHC Partners, L.P.               |       |           | 2,388 |              |  |   | 2,382 |       
|Interconn Ponte Vedra Company, L.L.C. |       |           | 1,673 |              |  |   | 1,210 |       
|Other                                 |       |           | 2,499 |              |  |   | 3,163 |       
|                                      |       |           |       |              |  |   |       |       
|                                      | Total |           | $     | 14,484       |  |   | $     | 15,825 | 
|                                      |       |           |       |              |  |   |       |       

We also own 100% of the Pittsburgh Airport
Residence Inn by Marriott. This investment is consolidated in
our financial statements.

In the first quarter of 2004, it was determined
that our investment in MIP Lessee, L.P. was impaired based on
purchase offers we received on two hotels included in the joint
venture. Accordingly, we recorded an impairment charge of $563
to reduce the carrying amount of the investment to its estimated
fair value. This amount is included in intangible asset
write-offs and other impairments in our statement of operations.

In addition, during the first quarter of 2004, we
wrote-off our remaining investment in our joint venture that
owns the Residence Inn Houston Astrodome Medical Center. The
hotel has been underperforming and in the first quarter of 2004
the joint venture was notified that it had defaulted on its bank
loan. We do not expect to recover our investment in this joint
venture, therefore we wrote-off the remaining carrying value of
$538. This amount is included in intangible asset write-offs and
other impairments in our statement of operations. In addition,
this joint venture is deemed to be with a related party, as one
of our directors holds a 22.46% ownership interest in this hotel.

Our review of our other investments and advances
to affiliates did not indicate that any other investments or
advances were impaired. The recoverability of the carrying
values of our investments and advances is, however, dependent
upon operating results of the underlying real estate
investments. Future adverse changes in the hospitality and
lodging industry, market conditions or poor operating results of
the underlying investments could result in future losses or the
inability to recover the carrying value of these long-lived
assets.

We are not responsible for, and do not guarantee
the debt or other obligations of any of these investees.

8



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##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Presented below is the combined summarized
financial information of the following investments: MIP Lessee,
L.P., FCH/ IHC Hotels, L.P., FCH/ IHC Leasing, L.P., CNL/ IHC
Partners, L.P., and S.D. Bridgeworks, LLC, for the three months
ended March 31, 2004. Summarized profit and loss
information for these investments is required by
Regulation S-X to be disclosed in interim periods, as they
have met certain financial tests in relation to our consolidated
financial position and results of operations. The summarized
information is as follows:

|                              |  |   |        |  
|----------------------------- |  | - | ------ | -
|Revenue                       |  | $ | 35,149 |  
|Operating expenses            |  | $ | 28,882 |  
|Net loss                      |  | $ | (5,482 | )
|Our share of the above losses |  | $ | (616   | )

Our joint venture partner in FCH/ IHC Hotels,
L.P. and FCH/ IHC Leasing, L.P. is FelCor Lodging Trust, Inc.
(FelCor). FelCor consolidates these two joint
ventures. During the fourth quarter of 2003, we recorded an
impairment charge of $4,476 to reduce our carrying value in
these joint ventures to zero.

5.     INTANGIBLE
ASSETS

Intangible assets consist of the following:

|                        |                               |           |        |              |   |   |        |        |  
|----------------------- | ----------------------------- | --------- | ------ | ------------ | - | - | ------ | ------ | -
|                        |                               | March 31, |        | December 31,
|                        |                               | 2004      |        | 2003        
|                        |                               |           |        |             
|Management contracts    |                               | $         | 52,489 |              |   | $ | 56,913 |       
|Franchise fees          |                               |           | 1,945  |              |   |   | 1,945  |       
|Deferred financing fees |                               |           | 2,378  |              |   |   | 2,378  |       
|Other                   |                               |           | 146    |              |   |   | 946    |       
|                        |                               |           |        |              |   |   |        |       
|                        | Total cost                    |           |        | 56,958       |   |   |        | 62,182 |  
|                        | Less accumulated amortization |           |        | (6,505       | ) |   |        | (6,844 | )
|                        |                               |           |        |              |   |   |        |       
|Intangible assets, net  |                               | $         | 50,453 |              |   | $ | 55,338 |       
|                        |                               |           |        |              |   |   |        |       

We amortize the value of our intangible assets
over their estimated useful lives, which generally equal the
terms of the corresponding management, franchise, or financing
agreement.

We incurred aggregate amortization expense of
$966 and $3,375 on these assets for the three months ended
March 31, 2004 and 2003, respectively; with the decrease
attributable to a large group of management contracts that were
fully amortized in the second quarter of 2003. Amortization of
deferred financing fees is included in interest expense.

During the first quarter of 2004, in connection
with its asset disposition plan, our largest client, MeriStar
Hospitality, sold 11 hotels that we managed. We wrote-off $3,296
of unamortized management contract costs associated with these
disposed hotels. This amount is included in intangible asset
write-offs and other impairments in our statement of operations.

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

|                              |  |   |       | 
|----------------------------- |  | - | ----- | 
|Year ending December 31, 2004 |  | $ | 3,644 | 
|Year ending December 31, 2005 |  |   | 3,428 | 
|Year ending December 31, 2006 |  |   | 3,158 | 
|Year ending December 31, 2007 |  |   | 2,563 | 
|Year ending December 31, 2008 |  |   | 2,537 | 

9



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##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


6.     LONG-TERM
DEBT

Our long-term debt consists of the following:

|                             |                      |           |        |              |   |   |        |        |  
|---------------------------- | -------------------- | --------- | ------ | ------------ | - | - | ------ | ------ | -
|                             |                      | March 31, |        | December 31,
|                             |                      | 2004      |        | 2003        
|                             |                      |           |        |             
|Senior credit agreement      |                      | $         | 46,692 |              |   | $ | 42,598 |       
|Non-recourse promissory note |                      |           | 3,723  |              |   |   | 3,723  |       
|Subordinated term loan       |                      |           | 40,000 |              |   |   | 40,000 |       
|                             |                      |           |        |              |   |   |        |       
|                             |                      |           | 90,415 |              |   |   | 86,321 |       
|                             | Less current portion |           |        | (1,625       | ) |   |        | (1,625 | )
|                             |                      |           |        |              |   |   |        |       
|Total long-term debt         |                      | $         | 88,790 |              |   | $ | 84,696 |       
|                             |                      |           |        |              |   |   |        |       

Senior credit agreement Effective July 31, 2002, in
connection with the closing of the MeriStar-Interstate merger,
we entered into a $113,000 senior credit agreement with a group
of banks. The senior credit agreement initially consisted of a
$65,000 term loan and a $48,000 revolving credit facility. The
term loan is payable in quarterly installments of $406 that
began January 1, 2003, with the balance due on
July 31, 2005. During the fourth quarter of 2003, using the
proceeds from a public equity offering, we repaid $45,276 of the
term loan. The revolving credit facility is due on July 28,
2005 (with a one-year renewal at our option). The interest rate
on the senior credit agreement will be LIBOR plus 3.00% to
4.50%, depending upon the results of certain financial tests.
The senior credit facility contains certain covenants, including
maintenance of financial ratios at the end of each quarter,
compliance reporting requirements and other customary
restrictions. At March 31, 2004, we were in compliance with
these covenants. The senior credit agreement also includes
pledges of collateral, including the following:



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

At March 31, 2004, borrowings under the
senior credit agreement bore interest at a rate of 5.01% per
annum, which is the 30-day LIBOR plus 3.00%. We are currently in
the process of negotiating the refinancing of this facility,
which we expect to complete during the second quarter of 2004.

We incurred $608 and $1,096 of interest expense
on the senior credit agreement for the three months ended
March 31, 2004 and 2003, respectively; the decrease in
interest expense resulting from our prepayment of $45,276 of our
term loan with proceeds from our November public equity offering.

Non-recourse promissory note In March 2001, we entered into a
non-recourse promissory note in the amount of $4,170 with FelCor
Lodging Trust Incorporated (FelCor) to fund the
acquisition of a 50% non-controlling equity interest in two
partnerships that own eight mid-scale hotels. Interest on the
note is payable monthly at the rate of 12% per annum and the
outstanding principal balance is due and payable on
December 31, 2010. For the three months ended
March 31, 2004 and 2003, we incurred $112 and $125 of
interest expense on the promissory note, respectively.

In June 2003, we made unscheduled principal
payments totaling $447 on the note. As of March 31, 2004
the remaining balance on the promissory note is $3,723. In
connection with one of the payments, our ownership interest in
the partnership was reduced from 50% to 49.5% as FelCor made an
additional contribution to the partnership at that time. We have
suspended further principal and interest payments on this
non-recourse promissory note, and accordingly, are in
non-compliance with the terms of the note. We

10



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##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


expect that we will ultimately transfer ownership
of our equity interests in these joint ventures to FelCor in
return for the extinguishment of the debt.

Subordinated term
loan In January 2003, we
entered into a $40,000 subordinated term loan that carries a
variable interest rate based on the 30-day LIBOR plus a spread
of 8.50%. The subordinated term loan matures on January 31,
2006, but if the revolving portion of our senior credit facility
is extended for an additional year, the maturity of the
subordinated term loan will also be automatically extended by
one year to January 31, 2007. This term loan is
subordinated to borrowings under the senior credit agreement and
contains certain covenants, including maintenance of financial
ratios at the end of each quarter, compliance reporting
requirements and other customary restrictions. At March 31,
2004, we were in compliance with these covenants. At
March 31, 2004, borrowings under the subordinated term loan
bore interest at a rate of 9.63% per annum. We incurred $973 and
$890 of interest expense on the subordinated term loan for the
three months ended March 31, 2004 and 2003, respectively.

Fair
Value Our outstanding
long-term debt is based on LIBOR rates. We have determined that
the fair value of our outstanding borrowings on our senior
credit facility and subordinated term loan approximated their
carrying values at March 31, 2004. The fair value of our
swap agreement was a liability of approximately $241 at
March 31, 2004. We believe that our non-recourse promissory
note would have no value to a third party. We intend to exchange
the promissory note for our equity interests in the related
joint ventures, as discussed above. In addition, the carrying
values of these investments have been previously written down to
zero.

7.     SEGMENT
INFORMATION

We are organized into two operating divisions:
hotel management and corporate housing. Both of these divisions
are reportable operating segments. Each division is managed
separately because of its distinct products and services. We
evaluate the performance of each division based on earnings
before interest, taxes, depreciation and amortization, equity in
earnings (losses) of affiliates, and in 2003, a gain on
refinancing (Adjusted EBITDA).

The other items in the tables below represent
operating segment activity and assets for the non-reportable
segments. Adjusted EBITDA from other activities includes merger
and integration costs, restructuring charges and intangible
asset write-offs and other impairments. Other assets include
deferred tax assets and net deferred financing costs.

We use Adjusted EBITDA to evaluate the
performance of our segments. The tables below reconcile Adjusted
EBITDA to net income (loss) for each of the periods presented.

|                                      |                                     |            |       |           |  |       |        |            |   |   |        |        |   |   |        |        |  
|------------------------------------- | ----------------------------------- | ---------- | ----- | --------- |  | ----- | ------ | ---------- | - | - | ------ | ------ | - | - | ------ | ------ | -
|                                      |                                     | Hotel      |       | Corporate |  |       |        | Financial 
|                                      |                                     | Management |       | Housing   |  | Other |        | Statements
|                                      |                                     |            |       |           |  |       |        |           
|Three months ended March 31,
    2004 |                                     |            |       |           |  |       |        |            |   |   |        |        |   |   |        |       
|Net income (loss)                     |                                     | $          | 315   |           |  | $     | (1,287 | )          |   | $ | (2,772 | )      |   | $ | (3,744 | )     
|Adjustments:                          |                                     |            |       |           |  |       |        |            |   |   |        |        |   |   |        |       
|                                      | Depreciation and amortization       |            |       | 2,031     |  |       |        | 393        |   |   |        |       |   |   |        | 2,424  |  
|                                      | Interest expense, net               |            |       | 1,311     |  |       |        | 436        |   |   |        |       |   |   |        | 1,747  |  
|                                      | Equity in losses of affiliates      |            |       | 776       |  |       |        |           |   |   |        |       |   |   |        | 776    |  
|                                      | Minority interest expense (benefit) |            |       | 4         |  |       |        | (16        | ) |   |        | (34    | ) |   |        | (46    | )
|                                      | Income tax expense (benefit)        |            |       | 207       |  |       |        | (841       | ) |   |        | (1,814 | ) |   |        | (2,448 | )
|                                      |                                     |            |       |           |  |       |        |            |   |   |        |        |   |   |        |       
|Adjusted EBITDA                       |                                     | $          | 4,644 |           |  | $     | (1,315 | )          |   | $ | (4,620 | )      |   | $ | (1,291 | )     
|                                      |                                     |            |       |           |  |       |        |            |   |   |        |        |   |   |        |       

11



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                      |                                                  |            |         |           |   |       |        |            |   |   |        |         |   |   |         |         |  
|------------------------------------- | ------------------------------------------------ | ---------- | ------- | --------- | - | ----- | ------ | ---------- | - | - | ------ | ------- | - | - | ------- | ------- | -
|                                      |                                                  | Hotel      |         | Corporate |   |       |        | Financial 
|                                      |                                                  | Management |         | Housing   |   | Other |        | Statements
|                                      |                                                  |            |         |           |   |       |        |           
|Three months ended March 31,
    2003 |                                                  |            |         |           |   |       |        |            |   |   |        |         |   |   |         |        
|Net income (loss)                     |                                                  | $          | (827    | )         |   | $     | (1,646 | )          |   | $ | 6,902  |         |   | $ | 4,429   |        
|Adjustments:                          |                                                  |            |         |           |   |       |        |            |   |   |        |         |   |   |         |        
|                                      | Depreciation and amortization                    |            |         | 4,345     |   |       |        | 337        |   |   |        |        |   |   |         | 4,682   |  
|                                      | Interest expense, net                            |            |         | 1,732     |   |       |        | 577        |   |   |        |        |   |   |         | 2,309   |  
|                                      | Equity in losses of affiliates                   |            |         | 348       |   |       |        |           |   |   |        |        |   |   |         | 348     |  
|                                      | Gain on refinancing term loan from related party |            |         |          |   |       |        |           |   |   |        | (13,629 | ) |   |         | (13,629 | )
|                                      | Minority interest expense (benefit)              |            |         | (32       | ) |       |        | (62        | ) |   |        | 262     |   |   |         | 168     |  
|                                      | Income tax expense (benefit)                     |            |         | (551      | ) |       |        | (1,097     | ) |   |        | 4,600   |   |   |         | 2,952   |  
|                                      |                                                  |            |         |           |   |       |        |            |   |   |        |         |   |   |         |        
|Adjusted EBITDA                       |                                                  | $          | 5,015   |           |   | $     | (1,891 | )          |   | $ | (1,865 | )       |   | $ | 1,259   |        
|                                      |                                                  |            |         |           |   |       |        |            |   |   |        |         |   |   |         |        
|Three months ended March 31,
    2004 |                                                  |            |         |           |   |       |        |            |   |   |        |         |   |   |         |        
|Revenue                               |                                                  | $          | 211,803 |           |   | $     | 25,590 |            |   | $ |       |         |   | $ | 237,393 |        
|Adjusted EBITDA                       |                                                  | $          | 4,644   |           |   | $     | (1,315 | )          |   | $ | (4,620 | )       |   | $ | (1,291  | )      
|Total assets                          |                                                  | $          | 221,137 |           |   | $     | 20,433 |            |   | $ | 23,230 |         |   | $ | 264,800 |        
|Three months ended March 31,
    2003 |                                                  |            |         |           |   |       |        |            |   |   |        |         |   |   |         |        
|Revenue                               |                                                  | $          | 231,582 |           |   | $     | 25,819 |            |   | $ |       |         |   | $ | 257,401 |        
|Adjusted EBITDA                       |                                                  | $          | 5,015   |           |   | $     | (1,891 | )          |   | $ | (1,865 | )       |   | $ | 1,259   |        
|Total assets                          |                                                  | $          | 254,659 |           |   | $     | 16,190 |            |   | $ | 19,654 |         |   | $ | 290,503 |        

Revenues from foreign operations were as follows
for the three months ended March 31:

|               |  |      |       |      |  |   |       | 
|-------------- |  | ---- | ----- | ---- |  | - | ----- | 
|               |  | 2004 |       | 2003
|               |  |      |       |     
|Canada         |  | $    | 1,552 |      |  | $ | 2,178 | 
|United Kingdom |  |      | 5,764 |      |  |   | 6,036 | 
|France         |  |      | 373   |      |  |   | 331   | 
|Russia         |  |      | 375   |      |  |   | 375   | 

8.     SUPPLEMENTAL
CASH FLOW INFORMATION

|                                         |              |                    |   |       |  |  |   |       | 
|---------------------------------------- | ------------ | ------------------ | - | ----- |  |  | - | ----- | 
|                                         |              |                   
|                                         |              | Three months ended
|                                         |              | March 31,         
|                                         |              |                   
|                                         |              | 2004               |   | 2003 
|                                         |              |                    |   |      
|Cash paid for interest and income taxes: |              |                    |   |       |  |  |   |      
|                                         | Interest     |                    | $ | 1,820 |  |  | $ | 1,872 | 
|                                         | Income taxes |                    | $ | 593   |  |  | $ | 262   | 

9.     RESTRUCTURING
EXPENSES

We have recorded $127 in restructuring expenses
for the three months ended March 31, 2004. This amount
relates to severance costs for former personnel relating to the
restructuring of our corporate housing division. At
December 31, 2003, we had an accrual of $5,388 for
restructuring costs relating to the MeriStar-Interstate merger.
At March 31, 2004, the balance in that accrual is
approximately $3,521.

12



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##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


10.     RELATED
PARTIES

Related parties, as defined in SFAS 57
Related Party Disclosures, include MeriStar
Hospitality, the hotels included in our real estate joint
ventures, and a small number of hotels which are affiliated with
certain of our directors. Total management fees from related
parties amounted to $7,965, and $7,482 for the three months
ended March 31, 2004 and 2003, respectively. In addition,
accounts payable-related party includes Wyndham International
Inc. (Wyndham), which holds a 1.6627%
non-controlling economic interest in one of our operating
subsidiaries.

11.     SUBSEQUENT
EVENTS

Operating Partnership Units As of March 31, 2004, we had
247,122 Class A units and 78,431 preferred units
outstanding in our subsidiary operating partnership, Interstate
Operating Company, L.P. This partnership indirectly holds
substantially all of our assets. The preferred units were held
by an affiliate of Mahmood J. Khimji, one of our directors. On
May 3, 2004, we redeemed all 78,431 preferred units for
cash consideration, totaling $1,310, at a redemption price of
$16.70 per unit, which was paid to Mr. Khimjis
affiliates. The preferred units were included in minority
interests on our balance sheet at March 31, 2004.

Severance Agreement Effective April 1, 2004, we and
our chairman, Paul W. Whetsell entered into an agreement to
terminate his employment as an executive officer, as he ceased
acting as chief executive officer in October 2003 when
Mr. Jorns assumed the role. Mr. Whetsell continues to
serve as a non-executive chairman of the board of directors.
Pursuant to this agreement, Mr. Whetsell shall be granted
$1,563, consisting of 250,000 shares of restricted stock at a
price of $5.81 per share, and cash consideration of $110. We
will reimburse Mr. Whetsell for federal and state taxes on
this entire severance payment. The restricted stock vests over
three years and is contingent on Mr. Whetsell continuing as
chairman of our board of directors.

Sale of BridgeStreet Toronto In May of 2004, we entered into a
contract for the sale of BridgeStreet Canada, Inc., our
corporate housing operation in Toronto. The sale is dependent
upon certain contingencies in the contract, and therefore it is
not certain that the sale will be completed. The Toronto market
has been underperforming, primarily due to its long-term lease
commitments that do not allow us to adjust our inventory as
easily as we can in other markets. In exchange for the Toronto
operations, we may be entitled to minor earn-out amounts through
2007, directly related to the performance of the Toronto
operations, pursuant to the contract.

13



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

Background

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

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

Business Overview

General
We are the largest independent U.S. hotel management company not
affiliated with a hotel brand, measured by number of rooms under
management. We manage a portfolio of hospitality properties and
provide related services in the hotel, corporate housing,
resort, conference center and golf markets. We also own one
hotel property and hold non-controlling joint venture equity
interests in 29 of our managed properties. Our portfolio is
diversified by franchise and brand affiliations. The related
services we provide include insurance and risk management
services, purchasing and project management services,
information technology and telecommunications services and
centralized accounting services.

As of March 31, 2004, we managed 278
properties, with 62,049 rooms in 40 states, the District of
Columbia, Canada, Russia and Portugal. As of March 31,
2004, we had 2,964 apartments under lease or management through
our BridgeStreet corporate housing division in the United
States, Canada, France and the United Kingdom.

We have two operating divisions, hotel management
and corporate housing, both of which are reportable operating
segments. Each division is managed separately because of its
distinct products and services.

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

We manage all of the properties owned by MeriStar
Hospitality, a real estate investment trust, or REIT. As of
March 31, 2004, MeriStar Hospitality owned
82 properties, eight of which MeriStar Hospitality has
stated it intends to dispose of. Our relationship with MeriStar
Hospitality is governed in part by an intercompany agreement.
That agreement provides each of us the right to participate in
certain transactions entered into by the other company. The
intercompany agreement provides MeriStar Hospitality with the
right of first refusal with respect to some of our hotel real
estate investment opportunities and it also provides us with a
right of first refusal with respect to management of some of
MeriStar Hospitalitys hotel investment opportunities,
excluding hotels that MeriStar Hospitality elects to have
managed by a hotel brand. Historically, we have had close
operating, management and governance relationships with MeriStar
Hospitality. We manage all of MeriStar Hospitalitys hotel
properties under long-term management contracts and have, in the
past, shared several key management personnel and board members
with MeriStar Hospitality.

14



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Due to the merger between MeriStar and Interstate
and our resulting increased scale, we and MeriStar Hospitality
have split the management teams of the two companies, although
Paul W. Whetsell continues as the Chairman of both companies and
is the Chief Executive Officer of MeriStar Hospitality. In
addition, our board and MeriStar Hospitalitys board have
each formed special committees to explore further changes to the
relationship between the two companies, including possible
changes to or termination of the intercompany agreement and
certain changes to the management contracts.


Revenue
Our revenue consists of:



| |   |                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | management fee revenue, which consists of
    management fees earned under our management agreements and
    includes termination fees as they are earned;                                                                               
|
| |  | corporate housing revenue, which consists of
    revenues from our BridgeStreet corporate housing division;                                                                                                                              
|
| |  | lodging revenue, which consists of rooms, food
    and beverage and other department revenues from our owned hotel;
    and                                                                                                              
|
| |  | other revenue, which consists of insurance
    revenue from Northridge Insurance Company, purchasing revenue,
    accounting fees, technical services revenues, information
    technology support fees, renovation fees, and other fees.

We employ the staff at our managed properties.
Under our management agreements, the hotel owners reimburse us
for payroll, benefits, and certain other costs related to the
operations of the managed properties. Emerging Issues Task
Force, (EITF) No. 01-14, Income Statement
Characteristics of Reimbursements for Out-of-pocket
Expenses, establishes standards for accounting for
reimbursable expenses in our income statement. Under this
pronouncement, the reimbursement of payroll, benefits and costs
is recorded as revenue, with a corresponding expense recorded as
other expenses from managed properties in our
statement of operations.

Operating
Expenses Our operating
expenses consist of operating expenses by department and
undistributed operating expenses. Operating expenses by
department include expenses associated with our corporate
housing division and our lodging operations. The corporate
housing expenses include apartment rent, furniture, utilities
and housekeeping, and lodging expenses include costs associated
with rooms, food and beverage and other department expenses and
property operating costs related to our owned hotel.

Undistributed operating expenses include the
following items:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | administrative and general expenses, which are
    associated with the management of hotels and corporate housing
    facilities and consist primarily of expenses such as corporate
    payroll and related benefits, operations management, sales and
    marketing, finance, legal, information technology support, human
    resources and other support services, as well as general
    corporate expenses;
|
| |  | depreciation and amortization; and                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | other costs, such as merger and integration
    costs, intangible asset write-offs and other impairments,
    restructuring charges and other costs that are not allocable to
    hotel management or corporate housing.                                                                                                                                                                                         

Recent events

Termination of Management
Agreements In connection
with the merger of MeriStar and Interstate in 2002, we assigned
estimated fair values to each of the management agreements
considered purchased by Interstate, the accounting acquiror in
the merger. These assigned fair values are included as
intangible assets on our balance sheet. We are amortizing these
intangible assets over the terms of the management agreements.
If one of these management agreements is terminated prior to its
full term, for example, due to the sale of a hotel or an owner
choosing to exercise a termination clause, we will record a loss
on the write-off of the related unamortized intangible asset
value.

15



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The hotel operating environment has caused some
owners of our managed hotels to sell hotels. When a hotel is
sold, we are usually replaced as the hotels manager.
During the first quarter of 2004, MeriStar Hospitality sold 11
hotels that we had managed. As of March 31, 2004, MeriStar
Hospitality had also announced plans to sell an additional eight
hotels as part of its asset disposition plan, all of which we
currently manage. We wrote-off $3,296 of unamortized management
contract costs associated with the 11 disposed hotels. This
amount is included in intangible asset write-offs and other
impairments in our statement of operations. We expect to write
off an additional estimated $2,730 with respect to the eight
hotels that MeriStar Hospitality intended to sell as of
March 31, 2004. Those eight hotels, together with the 11
hotels sold in the first quarter of 2004, accounted for $3,821,
or 5.9% of our revenues for the year ended December 31,
2003. Other owners may also dispose of assets.

Generally, if we are terminated as manager upon
the sale of one of MeriStar Hospitalitys hotels, we will
receive a termination fee equal to the present value of
remaining payments as defined in the management agreement. Any
termination fee is to be paid in thirty equal monthly
installments, without interest, commencing the month following
the termination. MeriStar Hospitality will be able to credit
against any termination payments the present value of projected
fees, as defined in the management agreements, including,
without limitation, the present value of any projected fees of
any new management agreements executed during the thirty-month
period over which payments are made. Net of such offsets, as of
March 31, 2004, we would be entitled to receive
approximately $11,698 of termination fees relating to hotels
sold by MeriStar Hospitality, and approximately $5,365 relating
to 8 hotels MeriStar Hospitality intends to sell, assuming
no new contracts are executed and used as offsets to the
termination fees due us. MeriStar Hospitality has notified us
that they are questioning the method of calculating the
termination fees. According to their proposed calculation, the
amount of termination fees we would be entitled to receive is
approximately $5,000 less than the amount due us in accordance
with the method that has been used historically, and which we
believe is correct.

Our management agreements with other owners
generally provide for limited termination fees if our management
agreement is terminated upon the sale of the hotel. We record
termination fees as management fee revenue as they are earned.
We have recorded $1,087 of termination fees included in our
statement of operations for the three months ended
March 31, 2004, with no like revenue in the same period of
2003.

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

Related Party Transactions

Related parties, as defined in SFAS 57
Related Party Disclosures, include MeriStar
Hospitality, the hotels included in our real estate joint
ventures, and a small number of hotels which are affiliated with
certain of our directors. Total management fees from related
parties amounted to $7,965, and $7,482 for the three months
ended March 31, 2004 and 2003, respectively. In addition,
accounts payable-related party includes Wyndham International
Inc. (Wyndham), which holds a 1.6627%
non-controlling economic interest in one of our operating
subsidiaries.

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Critical Accounting Policies and
Estimates

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

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



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

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

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



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

During first quarter of 2004, we wrote off $3,296
of unamortized management contract costs relating to terminated
contracts. We recorded an impairment charge of $1,101 for our
equity investments that were deemed impaired.

Impairment of
Goodwill In accordance
with SFAS No. 142, annually, or as circumstances warrant,
we perform an analysis to determine whether the goodwill
carrying value has been impaired. To test goodwill for
impairment, we perform an analysis to compare the fair value of
the reporting unit to which the goodwill is assigned to the
carrying value of the reporting unit. We make estimates of the
discounted cash flows from the expected future operations of the
reporting unit. If the analysis indicates that the fair value of
the reporting unit is less than its carrying value, we do an
analysis to compare the implied fair value of the reporting
units goodwill with the carrying amount of that goodwill.
The implied fair value of the goodwill is determined by
allocating the fair value of the reporting unit to all the
assets and liabilities of that unit as if the reporting unit had
been acquired in a business combination. The excess of the fair
value of reporting unit over the amounts assigned to its assets
and liabilities is the implied fair value of the goodwill. If
the implied fair value of the goodwill is less than the carrying
value, an impairment loss is recognized in an amount equal to
that excess. Any impairment losses are recorded as operating
expenses. We did not recognize any impairment losses for
goodwill in first quarter of 2004 or during 2003.

17



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Valuation
Allowances We use our
judgment in determining our provision for income taxes, our
deferred tax assets and liabilities, and any valuation allowance
recorded against our deferred tax assets. At March 31,
2004, we have recorded a $13,000 valuation allowance to reduce
our deferred tax assets to the amount that we believe is more
likely than not to be realized. This is an allowance against
some, but not all, of our recorded deferred tax assets. We have
considered estimated future taxable income and prudent and
feasible ongoing tax planning strategies in assessing the need
for a valuation allowance. Our estimates of taxable income
require us to make assumptions about various factors that affect
our operating results, such as economic conditions, consumer
demand, competition and other factors. Our actual results may
differ from these estimates. Based on actual results or a
revision in future estimates, we might determine that we would
not be able to realize additional portions of our net deferred
tax assets in the future; if that occurred, we would record a
charge to the income tax provision in that period.

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

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

Non-GAAP Financial Measures

Adjusted EBITDA represents earnings (losses)
before interest, income tax expense (benefit), depreciation and
amortization, equity in earnings (losses) of affiliates, and in
2003, a gain on refinancing.

We use Adjusted EBITDA as a measure of operating
performance. Adjusted EBITDA should not be considered as an
alternative to net income under accounting principles generally
accepted in the United States of America for purposes of
evaluating our results of operations, and does not represent
cash flow from operations as defined by generally accepted
accounting principles and is not necessarily indicative of cash
available to fund all cash flow needs.

We believe Adjusted EBITDA is useful to an
investor in evaluating our operating performance because:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A significant portion of our assets consists of
    intangible assets. Of those intangible assets, our management
    contracts are amortized over their remaining terms, and, in
    accordance with generally accepted accounting principles, those
    assets are subject to straight-line amortization. Because
    depreciation and amortization are non-cash items, we believe
    that presentation of Adjusted EBITDA is a useful supplemental
    measure of our operating performance;
|
| |  | Adjusted EBITDA is widely used in the hotel
    management industry to measure operating performance without
    regard to items such as depreciation and amortization; and                                                                                                                                                                                                                                                                                                                     
|
| |  | We believe Adjusted EBITDA helps investors
    meaningfully evaluate and compare the results of our operations
    from period to period by removing the impact of our asset base
    (primarily depreciation and amortization) from our operating
    results.                                                                                                                                                                                                                                 

Our management uses Adjusted EBITDA:



| |   |                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | as a measurement of operating performance because
    it assists us in comparing our operating performance on a
    consistent basis as it removes the impact of our asset base
    (primarily depreciation and amortization) from our operating
    results;
|
| |  | in presentations to our Board of Directors to
    enable it to have the same measurement of operating performance
    used by management;                                                                                                                    

18



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| |   |                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | for planning purposes, including the preparation
    of our annual operating budget;                                                                                      
|
| |  | for compensation purposes, including the basis
    for bonuses and other incentives for certain employees;                                                                
|
| |  | as a valuation measure for evaluating our
    operating performance and our capacity to incur and service
    debt, fund capital expenditures and expand our business; and
|
| |  | as one measure in determining the value of other
    acquisitions and dispositions.                                                                                       

There are material limitations to using a measure
such as Adjusted EBITDA, including the difficulty associated
with comparing results among more than one company and the
inability to analyze certain significant items, including
depreciation and interest expense, that directly affect our net
income or loss. Management compensates for these limitations by
considering the economic effect of the excluded expense items
independently as well as in connection with its analysis of net
income.

We are organized into two operating divisions,
hotel management and corporate housing. Both of these divisions
are reportable operating segments. Each division is managed
separately because of its distinctive products and services. We
evaluate the performance of each division based on Adjusted
EBITDA.

The other items in the tables below represent
operating segment activity and assets for the non-reportable
segments. Adjusted EBITDA from other activities includes merger
and integration costs, restructuring charges and intangible
asset write-offs and other impairments. The table shown below
reconciles Adjusted EBITDA to net income (loss) for the periods
presented.

Adjusted EBITDA should be considered in addition
to, not as a substitute for or as being superior to, operating
losses, cash flows, or other measures of financial performance
prepared in accordance with accounting principles generally
accepted in the United States of America.

|                                      |                                                  |            |       |           |   |       |        |            |   |   |        |         |   |   |        |         |  
|------------------------------------- | ------------------------------------------------ | ---------- | ----- | --------- | - | ----- | ------ | ---------- | - | - | ------ | ------- | - | - | ------ | ------- | -
|                                      |                                                  | Hotel      |       | Corporate |   |       |        | Financial 
|                                      |                                                  | Management |       | Housing   |   | Other |        | Statements
|                                      |                                                  |            |       |           |   |       |        |           
|Three months ended March 31,
    2004 |                                                  |            |       |           |   |       |        |            |   |   |        |         |   |   |        |        
|Net income (loss)                     |                                                  | $          | 315   |           |   | $     | (1,287 | )          |   | $ | (2,772 | )       |   | $ | (3,744 | )      
|Adjustments:                          |                                                  |            |       |           |   |       |        |            |   |   |        |         |   |   |        |        
|                                      | Depreciation and amortization                    |            |       | 2,031     |   |       |        | 393        |   |   |        |        |   |   |        | 2,424   |  
|                                      | Interest expense, net                            |            |       | 1,311     |   |       |        | 436        |   |   |        |        |   |   |        | 1,747   |  
|                                      | Equity in losses of affiliates                   |            |       | 776       |   |       |        |           |   |   |        |        |   |   |        | 776     |  
|                                      | Minority interest expense (benefit)              |            |       | 4         |   |       |        | (16        | ) |   |        | (34     | ) |   |        | (46     | )
|                                      | Income tax expense (benefit)                     |            |       | 207       |   |       |        | (841       | ) |   |        | (1,814  | ) |   |        | (2,448  | )
|                                      |                                                  |            |       |           |   |       |        |            |   |   |        |         |   |   |        |        
|Adjusted EBITDA                       |                                                  | $          | 4,644 |           |   | $     | (1,315 | )          |   | $ | (4,620 | )       |   | $ | (1,291 | )      
|                                      |                                                  |            |       |           |   |       |        |            |   |   |        |         |   |   |        |        
|Three months ended March 31,
    2003 |                                                  |            |       |           |   |       |        |            |   |   |        |         |   |   |        |        
|Net income (loss)                     |                                                  | $          | (827  | )         |   | $     | (1,646 | )          |   | $ | 6,902  |         |   | $ | 4,429  |        
|Adjustments:                          |                                                  |            |       |           |   |       |        |            |   |   |        |         |   |   |        |        
|                                      | Depreciation and amortization                    |            |       | 4,345     |   |       |        | 337        |   |   |        |        |   |   |        | 4,682   |  
|                                      | Interest expense, net                            |            |       | 1,732     |   |       |        | 577        |   |   |        |        |   |   |        | 2,309   |  
|                                      | Equity in losses of affiliates                   |            |       | 348       |   |       |        |           |   |   |        |        |   |   |        | 348     |  
|                                      | Gain on refinancing term loan from related party |            |       |          |   |       |        |           |   |   |        | (13,629 | ) |   |        | (13,629 | )
|                                      | Minority interest expense (benefit)              |            |       | (32       | ) |       |        | (62        | ) |   |        | 262     |   |   |        | 168     |  
|                                      | Income tax expense (benefit)                     |            |       | (551      | ) |       |        | (1,097     | ) |   |        | 4,600   |   |   |        | 2,952   |  
|                                      |                                                  |            |       |           |   |       |        |            |   |   |        |         |   |   |        |        
|Adjusted EBITDA                       |                                                  | $          | 5,015 |           |   | $     | (1,891 | )          |   | $ | (1,865 | )       |   | $ | 1,259  |        
|                                      |                                                  |            |       |           |   |       |        |            |   |   |        |         |   |   |        |        

19



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##### 



Results of Operations

Outlook
Through the end of 2003, the sluggish economy, the conflict in
Iraq, fear of terrorist acts, health concerns for travelers, and
delays and difficulties in travel due to heightened security
measures at airports had a major impact on our operating
results. Because of the significant slowdown of the economy over
the past three years, our managed hotels had generally
experienced significant declines in occupancy and average rates
charged. Weaker hotel performance had reduced our base and
incentive management fees, and also gave rise to additional
losses from minority investments we had made in connection with
some of the hotels that we manage.

The three month period ending March 31, 2004
has been the first quarter in the past several years in which
our operating statistics demonstrated significant improvement.
Revenue per available room (RevPAR) has improved 5.0%, occupancy
is up 2.8% and average daily rate (ADR) is up 2.1%, all compared
to the same period of the prior year. These improvements are
primarily related to the improvement in the U.S. economy.
The gross domestic product rose 4.2% in the first quarter of
2004, after a 4.1% rise in the fourth quarter of 2003,
demonstrating an improving trend. In addition, when excluding
managed hotels that are held for sale by the owner or undergoing
extensive renovations, RevPAR has improved 7.2%, occupancy rose
4.6% and ADR increased 2.4%, all compared to the same period of
prior year. Improvements such as these have not been seen since
before the September 11 tragedy. We are encouraged by these
improvements and expect that our operations will improve if
these trends continue.

The economy, the conflict in Iraq and traveler
health concerns due to SARS had also negatively impacted the
demand for corporate relocations and long-term assignments, two
primary drivers of our corporate housing operations. We expect
those operations to continue to be impacted until business
travel patterns are stabilized.

These events have had an adverse impact on our
financial performance. While the U.S. economy continues to
improve, business travel patterns have not yet returned to
pre-9/ 11 levels. In response to this current operating
environment, our business strategy is as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Earn base fees, incentive fees and fees from
    other services from our existing management contracts, as well
    as secure additional management contracts on quality properties.
    We will continue to work with the owners of our managed hotel
    properties to enhance revenues and control costs in order to
    improve those properties operating results.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Increase the number of our investments in hotels,
    resorts and conference centers, through the creation of joint
    ventures and/or real estate funds, where we will invest
    alongside other real estate investors and manage the acquired
    properties. These investments will enable us to increase our
    revenues from management fees from the associated properties and
    share in any earnings from the investments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Control our inventory and costs in our existing
    corporate housing markets, increase our focus on high growth
    markets such as New York, Washington, D.C. and Chicago and
    increase our sales effort in our primary national segments. We
    may also add additional markets in North America if the
    conditions are favorable. We will continue to expand the
    Licensed Global Partner Program in which we license the
    BridgeStreet name to various corporate housing providers
    throughout the U.S. We plan to reduce our inventory in areas
    where demand is weak or declining, such as the Toronto market,
    where long-term leases have previously not permitted us to
    adjust our inventory as flexibly as in other markets. Our goal
    going forward will be to shorten the length of our lease
    commitments where possible and look for more opportunities to
    convert higher risk apartment blocks into management
    arrangements.



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | Three months ended March 31, 2004
    compared with three months ended March 31,
    2003

Overview
At March 31, 2004 we managed 278 properties, with 62,049
guest rooms, compared to 383 properties with 81,309 guest
rooms at March 31, 2003, and 295 properties with 65,250
guest rooms at

20



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##### 



December 31, 2003. Hotels under management
were reduced by a net of 105 in the preceding year, with the
majority of the reductions due to the following:




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The sale of 32 properties by MeriStar
    Hospitality, of which 11 were disposed of in the first quarter
    of 2004, in connection with its asset disposition plan. (See
    Termination of Management Contractsabove for detail).                                                                                                                                                                                                                                                                                                                                                             
|
| |  | In July of 2003 CNL Hospitality (CNL)
    acquired RFS Hotel Investors, Inc (RFS). We had
    managed 50 of the 57 former RFS hotel properties, that were
    subject to management contracts with limited allowable
    management fees. CNL terminated our management contracts for
    28 properties that we formerly managed, and we ceased
    management of the majority of these by December 31, 2003,
    with the remainder terminating in January 2004. In
    October 2003 we entered into an agreement to manage the
    remaining 22 hotels, with market-based management fees.
|
| |  | On July 1, 2002, we assigned the leases of
    47 hotels to a subsidiary of Winston Hotels, Inc.
    (Winston), under a provision of the REIT
    Modernization Act that allows REITs to recognize the revenues
    and expenses of their hotels through taxable subsidiaries or
    lease them to taxable subsidiaries. As part of this agreement,
    we had continued to operate 33 of Winstons properties for
    a period of time. These contracts were terminated as of
    June 30, 2003.                                                                                             

Although our total number of managed hotels has
decreased, our Adjusted EBITDA has not been materially
negatively impacted, as most of the terminated contracts were
significantly less advantageous to us economically than the
contracts we retained or added. For example, we are entitled to
termination fees from MeriStar Hospitality (see Termination
of Management Contractsabove for detail of termination
fees), and the majority of hotels that we have retained or added
are higher quality, upscale properties generating more revenue
than those that were lost. The majority of the properties
terminated by Winston and RFS were select-service and therefore
did not generate significant Adjusted EBITDA. In addition, the
management contracts terminated by CNL had limits on the amount
of revenue we could recognize according to their agreements,
whereas the new management contracts for the retained CNL
properties do not.

Revenue

The following table shows the operating
statistics for our managed hotels on a same store basis for the
three months ended March 31, (dollars not in thousands):

|                                    |  |      |        |      |  |        |        |   |  |  |     |  
|----------------------------------- |  | ---- | ------ | ---- |  | ------ | ------ | - |  |  | --- | -
|                                    |  | 2004 |        | 2003 |  | Change
|                                    |  |      |        |      |  |       
|Revenue per available room (RevPAR) |  | $    | 67.27  |      |  | $      | 64.07  |   |  |  | 5.0 | %
|Average daily rate (ADR)            |  | $    | 103.34 |      |  | $      | 101.19 |   |  |  | 2.1 | %
|Occupancy                           |  |      | 65.1   | %    |  |        | 63.3   | % |  |  | 2.8 | %

Our total revenue decreased $20,008, or 7.7%, to
$237,393 for the three months ended March 31, 2004 compared
to $257,401 for the three months ended March 31, 2003.
Major components of this decrease were:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue from management fees decreased $690, or
    4.8%, to $13,678 for the three months ended March 31, 2004,
    from $14,368 for the three months ended March 31, 2003.
    While our RevPAR, ADR and occupancy have improved year over
    year, the decrease in total number of hotels under management
    has caused a decrease in our total management fee revenue. (See
    Overviewabove for detail of terminated contracts). The
    decrease due to the terminated management contracts was offset
    by termination fees of $1,087 for the first quarter of 2004
    relating the properties sold by MeriStar Hospitality.
|
| |  | Revenue from our corporate housing operations has
    decreased $229, or 0.9%, to $25,590 for the three months ended
    March 31, 2004, from $25,819 for the three months ended
    March 31, 2003. This decrease in revenue is partially
    attributable to the decrease in number of units under lease by
    approximately 7.1%, from 3,190 at March 31, 2003 to 2,964
    at March 31, 2004. The decrease is also attributable to the
    poor performance in the Toronto market, where we had substantial
    commitments under long-term leases. As a result, when demand in
    that market decreased, we could not adjust our  

21



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##### 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | cost structure and therefore incurred expenses on
    leases with no related revenue. These losses were offset by
    stronger U.S. markets such as New York, Chicago and
    Washington, D.C.                                                                                                                                                                                                                                                                           
|
| |  | Reimbursable costs, which we record as revenue
    under EITF 01-14, decreased by $18,347, or 8.6%, to $194,150 for
    the three months ended March 31, 2004, from $212,497 for
    the three months ended March 31, 2003. The primary reason
    for this is the decrease in number of managed hotels from
    March 31, 2003 to March 31, 2004, directly resulting
    in a decreased number of hotel employees and related
    reimbursable salary and other expense.

Operating
expenses by department

Total operating expenses by department decreased
$643, or 2.8%, to $22,099 for the three months ended
March 31, 2004 compared to $22,742 for the three months
ended March 31, 2003. Operating expenses by department
include expenses that are related to lodging from our owned
hotel, and to our corporate housing division. The majority of
this decrease relates to the corporate housing division, where
there was a decrease in the number of units available for lease,
and consequently less expense, as discussed above.

Undistributed
operating expenses

Total undistributed operating expenses decreased
$726 or 2.8%, to $24,859 for the three months ended
March 31, 2004, compared to $25,585 for the three months
ended March 31, 2003. Major factors affecting the decrease
were:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Administrative and general expenses decreased
    $1,223, or 6.4%, to $17,815 for the three months ended
    March 31, 2004, compared to $19,038 for the three months
    ended March 31, 2003. The primary reason for this is the
    decreased number of hotels under management, and the effects of
    cost control measures taken during the year. This decrease was
    offset by an increase in our insurance expense. Northridge
    Insurance Company provides reinsurance on certain lines of
    coverage in order to improve the terms and conditions of
    insurance available to our clients. We believe that this program
    provides us a competitive advantage in obtaining and retaining
    management contracts. During the first quarter of 2004, we
    incurred one claim on our property reinsurance program which
    reached our maximum per occurrence exposure of $1,000. Claims of
    this magnitude are unusual. Nonetheless, we have lowered our
    maximum per occurrence loss limit to $500 in order to reduce our
    exposure on future claims.               
|
| |  | Depreciation and amortization expense decreased
    $2,258, or 48.2%, to $2,424 for the three months ended
    March 31, 2004, from $4,682 for the three months ended
    March 31, 2003. This decrease is primarily due to a large
    number of management contracts that became fully amortized
    during the second quarter of 2003 and the loss of certain
    management contracts during the year. This decrease was
    partially offset by the increase in purchases of property, plant
    and equipment during mid-2003 relating to the relocation of our
    corporate office, and the related increase in depreciation taken
    on those assets.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Merger and integration costs were $1,865 for the
    three months ended March 31, 2003, with no similar expense
    for the three months ended March 31, 2004. These costs
    include professional fees, travel, relocation costs and other
    transition costs that were incurred in connection with merger of
    MeriStar and Interstate in July of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Intangible asset write-offs and other impairments
    were $4,493 for the three months ended March 31, 2004, with
    no similar expense in the same period last year. The majority of
    this expense is due to the write-off of management contracts
    related to hotel properties sold by MeriStar Hospitality, in
    connection with its announced asset disposition plan. We
    wrote-off $3,296 of intangible assets associated with these
    terminated management contracts during the first quarter of
    2004. Also included in this amount is a $563 write-off of a
    portion of our investment in MIP, Lessee, L.P., as it was deemed
    partially impaired based on purchase offers received for two of
    the hotels owned by the joint venture. We also wrote-off $538,
    representing our remaining investment in our joint venture that
    owns the Residence Inn Houston Astrodome Medical Center, as it
    was determined that the carrying value would not be recovered
    due to the hotels underperformance. The remaining $96 of
    expense relates to fixed

22



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##### 



| |  |                                                                                                                                                                                                                 
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | asset write-offs associated with closing of our
    subsidiary that managed the former RFS properties, for which
    management contracts were terminated when RFS was purchased by
    CNL (see Overviewabove).

Reimbursable costs, which we record as expense
under EITF 01-14, decreased by $18,347, or 8.6%, to
$194,150 for the three months ended March 31, 2004, from
$212,497 for the three months ended March 31, 2003. The
primary reason for this is the decrease in the number of managed
hotels from March 31, 2003 to March 31, 2004, directly
resulting in a decreased number of hotel employees and related
reimbursable salaries and other expense.

Net
income (loss)

Net income (loss) decreased $8,173 to $(3,744)
for the three months ended March 31, 2004, from $4,429 for
the three months ended March 31, 2003. In addition to the
increase in net operating loss of $292, due to the decrease in
revenues and the lesser decrease in expenses as discussed above,
the most significant factor in the decrease in net income (loss)
is the gain on debt refinancing in the amount of $13,629
recorded in the first quarter of 2003, with no similar item in
2004. At December 31, 2002, we had $56,069 of long-term
debt under a term loan due to MeriStar Hospitality, which was
due to mature on July 31, 2007. MeriStar Hospitality,
seeking additional liquidity, approached us in late 2002
regarding a negotiated discounted repayment of the MeriStar
Hospitality term loan. The repayment of $42,056 was completed in
January 2003. We financed part of the repayment with the
proceeds from a $40,000 subordinated term loan and realized a
gain of $13,629.

In addition, our equity in losses of affiliates
increased $428, or 123.0%, to $776 for the three months ended
March 31, 2004, compared to $348 for the same period in
2003. These losses consist of our proportionate share of the net
losses incurred by our non-controlling equity investments. We
incurred greater losses in the 2004 period from our MIP Lessee,
L.P. investment as the hotels were not performing as anticipated.

Offsetting these items, net interest expense
decreased $562, or 24.3%, to $1,747 for the three months ended
March 31, 2004, from $2,309 for the same period in 2003. We
incurred less interest expense on our senior credit facility as
we made repayments of $45,276 in the fourth quarter of 2003,
using proceeds from a public equity offering. In addition, we
incurred less interest expense on our non-recourse promissory
note as we made two principal payments during the third quarter
of 2003.

Additionally, income tax expense (benefit) was
$(2,448) for the three months ended March 31, 2004,
compared to $2,952 for the three months ended March 31,
2003. The main reason for this fluctuation is that we incurred a
loss in the 2004 period, as opposed to income in the 2003
period. In both periods, we used a tax rate of approximately 40%.

Adjusted
EBITDA

Adjusted EBITDA decreased $2,550, to $(1,291) for
the three months ended March 31, 2004, from $1,259 for the
three months ended March 31, 2003. This decrease is due to
the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Net income from hotel management operations
    increased $1,142, to $315 for the three months ended
    March 31, 2004, from $(827) for the three months ended
    March 31, 2003. Hotel managements Adjusted EBITDA
    decreased $371, or 7.4%, to $4,644 for the three months ended
    March 31, 2004, from $5,015 for the three months ended
    March 31, 2003. Hotel managements Adjusted EBITDA had
    a relatively small decrease even though we have fewer properties
    under management currently, compared to March 31, 2003.
    This is because management contracts we have retained or added
    are more advantageous to us economically than the ones that were
    lost. Included in hotel managements Adjusted EBITDA is
    $1,087 of termination fees from MeriStar Hospitality, with
    respect to the properties they have sold.
|
| |  | Net loss from corporate housing operations
    decreased $359, to $(1,287) for the three months ended
    March 31, 2004, from $(1,646) for the same period of 2003.
    Corporate housings Adjusted EBITDA                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

23



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | increased $576, or 30.5%, to $(1,315) for the
    three months ended March 31, 2004, from $(1,891) for the
    same period of 2003. The increase in Adjusted EBITDA can be
    primarily attributed to improved inventory and operating cost in
    the 2004 period.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Net income from other activities decreased
    $9,674, to $(2,772) for the three months ended March 31,
    2004, from $6,902 for the three months ended March 31,
    2003. Adjusted EBITDA from other activities decreased $2,755, or
    147.7%, to $(4,620) for the three months ended March 31,
    2004, from $(1,865) for the three months ended March 31,
    2003. In 2004, other activity includes restructuring charges of
    $127 relating to our corporate housing division and $4,493 of
    intangible asset write-offs and other impairments, compared to
    the 2003 period which includes merger and integration costs of
    $1,865 associated with the MeriStar-Interstate merger in July of
    2002.

Liquidity and Capital Resources

Working
Capital We had $5,346 of
cash and cash equivalents at March 31, 2004, compared to
$7,450 at December 31, 2003, and working capital deficit
(current assets less current liabilities) of $2,466 at
March 31, 2004 compared to $8,349 at December 31,
2003. This improvement in working capital of $5,883 resulted
primarily from timing of accounts receivable and the payment of
accounts payable and accrued liabilities.

Operating
Activities Net cash used
in operating activities was $7,054 for the three months ended
March 31, 2004 compared to $762 for the three months ended
March 31, 2003. The increased use of cash resulted
primarily from reductions in the accounts payable and accrued
liabilities balances, specifically the payments of incentive
compensation and severance amounts during first quarter 2004, as
well as timing of collections of accounts receivable.

If economic conditions, travel patterns or other
factors negatively impact the financial results of our managed
hotels and corporate housing operations, our management fee and
corporate housing revenues could decrease, and we may incur
additional losses from our minority investments. These events
and factors could negatively impact our cash flows from
operating activities and net income or loss.

We are required to distribute 1.6627% of cash
flows from the operations of Interstate Hotels, LLC, one of our
operating subsidiaries, to Wyndham International, Inc.
(Wyndham), based on Wyndhams common interest
in that entity. The net distribution payable to Wyndham at
March 31, 2004 and 2003 was approximately $441 and $303,
respectively.

Investing
Activities Net cash
provided by (used in) investing activities was $46 for the three
months ended March 31, 2004 compared to $(1,690) for the
three months ended March 31, 2003. The main reason for this
decrease in use of cash relates to the decrease in restricted
cash during the first quarter of 2004 from our purchasing
subsidiary. That subsidiarys restricted cash consists of
advances for capital expansion and renovation projects, and
these amounts are used as the projects are performed. The
decrease relates to the continuation of projects, as well as
timing of advances. Offsetting this is the increase in
investments in hotel real estate, as we contributed $563 to our
existing equity investments, including $463 to a preferred
equity investment for a capital expansion project.

We periodically make equity investments in
entities that own certain hotel properties we manage. We
evaluate these investment opportunities based on financial and
strategic factors such as the estimated potential value of the
underlying hotel properties and the management fee revenues we
can obtain from the investment.

Financing
Activities Net cash
provided by financing activities was $4,655 for the three months
ended March 31, 2004, compared $10,892 for the same period
of 2003. This decrease in cash provided is mainly due to net
borrowings and repayments on long-term debt. We had net
borrowings of $12,542 in 2003, as opposed to net borrowings of
$4,094 in 2004. In January 2003, we entered into a new $40,000
subordinated term loan, and repaid the MeriStar Hospitality term
loan, realizing a gain of $13,629.

24



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##### 



Senior credit agreement Effective July 31, 2002, in
connection with the closing of the MeriStar-Interstate merger,
we entered into a $113,000 senior credit agreement with a group
of banks. The senior credit agreement initially consisted of a
$65,000 term loan and a $48,000 revolving credit facility. The
term loan is payable in quarterly installments of $406 that
began January 1, 2003, with the balance due on
July 31, 2005. During the fourth quarter of 2003, using the
proceeds from a public equity offering, we repaid $45,276 of the
term loan. The revolving credit facility is due on July 28,
2005 (with a one-year renewal at our option). The interest rate
on the senior credit agreement will be LIBOR plus 3.00% to
4.50%, depending upon the results of certain financial tests.
The senior credit facility contains certain covenants, including
maintenance of financial ratios at the end of each quarter,
compliance reporting requirements and other customary
restrictions. At March 31, 2004, we were in compliance with
these covenants. The senior credit agreement also includes
pledges of collateral, including the following:



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

At March 31, 2004, borrowings under the
senior credit agreement bore interest at a rate of 5.01% per
annum, which is the 30-day LIBOR plus 3.00%. We are currently in
the process of negotiating the refinancing of this facility,
which we expect to complete during the second quarter of 2004.

We incurred $608 and $1,096 of interest expense
on the senior credit agreement for the three months ended
March 31, 2004 and 2003, respectively; the decrease in
interest expense resulting from our prepayment of $45,276 of our
term loan with proceeds from our November public equity
offering. As of May 10, 2004, the total availability under
our senior credit agreement was $10,000.

Subordinated term
loan In January 2003, we
entered into a $40,000 subordinated term loan that carries a
variable interest rate based on the 30-day LIBOR plus a spread
of 8.50%. The subordinated term loan matures on January 31,
2006, but if the revolving portion of our senior credit facility
is extended for an additional year, the maturity of the
subordinated term loan will also be automatically extended by
one year to January 31, 2007. This term loan is
subordinated to borrowings under the senior credit agreement and
contains certain covenants, including maintenance of financial
ratios at the end of each quarter, compliance reporting
requirements and other customary restrictions. At March 31,
2004, we were in compliance with these covenants. At
March 31, 2004, borrowings under the subordinated term loan
bore interest at a rate of 9.63% per annum. We incurred $973 and
$890 of interest expense on the subordinated term loan for the
three months ended March 31, 2004 and 2003, respectively.

Non-recourse promissory
note In March 2001, we
entered into a non-recourse promissory note in the amount of
$4,170 with FelCor Lodging Trust Incorporated to fund the
acquisition of a 50% non-controlling equity interest in two
partnerships that own eight mid-scale hotels. Interest on the
note is payable monthly at the rate of 12% per annum and
the outstanding principal balance is due and payable on
December 31, 2010. For the three months ended
March 31, 2004 and 2003, we incurred $112 and $125,
respectively, of interest expense on the promissory note.

In June 2003, we made unscheduled principal
payments totaling $447 on the note. As of March 31, 2004
the remaining balance on the promissory note is $3,723. In
connection with one of the payments, our ownership interest in
the partnership was reduced from 50% to 49.5% as FelCor made an
additional contribution to the partnership at that time. We have
suspended further principal and interest payments on this
non-recourse promissory note and, accordingly, are in
non-compliance with the terms of the note. We expect that we
will ultimately transfer ownership of our equity interests in
these joint ventures to FelCor in return for the extinguishment
of the debt.

Public equity
offering On
November 26, 2003, in a public equity offering, we offered
8,500,000 shares of our common stock, par value $0.01 per
share, at a price of $5.25 per share. An additional 500,000
shares of

25



---



##### 



common stock were offered by our principal
investor group. On December 16, 2003, the underwriters
exercised their over-allotment option for an additional
601,900 shares.


Our total proceeds from this equity offering, net
of the underwriting discount but prior to deducting other
expenses, amounted to approximately $45,276. We did not receive
any proceeds from the sale of shares by the principal investor
group. The total proceeds were used to repay our term loan under
our senior credit facility.

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

Contractual Obligations and Maturities of
Indebtedness

The following table summarizes our contractual
obligations at March 31, 2004 and the effect that those
obligations are expected to have on our liquidity and cash flows
in future periods:

|                                                 |  |               |         |           |  |           |        |           |  |         |         |  |  |   |        |  |  |   |        | 
|------------------------------------------------ |  | ------------- | ------- | --------- |  | --------- | ------ | --------- |  | ------- | ------- |  |  | - | ------ |  |  | - | ------ | 
|                                                 |  |              
|                                                 |  | Payment terms
|                                                 |  |              
|                                                 |  |               |         | Less than |  |           |        | More than
|                                                 |  | Total         |         | 1 year    |  | 1-3 years |        | 3-5 years |  | 5 years
|                                                 |  |               |         |           |  |           |        |           |  |        
|Senior credit facility                           |  | $             | 46,692  |           |  | $         | 1,625  |           |  | $       | 45,067  |  |  | $ |       |  |  | $ |       | 
|Non-recourse promissory note                     |  |               | 3,723   |           |  |           |       |           |  |         |        |  |  |   |       |  |  |   | 3,723  | 
|Subordinated term-loan                           |  |               | 40,000  |           |  |           |       |           |  |         | 40,000  |  |  |   |       |  |  |   |       | 
|Non-cancelable leases                            |  |               | 91,641  |           |  |           | 27,986 |           |  |         | 29,682  |  |  |   | 11,473 |  |  |   | 22,500 | 
|Redeemable preferred operating partnership units |  |               | 1,310   |           |  |           | 1,310  |           |  |         |        |  |  |   |       |  |  |   |       | 
|Wyndham interest                                 |  |               | 874     |           |  |           | 874    |           |  |         |        |  |  |   |       |  |  |   |       | 
|                                                 |  |               |         |           |  |           |        |           |  |         |         |  |  |   |        |  |  |   |        | 
|Total                                            |  | $             | 184,240 |           |  |           | 31,795 |           |  |         | 114,749 |  |  |   | 11,473 |  |  |   | 26,223 | 
|                                                 |  |               |         |           |  |           |        |           |  |         |         |  |  |   |        |  |  |   |        | 

Long-Term
Debt For principal
repayment and debt service obligations with respect to our
long-term debt, see Note 7 to our consolidated financial
statements.

Lease
Commitments We lease
apartments for our Corporate Housing division and office space
for our corporate offices. The leases run through 2014 and are
included in the table above.

Management Agreement
Commitments Under the
provisions of management agreements with certain hotel owners,
we have outstanding commitments to provide an aggregate of
$2,591 to these hotel owners in the form of investments or
loans, if requested. The loans may be forgiven or repaid based
upon the specific terms of each management agreement. The timing
of future investments or working capital loans to hotel owners
is currently unknown as it is at the hotel owners
discretion.

Letter of
Credit We have a $2,500
letter of credit outstanding from Interstate Operating Co. L.P.
and Northridge Insurance Company in favor of the property
insurance carrier. The letter of credit expires on June 25,
2004, unless renewed.

Equity Investment
Funding In connection with
our equity investments in hotel real estate, we are partners or
members of various unconsolidated partnerships or limited
liability companies. The terms of such partnership or limited
liability company agreements provide that we contribute capital
as specified. The timing and amount of such contributions of
capital, if any, is currently unknown and is therefore not
reflected in the chart set forth above. We have non-controlling
equity interests in 9 hotel real estate limited
partnerships and limited liability companies. We do not
guarantee the debt or other obligations of any of these
investments.

26



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##### 



Wyndham
interest Wyndham
International, Inc., (Wyndham) holds a 1.6627%
non-controlling economic interest in one of our operating
subsidiaries. In conjunction with the MeriStar-Interstate
merger, we accelerated the timing of Wyndhams right to
require us to redeem this interest. Effective July 20,
2002, Wyndham has the right to require us to redeem this
interest. The estimated value of this interest at March 31,
2004 is $433 and is included in accounts payable-related parties
on our consolidated balance sheet. In addition, we are required
to distribute to Wyndham 1.6627% of cash flows from the
operations of one of our subsidiaries, based on their common
interest in that entity. As of March 31, 2004, the net
distribution payable to Wyndham was approximately $441, and is
included in accounts payable-related parties on our consolidated
balance sheet.

Redeemable Preferred Operating Partnership
Units As of March 31,
2004, we had 247,122 Class A units and 78,431 preferred
units outstanding in our subsidiary operating partnership,
Interstate Operating Company, L.P. This partnership indirectly
holds substantially all of our assets. The preferred units were
held by an affiliate of Mahmood J. Khimji, one of our
directors. On May 3, 2004, we redeemed all 78,431 preferred
units for cash consideration, totaling $1,310, at a redemption
price of $16.70 per unit, which was paid to
Mr. Khimjis affiliates. The preferred units were
included in minority interests on our balance sheet at
March 31, 2004.

Item
3.     Quantitative and Qualitative
Disclosures About Market Risk

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

Our senior secured credit facility matures
July 31, 2005, with a one year extension of the revolving
portion at our option. At March 31, 2004, we had borrowings
of $46,692 outstanding on the facility. Interest on the debt is
variable, based on the 30-day LIBOR plus a spread of 3.0% to
4.5% depending on the results of certain financial tests. The
senior credit facility bore interest at a rate of 9.63% at
March 31, 2004. We have determined that the fair value of
the debt approximates its carrying value. We are currently in
the process of refinancing this facility which we expect to
complete in the second quarter of 2004. We expect to write off
approximately $357 of net deferred financing costs associated
with this facility at the time of the refinancing.

Our subordinated term loan matures on
January 31, 2006, but if the revolving portion of our
senior credit facility is extended for an additional year, which
it may be at our option, the maturity of the subordinated term
loan will also be automatically extended by one year to
January 31, 2007. Interest on the debt is based on the
30-day LIBOR plus 850 basis points. At March 31, 2004,
borrowings under the subordinated term loan bore interest at a
rate of 9.63% per annum. We have determined that the fair value
of the debt approximates its carrying value.

Our non-recourse promissory note to FelCor with a
balance of $3,723 is due on December 31, 2010. Interest on
the note is payable monthly at the rate of 12% per annum.
We believe that our non-recourse promissory note would have no
value to a third party. We intend to exchange the promissory
note for our equity interests in the related joint ventures, as
discussed in Note 6. In addition, the carrying values of
these investments have been previously written down to zero.

In October 2002, we entered into a $30,000,
two-year interest rate swap agreement with a financial
institution in order to hedge against the effect that future
interest rate fluctuations may have on our floating rate debt.
The swap agreement effectively fixes the 30-day LIBOR at 2.50%.
The fair value of the swap agreement was a liability of $241 at
March 31, 2004.

In March 2003, we entered into a $35,000,
twenty-two month interest rate cap agreement with a financial
institution in order to hedge against the effect that future
interest rate fluctuations may have on our floating rate debt.
The interest rate agreement caps the 30-day LIBOR at 4.50%. At
March 31, 2004, the fair value of this cap agreement was
insignificant.

27



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##### 



Giving effect to our interest rate hedging
activities, a 1.0% change in the 30-day LIBOR would have changed
our interest expense by approximately $152 and $200 for the
three months ended March 31, 2004 and 2003, respectively.

Our international operations are subject to
foreign exchange rate fluctuations. We derived approximately
3.4% and 3.5% of our total revenue for the three months ended
March 31, 2004 and 2003, respectively, from services
performed in Canada, the United Kingdom, France, and Russia. Our
foreign currency transaction gains and losses were a net loss of
$85 for the three months ended March 31, 2004 and is
included in accumulated comprehensive income (loss) on our
statement of operations, net of tax. To date, since most of our
foreign operations have been largely self-contained or
dollar-denominated, we have not been exposed to material foreign
exchange risk. Therefore, we have not entered into any foreign
currency exchange contracts or other derivative financial
instruments to hedge the effects of adverse fluctuations in
foreign currency exchange rates. In the event that we have large
transactions requiring currency conversion we would reevaluate
whether we should engage in hedging activities.

Item
4.     Controls and
Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures
that are designed to ensure that information that is required to
be disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms, and that the information is
accumulated and communicated to our management, including our
chief executive officer, chief financial officer, and chief
accounting officer, as appropriate, to allow timely decisions
regarding required disclosure based closely on the definition of
disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15-d15(e)).

We carried out an evaluation, under the
supervision and with the participation of our management,
including our chief executive officer, our chief financial
officer and our chief accounting officer, of the effectiveness
of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report.
Based on this evaluation, it was concluded that our disclosure
controls and procedures were adequate and effective in ensuring
that material information relating to us and our consolidated
subsidiaries would be made known to them by others within those
entities, particularly during the period in which this report
was being prepared.

Changes in Internal Controls

There has not been any change in our internal
control over financial reporting since the date of the last
evaluation thereof that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.

It should be noted that any system of controls,
however well designed and operated, can provide only reasonable,
and not absolute, assurance that the objectives of the system
are met. In addition, the design of any control system is based
in part upon certain assumptions about the likelihood of future
events. Because of these and other inherent limitations of
control systems, there is only reasonable assurance that our
controls will succeed in achieving their stated goals under all
potential future conditions. Also, we have investments in
certain unconsolidated entities. As we do not control or manage
these entities, our disclosure controls and procedures with
respect to these entities are substantially more limited than
those we maintain with respect to our consolidated subsidiaries.

28



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##### 



PART II. OTHER INFORMATION

Item 1.     Legal
Proceedings

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

Item
2.     Changes in Securities and Use
of Proceeds

None.

Item
3.     Defaults Upon Senior
Securities

None.

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

None.

Item 5.     Other
Information

Forward-Looking Information

Information both included in and incorporated by
reference in this quarterly report on Form 10-Q may contain
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, and may involve known
and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements of our
company to be materially different from future results,
performance or achievements expressed or implied by such
forward-looking statements. Forward-looking statements, which
are based on certain assumptions and describe our future plans,
strategies and expectations, are generally identifiable by use
of the words may, will,
should, expect, anticipate,
estimate, believe, intend,
or project or the negative thereof or other
variations thereon or comparable terminology. Factors which
could have a material adverse effect on our operations and
future prospectus include, but are not limited to:



| |   |                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the current volatility of the national economy;                                                                                                                                                                                                                              
|
| |  | economic conditions generally and the real estate
    market specifically;                                                                                                                                                                                                   
|
| |  | the impact of the September 11, 2001
    terrorist attacks and actual or threatened future terrorist
    incidents or hostilities;                                                                                                                                           
|
| |  | the aftermath of the war with Iraq, continuing
    conflicts in that geographic region and related ongoing U.S.
    involvement;                                                                                                                                             
|
| |  | international geopolitical difficulties or health
    concerns;                                                                                                                                                                                                              
|
| |  | uncertainties associated with obtaining
    additional financing for future real estate projects and to
    undertake future capital improvements;                                                                                                                           
|
| |  | demand for, and costs associated with, real
    estate development and hotel rooms, market conditions affecting
    the real estate industry, seasonality of resort and hotel
    revenues and fluctuations in operating results;                                            
|
| |  | changes in laws and regulations applicable 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;
|
| |  | legislative/regulatory changes, including changes
    to laws governing the taxation of REITs;                                                                                                                                                                               

29



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##### 





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

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

These risks and uncertainties, along with the
risk factors set forth in our Annual Report on Form 10-K
for the year ended December 31, 2003, should be considered
in evaluating any forward-looking statements in this quarterly
report on Form 10-Q.

Item
6.     Exhibits and Reports on
Form 8-K

(a) Exhibits

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

30



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##### 



|            |      |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                   
|----------- | ---- | ----------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |      | Description of Document
|            |      |                        
|            | 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)).                                                                                                                                                                               
|            | 4.4  |                         |  | Registration Rights Agreement, dated
    March 31, 1999, between the Company (formerly MeriStar
    Hotels & Resorts, Inc.), Oak Hill Capital Partners,
    L.P. and Oak Hill Capital Management Partners, L.P.
    (incorporated by reference to Exhibit 4.7 to the
    Companys Form 10-Q filed with the Securities and
    Exchange Commission for the three months ended March 31,
    1999).
|            | 9.1  |                         |  | Board Composition Agreement, dated as of
    July 31, 2002, among the Company. and certain stockholders
    of the Registrant specified therein (incorporated by reference
    to Exhibit 9.1 to the Companys Form 8-K filed
    with the Securities and Exchange Commission on August 7,
    2002).                                                                                             
|            | 9.2  |                         |  | Amendment to Board Composition Agreement, dated
    January 30, 2004, among the Company, and certain
    stockholders of the Registrant specified therein (incorporated
    by reference to Exhibit 9.2 to the Companys
    Form 10-K filed with the Securities and Exchanges
    Commission on March 9, 2003.)                                                                                  
|            | 31.1 |                         |  | Sarbanes-Oxley Act Section 302
    Certifications of the Chief Executive Officer.                                                                                                                                                                                                                                                                                                                 
|            | 31.2 |                         |  | Sarbanes-Oxley Act Section 302
    Certifications of the Chief Financial Officer.                                                                                                                                                                                                                                                                                                                 
|            | 32.1 |                         |  | Sarbanes-Oxley Act Section 906
    Certifications of Chief Executive Officer.                                                                                                                                                                                                                                                                                                                     
|            | 32.2 |                         |  | Sarbanes-Oxley Act Section 906
    Certifications of Chief Financial Officer.                                                                                                                                                                                                                                                                                                                     

(b) Reports on Form 8-K

Current report on Form 8-K (Item 12)
dated and filed March 3, 2004, regarding the
2003 year-end earnings press release.

31



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##### 



SIGNATURE

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



| |                                                 
| | ------------------------------------------------
| | INTERSTATE HOTELS & RESORTS, INC.               
|
| | /s/ J. WILLIAM RICHARDSON                       
| |                                                 
| | J. William Richardson                           
| | Chief Financial Officer                         
| | (Duly authorized officer)                       
| | (Principal financial and accounting
    officer)

Dated: May 10, 2004

32