##### 



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 1934For the quarterly period ended
    September 30, 2006oro

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

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

22203(Zip
    Code)    www.ihrco.com
 Form 10-Q
   (703) 387-3100
 (Registrants Telephone
    Number, Including Area Code)
   þ o
  Rule 12b-2
 o þ o
  Rule 12b-2 o þ




---



##### 



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


Financial
    Statements (Unaudited):Consolidated
    Balance Sheets  September 30, 2006 and
    December 31, 2005


2Consolidated
    Statements of Operations and Comprehensive Income
    (Loss)  Three and nine months ended
    September 30, 2006 and 2005


3Consolidated
    Statements of Cash Flows  Nine months ended
    September 30, 2006 and 2005


4Notes to
    Consolidated Financial Statements


5Item 2:


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


22Item 3:


Quantitative and
    Qualitative Disclosures About Market Risk


34Item 4:


Controls and
    Procedures


34PART II.
    OTHER INFORMATIONItem 1:


Legal
    Proceedings


35Item 6:


Exhibits


35   1




---



##### 



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


December 31,2006


2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
12,320


$
12,929Restricted cash


4,181



3,209Accounts receivable, net of
    allowance for doubtful accounts of $2,353 and $1,873 respectively


55,810



41,594Due from related parties, net of
    allowance for doubtful accounts of $963 and $1,800 respectively


1,498



6,001Prepaid expenses and other current
    assets


14,354



8,594Total current assets


88,163



72,327Marketable securities


1,385



1,503Property and equipment, net


69,546



52,070Investments in and advances to
    affiliates


10,630



7,686Notes receivable


4,962



6,052Deferred income taxes, net


14,721



11,925Goodwill


86,185



96,809Intangible assets, net


32,707



44,708Total assets

$
308,299


$
293,080LIABILITIES, MINORITY INTEREST
    AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
4,991


$
4,508Accrued expenses


75,879



70,347Current portion of long-term debt


3,750



3,750Total current liabilities


84,620



78,605Deferred compensation


1,329



1,474Long-term debt


67,552



81,302Total liabilities


153,501



161,381Minority interest


468



1,059Commitments and contingenciesStockholders equity:Preferred stock, $.01 par
    value; 5,000,000 shares authorized, no shares issued






Common stock, $.01 par value;
    250,000,000 shares authorized; 31,513,468, and
    30,609,935 shares issued and outstanding at
    September 30, 2006 and December 31, 2005 respectively


315



306Treasury stock


(69
)


(69
)Paid-in capital


193,254



189,330Accumulated other comprehensive
    income


868



64Accumulated deficit


(40,038
)


(58,991
)Total stockholders equity


154,330



130,640Total liabilities, minority
    interest and stockholders equity

$
308,299


$
293,080   The accompanying notes are an integral part of the
    consolidated financial statements.
 2




---



##### 



INTERSTATE
    HOTELS & RESORTS, INC.
    CONSOLIDATED STATEMENTS OF OPERATIONS
    AND COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands, except per share amounts)  Nine months endedThree months ended September 30,


September 30,2006


2005


2006


2005Revenue:Lodging

$
7,154


$
3,376


$
18,609


$
8,482Management fees


12,779



9,008



34,386



25,600Management fees-related parties


1,287



5,366



12,030



16,970Termination fees


16,995



274



18,774



867Termination fees-related parties






1,139



6,117



3,294Corporate housing


40,014



33,267



101,066



91,792Other


2,688



2,806



9,117



8,54180,917



55,236



200,099



155,546Other revenue from managed
    properties


202,780



241,710



645,553



665,450Total revenue


283,697



296,946



845,652



820,996Operating expense by department:Lodging


5,210



2,487



13,670



6,491Corporate housing


30,896



25,894



80,079



73,923Undistributed operating expenses:Administrative and general


19,594



19,317



58,553



56,961Depreciation and amortization


1,922



2,474



5,908



6,830Restructuring and severance














2,043Asset impairments and write-offs


2,024



1,046



10,666



2,95759,646



51,218



168,876



149,205Other expenses from managed
    properties


202,780



241,710



645,553



665,450Total operating expenses


262,426



292,928



814,429



814,655OPERATING INCOME


21,271



4,018



31,223



6,341Interest income


514



360



1,445



863Interest expense


(2,199
)


(1,965
)


(6,240
)


(8,218
)Equity in earnings (losses) of
    affiliates


4,745



(381
)


4,311



2,811Gain on sale of investment and
    extinguishment of debt






4,326







4,711INCOME BEFORE MINORITY INTEREST
    AND INCOME TAXES


24,331



6,358



30,739



6,508Income tax expense


(9,011
)


(2,585
)


(11,615
)


(2,647
)Minority interest expense


(122
)


(38
)


(171
)


(49
)INCOME FROM CONTINUING OPERATIONS


15,198



3,735



18,953



3,812Income from discontinued
    operations, net of tax






1,656







1,898NET INCOME

$
15,198


$
5,391


$
18,953


$
5,710Other comprehensive income (loss),
    net of tax:Foreign currency translation gain
    (loss)


66



(281
)


737



(314
)Unrealized gain (loss) on
    investments


55



27



67



(485
)COMPREHENSIVE INCOME

$
15,319


$
5,137


$
19,757


$
4,911BASIC EARNINGS PER SHARE:Continuing operations

$
0.48


$
0.12


$
0.61


$
0.13Discontinued operations






0.06







0.06Basic earnings per share

$
0.48


$
0.18


$
0.61


$
0.19DILUTIVE EARNING PER SHARE:Continuing operations

$
0.48


$
0.12


$
0.60


$
0.12Discontinued operations






0.05







0.06Dilutive Earning per share

$
0.48


$
0.17


$
0.60


$
0.18   The accompanying notes are an integral part of the
    consolidated financial statements.
 3




---



##### 



INTERSTATE
    HOTELS & RESORTS, INC.
    CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)  Nine months endedSeptember 30,2006


2005OPERATING ACTIVITIES:Net income

$
18,953


$
5,710Adjustments to reconcile net income
    to net cash provided by operating activities:Depreciation and amortization


5,908



6,830Amortization of deferred financing
    fees


573



2,530Stock compensation expense


788



942Bad debt expense


865



1,161Asset impairments and write-offs


10,666



2,957Equity in earnings of affiliates


(4,311
)


(2,811
)Gain on sale of investments and
    extinguishment of debt






(4,711
)Operating distributions from
    unconsolidated affiliates


285



375Minority interest


171



49Deferred income taxes


7,828



2,403Discontinued operations:Depreciation and amortization






155Gain on sale






(2,605
)Changes in assets and liabilities:Accounts receivable, net


(14,994
)


421Due from related parties, net


4,503



6,408Prepaid expenses and other current
    assets


(3,679
)


(1,189
)Accounts payable and accrued
    expenses


2,527



6,305Other changes in asset and
    liability accounts


594



(325
)Cash provided by operations


30,677



24,605INVESTING ACTIVITIES:Proceeds from the sale of
    investments






483Proceeds from the sale of
    discontinued operations






10,488Change in restricted cash


(972
)


(1,465
)Acquisition of subsidiary


(497
)


Acquisition of hotels


(14,538
)


(31,779
)Purchases of property and equipment


(6,261
)


(1,817
)Additions to intangible assets


(1,417
)


(1,700
)Contributions to unconsolidated
    affiliates


(13,192
)


(492
)Distributions from unconsolidated
    affiliates


15,754



6,610Changes in notes receivable


596



(531
)Cash used in investing activities


(20,527
)


(20,203
)FINANCING ACTIVITIES:Proceeds from borrowings


9,000



110,200Repayment of borrowings


(22,750
)


(109,372
)Proceeds from issuance of common
    stock


2,810



40Financing fees paid






(3,641
)Cash used in financing activities


(10,940
)


(2,773
)Effect of exchange rate on cash


181



(304
)Net (decrease) increase in cash and
    cash equivalents


(609
)


1,325CASH AND CASH EQUIVALENTS,
    beginning of period


12,929



16,481CASH AND CASH EQUIVALENTS, end of
    period

$
12,320


$
17,806SUPPLEMENTAL CASH FLOW
    INFORMATIONCash paid for interest and income
    taxes:Interest

$
5,564


$
5,349Income taxes


2,185



1,094   The accompanying notes are an integral part of the
    consolidated financial statements.
 4




---



##### 



INTERSTATE
    HOTELS & RESORTS, INC.
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)  1.
    BUSINESS
    SUMMARY          2.
    SUMMARY
    OF SIGNIFICANT ACCOUNTING POLICIES  General Form 10-K,
      Related Parties
 5




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Stock-Based Compensation Accounting for Stock Based Compensation Transition and Disclosure. Share Based
    Payment
  Accounting for Income Taxes Accounting for Uncertainty in Income
    Taxes An Interpretation of FASB Statement
    No. 109, Accounting for Income Taxes.
    Control of a Limited Partnership Determining Whether a General
    Partner, or the General Partners as a Group, Controls a Limited
    Partnership or Similar Entity When the Limited Partners Have
    Certain Rights, (EITF 04-05)
  Effects of Prior Year Misstatements Considering the Effects of
    Prior Year Misstatements when Quantifying Misstatements in
    Current Year Financial Statements,
 6




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    3.
    EARNINGS
    PER SHARE    Three months endedSeptember 30, 2006


September 30, 2005Income/





Per Share


Income/





Per Share(Loss)


Shares


Amount


(Loss)


Shares


AmountIncome from continuing operations

$
15,198



31,368


$
0.48


$
3,735



30,539


$
0.12Income from discontinued
    operations, net of tax














1,656







0.06Basic net income

$
15,198



31,368


$
0.48


$
5,391



30,539


$
0.18Assuming exercise of outstanding
    employee stock options less shares repurchased at average market
    price






190











132



Assuming vesting of outstanding
    restricted stock






195











134



(0.01
)Diluted net income

$
15,198



31,753


$
0.48


$
5,391



30,805


$
0.17   Nine months endedSeptember 30, 2006


September 30, 2005Income/





Per Share


Income/





Per Share(Loss)


Shares


Amount


(Loss)


Shares


AmountIncome from continuing operations

$
18,953



30,983


$
0.61


$
3,812



30,503


$
0.13Income from discontinued
    operations, net of tax














1,898







0.06Basic net income

$
18,953



30,983


$
0.61


$
5,710



30,503


$
0.19Assuming exercise of outstanding
    employee stock options less shares repurchased at average market
    price






282











130



Assuming vesting of outstanding
    restricted stock






159



(0.01
)






156



(0.01
)Diluted net income

$
18,953



31,424


$
0.60


$
5,710



30,789


$
0.18  7




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  4.
    INVESTMENTS
    AND ADVANCES TO AFFILIATES    Our Equity

September 30,


December 31,Joint Venture

Number of Hotels


Participation

2006


2005MIP Lessee, L.P.


8


10.0%

$
1,567


$
2,022CNL/IHC Partners, L.P.


3


15.0%


2,609



2,566RQB Resort/Development
    Investors, LLC(1)


1


10.0%


215



2,670True North Tesoro Property
    Partners, L.P.


1


15.9%


1,414



Amitel Holdings, LLC


6


15.0%


3,967



Cameron S-Sixteen Hospitality, LLC


1


10.9%


507



Other


4


5.0%-50.0%


351



428Total


24




$
10,630


$
7,686     (1)
    
    The December 31, 2005 balance
    relates to our joint venture with Interconn Ponte Vedra Company,
    L.P., which held the Sawgrass Marriott Resort & Spa
    until July 2006.         8




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Regulation S-X
  Three months ended


Nine months endedSeptember 30,


September 30,2006


2005


2006


2005Revenue

$
31,148


$
25,635


$
78,631


$
71,206Operating expenses


25,874



22,715



68,680



71,794Net income (loss)


47



(1,156
)


(4,547
)


(14,430
)Our share of the above earnings
    (losses)


5



(116
)


(455
)


(1,443
)   5.
    PROPERTY
    AND EQUIPMENT    September 30,


December 31,2006


2005Land

$
6,985


$
5,610Furniture and fixtures


11,707



7,866Building and improvements


46,080



32,297Leasehold improvements


6,139



5,198Computer equipment


9,855



9,038Software


12,244



12,298Other


1,696



865Total

$
94,706


$
73,172Less accumulated depreciation


(25,160
)


(21,102
)Property and equipment, net

$
69,546


$
52,070     6.
    INTANGIBLE
    ASSETS    September 30,


December 31,2006


2005Management contracts

$
38,738


$
49,902Franchise fees


1,600



1,226Deferred financing fees


2,223



2,339Total cost


42,561



53,467Less accumulated amortization


(9,854
)


(8,759
)Intangible assets, net

$
32,707


$
44,708  9




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          Accounting for Income
    Taxes.
  7.
    ACCRUED
    EXPENSES    September 30,


December 31,2006


2005Salaries and employee related
    benefits

$
28,992


$
34,234Other


46,887



36,113Total

$
75,879


$
70,347    10




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  8.
    LONG-TERM
    DEBT    September 30,


December 31,2006


2005Senior credit facility 
    revolving loan

$
10,526


$
20,526Senior credit facility 
    term loan


41,776



45,526Mortgage debt


19,000



19,000Total long-term debt


71,302



85,052Less current portion


(3,750
)


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

$
67,552


$
81,302   Senior Credit Facility
  30-day 30-day
    Mortgage Debt 30-day
  Interest Rate Caps 30-day 30-day
 11




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    9.
    SEGMENT
    INFORMATION  dollar-for-dollar
        Hotel


Corporate


HotelManagement


Housing


Ownership


Corporate


ConsolidatedThree months ended
    September 30, 2006Revenue

$
33,749


$
40,014


$
7,154


$



$
80,917Depreciation and amortization


929



296



582



115



1,922Operating expense


14,824



36,485



5,210



1,205



57,724Operating income (loss)


17,996



3,233



1,362



(1,320
)


21,271Interest expense, net






(2
)


(461
)


(1,222
)


(1,685
)Equity in earnings of affiliates










4,745







4,745Income (loss) before minority
    interests and income taxes

$
17,996


$
3,231


$
5,646


$
(2,542
)

$
24,331Capital expenditures

$
315


$
250


$
1,662


$
78


$
2,305 12




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Hotel


Corporate


HotelManagement


Housing


Ownership


Corporate


ConsolidatedThree months ended
    September 30, 2005Revenue

$
18,593


$
33,267


$
3,376


$



$
55,236Depreciation and amortization


1,592



272



403



207



2,474Operating expense


13,425



31,322



2,485



1,512



48,744Operating income (loss)


3,576



1,673



488



(1,719
)


4,018Interest expense, net










(298
)


(1,307
)


(1,605
)Equity in earnings of affiliates










(381
)






(381
)Other gains










4,326







4,326Income (loss) before minority
    interests and income taxes

$
3,576


$
1,673


$
4,135


$
(3,026
)

$
6,358Capital expenditures

$
160


$
106


$
162


$
39


$
467   Hotel


Corporate


HotelManagement


Housing


Ownership


Corporate


ConsolidatedNine months ended
    September 30, 2006Revenue

$
80,424


$
101,066


$
18,609


$



$
200,099Depreciation and amortization


2,896



1,193



1,481



338



5,908Operating expense


49,189



96,148



13,670



3,961



162,968Operating income (loss)


28,339



3,725



3,458



(4,299
)


31,223Interest expense, net






(18
)


(1,131
)


(3,646
)


(4,795
)Equity in earnings of affiliates










4,311







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

$
28,339


$
3,707


$
6,638


$
(7,945
)

$
30,739Total assets

$
172,445


$
40,351


$
76,735


$
18,768


$
308,299Capital expenditures

$
1,709


$
1,814


$
17,346


$
427


$
21,296Nine months ended
    September 30, 2005Revenue

$
55,272


$
91,792


$
8,482


$



$
155,546Depreciation and amortization


4,618



851



791



570



6,830Operating expense


38,925



89,555



6,491



7,404



142,375Operating income (loss)


11,729



1,386



1,200



(7,974
)


6,341Interest expense, net










(900
)


(6,455
)


(7,355
)Equity in earnings of affiliates










2,811







2,811Other gains










4,326



385



4,711Income (loss) before minority
    interests and income taxes

$
11,729


$
1,386


$
7,437


$
(14,044
)

$
6,508Total assets

$
183,660


$
35,522


$
44,667


$
20,698


$
284,547Capital expenditures

$
746


$
257


$
32,407


$
186


$
33,596  13




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Three months


Nine monthsended September 30,


ended September 30,2006


2005


2006


2005Canada

$
59


$
127


$
256


$
461United Kingdom

$
11,146


$
7,764


$
26,647


$
22,322France

$
752


$
544


$
1,898


$
1,599Russia

$
375


$
375


$
1,125


$
1,125   10.
    RESTRUCTURING
    AND SEVERANCE EXPENSES    11.
    ASSET
    IMPAIRMENTS AND WRITE-OFFS    Three months


Nine monthsended September 30,


ended September 30,2006


2005


2006


2005Management contract costs

$
2,024


$
1,046


$
10,666


$
2,094Hotel real estate investment fund
    costs














863Total

$
2,024


$
1,046


$
10,666


$
2,957     12.
    OTHER
    TRANSACTIONS     14




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    13.
    COMMITMENTS
    AND CONTINGENCIES  Insurance Matters
    Leases
  September 30,
    2006-2007

$
21,913September 30,
    2007-2008


36,002September 30,
    2008-2009


21,306September 30,
    2009-2010


17,325September 30,
    2010-2011


12,099Thereafter


20,969Total

$
129,614    15




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    September 30,
    2006-2007

$
902September 30,
    2007-2008


1,122September 30,
    2008-2009


1,167September 30,
    2009-2010


1,214September 30, 2010-2011


1,262Thereafter


2,565Total

$
8,232   Commitments Related to Management Agreements and Hotel
    Ownership
  Guarantees 15-year
  Letters of Credit
  Contingent Liabilities Related to
    Partnership Interests
   16




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  14.
    ACQUISITIONS &
    DISPOSITIONS  Acquisitions:
    Accounts receivable and other
    assets

$
44Land


1,375Buildings and improvements


12,087Furniture and fixtures


1,022Total

$
14,528     Cash and restricted cash

$
1,739Accounts receivable and other
    assets


105Land


4,700Buildings and improvements


23,235Furniture and fixtures


2,000Total

$
31,779     Dispositions:
  Accounting for the Impairment or Disposal of Long-Lived
    Assets
  Three months ended


Nine months endedSeptember 30, 2005


September 30, 2005Revenues

$
656


$
2,345Income before Taxes

$
2,805


$
3,217Income from discontinued
    operations, net of taxes

$
1,656


$
1,898  17




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  15.
    STOCK-BASED
    COMPENSATION      Black-Scholes
  Three months ended


Nine months endedSeptember 30,


September 30,2006


2005


2006


2005Net income, as reported

$
15,198


$
5,391


$
18,953


$
5,710Add: Stock-based employee
    compensation expense included in net income, net of tax


107



58



465



163Deduct: Total stock-based employee
    compensation expense determined under the fair value based
    method for all awards, net of tax


(107
)


(64
)


(465
)


(185
)Net income, pro forma

$
15,198


$
5,385


$
18,953


$
5,688Earnings per share:Basic, as reported

$
0.48


$
0.18


$
0.61



0.19Diluted, as reported

$
0.48


$
0.17


$
0.60



0.18Basic, pro forma

$
0.48


$
0.18


$
0.61



0.19Diluted, pro forma

$
0.48


$
0.17


$
0.60



0.18  18




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Nine months endedSeptember 30, 2006Expected volatility


31.1%Risk-free interest rate


5.1%Expected life of options


6.0 yearsExpected dividend yield


0%Forfeiture rate


2%   Expected Volatility
  Risk-Free Interest Rate
  Expected Life of Options
  Expected Dividend Yield
  Forfeiture Rate
        AggregateNumber of


Weighted Average


IntrinsicShares


Exercise Price/Share


ValueOptions outstanding at
    December 31, 2005


1,614,421


$
6.75Granted


62,500


$
6.22Exercised


(683,458
)

$
4.11Forfeited


(473,150
)

$
11.25Options outstanding at
    September 30, 2006


520,313


$
6.67


$
2,863,000Options exercisable at
    September 30, 2006


367,818


$
7.16


$
1,957,000  19




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      WeightedAverageNumber of


Grant-Restricted


Date FairShares


ValueUnvested at December 31, 2005


228,657


$
4.65Granted


273,000


$
5.60Vested


(156,856
)

$
4.72Forfeited


(18,224
)

$
4.37Unvested at September 30, 2006


326,577


$
5.40     16.
    INCOME
    TAXES       20




---



##### 



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    17.
    SUBSEQUENT
    EVENT  30-day 30-day
 21




---



##### 



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




---



##### 



Significant
    Events
  Investments and Acquisitions in Real Estate 30-day 30-day
      Turnover of Management Contracts
   23




---



##### 



Termination Fees


Management Fees


Management FeesNumber of


Number of


Nine Months


Nine Months


Nine MonthsOwner Group

Properties


Rooms


Ended 9/30/2006


Ended 9/30/2006


Ended 9/30/2005MeriStar/Blackstone


21



4,438


$
23.5 million
**

$
2.3 million


$
2.7 millionSunstone


13



2,567


$
0.3 million


$
1.0 million


$
0.8 millionGoldman Sachs


13



3,381



N/A


$
0.8 million


$
1.4 millionOthers


21



4,405


$
1.1 million


$
1.2 million


$
2.4 millionTotal


68



14,791


$
24.9 million


$
5.3 million


$
7.3 million     **
    
    These are the termination fees
    recorded related to all MeriStar/Blackstone properties for the
    nine months ended September 30, 2006, including the 37
    properties terminated prior to 2006. The termination fees
    recorded for the nine months ended September 30, 2006 for
    the 21 properties terminated in 2006 was $12.7 million.    Other Events
   24




---



##### 



Industry
    Overview
    Critical
    Accounting Policies and Estimates
    Form 10-K,
  Results
    of Operations
  Operating
    Statistics
    As of September 30,


Percent Change2006


2005


06 vs. 05Hotel
    ManagementProperties managed


233



294



(20.7
)%Number of rooms


52,617



67,425



(22.0
)%Hotel
    OwnershipNumber of properties


3



1



200.0
%Number of rooms


655



329



99.1
%Corporate
    HousingNumber of markets


17



17



Average number of leased
    apartments for the nine months ended


3,222



3,214



0.2
%     
    We acquired 18 additional management contracts from various
    owners.
    Blackstone/MeriStar transitioned 24 properties out of our system.
    We transitioned 27 properties out of our system from various
    other owners. 25




---



##### 




    Sunstone sold 14 properties which we no longer manage.
    14 of the hotels we managed for Goldman Sachs and Highgate
    Holdings have been sold, or transitioned to Highgate Holdings,
    for management.  1
  Three monthsended September 30,


Percent Change2006


2005


06 vs. 05Hotel
    ManagementRevPar

$
90.07


$
83.95



7.3
%ADR

$
118.92


$
111.22



6.9
%Occupancy


75.7
%


75.5
%


0.3
%Corporate
    HousingADR

$
125.78


$
111.72



12.6
%Occupancy


93.8
%


94.1
%


(0.3)
%   Nine monthsended September 30,


Percent Change2006


2005


06 vs. 05Hotel
    ManagementRevPar

$
88.12


$
80.23



9.8
%ADR

$
118.96


$
110.78



7.4
%Occupancy


74.1
%


72.4
%


2.3
%Corporate
    HousingADR

$
119.92


$
109.24



9.8
%Occupancy


92.7
%


92.5
%


0.2
%   Three
    months ended September 30, 2006 compared to the three
    months ended September 30, 2005
  Revenue
    Three monthsended September 30,


Percent Change2006


2005


06 vs. 05Lodging

$
7,154


$
3,376



>100
%Management fees


14,066



14,374



(2.1
)%Termination fees


16,995



1,413



>100
%Corporate housing


40,014



33,267



20.3
%Other


2,688



2,806



(4.2
)%Other revenue from managed
    properties


202,780



241,710



(16.1
)%Total revenue

$
283,697


$
296,946



(4.5
)%     1 We
    present these operating statistics for the periods included in
    this report on a same-store basis. We define our same-store
    hotels as those which (i) are managed or owned by us for
    the entirety of the reporting periods being compared or have
    been managed by us for part of the reporting periods compared
    and we have been able to obtain operating statistics for the
    period of time in which we did not manage the hotel and
    (ii) have not sustained substantial property damage,
    business interruption or undergone large-scale capital projects
    during the periods being reported. In addition, the operating
    results of hotels for which we no longer manage as of
    September 30, 2006 are not included in same-store hotel
    results for the periods presented herein. Of the 233 properties
    that we managed as of September 30, 2006, 217 hotels have
    been classified as same-store hotels.
 26




---



##### 



Lodging
  Management & termination fees
  Corporate housing
  Other
  Other revenue from managed properties
  Operating
    Expenses by Department
     27




---



##### 



Undistributed
    Operating Expenses
    Three MonthsEnded September 30,


Percent Change2006


2005


06 vs. 05Administrative and general

$
19,594


$
19,317



1.4
%Depreciation and amortization


1,922



2,474



(22.3
)%Asset impairments and write-offs


2,024



1,046



93.5
%Total undistributed operating
    expenses

$
23,540


$
22,837



3.1
%   Administrative and general
  Depreciation and amortization
  Asset impairments and write-offs
  Other
    Income and Expense
    Three MonthsEnded September 30,


Percent Change2006


2005


06 vs. 05Interest expense

$
2,199


$
1,965



11.9
%Equity in earnings (losses) of
    affiliates


4,745



(381
)


>100
%Gain on sale of
    investments & extinguishment of debt






4,326



(100
)%Income tax expense


9,011



2,585



>100
%Minority interest expense


122



38



>100
%Income from discontinued
    operations, net of tax






1,656



(100
)%   Interest expense
  Equity in earnings of affiliates
 28




---



##### 



Income tax expense
  Income from discontinued operations, net of tax
  Nine
    months ended September 30, 2006 compared to nine months
    ended September 30, 2005
  Revenue
    Nine MonthsEnded September 30,


Percent Change2006


2005


06 vs. 05Lodging

$
18,609


$
8,482



>100
%Management fees


46,416



42,570



9.0
%Termination fees


24,891



4,161



>100
%Corporate housing


101,066



91,792



10.1
%Other


9,117



8,541



6.7
%Other revenue from managed
    properties


645,553



665,450



(3.0
)%Total revenue

$
845,652


$
820,996



3.0
%   Lodging
  Management & termination
    fees
  Corporate housing
 29




---



##### 



Other
  Other revenue from managed properties
  Operating
    Expenses by Department
      Undistributed
    Operating Expenses
    Nine MonthsEnded September 30,


Percent Change2006


2005


06 vs. 05Administrative and general

$
58,553


$
56,961



2.8
%Depreciation and amortization


5,908



6,830



(13.5
)%Restructuring and severance






2,043



(100
)%Asset impairments and write-offs


10,666



2,957



>100
%Total undistributed operating
    expenses

$
75,127


$
68,791



9.2
%   Administrative and general
  Depreciation and amortization
 30




---



##### 



Restructuring and severance
  Asset impairments and write-offs
  Other
    Income and Expenses
    Nine MonthsEnded September 30,


Percent Change2006


2005


05 vs. 04Interest expense

$
6,240


$
8,218



(24.1
)%Equity in earnings (losses) of
    affiliates


4,311



2,811



53.4
%Gain on sale of investments and
    extinguishment of debt






4,711



(100
)%Income tax expense


11,615



2,647



>100
%Minority interest expense


171



49



>100
%Income from discontinued
    operations, net of tax






1,898



(100
)%   Interest expense
  Equity in earnings (losses) of affiliates
  Gain on sale of investments and extinguishment of
    debt
  Income tax expense
  Income from discontinued operations, net of
    tax
 31




---



##### 



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


Percent Change2006


2005


05 vs. 04Cash provided by operating
    activities

$
30,677


$
24,605



24.7
%Cash used in investing activities


(20,527
)


(20,203
)


1.6
%Cash used in financing activities


(10,940
)


(2,773
)


>100
%Working capital (deficit)


3,543



(9,493
)


>100
%Cash interest expense


5,564



5,349



4.0
%Debt balance


71,302



86,302



(17.4
)%   Operating Activities
  Investing Activities
  
    In 2006, we purchased the Hilton Garden Inn Baton Rouge Airport
    for $14.5 million while in 2005, we used a net of
    $21.3 million on two transactions related to owned hotels
    ($31.8 million related to purchase of the Hilton Concord
    offset by $10.5 million received from the sale of the
    Residence Inn Pittsburgh).
    We received additional net distributions from our joint venture
    investments in 2005 compared to 2006. In 2005, we received
    distributions of $4.5 million from the sale of the
    San Diego Gaslamp hotel, $1.1 million from the sale of
    the Sheraton Smithtown hotel and $1.0 million from the
    return of our preferred equity interest in MIP Lessee, L.P. In
    2006, we contributed a total of $13.0 million for
    investments in four joint ventures and received a distribution
    of $15.3 million from the sale of the Sawgrass Marriott
    Resort & Spa and $0.5 million from our Doral
    Tesoro joint venture. Distributions which are a return of our
    investment in the joint venture are recorded as investing cash
    flows while distributions which are a return on our investment
    are recorded as operating cash flows.
    We spent an additional $4.4 million on property and
    equipment in 2006, which is primarily related to improvements at
    our owned hotels and general corporate additions. We also spent
    $0.5 million in 2006 for the Twelve Oaks acquisition.  Financing Activities
  Liquidity
 32




---



##### 



Senior Credit Facility
  30-day 30-day
    Mortgage Debt 30-day
  30-day
 33




---



##### 



Item 3.
    Quantitative
    and Qualitative Disclosures About Market Risk  Form 10-K 30-day 30-day
  30-day
  Item 4.
    Controls
    and Procedures  Disclosure
    Controls and Procedures
  Rules 13a-15(e) 15d-15(e)).
    Changes
    in Internal Controls
     34




---



##### 



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

Description of Document3
.1

Amended and Restated Certificate
    of Incorporation of the Company, formerly MeriStar
    Hotels & Resorts, Inc. (incorporated by reference to
    Exhibit 3.1 to the Companys
    Form S-l/A
    filed with the Securities and Exchange Commission on
    July 23, 1998 (Registration
    No. 333-49881)).3
.1.1

Certificate of Amendment of the
    Restated Certificate of Incorporation of the Company dated
    September 30, 2001 (incorporated by reference to
    Exhibit 3.1.1 to the Companys
    Form 10-K
    filed with the Securities and Exchange Commission on
    April 15, 2002).3
.1.2

Certificate of Merger of
    Interstate Hotels Corporation into MeriStar Hotels &
    Resorts, Inc. (incorporated by reference to Exhibit 3.1.2
    to the Companys
    Form 8-A/A
    filed with the Securities and Exchange Commission on
    August 2, 2002).3
.1.3

Certificate of Amendment of the
    Restated Certificate of Incorporation of the Company dated
    July 31, 2002 (incorporated by reference to
    Exhibit 3.1.3 to the Companys
    Form 8-A/A
    filed with the Securities and Exchange Commission on
    August 2, 2002).3
.2

By-laws of the Company, formerly
    MeriStar Hotels & Resorts, Inc. (incorporated by
    reference to Exhibit 3.2 to the Companys
    Form S-l/A
    filed with the Securities and Exchange Commission on
    July 23, 1998 (Registration
    No. 333-49881)).3
.2.1

Amendment to the By-laws of the
    Company (incorporated by reference to Exhibit 3.3 to the
    Companys
    Form 8-A/A
    filed with the Securities and Exchange Commission on
    August 2, 2002).4
.1

Form of Common Stock Certificate
    of the Company (incorporated by reference to Exhibit 4.1 to
    the Companys
    Form 8-
    A/A filed with the Securities and Exchange Commission on
    August 2, 2002).4
.2

Preferred Share Purchase Rights
    Agreement, dated July 23,1998, between the Company,
    formerly MeriStar Hotels & Resorts, Inc., and the
    Rights Agent (incorporated by reference to Exhibit 4.4 to
    the Companys
    Form S-l/A
    filed with the Securities and Exchange Commission on
    July 23, 1998 (Registration
    No. 333-49881)).4
.2.1

Amendment to Rights Agreement,
    dated December 8, 2000, between the Company, formerly
    MeriStar Hotels & Resorts, Inc., and the Rights Agent
    (incorporated by reference to Exhibit 4.1 to the
    Companys
    Form 8-K
    filed with the Securities and Exchange Commission on
    December 12, 2000).4
.2.2

Second Amendment to Rights
    Agreement, dated May 1, 2002, between the Company, formerly
    MeriStar Hotels & Resorts, Inc., and the Rights Agent
    (incorporated by reference to Exhibit 4.1 to the
    Companys
    Form 8-K
    filed with the Securities and Exchange Commission on May 3,
    2002).4
.3

Form of Rights Certificate
    (incorporated by reference to Exhibit 4.3 to the
    Companys
    Form S-l/A
    filed with the Securities and Exchange Commission on
    July 23, 1998 (Registration
    No. 333-49881)).4
.4

Registration Rights Agreement,
    dated September 30, 1999, between the Company (formerly
    MeriStar Hotels & Resorts, Inc.), Oak Hill Capital
    Partners, L.P. and Oak Hill Capital Management Partners, L.P.
    (incorporated by reference to Exhibit 4.7 to the
    Companys
    Form 10-Q
    filed with the Securities and Exchange Commission for the three
    months ended June 30, 1999).10
.6*

Purchase and Sale Agreement
    between Alcor Holdings, LLC, an affiliate of The Blackstone
    Group, and Interstate Arlington, LP, dated September 11,
    2006, for the purchase of the Hilton Arlington.31
.1*

Sarbanes-Oxley Act
    Section 302 Certifications of the Chief Executive Officer.31
.2*

Sarbanes-Oxley Act
    Section 302 Certifications of the Chief Financial Officer.32
*

Sarbanes-Oxley Act
    Section 906 Certifications of Chief Executive Officer and
    Chief Financial Officer.     *
    
    Filed herewith 35




---



##### 



SIGNATURE
    Interstate Hotels Resorts, Inc.
  By:
    /s/  Bruce
    A. Riggins    Chief Financial Officer
   36