##### 









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

Commission File Number 1-14331


Interstate Hotels & Resorts, Inc.


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

www.ihrco.com




(703) 387-3100


(Registrants Telephone Number, Including Area Code)


þ


þ












---



##### 










INTERSTATE HOTELS & RESORTS, INC.


INDEX


|                                  |  |                                                                                                                                   |  |      |    | 
|--------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                  |  |                                                                                                                                   |  | Page |   
|                                  |  |                                                                                                                                   |  |      |   
|PART I. FINANCIAL
    INFORMATION
|                                 
|Item 1:                           |  | Financial Statements (Unaudited)                                                                                                  |  |      | 2  | 
|                                  |  | Consolidated Balance Sheets 
    June 30, 2005 and December 31, 2004                                                             |  |      | 2  | 
|                                  |  | Consolidated Statements of Operations and
    Comprehensive Income (Loss)  Three and six months
    ended June 30, 2005 and 2004 |  |      | 3  | 
|                                  |  | Consolidated Statements of Cash
    Flows  Six months ended June 30, 2005 and
    2004                                           |  |      | 4  | 
|                                  |  | Notes to Consolidated Financial
    Statements                                                                                    |  |      | 5  | 
|                                 
|Item 2:                           |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                                         |  |      | 16 | 
|                                 
|Item 3:                           |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                                    |  |      | 25 | 
|                                 
|Item 4:                           |  | Controls and Procedures                                                                                                           |  |      | 26 | 
|PART II. OTHER INFORMATION       
|                                 
|Item 1:                           |  | Legal Proceedings                                                                                                                 |  |      | 27 | 
|                                 
|Item 4:                           |  | Submission of Matters to a Vote of Security
    Holders                                                                           |  |      | 27 | 
|                                 
|Item 6:                           |  | Exhibits                                                                                                                          |  |      | 27 | 



1



---



##### 






PART I. FINANCIAL INFORMATION





Item 1:     Financial
Statements


INTERSTATE HOTELS & RESORTS, INC.





CONSOLIDATED BALANCE SHEETS


(In thousands, except share amounts)


|                                                            |                                                                                                                                                                                        |                                                                   |        |         |              |  |        |         |         | 
|----------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ------ | ------- | ------------ |  | ------ | ------- | ------- | 
|                                                            |                                                                                                                                                                                        | June 30,                                                          |        |         | December 31, | 
|                                                            |                                                                                                                                                                                        | 2005                                                              |        |         | 2004         | 
|                                                            |                                                                                                                                                                                        |                                                                   |        |         |              | 
|                                                            |                                                                                                                                                                                        | (Unaudited)                                                       |        |         |             
|ASSETS                                                     
|Current assets:                                             |                                                                                                                                                                                        |                                                                   |        |         |              |  |        |        
|                                                            | Cash and cash equivalents                                                                                                                                                              |                                                                   | $      | 12,599  |              |  | $      | 16,481  |        
|                                                            | Restricted cash                                                                                                                                                                        |                                                                   |        | 4,311   |              |  |        | 690     |        
|                                                            | Accounts receivable, net of allowance for doubtful accounts of
    $2,368 at June 30, 2005 and $3,090 at December 31, 2004                                                             |                                                                   |        | 34,016  |              |  |        | 32,765  |        
|                                                            | Due from related parties, net of allowance for doubtful accounts
    of $1,304 at June 30, 2005 and $836 at December 31,
    2004                                                      |                                                                   |        | 6,613   |              |  |        | 12,368  |        
|                                                            | Prepaid expenses and other current assets                                                                                                                                              |                                                                   |        | 11,813  |              |  |        | 9,012   |        
|                                                            |                                                                                                                                                                                        |                                                                   |        |         |              | 
|                                                            |                                                                                                                                                                                        | Total current assets                                              |        |         | 69,352       |  |        |         | 71,316  | 
|Marketable securities                                       |                                                                                                                                                                                        |                                                                   | 1,473  |         |              |  | 1,706  |        
|Property and equipment, net                                 |                                                                                                                                                                                        |                                                                   | 48,307 |         |              |  | 19,981 |        
|Investments in and advances to affiliates                   |                                                                                                                                                                                        |                                                                   | 8,256  |         |              |  | 12,155 |        
|Notes receivable                                            |                                                                                                                                                                                        |                                                                   | 5,721  |         |              |  | 5,180  |        
|Deferred income taxes                                       |                                                                                                                                                                                        |                                                                   | 19,016 |         |              |  | 18,312 |        
|Goodwill                                                    |                                                                                                                                                                                        |                                                                   | 96,809 |         |              |  | 96,802 |        
|Intangible assets, net                                      |                                                                                                                                                                                        |                                                                   | 49,059 |         |              |  | 51,162 |        
|                                                            |                                                                                                                                                                                        |                                                                   |        |         |              | 
|                                                            |                                                                                                                                                                                        | Total assets                                                      |        | $       | 297,993      |  |        | $       | 276,614 | 
|                                                            |                                                                                                                                                                                        |                                                                   |        |         |              | 
|                                                           
|LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS
    EQUITY
|Current liabilities:                                        |                                                                                                                                                                                        |                                                                   |        |         |              |  |        |        
|                                                            | Accounts payable                                                                                                                                                                       |                                                                   | $      | 6,060   |              |  | $      | 5,651   |        
|                                                            | Accrued expenses                                                                                                                                                                       |                                                                   |        | 70,800  |              |  |        | 61,003  |        
|                                                            | Current portion of long-term debt                                                                                                                                                      |                                                                   |        | 5,750   |              |  |        | 5,750   |        
|                                                            |                                                                                                                                                                                        |                                                                   |        |         |              | 
|                                                            |                                                                                                                                                                                        | Total current liabilities                                         |        |         | 82,610       |  |        |         | 72,404  | 
|Deferred compensation                                       |                                                                                                                                                                                        |                                                                   | 1,473  |         |              |  | 1,706  |        
|Long-term debt                                              |                                                                                                                                                                                        |                                                                   | 94,473 |         |              |  | 83,447 |        
|                                                            |                                                                                                                                                                                        |                                                                   |        |         |              | 
|                                                            |                                                                                                                                                                                        | Total liabilities                                                 |        |         | 178,556      |  |        |         | 157,557 | 
|Minority interest                                           |                                                                                                                                                                                        |                                                                   | 938    |         |              |  | 930    |        
|Commitments and contingencies                               |                                                                                                                                                                                        |                                                                   |        |         |              |  |        |        
|Stockholders equity:                                       |                                                                                                                                                                                        |                                                                   |        |         |              |  |        |        
|                                                            | Preferred stock, $.01 par value; 5,000,000 shares
    authorized, no shares issued                                                                                                     |                                                                   |        |        |              |  |        |        |        
|                                                            | Common stock, $.01 par value; 250,000,000 shares
    authorized; 30,730,536, and 30,629,519 shares issued and
    outstanding at June 30, 2005 and December 31, 2004,
    respectively |                                                                   |        | 308     |              |  |        | 307     |        
|                                                            | Treasury stock                                                                                                                                                                         |                                                                   |        | (69     | )            |  |        | (69     | )      
|                                                            | Paid-in capital                                                                                                                                                                        |                                                                   |        | 189,408 |              |  |        | 188,865 |        
|                                                            | Accumulated other comprehensive income                                                                                                                                                 |                                                                   |        | 401     |              |  |        | 892     |        
|                                                            | Accumulated deficit                                                                                                                                                                    |                                                                   |        | (71,549 | )            |  |        | (71,868 | )      
|                                                            |                                                                                                                                                                                        |                                                                   |        |         |              | 
|                                                            |                                                                                                                                                                                        | Total stockholders equity                                        |        |         | 118,499      |  |        |         | 118,127 | 
|                                                            |                                                                                                                                                                                        |                                                                   |        |         |              | 
|                                                            |                                                                                                                                                                                        | Total liabilities, minority interest and stockholders
    equity |        | $       | 297,993      |  |        | $       | 276,614 | 
|                                                            |                                                                                                                                                                                        |                                                                   |        |         |              | 

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


2



---



##### 



INTERSTATE HOTELS & RESORTS, INC.





CONSOLIDATED STATEMENTS OF OPERATIONS


AND COMPREHENSIVE INCOME (LOSS)


(Unaudited, in thousands, except per share amounts)


|                                                               |                                          |                          |        |         |                  |   |        |         |         |   |         |         |         |   |        |         |         | 
|-------------------------------------------------------------- | ---------------------------------------- | ------------------------ | ------ | ------- | ---------------- | - | ------ | ------- | ------- | - | ------- | ------- | ------- | - | ------ | ------- | ------- | 
|                                                               |                                          | Three months ended       |        |         | Six months ended |  
|                                                               |                                          | June 30,                 |        |         | June 30,         |  
|                                                               |                                          |                          |        |         |                  |  
|                                                               |                                          | 2005                     |        |         | 2004             |   |        | 2005    |         |   | 2004    |        
|                                                               |                                          |                          |        |         |                  |   |        |         |         |   |         |        
|Revenue:                                                       |                                          |                          |        |         |                  |   |        |         |         |   |         |         |         |   |        |        
|                                                               | Lodging revenues                         |                          | $      | 4,234   |                  |   | $      | 848     |         |   | $       | 6,796   |         |   | $      | 1,571   |        
|                                                               | Management fees                          |                          |        | 9,213   |                  |   |        | 6,248   |         |   |         | 16,593  |         |   |        | 11,961  |        
|                                                               | Management fees-related parties          |                          |        | 7,140   |                  |   |        | 8,720   |         |   |         | 13,759  |         |   |        | 16,685  |        
|                                                               | Corporate housing                        |                          |        | 31,125  |                  |   |        | 27,555  |         |   |         | 58,525  |         |   |        | 51,805  |        
|                                                               | Other revenue                            |                          |        | 3,503   |                  |   |        | 3,102   |         |   |         | 6,458   |         |   |        | 6,354   |        
|                                                               |                                          |                          |        |         |                  |   |        |         |         |   |         |        
|                                                               |                                          |                          | 55,215 |         |                  |   | 46,473 |         |         |   | 102,131 |         |         |   | 88,376 |        
|                                                               | Other revenue from managed properties    |                          |        | 229,407 |                  |   |        | 194,334 |         |   |         | 433,704 |         |   |        | 373,874 |        
|                                                               |                                          |                          |        |         |                  |   |        |         |         |   |         |        
|                                                               |                                          | Total revenue            |        |         | 284,622          |   |        |         | 240,807 |   |         |         | 535,835 |   |        |         | 462,250 | 
|Operating expenses by department:                              |                                          |                          |        |         |                  |   |        |         |         |   |         |         |         |   |        |        
|                                                               | Lodging expenses                         |                          |        | 2,818   |                  |   |        | 508     |         |   |         | 4,768   |         |   |        | 972     |        
|                                                               | Corporate housing                        |                          |        | 24,620  |                  |   |        | 21,903  |         |   |         | 48,029  |         |   |        | 42,285  |        
|Undistributed operating expenses:                              |                                          |                          |        |         |                  |   |        |         |         |   |         |         |         |   |        |        
|                                                               | Administrative and general               |                          |        | 19,896  |                  |   |        | 17,684  |         |   |         | 37,927  |         |   |        | 35,202  |        
|                                                               | Depreciation and amortization            |                          |        | 2,271   |                  |   |        | 2,338   |         |   |         | 4,511   |         |   |        | 4,733   |        
|                                                               | Restructuring and severance expenses     |                          |        | 96      |                  |   |        | 3,312   |         |   |         | 2,119   |         |   |        | 3,439   |        
|                                                               | Asset impairments and write-offs         |                          |        | 849     |                  |   |        | 1,698   |         |   |         | 1,911   |         |   |        | 6,191   |        
|                                                               |                                          |                          |        |         |                  |   |        |         |         |   |         |        
|                                                               |                                          |                          | 50,550 |         |                  |   | 47,443 |         |         |   | 99,265  |         |         |   | 92,822 |        
|                                                               | Other expenses from managed properties   |                          |        | 229,407 |                  |   |        | 194,334 |         |   |         | 433,704 |         |   |        | 373,874 |        
|                                                               |                                          |                          |        |         |                  |   |        |         |         |   |         |        
|                                                               |                                          | Total operating expenses |        |         | 279,957          |   |        |         | 241,777 |   |         |         | 532,969 |   |        |         | 466,696 | 
|                                                               |                                          |                          |        |         |                  |   |        |         |         |   |         |        
|OPERATING INCOME (LOSS)                                        |                                          |                          | 4,665  |         |                  |   | (970   | )       |         |   | 2,866   |         |         |   | (4,446 | )      
|Interest income                                                |                                          |                          | 232    |         |                  |   | 411    |         |         |   | 370     |         |         |   | 690    |        
|Interest expense                                               |                                          |                          | (2,321 | )       |                  |   | (1,979 | )       |         |   | (6,253  | )       |         |   | (3,980 | )      
|Equity in income (loss) of affiliates                          |                                          |                          | 350    |         |                  |   | (165   | )       |         |   | 3,192   |         |         |   | (941   | )      
|Gain on sale of investment                                     |                                          |                          |       |         |                  |   |       |         |         |   | 385     |         |         |   |       |        
|                                                               |                                          |                          |        |         |                  |   |        |         |         |   |         |        
|INCOME (LOSS) BEFORE MINORITY INTEREST AND INCOME TAXES        |                                          |                          | 2,926  |         |                  |   | (2,703 | )       |         |   | 560     |         |         |   | (8,677 | )      
|Income tax (expense) benefit                                   |                                          |                          | (1,154 | )       |                  |   | 1,385  |         |         |   | (230    | )       |         |   | 3,939  |        
|Minority interest (expense) benefit                            |                                          |                          | (29    | )       |                  |   | 29     |         |         |   | (11     | )       |         |   | 75     |        
|                                                               |                                          |                          |        |         |                  |   |        |         |         |   |         |        
|INCOME (LOSS) FROM CONTINUING OPERATIONS                       |                                          |                          | 1,743  |         |                  |   | (1,289 | )       |         |   | 319     |         |         |   | (4,663 | )      
|Loss from discontinued operations, net of tax                  |                                          |                          |       |         |                  |   | (1,362 | )       |         |   |        |         |         |   | (1,732 | )      
|                                                               |                                          |                          |        |         |                  |   |        |         |         |   |         |        
|NET INCOME (LOSS)                                              |                                          | $                        | 1,743  |         |                  | $ | (2,651 | )       |         | $ | 319     |         |         | $ | (6,395 | )      
|                                                               |                                          |                          |        |         |                  |   |        |         |         |   |         |        
|Other comprehensive loss, net of tax:                          |                                          |                          |        |         |                  |   |        |         |         |   |         |         |         |   |        |        
|                                                               | Foreign currency translation loss        |                          |        | 64      |                  |   |        | (21     | )       |   |         | (33     | )       |   |        | (105    | )      
|                                                               | Unrealized gain on investments and other |                          |        | 25      |                  |   |        | 56      |         |   |         | (458    | )       |   |        | 56      |        
|                                                               |                                          |                          |        |         |                  |   |        |         |         |   |         |        
|                                                               | COMPREHENSIVE INCOME (LOSS)              |                          | $      | 1,832   |                  |   | $      | (2,616  | )       |   | $       | (172    | )       |   | $      | (6,444  | )      
|                                                               |                                          |                          |        |         |                  |   |        |         |         |   |         |        
|Basic earnings (loss) per share from continuing operations     |                                          | $                        | 0.06   |         |                  | $ | (0.04  | )       |         | $ | 0.01    |         |         | $ | (0.15  | )      
|Basic earnings (loss) per share from discontinued operations   |                                          |                          |       |         |                  |   | (0.05  | )       |         |   |        |         |         |   | (0.06  | )      
|                                                               |                                          |                          |        |         |                  |   |        |         |         |   |         |        
|Basic earnings (loss) per share                                |                                          | $                        | 0.06   |         |                  | $ | (0.09  | )       |         | $ | 0.01    |         |         | $ | (0.21  | )      
|                                                               |                                          |                          |        |         |                  |   |        |         |         |   |         |        
|Diluted earnings (loss) per share from continuing operations   |                                          | $                        | 0.06   |         |                  | $ | (0.04  | )       |         | $ | 0.01    |         |         | $ | (0.15  | )      
|Diluted earnings (loss) per share from discontinued operations |                                          |                          |       |         |                  |   | (0.05  | )       |         |   |        |         |         |   | (0.06  | )      
|                                                               |                                          |                          |        |         |                  |   |        |         |         |   |         |        
|Diluted earnings (loss) per share                              |                                          | $                        | 0.06   |         |                  | $ | (0.09  | )       |         | $ | 0.01    |         |         | $ | (0.21  | )      
|                                                               |                                          |                          |        |         |                  |   |        |         |         |   |         |        

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)


|                                                 |                                                                                                        |                                                       |                                                                                        |                                                 |        |        |         |         |        |         |         |  
|------------------------------------------------ | ------------------------------------------------------------------------------------------------------ | ----------------------------------------------------- | -------------------------------------------------------------------------------------- | ----------------------------------------------- | ------ | ------ | ------- | ------- | ------ | ------- | ------- | -
|                                                 |                                                                                                        | Six months ended                                      |                                                                                       
|                                                 |                                                                                                        | June 30,                                              |                                                                                       
|                                                 |                                                                                                        |                                                       |                                                                                       
|                                                 |                                                                                                        | 2005                                                  |                                                                                        |                                                 | 2004   |       
|                                                 |                                                                                                        |                                                       |                                                                                        |                                                 |        |       
|OPERATING ACTIVITIES:                            |                                                                                                        |                                                       |                                                                                        |                                                 |        |        |         |        
|                                                 | Net income (loss)                                                                                      |                                                       | $                                                                                      | 319                                             |        |        | $       | (6,395  | )     
|                                                 | Adjustments to reconcile net income (loss) to net cash provided
    by (used in) operating activities: |                                                       |                                                                                        |                                                 |        |        |         |         |       
|                                                 |                                                                                                        | Depreciation and amortization                         |                                                                                        |                                                 | 4,511  |        |         |         | 4,733  |        
|                                                 |                                                                                                        | Amortization and write-off of deferred financing fees |                                                                                        |                                                 | 2,212  |        |         |         |       |        
|                                                 |                                                                                                        | Equity in (income) loss of affiliates                 |                                                                                        |                                                 | (3,192 | )      |         |         | 941    |        
|                                                 |                                                                                                        | Asset impairments and write-offs                      |                                                                                        |                                                 | 1,911  |        |         |         | 5,721  |        
|                                                 |                                                                                                        | Minority interest                                     |                                                                                        |                                                 | 11     |        |         |         | (75    | )      
|                                                 |                                                                                                        | Deferred income taxes                                 |                                                                                        |                                                 | (704   | )      |         |         | (3,545 | )      
|                                                 |                                                                                                        | Gain on sale of investments                           |                                                                                        |                                                 | (385   | )      |         |         |       |        
|                                                 |                                                                                                        | Grant of stock for severance                          |                                                                                        |                                                 |       |        |         |         | 3,181  |        
|                                                 |                                                                                                        | Discontinued Operations:                              |                                                                                        |                                                 |        |        |         |         |        |        
|                                                 |                                                                                                        |                                                       | Depreciation                                                                           |                                                 |        |       |         |         |        | 48      |        
|                                                 |                                                                                                        |                                                       | Loss on disposal of discontinued operations                                            |                                                 |        |       |         |         |        | 376     |        
|                                                 |                                                                                                        | Changes in assets and liabilities:                    |                                                                                        |                                                 |        |        |         |         |        |        
|                                                 |                                                                                                        |                                                       | Accounts receivable, net                                                               |                                                 |        | (430   | )       |         |        | (11,009 | )      
|                                                 |                                                                                                        |                                                       | Prepaid expenses, other current assets, and officers and
    employees note receivable |                                                 |        | (2,501 | )       |         |        | (1,669  | )      
|                                                 |                                                                                                        |                                                       | Accounts payable and accrued expenses                                                  |                                                 |        | 10,763 |         |         |        | (2,700  | )      
|                                                 |                                                                                                        |                                                       | Due from related parties                                                               |                                                 |        | 5,755  |         |         |        | (972    | )      
|                                                 |                                                                                                        |                                                       | Other changes in asset and liability accounts                                          |                                                 |        | 322    |         |         |        | 299     |        
|                                                 |                                                                                                        |                                                       |                                                                                        |                                                 |        |       
|                                                 |                                                                                                        |                                                       |                                                                                        | Cash provided by (used in) operations           |        |        | 18,592  |         |        |         | (11,066 | )
|                                                 |                                                                                                        |                                                       |                                                                                        |                                                 |        |       
|INVESTING ACTIVITIES:                            |                                                                                                        |                                                       |                                                                                        |                                                 |        |        |         |        
|                                                 | Proceeds from the sale of investments                                                                  |                                                       |                                                                                        | 483                                             |        |        |         |        |       
|                                                 | Change in restricted cash                                                                              |                                                       |                                                                                        | (3,621                                          | )      |        |         | 1,422   |       
|                                                 | Purchases of property and equipment                                                                    |                                                       |                                                                                        | (31,285                                         | )      |        |         | (1,073  | )     
|                                                 | Purchases of intangible assets                                                                         |                                                       |                                                                                        | (543                                            | )      |        |         | (223    | )     
|                                                 | (Contributions) distributions to/from affiliates, net                                                  |                                                       |                                                                                        | 4,678                                           |        |        |         | (451    | )     
|                                                 | Change in notes receivable                                                                             |                                                       |                                                                                        | 374                                             |        |        |         | 2,861   |       
|                                                 |                                                                                                        |                                                       |                                                                                        |                                                 |        |       
|                                                 |                                                                                                        |                                                       |                                                                                        | Cash provided by (used in) investing activities |        |        | (29,914 | )       |        |         | 2,536   |  
|                                                 |                                                                                                        |                                                       |                                                                                        |                                                 |        |       
|FINANCING ACTIVITIES:                            |                                                                                                        |                                                       |                                                                                        |                                                 |        |        |         |        
|                                                 | Proceeds from borrowings                                                                               |                                                       |                                                                                        | 106,200                                         |        |        |         | 34,000  |       
|                                                 | Repayment of borrowings                                                                                |                                                       |                                                                                        | (95,174                                         | )      |        |         | (30,312 | )     
|                                                 | Net proceeds from issuance of common stock                                                             |                                                       |                                                                                        | 22                                              |        |        |         | 717     |       
|                                                 | Cash paid for redemption of preferred operating partnership units                                      |                                                       |                                                                                        |                                                |        |        |         | (1,310  | )     
|                                                 | Financing fees paid                                                                                    |                                                       |                                                                                        | (3,585                                          | )      |        |         |        |       
|                                                 |                                                                                                        |                                                       |                                                                                        |                                                 |        |       
|                                                 |                                                                                                        |                                                       |                                                                                        | Cash provided by financing activities           |        |        | 7,463   |         |        |         | 3,095   |  
|                                                 |                                                                                                        |                                                       |                                                                                        |                                                 |        |       
|Effect of exchange rate on cash                  |                                                                                                        |                                                       | (23                                                                                    | )                                               |        |        | 506     |        
|Net decrease in cash and cash equivalents        |                                                                                                        |                                                       | (3,882                                                                                 | )                                               |        |        | (4,929  | )      
|Cash and cash equivalents at beginning of period |                                                                                                        |                                                       | 16,481                                                                                 |                                                 |        |        | 7,450   |        
|                                                 |                                                                                                        |                                                       |                                                                                        |                                                 |        |       
|Cash and cash equivalents at end of period       |                                                                                                        | $                                                     | 12,599                                                                                 |                                                 |        | $      | 2,521   |        
|                                                 |                                                                                                        |                                                       |                                                                                        |                                                 |        |       
|SUPPLEMENTAL CASH FLOW INFORMATION               |                                                                                                        |                                                       |                                                                                        |                                                 |        |        |         |        
|Cash paid for interest and income taxes:         |                                                                                                        |                                                       |                                                                                        |                                                 |        |        |         |        
|                                                 |                                                                                                        |                                                       |                                                                                        | Interest                                        |        | $      | 3,296   |         |        | $       | 3,513   |  
|                                                 |                                                                                                        |                                                       |                                                                                        | Income taxes                                    |        |        | 476     |         |        |         | 766     |  

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


4



---



##### 



INTERSTATE HOTELS & RESORTS, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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







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

General








Stock-Based Compensation




5



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                                                                                    |                      |                    |       |      |                  |   |        |       |   |   |      |      |  |   |        |       |  
|----------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ------------------ | ----- | ---- | ---------------- | - | ------ | ----- | - | - | ---- | ---- |  | - | ------ | ----- | -
|                                                                                                                                    |                      | Three months ended |       |      | Six months ended |  
|                                                                                                                                    |                      | June 30,           |       |      | June 30,         |  
|                                                                                                                                    |                      |                    |       |      |                  |  
|                                                                                                                                    |                      | 2005               |       |      | 2004             |   |        | 2005  |   |   | 2004 |     
|                                                                                                                                    |                      |                    |       |      |                  |   |        |       |   |   |      |     
|Net income (loss), as reported                                                                                                      |                      | $                  | 1,743 |      |                  | $ | (2,651 | )     |   | $ | 319  |      |  | $ | (6,395 | )    
|Add: Stock-based employee compensation expense included in
    reported net income (loss), net of tax                               |                      |                    | 55    |      |                  |   | 69     |       |   |   | 105  |      |  |   | 132    |      
|Deduct: Total stock-based employee compensation expense
    determined under fair value based method for all awards, net of
    tax |                      |                    | (62   | )    |                  |   | (93    | )     |   |   | (121 | )    |  |   | (205   | )    
|                                                                                                                                    |                      |                    |       |      |                  |   |        |       |   |   |      |     
|Net income (loss), pro forma                                                                                                        |                      | $                  | 1,736 |      |                  | $ | (2,675 | )     |   | $ | 303  |      |  | $ | (6,468 | )    
|                                                                                                                                    |                      |                    |       |      |                  |   |        |       |   |   |      |     
|Earnings per share:                                                                                                                 |                      |                    |       |      |                  |   |        |       |   |   |      |      |  |   |        |      
|                                                                                                                                    | Basic, as reported   |                    | $     | 0.06 |                  |   | $      | (0.09 | ) |   | $    | 0.01 |  |   | $      | (0.21 | )
|                                                                                                                                    |                      |                    |       |      |                  |   |        |       |   |   |      |     
|                                                                                                                                    | Basic, pro forma     |                    | $     | 0.06 |                  |   | $      | (0.09 | ) |   | $    | 0.01 |  |   | $      | (0.21 | )
|                                                                                                                                    |                      |                    |       |      |                  |   |        |       |   |   |      |     
|                                                                                                                                    | Diluted, as reported |                    | $     | 0.06 |                  |   | $      | (0.09 | ) |   | $    | 0.01 |  |   | $      | (0.21 | )
|                                                                                                                                    |                      |                    |       |      |                  |   |        |       |   |   |      |     
|                                                                                                                                    | Diluted, pro forma   |                    | $     | 0.06 |                  |   | $      | (0.09 | ) |   | $    | 0.01 |  |   | $      | (0.21 | )
|                                                                                                                                    |                      |                    |       |      |                  |   |        |       |   |   |      |     



Recent Accounting Pronouncements




Accounting Changes and Error Corrections  a
replacement of APB Opinion No. 20 and FASB Statement
No. 3


6



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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



|                                                                         |  |                    |        |  |                  |   |        |      |  |   |        |  |  |   |        |  
|------------------------------------------------------------------------ |  | ------------------ | ------ |  | ---------------- | - | ------ | ---- |  | - | ------ |  |  | - | ------ | -
|                                                                         |  | Three months ended |        |  | Six months ended |  
|                                                                         |  | June 30,           |        |  | June 30,         |  
|                                                                         |  |                    |        |  |                  |  
|                                                                         |  | 2005               |        |  | 2004             |   |        | 2005 |  |   | 2004   | 
|                                                                         |  |                    |        |  |                  |   |        |      |  |   |        | 
|Income (loss) from continuing operations                                 |  | $                  | 1,743  |  |                  | $ | (1,289 | )    |  | $ | 319    |  |  | $ | (4,663 | )
|Loss from discontinued operations, net of tax                            |  |                    |       |  |                  |   | (1,362 | )    |  |   |       |  |  |   | (1,732 | )
|                                                                         |  |                    |        |  |                  |   |        |      |  |   |        | 
|Net income (loss)                                                        |  | $                  | 1,743  |  |                  | $ | (2,651 | )    |  | $ | 319    |  |  | $ | (6,395 | )
|                                                                         |  |                    |        |  |                  |   |        |      |  |   |        | 
|Weighted average number of basic shares outstanding (in
    thousands)   |  |                    | 30,716 |  |                  |   | 30,587 |      |  |   | 30,686 |  |  |   | 30,328 |  
|Basic earnings (loss) per share from continuing operations               |  | $                  | 0.06   |  |                  | $ | (0.04  | )    |  | $ | 0.01   |  |  | $ | (0.15  | )
|Basic earnings (loss) per share from discontinued operations             |  |                    |       |  |                  |   | (0.05  | )    |  |   |       |  |  |   | (0.06  | )
|                                                                         |  |                    |        |  |                  |   |        |      |  |   |        | 
|Basic earnings (loss) per share                                          |  | $                  | 0.06   |  |                  | $ | (0.09  | )    |  | $ | 0.01   |  |  | $ | (0.21  | )
|                                                                         |  |                    |        |  |                  |   |        |      |  |   |        | 
|Weighted average number of diluted shares outstanding (in
    thousands) |  |                    | 30,993 |  |                  |   | 30,587 |      |  |   | 30,980 |  |  |   | 30,328 |  
|Diluted earnings (loss) per share from continuing operations             |  | $                  | 0.06   |  |                  | $ | (0.04  | )    |  | $ | 0.01   |  |  | $ | (0.15  | )
|Diluted earnings (loss) per share from discontinued operations           |  |                    |       |  |                  |   | (0.05  | )    |  |   |       |  |  |   | (0.06  | )
|                                                                         |  |                    |        |  |                  |   |        |      |  |   |        | 
|Diluted earnings (loss) per share                                        |  | $                  | 0.06   |  |                  | $ | (0.09  | )    |  | $ | 0.01   |  |  | $ | (0.21  | )
|                                                                         |  |                    |        |  |                  |   |        |      |  |   |        | 



7



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



|                                      |       |          |       |       |              |   |       |        | 
|------------------------------------- | ----- | -------- | ----- | ----- | ------------ | - | ----- | ------ | 
|                                      |       | June 30, |       |       | December 31, |  
|                                      |       | 2005     |       |       | 2004         |  
|                                      |       |          |       |       |              |  
|MIP Lessee, L.P.                      |       | $        | 2,543 |       |              | $ | 4,856 |       
|S.D. Bridgeworks, LLC                 |       |          |      |       |              |   | 253   |       
|CNL/ IHC Partners, L.P.               |       |          | 2,526 |       |              |   | 2,477 |       
|Interconn Ponte Vedra Company, L.L.C. |       |          | 2,663 |       |              |   | 2,334 |       
|Other                                 |       |          | 524   |       |              |   | 2,235 |       
|                                      |       |          |       |       |              |  
|                                      | Total |          | $     | 8,256 |              |   | $     | 12,155 | 
|                                      |       |          |       |       |              |  













|                                     |  |                   |        |  |                   |   |        |  
|------------------------------------ |  | ----------------- | ------ |  | ----------------- | - | ------ | -
|                                     |  | Six months ended, |        |  | Six months ended, |  
|                                     |  | June 30, 2005     |        |  | June 30, 2004     |  
|                                     |  |                   |        |  |                   |  
|Revenue                              |  | $                 | 74,875 |  |                   | $ | 86,076 |  
|Operating expenses                   |  | $                 | 51,675 |  |                   | $ | 59,467 |  
|Net income (loss)                    |  | $                 | 23,488 |  |                   | $ | (4,374 | )
|Our share of the net income (losses) |  | $                 | 3,172  |  |                   | $ | (815   | )

8



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



|                                |                               |          |        |        |              |   |        |        |  
|------------------------------- | ----------------------------- | -------- | ------ | ------ | ------------ | - | ------ | ------ | -
|                                |                               | June 30, |        |        | December 31, |  
|                                |                               | 2005     |        |        | 2004         |  
|                                |                               |          |        |        |              |  
|Management contracts            |                               | $        | 51,675 |        |              | $ | 53,186 |       
|Franchise fees                  |                               |          | 1,284  |        |              |   | 1,945  |       
|Deferred financing fees         |                               |          | 2,010  |        |              |   | 2,676  |       
|Management contracts in process |                               |          | 2,415  |        |              |   | 2,018  |       
|                                |                               |          |        |        |              |  
|                                | Total cost                    |          |        | 57,384 |              |   |        | 59,825 |  
|                                | Less accumulated amortization |          |        | (8,325 | )            |   |        | (8,663 | )
|                                |                               |          |        |        |              |  
|Intangible assets, net          |                               | $        | 49,059 |        |              | $ | 51,162 |       
|                                |                               |          |        |        |              |  





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





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



|                                      |                                        |          |        |         |              |   |        |        | 
|------------------------------------- | -------------------------------------- | -------- | ------ | ------- | ------------ | - | ------ | ------ | 
|                                      |                                        | June 30, |        |         | December 31, |  
|                                      |                                        | 2005     |        |         | 2004         |  
|                                      |                                        |          |        |         |              |  
|Senior credit facility-revolving loan |                                        | $        | 25,000 |         |              | $ | 27,000 |       
|Senior credit facility-term loan      |                                        |          | 50,500 |         |              |   | 16,474 |       
|Non-recourse promissory note          |                                        |          | 3,723  |         |              |   | 3,723  |       
|Sunstone promissory note              |                                        |          | 2,000  |         |              |   | 2,000  |       
|Subordinated term loan                |                                        |          |       |         |              |   | 40,000 |       
|Mortgage debt                         |                                        |          | 19,000 |         |              |   |       |       
|                                      |                                        |          |        |         |              |  
|                                      | Total long-term debt                   |          |        | 100,223 |              |   |        | 89,197 | 
|Less current portion                  |                                        |          | (5,750 | )       |              |   | (5,750 | )     
|                                      |                                        |          |        |         |              |  
|                                      | Long-term debt, net of current portion |          | $      | 94,473  |              |   | $      | 83,447 | 
|                                      |                                        |          |        |         |              |  

Senior Credit Facility-Revolving Loan and Term
Loan


9



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












Non-Recourse Promissory Note




Sunstone Promissory Note


10



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Subordinated Term Loan


Mortgage Debt


Interest Rate Caps




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



|                                 |  |            |         |   |           |   |        |       |  |           |            |  |  |   |         |  
|-------------------------------- |  | ---------- | ------- | - | --------- | - | ------ | ----- |  | --------- | ---------- |  |  | - | ------- | -
|                                 |  | Hotel      |         |   | Corporate |   |        |       |  | Financial |           
|                                 |  | Management |         |   | Housing   |   |        | Other |  |           | Statements | 
|                                 |  |            |         |   |           |   |        |       |  |           |            | 
|Three months ended June 30, 2005 |  |            |         |   |           |   |        |       |  |           |            |  |  |   |         |  
|Revenue                          |  | $          | 253,497 |   |           | $ | 31,125 |       |  | $         |           |  |  | $ | 284,622 |  
|Net income                       |  | $          | 1,147   |   |           | $ | 596    |       |  | $         |           |  |  | $ | 1,743   |  
|Three months ended June 30, 2004 |  |            |         |   |           |   |        |       |  |           |            |  |  |   |         |  
|Revenue                          |  | $          | 213,252 |   |           | $ | 27,555 |       |  | $         |           |  |  | $ | 240,807 |  
|Net loss                         |  | $          | (2,405  | ) |           | $ | (246   | )     |  | $         |           |  |  | $ | (2,651  | )
|Six months ended June 30, 2005   |  |            |         |   |           |   |        |       |  |           |            |  |  |   |         |  
|Revenue                          |  | $          | 477,310 |   |           | $ | 58,525 |       |  | $         |           |  |  | $ | 535,835 |  
|Net income (loss)                |  | $          | 646     |   |           | $ | (327   | )     |  | $         |           |  |  | $ | 319     |  
|Total assets                     |  | $          | 258,354 |   |           | $ | 18,978 |       |  | $         | 20,661     |  |  | $ | 297,993 |  
|Six months ended June 30, 2004   |  |            |         |   |           |   |        |       |  |           |            |  |  |   |         |  
|Revenue                          |  | $          | 410,445 |   |           | $ | 51,805 |       |  | $         |           |  |  | $ | 462,250 |  
|Net loss                         |  | $          | (5,322  | ) |           | $ | (1,073 | )     |  | $         |           |  |  | $ | (6,395  | )
|Total assets                     |  | $          | 231,825 |   |           | $ | 17,919 |       |  | $         | 24,055     |  |  | $ | 273,799 |  

11



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|               |  |                    |       |  |                  |   |       |      |  |   |        |  |  |   |        | 
|-------------- |  | ------------------ | ----- |  | ---------------- | - | ----- | ---- |  | - | ------ |  |  | - | ------ | 
|               |  | Three months ended |       |  | Six months ended |  
|               |  | June 30,           |       |  | June 30,         |  
|               |  |                    |       |  |                  |  
|               |  | 2005               |       |  | 2004             |   |       | 2005 |  |   | 2004   | 
|               |  |                    |       |  |                  |   |       |      |  |   |        | 
|United Kingdom |  | $                  | 7,561 |  |                  | $ | 5,335 |      |  | $ | 14,578 |  |  | $ | 11,099 | 
|France         |  |                    | 565   |  |                  |   | 421   |      |  |   | 1,055  |  |  |   | 794    | 
|Russia         |  |                    | 765   |  |                  |   | 670   |      |  |   | 1,769  |  |  |   | 1,488  | 
|Canada         |  |                    | 1,012 |  |                  |   | 1,013 |      |  |   | 2,171  |  |  |   | 1,332  | 
|Portugal       |  |                    |      |  |                  |   | 88    |      |  |   | 27     |  |  |   | 240    | 









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





|                                                        |       |                |    |    |                |   |       |       |  |   |       |       |  |   |       |       | 
|------------------------------------------------------- | ----- | -------------- | -- | -- | -------------- | - | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                                                        |       | Three months   |    |    | Six months     |  
|                                                        |       | ended June 30, |    |    | ended June 30, |  
|                                                        |       |                |    |    |                |  
|                                                        |       | 2005           |    |    | 2004           |   |       | 2005  |  |   | 2004  |      
|                                                        |       |                |    |    |                |   |       |       |  |   |       |      
|Severance to former CEOs and other corporate personnel |       | $              | 46 |    |                | $ | 3,312 |       |  | $ | 1,952 |       |  | $ | 3,312 |      
|Severance to former corporate housing personnel         |       |                | 50 |    |                |   |      |       |  |   | 167   |       |  |   | 127   |      
|                                                        |       |                |    |    |                |   |       |       |  |   |       |      
|                                                        | Total |                | $  | 96 |                |   | $     | 3,312 |  |   | $     | 2,119 |  |   | $     | 3,439 | 
|                                                        |       |                |    |    |                |   |       |       |  |   |       |      

Severance to Former CEOs and other Corporate
Personnel


Severance to Former Corporate Housing
Personnel


12



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



|                                         |       |                |     |     |                |   |       |       |  |   |       |       |  |   |       |       | 
|---------------------------------------- | ----- | -------------- | --- | --- | -------------- | - | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                                         |       | Three Months   |     |     | Six Months     |  
|                                         |       | Ended June 30, |     |     | Ended June 30, |  
|                                         |       |                |     |     |                |  
|                                         |       | 2005           |     |     | 2004           |   |       | 2005  |  |   | 2004  |      
|                                         |       |                |     |     |                |   |       |       |  |   |       |      
|Management contract costs                |       | $              | 809 |     |                | $ | 1,092 |       |  | $ | 1,048 |       |  | $ | 4,388 |      
|Investment in and advances to affiliates |       |                |    |     |                |   |      |       |  |   |      |       |  |   | 1,101 |      
|Hotel real estate investment fund costs  |       |                | 40  |     |                |   |      |       |  |   | 863   |       |  |   |      |      
|Cost of uncompleted merger               |       |                |    |     |                |   | 606   |       |  |   |      |       |  |   | 606   |      
|Other                                    |       |                |    |     |                |   |      |       |  |   |      |       |  |   | 96    |      
|                                         |       |                |     |     |                |   |       |       |  |   |       |      
|                                         | Total |                | $   | 849 |                |   | $     | 1,698 |  |   | $     | 1,911 |  |   | $     | 6,191 | 
|                                         |       |                |     |     |                |   |       |       |  |   |       |      

Management Contract Write-offs




Investment in and Advances to Affiliates


Hotel Real Estate Investment Fund costs


Cost of Uncompleted Merger




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





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

Insurance Matters


13



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Leases 


|           |       |   |        |         | 
|---------- | ----- | - | ------ | ------- | 
|2005       |       | $ | 35,281 |        
|2006       |       |   | 24,824 |        
|2007       |       |   | 11,639 |        
|2008       |       |   | 9,330  |        
|2009       |       |   | 8,463  |        
|Thereafter |       |   | 24,957 |        
|           |       |   |       
|           | Total |   | $      | 114,494 | 
|           |       |   |       

Management Agreement Commitments


Termination Fees


Contingent Liabilities Related to
Partnership Interests






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



14



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



|                                   |  |                  |       | 
|---------------------------------- |  | ---------------- | ----- | 
|                                   |  | Six months ended |      
|                                   |  | June 30, 2005    |      
|                                   |  |                  |      
|Pro Forma Total Lodging Revenues   |  | $                | 7,944 | 
|Pro Forma Net Income               |  | $                | 209   | 
|Pro Forma Diluted Income per share |  | $                | 0.01  | 



Disposition Subsequent to Balance Sheet Date Accounting for the Impairment or Disposal
of Long-Lived Assets


|                                         |                   |   |       |       | 
|---------------------------------------- | ----------------- | - | ----- | ----- | 
|Property and equipment, net              |                   | $ | 7,642 |      
|Other assets                             |                   |   | 333   |      
|                                         |                   |   |      
|                                         | Total assets      |   | $     | 7,975 | 
|                                         |                   |   |      
|Accounts payable and accrued liabilities |                   |   | 184   |      
|                                         |                   |   |      
|                                         | Total liabilities |   | $     | 184   | 
|                                         |                   |   |      



|                    |  |                    |     |  |                  |   |       |                    |  |   |                  |  |  |   |       | 
|------------------- |  | ------------------ | --- |  | ---------------- | - | ----- | ------------------ |  | - | ---------------- |  |  | - | ----- | 
|                    |  | Three months ended |     |  | Six months ended |   |       | Three months ended |  |   | Six months ended | 
|                    |  | June 30, 2005      |     |  | June 30, 2005    |   |       | June 30, 2004      |  |   | June 30, 2004    | 
|                    |  |                    |     |  |                  |   |       |                    |  |   |                  | 
|Revenues            |  | $                  | 884 |  |                  | $ | 1,688 |                    |  | $ | 848              |  |  | $ | 1,571 | 
|Income before taxes |  |                    | 216 |  |                  |   | 395   |                    |  |   | 171              |  |  |   | 267   | 

Dispositions


|                  |  |                    |      |   |                  |   |        |  
|----------------- |  | ------------------ | ---- | - | ---------------- | - | ------ | -
|                  |  | Three months ended |      |   | Six months ended |  
|                  |  | June 30, 2004      |      |   | June 30, 2004    |  
|                  |  |                    |      |   |                  |  
|Revenues          |  | $                  | 894  |   |                  | $ | 2,233  |  
|Loss before taxes |  |                    | (966 | ) |                  |   | (1,232 | )

15



---



##### 








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

Forward-Looking Statements






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



16



---



##### 





Quarterly Summary


General






Recent events


Disposition Subsequent to Balance Sheet 


Disposition of Hotel by MeriStar Investment Partners,
L.P. 


Departure of Directors or Principal Officers 




Hurricanes in Florida


Critical Accounting Policies and Estimates




17



---



##### 







Results of Operations




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

Overview




| |   |                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In March 2005, we began operating 22 upscale hotels owned by a
    partnership consisting of a private investment fund managed by
    affiliates of Goldman Sachs and Highgate Holdings. During the
    second quarter of 2005, we transitioned two of these properties
    out of our system.                                                                                            
|
| |  | In connection with our purchase of Sunstone, we acquired
    management contracts for 54 properties, during the fourth
    quarter of 2004. During the six months ended June 30, 2005,
    we transitioned four of these properties out of our system and
    added one property.                                                                                                         
|
| |  | From June 30, 2004 to June 30, 2005, MeriStar sold
    seven properties, six of which we no longer manage. In addition,
    we transitioned 38 other properties out of our system, including
    the eight properties that were owned by our joint venture with
    FelCor, which have been foreclosed upon by the lender, and added
    six properties to our system from various owners.



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



|                                    |  |      |        |   |      |   |        |        |  |  |      |  
|----------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ------ |  |  | ---- | -
|                                    |  | 2005 |        |   | 2004 |   |        | Change | 
|                                    |  |      |        |   |      |   |        |        | 
|Revenue per available room (RevPAR) |  | $    | 82.02  |   |      | $ | 73.84  |        |  |  | 11.1 | %
|Average daily rate (ADR)            |  | $    | 110.34 |   |      | $ | 101.61 |        |  |  | 8.6  | %
|Occupancy                           |  |      | 74.3   | % |      |   | 72.7   | %      |  |  | 2.3  | %



|                         |  |      |        |   |      |   |       |        |  |  |      |   
|------------------------ |  | ---- | ------ | - | ---- | - | ----- | ------ |  |  | ---- | --
|                         |  | 2005 |        |   | 2004 |   |       | Change | 
|                         |  |      |        |   |      |   |       |        | 
|Number of markets        |  |      | 17     |   |      |   | 18    |        |  |  | (5.6 | )%
|Average number of units  |  |      | 3,266  |   |      |   | 3,405 |        |  |  | (4.1 | )%
|Average daily rate (ADR) |  | $    | 108.05 |   |      | $ | 99.45 |        |  |  | 8.6  | % 
|Occupancy                |  |      | 92.9   | % |      |   | 90.9  | %      |  |  | 2.2  | % 





| |   |                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue from lodging increased $3,386, to $4,234 for the three
    months ended June 30, 2005, compared to $848 for the three
    months ended June 30, 2004. The increase in lodging revenue
    is associated with the acquisition of the Hilton Concord hotel
    in February 2005. For the three months ended June 30, 2005
    revenue associated with Hilton Concord was $3,350.

18



---



##### 





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue from management fees increased $1,385, or 9%, to $16,353
    for the three months ended June 30, 2005, from $14,968 for
    the three months ended June 30, 2004. Our RevPAR, ADR and
    occupancy have improved year over year due to the significant
    improvements in market conditions, and the net increase in total
    number of hotels under management.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Revenue from our corporate housing operations has increased
    $3,570, or 13.0%, to $31,125 for the three months ended
    June 30, 2005, from $27,555 for the three months ended
    June 30, 2004. This increase in revenue is partially
    attributable to an increase in ADR by approximately 8.6%, to
    $108.05 from $99.45, and an increase in occupancy to 92.9% from
    90.9%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Reimbursable expenses, which we record as other revenue and
    other expenses from managed properties, increased by $35,073, or
    18%, to $229,407 for the three months ended June 30, 2005,
    from $194,334 for the three months ended June 30, 2004. The
    primary reason for this increase is the increase in the number
    of managed hotels, directly resulting in an increase in the
    number of hotel employees and in related reimbursable salaries
    and other expenses. In addition, other revenue from managed
    properties has been revised and reduced for the three months
    ended June 30, 2004 by $12,497. Our statements of
    operations include an equal and offsetting amount 
    Other expenses from managed properties 
    which has also been revised by the same amount. These amounts
    represent the payroll and related costs, and certain other costs
    of the hotels operations that are contractually reimbursed
    to us by the hotel owners. The revisions have no impact on
    operating income (loss), net income (loss), or earnings (loss)
    per share, or our balance sheet or cash flows.



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





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lodging expenses increased $2,310, or 455%, to $2,818 for the
    three months ended June 30, 2005, compared to $508 for the
    three months ended June 30, 2004. The increase in lodging
    expenses is primarily due to the acquisition of the Hilton
    Concord hotel in February 2005. For the three months ended
    June 30, 2005 expenses associated with the Hilton Concord
    were $2,286.                                                                                           
|
| |  | Corporate housing expenses increased $2,717, or 12.4%, to
    $24,620, for the three months ended June 30, 2005, compared
    to $21,903 for the three months ended June 30, 2004. The
    increase in corporate housing expenses is primarily due to an
    increase in apartment rental expenses. The mix of units has
    increased in our metropolitan regions of Chicago and London,
    which have higher per unit costs compared to the markets we
    exited in 2004, Detroit and Toronto.



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





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Administrative and general expenses increased $2,212, or 12.6%,
    to $19,896 for the three months ended June 30, 2005, from
    $17,684 for the three months ended June 30, 2004. The
    majority of this increase is due to a $1,642 increase in
    administrative and general costs from the Sunstone operations
    that we acquired in October 2004. In addition, our insurance
    subsidiary incurred an additional $410 of general and
    administrative costs associated with reserves and losses. In
    February 2005, we acquired the Hilton Concord and incurred $195
    in associated costs.
|
| |  | Restructuring and severance charges were $96 and $3,312 for the
    three months ended June 30, 2005, and 2004, respectively.
    In the second quarter of 2004 we recorded $3,312 related to
    severance costs for our former CEO.                                                                                                                                                                                                                                                                                                                                                                          

19



---



##### 





| |   |                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Intangible asset write-offs and other impairments decreased
    $849, to $849 for the three months ended June 30, 2005,
    from $1,698 for the same period last year. These expenses are
    detailed as follows:

|                                        |       |                |     |     |      |   |       |       | 
|--------------------------------------- | ----- | -------------- | --- | --- | ---- | - | ----- | ----- | 
|                                        |       | Three Months   |    
|                                        |       | Ended June 30, |    
|                                        |       |                |    
|                                        |       | 2005           |     |     | 2004 |  
|                                        |       |                |     |     |      |  
|Management contract costs               |       | $              | 809 |     |      | $ | 1,092 |      
|Hotel real estate investment fund costs |       |                | 40  |     |      |   |      |      
|Cost of uncompleted merger              |       |                |    |     |      |   | 606   |      
|                                        |       |                |     |     |      |  
|                                        | Total |                | $   | 849 |      |   | $     | 1,698 | 
|                                        |       |                |     |     |      |  





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Reimbursable expenses, which we record as other revenue and
    other expenses from managed properties increased by $35,073, or
    18%, to $229,407 for the three months ended June 30, 2005,
    from $194,334 for the three months ended June 30, 2004. The
    primary reason for this is the increase in the number of managed
    hotels directly resulting in an increased number of hotel
    employees and related reimbursable salaries and other expenses.
    In addition, other expenses from managed properties has been
    revised and reduced for the three months ending June 30,
    2004 by $12,497. Our statements of operations include an equal
    and offsetting amount  Other revenue from
    managed properties  which has also been revised
    by the same amount. These amounts represent the payroll and
    related costs, and certain other costs of the hotels
    operations that are contractually reimbursed to us by the hotel
    owners. The revisions have no impact on operating income (loss),
    net income (loss), or earnings (loss) per share, or our balance
    sheet or cash flows.



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





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Net interest expense increased $521, to $2,089, for the three
    months ended June 30, 2005, from $1,568 for the same period
    in 2004. The increase is due to higher interest expense directly
    associated with a higher average debt balance during the second
    quarter of 2005 compared to the second quarter of 2004 resulting
    from the debt incurred with the purchase of Sunstone and the
    Hilton Concord, as well as the refinancing of our line of
    credit. In addition, interest income decreased due to the
    repayment in June 2004 of the note receivable owed to us from
    S.D. Bridgeworks, L.L.C.
|
| |  | Our equity in earnings (losses) of affiliates increased $515, to
    $350, for the three months ended June 30, 2005, compared to
    $(165) for the same period in 2004. The majority of this
    increase is attributable to the gain on sale of the Hilton
    San Diego Gaslamp Hotel retail space sold by our joint
    venture S.D. Bridgeworks, LLC in June 2005. These earnings
    were offset by losses from our proportionate share of the net
    losses incurred by our other non-controlling equity investments.                                                                                                          
|
| |  | Income tax (expense) benefit was $(1,154) for the three
    months ended June 30, 2005, compared to $1,385 for the
    three months ended June 30, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



| |                                                                                
| | -------------------------------------------------------------------------------
| | Six months ended June 30, 2005 compared with six
    months ended June 30, 2004



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



|                                    |  |      |        |   |      |   |        |        |  |  |      |  
|----------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ------ |  |  | ---- | -
|                                    |  | 2005 |        |   | 2004 |   |        | Change | 
|                                    |  |      |        |   |      |   |        |        | 
|Revenue per available room (RevPAR) |  | $    | 76.51  |   |      | $ | 69.52  |        |  |  | 10.1 | %
|Average daily rate (ADR)            |  | $    | 108.50 |   |      | $ | 100.32 |        |  |  | 8.2  | %
|Occupancy                           |  |      | 70.5   | % |      |   | 69.3   | %      |  |  | 1.8  | %

20



---



##### 





|                         |  |      |        |   |      |   |       |        |  |  |      |   
|------------------------ |  | ---- | ------ | - | ---- | - | ----- | ------ |  |  | ---- | --
|                         |  | 2005 |        |   | 2004 |   |       | Change | 
|                         |  |      |        |   |      |   |       |        | 
|Number of markets        |  |      | 17     |   |      |   | 18    |        |  |  | (5.6 | )%
|Average number of unites |  |      | 3,151  |   |      |   | 3,370 |        |  |  | (6.5 | )%
|Average daily rate (ADR) |  | $    | 107.94 |   |      | $ | 94.66 |        |  |  | 14.0 | % 
|Occupancy                |  |      | 91.6   | % |      |   | 89.1  | %      |  |  | 2.8  | % 





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue from lodging increased $5,225, to $6,796, for the six
    months ended June 30, 2005, from $1,571 for the six months
    ended June 30, 2004. This increase in lodging revenue is
    associated with the acquisition of the Hilton Concord hotel in
    February 2005. For the six months ended June 30, 2005
    revenue from Hilton Concord was $5,108.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Revenue from management fees increased $1,706, or 6%, to $30,352
    for the six months ended June 30, 2005, from $28,646 for
    the six months ended June 30, 2004. Our RevPAR, ADR and
    occupancy have improved year over year, due to the significant
    improvement in market conditions and the net increase in total
    number of hotels under management.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Revenue from our corporate housing operations increased $6,720,
    or 13.0%, to $58,525 for the six months ended June 30,
    2005, from $51,805 for the six months ended June 30, 2004.
    This increase in revenue is partially attributable to an
    increase in ADR of approximately 14.0%, to $107.94 from $94.66,
    and an increase in occupancy to 91.6% from 89.1%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Reimbursable expenses, which we record as other revenue and
    other expenses from managed properties increased by $59,830, or
    16%, to $433,704 for the six months ended June 30, 2005,
    from $373,874 for the six months ended June 30, 2004. The
    primary reason for this increase is the increase in the number
    of managed hotels resulting in an increase in the number of
    hotel employees and in related reimbursable salaries and other
    expenses. In addition, other revenue from managed properties has
    been revised and reduced for the six months ending June 30,
    2004 by $27,107. Our statements of operations include an equal
    and offsetting amount  Other expenses from
    managed properties  which has also been revised
    by the same amount. These amounts represent the payroll and
    related costs, and certain other costs of the hotels
    operations that are contractually reimbursed to us by the hotel
    owners. The revisions have no impact on operating income (loss),
    net income (loss), or earnings (loss) per share, or our balance
    sheet or cash flows.



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





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lodging expenses increased $3,796 or 390.5%, to $4,768 for the
    six months ended June 30, 2005, compared to $972 for the
    six months ended June 30, 2004. The increase in lodging
    expenses is primarily due to the acquisition of the Hilton
    Concord hotel in February 2005. For the six months ended
    June 30, 2005 expenses associated with the Hilton Concord
    were $3,565.                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Corporate housing expenses increased $5,744, or 13.6%, to
    $48,029, for the six months ended June 30, 2005, compared
    to $42,285 for the six months ended June 30, 2004. The
    increase in corporate housing expenses is primarily due to an
    increase in apartment rental expenses. The mix of rental units
    has increased in our metropolitan regions of Chicago and London,
    which have higher per unit costs compared to the markets we
    exited in 2004, Detroit and Toronto. Finally, fees from
    BridgeStreets network partner business increased by over
    $2,000 for the six months ended June 30, 2005 as compared
    to the six months ended June 2004. The unit growth in this area
    also carries a higher cost per unit versus the standard
    BridgeStreet leased apartment.

21



---



##### 





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





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Administrative and general expenses increased $2,725, or 7.7%,
    to $37,927 for the six months ended June 30, 2005, compared
    to $35,202 for the six months ended June 30, 2004. The
    majority of this increase is due to $3,688 in administrative and
    general costs from the Sunstone operations that we acquired in
    October 2004. In addition, we purchased the Hilton Concord in
    February 2005, which contributed $279 in costs. These increases
    were offset by a decrease in expenses associated with losses
    paid by our insurance subsidiary. In addition, during the first
    quarter of 2004, we incurred $593 of expenses following the
    closing of our Flagstone subsidiary in the fourth quarter of
    2003, with no similar expenses in 2005.                                                             
|
| |  | Depreciation and amortization expense decreased $222, or 4.7%,
    to $4,511 for the six months ended June 30, 2005, from
    $4,733 for the six months ended June 30, 2004. The majority
    of this decrease is due to approximately a $500 decrease in
    depreciation expense for assets that have become fully
    depreciated. In addition, amortization expense has decreased by
    approximately $210 due to various management contracts that were
    lost when hotels transitioned out of our system or were fully
    amortized during 2004 and 2005. These decreases were offset by
    additional amortization expense for contracts acquired in 2005
    and late 2004, and the acquisition of Hilton Concord, that
    resulted in approximately $542 of additional depreciation
    expense for the six months ended June 30, 2005.
|
| |  | Restructuring and severance charges were $2,119 and $3,439 for
    the six months ended June 30, 2005, and 2004, respectively.
    The decrease is primarily due to the decrease in severance costs
    as approximately $1,800 of severance was paid for our former
    CEO, Steve Jorns in 2005, while in 2004 we incurred
    approximately $3,312 in severance costs for our former CEO, Paul
    Whetsell.                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Intangible asset write-offs and other impairments decreased
    $4,280, to $1,911, for the six months ended June 30, 2005,
    from $6,191 for the same period last year. These expenses are
    detailed as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|                                        |       |                |       |       |      |   |       |       | 
|--------------------------------------- | ----- | -------------- | ----- | ----- | ---- | - | ----- | ----- | 
|                                        |       | Six Months     |      
|                                        |       | Ended June 30, |      
|                                        |       |                |      
|                                        |       | 2005           |       |       | 2004 |  
|                                        |       |                |       |       |      |  
|Management contract costs               |       | $              | 1,048 |       |      | $ | 4,388 |      
|Investment impairments                  |       |                |      |       |      |   | 1,101 |      
|Hotel real estate investment fund costs |       |                | 863   |       |      |   |      |      
|Cost of uncompleted merger              |       |                |      |       |      |   | 606   |      
|Other                                   |       |                |      |       |      |   | 96    |      
|                                        |       |                |       |       |      |  
|                                        | Total |                | $     | 1,911 |      |   | $     | 6,191 | 
|                                        |       |                |       |       |      |  





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Reimbursable expenses, which we record as other revenue and
    other expenses increased by $59,830, or 16%, to $433,704 for the
    six months ended June 30, 2005, from $373,874 for the six
    months ended June 30, 2004. The primary reason for this is
    the increase in the number of managed hotels directly resulting
    in an increased number of hotel employees and related
    reimbursable salaries and other expenses. In addition, other
    expenses from managed properties has been revised and reduced
    for the six months ending June 30, 2004 by $27,107. Our
    statements of operations include an equal and offsetting
    amount  Other revenue from managed
    properties  which has also been revised by the
    same amount. These amounts represent the payroll and related
    costs, and certain other costs of the hotels operations
    that are contractually reimbursed to us by the hotel owners. The
    revisions have no impact on operating income (loss), net income
    (loss), or earnings (loss) per share, or our balance sheet or
    cash flows.

22



---



##### 





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





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our equity in earnings (losses) of affiliates increased $4,133,
    or 439.2%, to $3,192 for the six months ended June 30,
    2005, compared to $(941) for the same period in 2004. The
    majority of this increase is attributable to the recognition of
    our share of the gain on sale of the Hilton San Diego
    Gaslamp Hotel sold by our joint venture S.D. Bridgeworks, L.L.C.
    which totaled approximately $4,200. This gain and the earnings
    from certain of our other investees were offset by losses from
    our proportionate share of the net losses incurred by certain of
    our other non-controlling equity investments.
|
| |  | Net interest expense increased $2,593, or 78.8%, to $5,883 for
    the six months ended June 30, 2005, from $3,290 for the
    same period in 2004. Included in interest expense is $1,847 of
    unamortized deferred financing fees written-off in connection
    with the repayment of our old subordinated term loan. In
    addition, we have incurred additional interest expense directly
    associated with the increase in our debt balance.                                                                                                                                                                                                  
|
| |  | Income tax (expense) benefit was $(230) for the six months
    ended June 30, 2005, compared to $3,939 for the six months
    ended June 30, 2004. Our effective tax rate is
    approximately 41% in the 2005 period and was approximately 40%
    in the 2004 period.                                                                                                                                                                                                                                                                                                                                                                                 

Liquidity and Capital Resources


Working Capital


Operating Activities


Investing Activities


Financing Activities


DEBT


Senior Credit Facility-Revolving Loan and Term
Loan


23



---



##### 













Mortgage Debt


Non-Recourse Promissory Note




Interest Rate Caps


24



---



##### 





Sunstone Promissory Note


Liquidity







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

Interest Rate Risk












25



---



##### 







Exchange Rate Risk









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

Disclosure Controls and Procedures






Changes in Internal Controls








26



---



##### 






PART II. OTHER INFORMATION







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








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









|                 |  |     |            |  |          |  |         | 
|---------------- |  | --- | ---------- |  | -------- |  | ------- | 
|                 |  | For |            |  | Withheld | 
|                 |  |     |            |  |          | 
|Paul W. Whestell |  |     | 22,331,765 |  |          |  | 963,590 | 
|Thomas F. Hewitt |  |     | 22,626,472 |  |          |  | 668,883 | 





|        |  |  |            | 
|------- |  |  | ---------- | 
|For     |  |  | 23,263,506 | 
|Against |  |  | 16,716     | 
|Abstain |  |  | 15,132     | 






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

Exhibits


|            |      |                         |  |                                                                                                                                                                                                                                                                                                       
|----------- | ---- | ----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |      | Description of Document
|            |      |                        
|            | 3.1  |                         |  | Amended and Restated Certificate of Incorporation of the
    Company, formerly MeriStar Hotels & Resorts, Inc.
    (incorporated by reference to Exhibit 3.1 to the
    Companys Form S-1/A filed with the Securities and
    Exchange Commission on July 23, 1998 (Registration
    No. 333-49881)).
|           
|            | 3.1. | 1                       |  | Certificate of Amendment of the Restated Certificate of
    Incorporation of the Company dated 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).                                                                                                       

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##### 



|            |       |                         |  |                                                                                                                                                                                                                                                                                                                                                                                             
|----------- | ----- | ----------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |       | Description of Document
|            |       |                        
|           
|            | 4.1   |                         |  | Form of Common Stock Certificate of the Company (incorporated by
    reference to Exhibit 4.1 to the Companys Form 8-A/A
    filed with the Securities and Exchange Commission on
    August 2, 2002).                                                                                                                                                                                     
|           
|            | 4.2   |                         |  | Preferred Share Purchase Rights Agreement, dated July 23,
    1998, between the Company, formerly MeriStar Hotels &
    Resorts, Inc., and the Rights Agent (incorporated by reference
    to Exhibit 4.4 to the Companys Form S-1/A filed
    with the Securities and Exchange Commission on July 23,
    1998(Registration No. 333-49881)).                                              
|           
|            | 4.2.  | 1                       |  | Amendment to Rights Agreement, dated December 8, 2000,
    between the Company, formerly MeriStar Hotels &
    Resorts, Inc., and the Rights Agent (incorporated by reference
    to Exhibit 4.1 to the Companys Form 8-K filed
    with the Securities and Exchange Commission on December 12,
    2000).                                                                                 
|           
|            | 4.2.  | 2                       |  | Second Amendment to Rights Agreement, dated May 1, 2002,
    between the Company, formerly MeriStar Hotels &
    Resorts, Inc., and the Rights Agent (incorporated by reference
    to Exhibit 4.1 to the Companys Form 8-K filed
    with the Securities and Exchange Commission on May 3, 2002).                                                                                         
|           
|            | 4.3   |                         |  | Form of Rights Certificate (incorporated by reference to
    Exhibit 4.3 to the Companys Form S-1/A filed
    with the Securities and Exchange Commission on July 23,
    1998 (Registration No. 333-49881)).                                                                                                                                                                              
|           
|            | 4.4   |                         |  | Registration Rights Agreement, dated June 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).
|           
|            | 10.2* |                         |  | Second Amendment to Amended and Restated Senior Secured Credit
    Agreement, dated as of May 2, 2005, among Interstate
    Operating Company, L.P., Societe Generale, SG Americas
    Securities, LLC, and various other lenders.                                                                                                                                                          
|           
|            | 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.                                                                                                                                                                                                                                                                                   

28



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##### 



SIGNATURE






| |                                             
| | --------------------------------------------
| | Interstate
    Hotels & Resorts, Inc.       
|
| | /s/ J. William Richardson                   
| |                                             
| | J. William Richardson                       
| | Chief Financial Officer                     
| | (Duly authorized officer)                   
| | (Principal financial and accounting officer)



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