##### 









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-Q

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | For the quarterly period ended June 30,
    2003                                            
|          
|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.

(Exact name of registrant as specified in its
charter)


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

www.ihrco.com

This Form 10-Q can be accessed at no charge
through above website.


Registrants Telephone Number, Including
Area Code:

(703) 387-3100


Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
for which the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ          No o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Securities Exchange Act of
1934).     Yes þ          No o

The number of shares of Common Stock, par value
$0.01 per share, outstanding at August 7, 2003 was
20,622,004.



---






---



##### 



INTERSTATE HOTELS & RESORTS,
INC.



INDEX


|                              |  |                                                                                                                                                          |  |      |    | 
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                              |  |                                                                                                                                                          |  | Page
|                              |  |                                                                                                                                                          |  |     
|PART I. FINANCIAL INFORMATION
|                             
|Item 1:                       |  | Financial Statements (unaudited)                                                                                                                         |  |      |    | 
|                              |  | Condensed Consolidated Balance Sheets 
    June 30, 2003 and December 31, 2002                                                                          |  |      | 2  | 
|                              |  | Condensed Consolidated Statements of Operations
    and Other Comprehensive Income (Loss)  Three months
    and six months ended June 30, 2003 and 2002 |  |      | 3  | 
|                              |  | Condensed Consolidated Statements of Cash
    Flows  Six months ended June 30, 2003 and 2002                                                            |  |      | 4  | 
|                              |  | Notes to Condensed 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                                                                                           |  |      | 31 | 
|                             
|Item 4:                       |  | Controls and Procedures                                                                                                                                  |  |      | 32 | 
|                             
|PART II. OTHER INFORMATION   
|                             
|Item 1:                       |  | Legal Proceedings                                                                                                                                        |  |      | 33 | 
|                             
|Item 2:                       |  | Changes in Securities and Use of Proceeds                                                                                                                |  |      | 33 | 
|                             
|Item 3:                       |  | Defaults Upon Senior Securities                                                                                                                          |  |      | 33 | 
|                             
|Item 4:                       |  | Submission of Matters to a Vote of Security
    Holders                                                                                                  |  |      | 33 | 
|                             
|Item 5:                       |  | Other Information                                                                                                                                        |  |      | 33 | 
|                             
|Item 6:                       |  | Exhibits and Reports on Form 8-K                                                                                                                         |  |      | 34 | 

1



---



##### 



PART I. FINANCIAL INFORMATION

Item
1:     Financial
Statements

INTERSTATE HOTELS & RESORTS,
INC.

CONDENSED CONSOLIDATED BALANCE
SHEETS


(in thousands, except per share
amounts)


|                                                             |                                                                                                                                                                      |                                                                    |         |              |         |  |         |         |         | 
|------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | ------- | ------------ | ------- |  | ------- | ------- | ------- | 
|                                                             |                                                                                                                                                                      | June 30,                                                           |         | December 31,
|                                                             |                                                                                                                                                                      | 2003                                                               |         | 2002        
|                                                             |                                                                                                                                                                      |                                                                    |         |             
|                                                             |                                                                                                                                                                      | (unaudited)                                                        |         |             
|ASSETS                                                      
|Current assets:                                              |                                                                                                                                                                      |                                                                    |         |              |         |  |         |        
|                                                             | Cash and cash equivalents                                                                                                                                            |                                                                    | $       | 22,911       |         |  | $       | 7,054   |        
|                                                             | Restricted cash                                                                                                                                                      |                                                                    |         | 2,982        |         |  |         | 1,366   |        
|                                                             | Accounts receivable, net of allowance for
    doubtful accounts of $4,801 at June 30, 2003 and $4,125 at
    December 31, 2002                                       |                                                                    |         | 34,045       |         |  |         | 13,532  |        
|                                                             | Insurance premiums receivable                                                                                                                                        |                                                                    |         | 1,244        |         |  |         | 5,638   |        
|                                                             | Due from MeriStar Hospitality                                                                                                                                        |                                                                    |         | 5,925        |         |  |         | 10,500  |        
|                                                             | Prepaid expenses and other current assets                                                                                                                            |                                                                    |         | 10,398       |         |  |         | 11,783  |        
|                                                             |                                                                                                                                                                      |                                                                    |         |              |         |  |         |        
|                                                             |                                                                                                                                                                      | Total current assets                                               |         |              | 77,505  |  |         |         | 49,873  | 
|Marketable securities                                        |                                                                                                                                                                      |                                                                    | 1,057   |              |         |  | 2,413   |        
|Property and equipment, net                                  |                                                                                                                                                                      |                                                                    | 23,490  |              |         |  | 24,894  |        
|Officers and employees notes receivable                      |                                                                                                                                                                      |                                                                    | 363     |              |         |  | 373     |        
|Investments in and advances to affiliates                    |                                                                                                                                                                      |                                                                    | 25,274  |              |         |  | 25,199  |        
|Deferred income taxes                                        |                                                                                                                                                                      |                                                                    | 18,289  |              |         |  | 20,174  |        
|Goodwill                                                     |                                                                                                                                                                      |                                                                    | 90,332  |              |         |  | 91,960  |        
|Intangible assets, net                                       |                                                                                                                                                                      |                                                                    | 61,154  |              |         |  | 65,795  |        
|                                                             |                                                                                                                                                                      |                                                                    |         |              |         |  |         |        
|                                                             |                                                                                                                                                                      | Total assets                                                       |         | $            | 297,464 |  |         | $       | 280,681 | 
|                                                             |                                                                                                                                                                      |                                                                    |         |              |         |  |         |        
|LIABILITIES, MINORITY INTERESTS AND
    STOCKHOLDERS EQUITY
|Current liabilities:                                         |                                                                                                                                                                      |                                                                    |         |              |         |  |         |        
|                                                             | Accounts payable and accrued expenses                                                                                                                                |                                                                    | $       | 77,276       |         |  | $       | 60,363  |        
|                                                             | Income taxes payable                                                                                                                                                 |                                                                    |         | 1,528        |         |  |         | 1,000   |        
|                                                             | Current portion of long-term debt                                                                                                                                    |                                                                    |         | 1,625        |         |  |         | 1,625   |        
|                                                             |                                                                                                                                                                      |                                                                    |         |              |         |  |         |        
|                                                             |                                                                                                                                                                      | Total current liabilities                                          |         |              | 80,429  |  |         |         | 62,988  | 
|Deferred compensation                                        |                                                                                                                                                                      |                                                                    | 1,057   |              |         |  | 2,413   |        
|Long-term debt                                               |                                                                                                                                                                      |                                                                    | 130,583 |              |         |  | 132,614 |        
|                                                             |                                                                                                                                                                      |                                                                    |         |              |         |  |         |        
|                                                             |                                                                                                                                                                      | Total liabilities                                                  |         |              | 212,069 |  |         |         | 198,015 | 
|Minority interests                                           |                                                                                                                                                                      |                                                                    | 4,592   |              |         |  | 6,242   |        
|Commitments and contingencies                                |                                                                                                                                                                      |                                                                    |         |              |         |  |         |        
|Stockholders equity:                                        |                                                                                                                                                                      |                                                                    |         |              |         |  |         |        
|                                                             | Common stock, $.01 par value; 50,000 shares
    authorized; 20,617 and 20,557 shares issued and outstanding at
    June 30, 2003 and December 31, 2002, respectively |                                                                    |         | 206          |         |  |         | 205     |        
|                                                             | Treasury stock                                                                                                                                                       |                                                                    |         | (69          | )       |  |         | (46     | )      
|                                                             | Paid-in capital                                                                                                                                                      |                                                                    |         | 138,415      |         |  |         | 138,268 |        
|                                                             | Accumulated other comprehensive loss                                                                                                                                 |                                                                    |         | 64           |         |  |         | (249    | )      
|                                                             | Accumulated deficit                                                                                                                                                  |                                                                    |         | (57,813      | )       |  |         | (61,754 | )      
|                                                             |                                                                                                                                                                      |                                                                    |         |              |         |  |         |        
|                                                             |                                                                                                                                                                      | Total stockholders equity                                         |         |              | 80,803  |  |         |         | 76,424  | 
|                                                             |                                                                                                                                                                      |                                                                    |         |              |         |  |         |        
|                                                             |                                                                                                                                                                      | Total liabilities, minority interests and
    stockholders equity |         | $            | 297,464 |  |         | $       | 280,681 | 
|                                                             |                                                                                                                                                                      |                                                                    |         |              |         |  |         |        

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

2



---



##### 



INTERSTATE HOTELS & RESORTS,
INC.

CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


AND OTHER COMPREHENSIVE INCOME
(LOSS)


(Unaudited, in thousands, except per share
amounts)


|                                                            |                                                                          |                    |         |                  |   |      |         |               |   |   |         |         |   |   |         |         |  
|----------------------------------------------------------- | ------------------------------------------------------------------------ | ------------------ | ------- | ---------------- | - | ---- | ------- | ------------- | - | - | ------- | ------- | - | - | ------- | ------- | -
|                                                            |                                                                          |                    |         |                 
|                                                            |                                                                          | Three months ended |         | Six months ended
|                                                            |                                                                          | June 30,           |         | June 30,        
|                                                            |                                                                          |                    |         |                 
|                                                            |                                                                          | 2003               |         | 2002             |   | 2003 |         | 2002         
|                                                            |                                                                          |                    |         |                  |   |      |         |              
|                                                            |                                                                          |                    |         | (as restated)    |   |      |         | (as restated)
|Revenue:                                                    |                                                                          |                    |         |                  |   |      |         |               |   |   |         |         |   |   |         |        
|                                                            | Lodging revenues                                                         |                    | $       | 932              |   |      | $       | 779           |   |   | $       | 1,768   |   |   | $       | 1,455   |  
|                                                            | Management fees                                                          |                    |         | 15,261           |   |      |         | 4,866         |   |   |         | 29,456  |   |   |         | 9,128   |  
|                                                            | Corporate housing                                                        |                    |         | 28,392           |   |      |         |              |   |   |         | 54,211  |   |   |         |        |  
|                                                            | Other revenue                                                            |                    |         | 2,947            |   |      |         | 5,451         |   |   |         | 6,829   |   |   |         | 9,464   |  
|                                                            |                                                                          |                    |         |                  |   |      |         |               |   |   |         |         |   |   |         |        
|                                                            |                                                                          |                    | 47,532  |                  |   |      | 11,096  |               |   |   | 92,264  |         |   |   | 20,047  |        
|                                                            | Other revenue from managed properties                                    |                    |         | 212,105          |   |      |         | 71,874        |   |   |         | 424,602 |   |   |         | 134,315 |  
|                                                            |                                                                          |                    |         |                  |   |      |         |               |   |   |         |         |   |   |         |        
|Total revenue                                               |                                                                          |                    | 259,637 |                  |   |      | 82,970  |               |   |   | 516,866 |         |   |   | 154,362 |        
|Operating expenses by department:                           |                                                                          |                    |         |                  |   |      |         |               |   |   |         |         |   |   |         |        
|                                                            | Lodging expenses                                                         |                    |         | 664              |   |      |         | 549           |   |   |         | 1,284   |   |   |         | 1,030   |  
|                                                            | Corporate housing                                                        |                    |         | 23,511           |   |      |         |              |   |   |         | 45,633  |   |   |         |        |  
|Undistributed operating expenses:                           |                                                                          |                    |         |                  |   |      |         |               |   |   |         |         |   |   |         |        
|                                                            | Administrative and general                                               |                    |         | 17,167           |   |      |         | 10,021        |   |   |         | 36,035  |   |   |         | 16,207  |  
|                                                            | Depreciation and amortization                                            |                    |         | 3,666            |   |      |         | 2,582         |   |   |         | 8,348   |   |   |         | 5,110   |  
|                                                            | Merger and integration costs                                             |                    |         | 606              |   |      |         |              |   |   |         | 2,470   |   |   |         |        |  
|                                                            | Tender offer costs                                                       |                    |         |                 |   |      |         | 881           |   |   |         |        |   |   |         | 1,000   |  
|                                                            |                                                                          |                    |         |                  |   |      |         |               |   |   |         |         |   |   |         |        
|                                                            |                                                                          |                    | 45,614  |                  |   |      | 14,033  |               |   |   | 93,770  |         |   |   | 23,347  |        
|                                                            | Other expenses from managed properties                                   |                    |         | 212,105          |   |      |         | 71,874        |   |   |         | 424,602 |   |   |         | 134,315 |  
|                                                            |                                                                          |                    |         |                  |   |      |         |               |   |   |         |         |   |   |         |        
|Total operating expenses                                    |                                                                          |                    | 257,719 |                  |   |      | 85,907  |               |   |   | 518,372 |         |   |   | 157,662 |        
|                                                            |                                                                          |                    |         |                  |   |      |         |               |   |   |         |         |   |   |         |        
|Net operating income (loss)                                 |                                                                          |                    | 1,918   |                  |   |      | (2,937  | )             |   |   | (1,506  | )       |   |   | (3,300  | )      
|Interest expense, net                                       |                                                                          |                    | 2,519   |                  |   |      | 2,160   |               |   |   | 4,828   |         |   |   | 3,135   |        
|Equity in losses of affiliates                              |                                                                          |                    | 218     |                  |   |      | 416     |               |   |   | 566     |         |   |   | 596     |        
|Conversion incentive paymentconvertible
    notes          |                                                                          |                    |        |                  |   |      | 7,307   |               |   |   |        |         |   |   | 7,307   |        
|Gain on refinancing                                         |                                                                          |                    |        |                  |   |      |        |               |   |   | (13,629 | )       |   |   |        |        
|                                                            |                                                                          |                    |         |                  |   |      |         |               |   |   |         |         |   |   |         |        
|Income (loss) before minority interest and
    income taxes |                                                                          |                    | (819    | )                |   |      | (12,820 | )             |   |   | 6,729   |         |   |   | (14,338 | )      
|Minority interest expense (benefit)                         |                                                                          |                    | (7      | )                |   |      | (12     | )             |   |   | 161     |         |   |   | 52      |        
|Income tax expense (benefit)                                |                                                                          |                    | (325    | )                |   |      | (1,546  | )             |   |   | 2,627   |         |   |   | (2,093  | )      
|                                                            |                                                                          |                    |         |                  |   |      |         |               |   |   |         |         |   |   |         |        
|Net income (loss)                                           |                                                                          |                    | (487    | )                |   |      | (11,262 | )             |   |   | 3,941   |         |   |   | (12,297 | )      
|Mandatorily redeemable preferred stock:                     |                                                                          |                    |         |                  |   |      |         |               |   |   |         |         |   |   |         |        
|                                                            | Dividends                                                                |                    |         |                 |   |      |         | 148           |   |   |         |        |   |   |         | 307     |  
|                                                            | Accretion                                                                |                    |         |                 |   |      |         | 340           |   |   |         |        |   |   |         | 355     |  
|                                                            | Conversion incentive paymentpreferred stock                             |                    |         |                 |   |      |         | 1,943         |   |   |         |        |   |   |         | 1,943   |  
|                                                            |                                                                          |                    |         |                  |   |      |         |               |   |   |         |         |   |   |         |        
|Net income (loss) available to common
    shareholders      |                                                                          | $                  | (487    | )                |   | $    | (13,693 | )             |   | $ | 3,941   |         |   | $ | (14,902 | )      
|                                                            |                                                                          |                    |         |                  |   |      |         |               |   |   |         |         |   |   |         |        
|Other comprehensive income (loss), net of tax:              |                                                                          |                    |         |                  |   |      |         |               |   |   |         |         |   |   |         |        
|                                                            | Foreign currency translation gain                                        |                    |         | 208              |   |      |         |              |   |   |         | 234     |   |   |         |        |  
|                                                            | Unrealized loss on investments and other                                 |                    |         | (55              | ) |      |         |              |   |   |         | (46     | ) |   |         |        |  
|                                                            |                                                                          |                    |         |                  |   |      |         |               |   |   |         |         |   |   |         |        
|Comprehensive income (loss)                                 |                                                                          | $                  | (334    | )                |   | $    | (13,693 | )             |   | $ | 4,129   |         |   | $ | (14,902 | )      
|                                                            |                                                                          |                    |         |                  |   |      |         |               |   |   |         |         |   |   |         |        
|Weighted average number of:                                 |                                                                          |                    |         |                  |   |      |         |               |   |   |         |         |   |   |         |        
|                                                            | Basic shares outstanding                                                 |                    |         | 20,609           |   |      |         | 5,607         |   |   |         | 20,593  |   |   |         | 5,440   |  
|                                                            | Diluted shares outstanding                                               |                    |         | 20,609           |   |      |         | 5,607         |   |   |         | 21,226  |   |   |         | 5,440   |  
|                                                            | Net income (loss) available to common
    shareholders per basic share   |                    | $       | (0.02            | ) |      | $       | (2.44         | ) |   | $       | 0.19    |   |   | $       | (2.74   | )
|                                                            |                                                                          |                    |         |                  |   |      |         |               |   |   |         |         |   |   |         |        
|                                                            | Net income (loss) available to common
    shareholders per diluted share |                    | $       | (0.02            | ) |      | $       | (2.44         | ) |   | $       | 0.19    |   |   | $       | (2.74   | )
|                                                            |                                                                          |                    |         |                  |   |      |         |               |   |   |         |         |   |   |         |        

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

3



---



##### 



INTERSTATE HOTELS & RESORTS,
INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


(Unaudited, in thousands)


|                                                         |                                                                                          |                                           |        |               |         |   |         |         |        |  
|-------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ----------------------------------------- | ------ | ------------- | ------- | - | ------- | ------- | ------ | -
|                                                         |                                                                                          |                                          
|                                                         |                                                                                          | Six months ended                         
|                                                         |                                                                                          | June 30,                                 
|                                                         |                                                                                          |                                          
|                                                         |                                                                                          | 2003                                      |        | 2002         
|                                                         |                                                                                          |                                           |        |              
|                                                         |                                                                                          |                                           |        | (as restated)
|Cash flows from operating activities:                    |                                                                                          |                                           |        |               |         |   |         |        
|                                                         | Net income (loss)                                                                        |                                           | $      | 3,941         |         |   | $       | (12,297 | )     
|                                                         | Adjustments to reconcile net income (loss) to net
    cash used in operating activities: |                                           |        |               |         |   |         |         |       
|                                                         | Depreciation and amortization                                                            |                                           |        | 8,348         |         |   |         | 5,110   |       
|                                                         | Gain on refinancing                                                                      |                                           |        | (13,629       | )       |   |         |        |       
|                                                         | Equity in loss of affiliates                                                             |                                           |        | 566           |         |   |         | 596     |       
|                                                         | Minority interest                                                                        |                                           |        | 143           |         |   |         | 52      |       
|                                                         | Deferred income taxes                                                                    |                                           |        | 1,885         |         |   |         | (1,357  | )     
|                                                         | Write-off of assets                                                                      |                                           |        | 1,415         |         |   |         |        |       
|                                                         | Amortization of mandatorily redeemable preferred
    stock                               |                                           |        |              |         |   |         | 1,375   |       
|                                                         | Stock option expense                                                                     |                                           |        | 1             |         |   |         | 790     |       
|                                                         | Other                                                                                    |                                           |        | 8             |         |   |         | 2,082   |       
|                                                         | Changes in assets and liabilities:                                                       |                                           |        |               |         |   |         |         |       
|                                                         |                                                                                          | Accounts receivable, net                  |        |               | (11,235 | ) |         |         | (7,448 | )
|                                                         |                                                                                          | Prepaid expenses and other current assets |        |               | 901     |   |         |         | 51     |  
|                                                         |                                                                                          | Accounts payable and accrued expenses     |        |               | 17,227  |   |         |         | 2,179  |  
|                                                         |                                                                                          |                                           |        |               |         |   |         |        
|Net cash provided by (used in) operating
    activities  |                                                                                          |                                           | 9,571  |               |         |   | (8,867  | )      
|                                                         |                                                                                          |                                           |        |               |         |   |         |        
|Cash flows from investing activities:                    |                                                                                          |                                           |        |               |         |   |         |        
|                                                         | Change in restricted cash                                                                |                                           |        | (1,616        | )       |   |         | (28     | )     
|                                                         | Purchase of property and equipment, net                                                  |                                           |        | (1,722        | )       |   |         | (44     | )     
|                                                         | Purchases of intangible assets                                                           |                                           |        | (580          | )       |   |         |        |       
|                                                         | Purchases of marketable securities                                                       |                                           |        |              |         |   |         | (1,061  | )     
|                                                         | Proceeds from sale of marketable securities                                              |                                           |        |              |         |   |         | 795     |       
|                                                         | Net cash (invested for) received from equity
    investments in hotel real estate        |                                           |        | (87           | )       |   |         | 134     |       
|                                                         | Change in officers and employees notes
    receivable, net                               |                                           |        | 10            |         |   |         | (176    | )     
|                                                         | Change in advances to affiliates, net                                                    |                                           |        | (482          | )       |   |         | 1       |       
|                                                         | Merger-related acquisition costs                                                         |                                           |        |              |         |   |         | (1,729  | )     
|                                                         | Deposits and other                                                                       |                                           |        |              |         |   |         | 64      |       
|                                                         |                                                                                          |                                           |        |               |         |   |         |        
|Net cash used in investing activities                    |                                                                                          |                                           | (4,477 | )             |         |   | (2,044  | )      
|                                                         |                                                                                          |                                           |        |               |         |   |         |        
|Cash flows from financing activities:                    |                                                                                          |                                           |        |               |         |   |         |        
|                                                         | Borrowings under subordinated term loan                                                  |                                           |        | 40,000        |         |   |         |        |       
|                                                         | Borrowings under senior revolver                                                         |                                           |        | 40,000        |         |   |         |        |       
|                                                         | Repayment of term loan                                                                   |                                           |        | (42,052       | )       |   |         | (1,555  | )     
|                                                         | Repayments on senior revolver and note payable                                           |                                           |        | (25,962       | )       |   |         |        |       
|                                                         | Proceeds from issuance of common stock                                                   |                                           |        | 138           |         |   |         | 80      |       
|                                                         | Dividends paid on mandatorily redeemable
    preferred stock                             |                                           |        |              |         |   |         | (307    | )     
|                                                         | Financing fees paid                                                                      |                                           |        | (1,690        | )       |   |         | (42     | )     
|                                                         | Common stock repurchased                                                                 |                                           |        | (23           | )       |   |         |        |       
|                                                         | Conversion incentive payment-preferred stock                                             |                                           |        |              |         |   |         | (1,943  | )     
|                                                         | Other                                                                                    |                                           |        |              |         |   |         | 10      |       
|                                                         |                                                                                          |                                           |        |               |         |   |         |        
|Net cash provided by (used in) financing
    activities  |                                                                                          |                                           | 10,411 |               |         |   | (3,757  | )      
|                                                         |                                                                                          |                                           |        |               |         |   |         |        
|Effect of exchange rate on cash                          |                                                                                          |                                           | 352    |               |         |   |        |        
|                                                         |                                                                                          |                                           |        |               |         |   |         |        
|Net increase (decrease) in cash and cash
    equivalents |                                                                                          |                                           | 15,857 |               |         |   | (14,668 | )      
|Cash and cash equivalents at beginning of period         |                                                                                          |                                           | 7,054  |               |         |   | 39,040  |        
|                                                         |                                                                                          |                                           |        |               |         |   |         |        
|Cash and cash equivalents at end of period               |                                                                                          | $                                         | 22,911 |               |         | $ | 24,372  |        
|                                                         |                                                                                          |                                           |        |               |         |   |         |        

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

4



---



##### 



INTERSTATE HOTELS & RESORTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited, dollars in thousands, except per share
amounts)


1.     ORGANIZATION

Formation of Interstate Hotels & Resorts

MeriStar Hotels & Resorts, Inc., or MeriStar, and Interstate
Hotels Corporation, or Interstate, entered into an Agreement and
Plan of Merger, dated May 1, 2002 as amended on
June 3, 2002. In the merger transaction, Interstate merged
with and into MeriStar, and MeriStar was renamed Interstate
Hotels & Resorts, Inc. On July 31, 2002, after
receiving the required stockholder approvals, MeriStar and
Interstate completed the merger. The transaction was a
stock-for-stock merger of Interstate into MeriStar in which
Interstate stockholders received 4.6 shares of common stock for
each share of Interstate stock outstanding. Holders of MeriStar
common stock and operating partnership units continued to hold
their stock and units following the merger. In connection with
the merger, the holders of Interstates convertible debt
and preferred equity shares converted those instruments into
shares of common stock of the surviving company. Immediately
following the merger, we effected a one-for-five reverse stock
split.

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

The consolidated interim financial statements for the three- and
six-month periods ended June 30, 2002 reflect the
historical results of operations of Interstate, the accounting
acquiror. After the merger on July 31, 2002, the financial
statements include the operating results of the combined entity,
Interstate Hotels & Resorts, Inc.

Business Summary

We are the largest independent hotel management company in the
United States, measured by number of rooms under management. We
manage a portfolio of hospitality properties and provide related
services in the hotel, corporate housing, resort, conference
center, and golf markets. We also own one hotel. Our portfolio
is diversified by franchise and brand affiliations. The related
services we provide include insurance and risk management
services, purchasing and project management services,
information technology and telecommunications services, and
centralized accounting services.

As of June 30, 2003, we managed 347 properties with 75,556
rooms in 44 states, the District of Columbia, Canada, and
Russia. We wholly own one of these properties and have
non-controlling equity interests in 26 of these hotels. In
addition, at June 30, 2003, we had 3,453 apartments under
lease in the United States, Canada, the United Kingdom and
France. Our subsidiary operating partnerships indirectly hold
substantially all of our assets. We are the sole general partner
of those operating partnerships. We and certain independent
third parties are limited partners of the partnerships. The
interests of those third parties are reflected in minority
interests on our balance sheet. The partnership agreements give
the general partners full control over the business and affairs
of the partnerships.We manage all 105 properties owned by
MeriStar Hospitality Corporation, a real estate investment
trust, or REIT. We also have an intercompany agreement with
MeriStar Hospitality. That agreement provides each of us the
right to participate in certain transactions entered into by the
other company. The intercompany agreement provides MeriStar
Hospitality with the right of first refusal with respect to some
of our hotel real estate opportunities and it also provides us
with a right of first refusal with respect to some of MeriStar
Hospitalitys hotel management opportunities (excluding
hotels that MeriStar Hospitality elects to have managed by a
hotel brand).

5



---



##### 



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


2.     SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

General

We have prepared these unaudited interim financial statements
according to the rules and regulations of the Securities and
Exchange Commission. We have omitted certain information and
footnote disclosures that are normally included in financial
statements prepared in accordance with accounting principles
generally accepted in the United States of America. These
interim financial statements should be read in conjunction with
the financial statements, accompanying notes and other
information included in our Annual Report on Form 10-K, as
amended, for the year ended December 31, 2002. Certain 2002
amounts have been reclassified to conform to the 2003
presentation.

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

Stock-Based Compensation

In December 2002, the FASB issued SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and
Disclosure, to provide alternative methods of transition
for a voluntary change to the expense recognition provisions of
the fair value based method of accounting for stock-based
employee compensation. Effective January 1, 2003, we have
elected to adopt the fair-value method of accounting for stock
options under SFAS No. 148, using the prospective method.
We will record in our statement of operations the expense
related to stock options issued after January 1, 2003.

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

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

6



---



##### 



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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

|                                                                    |                                                                                                                     |                    |      |                  |   |      |         |       |   |   |       |      |   |   |         |      |  
|------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | ------------------ | ---- | ---------------- | - | ---- | ------- | ----- | - | - | ----- | ---- | - | - | ------- | ---- | -
|                                                                    |                                                                                                                     |                    |      |                 
|                                                                    |                                                                                                                     | Three months ended |      | Six months ended
|                                                                    |                                                                                                                     | June 30,           |      | June 30,        
|                                                                    |                                                                                                                     |                    |      |                 
|                                                                    |                                                                                                                     | 2003               |      | 2002             |   | 2003 |         | 2002 
|                                                                    |                                                                                                                     |                    |      |                  |   |      |         |      
|Net income (loss) available to common
    shareholders, as reported |                                                                                                                     | $                  | (487 | )                |   | $    | (13,693 | )     |   | $ | 3,941 |      |   | $ | (14,902 | )   
|                                                                    | Add: Stock-based employee compensation expense
    included in reported net income                                  |                    |      | 15               |   |      |         |      |   |   |       | 15   |   |   |         |     |  
|                                                                    | Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards |                    |      | (16              | ) |      |         | (12   | ) |   |       | (16  | ) |   |         | (14  | )
|                                                                    |                                                                                                                     |                    |      |                  |   |      |         |       |   |   |       |      |   |   |         |     
|Net income (loss) available to common
    shareholders, pro forma   |                                                                                                                     | $                  | (488 | )                |   | $    | (13,705 | )     |   | $ | 3,940 |      |   | $ | (14,916 | )   
|Earnings per share:                                                 |                                                                                                                     |                    |      |                  |   |      |         |       |   |   |       |      |   |   |         |     
|                                                                    | Basic, as reported                                                                                                  |                    | $    | (0.02            | ) |      | $       | (2.44 | ) |   | $     | 0.19 |   |   | $       | 2.74 |  
|                                                                    | Basic, pro forma                                                                                                    |                    | $    | (0.02            | ) |      | $       | (2.44 | ) |   | $     | 0.19 |   |   | $       | 2.74 |  
|                                                                    | Diluted, as reported                                                                                                |                    | $    | (0.02            | ) |      | $       | (2.44 | ) |   | $     | 0.19 |   |   | $       | 2.74 |  
|                                                                    | Diluted, pro forma                                                                                                  |                    | $    | (0.02            | ) |      | $       | (2.44 | ) |   | $     | 0.19 |   |   | $       | 2.74 |  

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

Revenue Recognition

Through the second quarter of 2002, we had
recorded incentive management fees in accordance with Staff
Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements, and Method No. 2 of Emerging
Issues Task Force or EITF Topic No. D-96, Accounting
for Management Fees Based on a Formula in which incentive
management fees are accrued as earned based on the profitability
of the hotel, subject to the specific terms of each individual
management agreement. The application of Method No. 2
resulted in the accrual of incentive management fees during
interim reporting periods throughout the annual measurement
period. The accrual would be reduced or eliminated in subsequent
interim reporting periods if the profitability of the hotel
missed performance thresholds later in the annual measurement
period.

During the third quarter of 2002, with an
effective date of January 1, 2002, we began recording
incentive management fees in accordance with Method No. 1
of EITF Topic No. D-96, Accounting for Management
Fees Based on a Formula, in which incentive management
fees are recorded in the period that it is certain the incentive
management fees are earned, which for annual incentive fee
measurements typically is in the last month of the annual
contract period. This change in accounting method had no effect
on the total annual management fees earned or amount of cash we
were paid, but did affect the timing of recognizing the revenue
from these fees. The effect of this change on the three months
ended June 30, 2002 was to increase the net loss available
to common shareholders by $1,029 ($0.18 per share) to a net loss
available to common shareholders of $13,693 ($2.44 per share).
The effect of this change on the six months ended June 30,
2002 was to increase the net loss available to common
shareholders by $1,949 ($0.36 per share) to a net loss available
to common shareholders of $14,902 ($2.74 per share). These
changes are reflected in our statement of operations for the
three and six months ended June 30, 2002.

Recent Accounting Pronouncements

In April 2002, the FASB issued SFAS No. 145
Rescission of FASB Statements No. 4, 44 and 64, Amendment
of SFAS No. 13, Technical Corrections. This statement
rescinds FASB Statement No. 4,

7



---



##### 



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Reporting Gains and Losses from
Extinguishment of Debt, and also amends other existing
authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability
under changed conditions. We adopted this amendment during 2002.
In accordance with the guidelines, we accounted for our gain on
debt refinancing in 2003 in income (loss) before minority
interests and income taxes, rather than as an extraordinary item.

FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, (FIN 45), an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB
Interpretation No. 34, was issued in November 2002. FIN 45
elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of FIN 45 are applicable on a
prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantors
fiscal year-end. The disclosure requirements in FIN 45 are
effective for financial statements of interim or annual periods
ending after December 15, 2002. The adoption of FIN 45 did
not have a material impact on our financial position or results
of operations.

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities, (FIN 46), an interpretation
of Accounting Research Bulletin No. 51, Consolidated
Financial Statements. FIN 46 explains how to identify
variable interest entities and how an enterprise assesses its
interests in a variable interest entity to decide whether to
consolidate the entity. This Interpretation requires existing
unconsolidated variable interest entities to be consolidated by
their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. FIN 46 is effective
immediately for variable interest entities created after
January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. The
Interpretation applies in the first fiscal year or interim
period beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. The adoption of FIN 46
will not impact our financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. This Statement amends and clarifies
financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other
contracts and for hedging activities under FASB Statement
No. 133, Accounting for Derivative Instruments and
Hedging Activities. The changes in this Statement improve
financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. This Statement is
effective for contracts entered into or modified after
June 30, 2003, with certain exceptions, and for hedging
relationships designated after June 30, 2003. If we enter
into contracts of this nature after June 30, 2003, we will
comply with SFAS No. 149.

In May 2003, the FASB issued SFAS No. 150
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify
a financial instrument that is within its scope as a liability
(or an asset in some circumstances). Many of those instruments
were previously classified as equity. This Statement is
effective for financial instruments issued or modified after
May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003.
In the instance that we issue such instruments, we will follow
the guidelines of SFAS No. 150.

3.     EARNINGS PER
SHARE

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

8



---



##### 



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


per common share assumes the issuance of common
stock for all potentially dilutive stock equivalents outstanding.

On July 31, 2002, in connection with the
merger of Interstate and MeriStar, the Interstate shareholders
received 4.6 shares of common stock for each share of Interstate
stock outstanding. MeriStar stockholders continued to hold their
existing stock. On August 1, 2002, we effected a
one-for-five reverse stock split of all outstanding shares of
common stock. The weighted average number of common shares
outstanding used in the table below is presented assuming the
conversion of Interstate stock and the reverse stock split
occurred on January 1, 2002.

The details of basic and diluted earnings
(loss) per common share for the three and six month periods
ended June 30, 2003 and 2002 were as follows:

|                                                                        |  |                    |        |                  |  |      |         |      |  |   |        |  |  |   |         |  
|----------------------------------------------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------- | ---- |  | - | ------ |  |  | - | ------- | -
|                                                                        |  |                    |        |                 
|                                                                        |  | Three months ended |        | Six months ended
|                                                                        |  | June 30,           |        | June 30,        
|                                                                        |  |                    |        |                 
|                                                                        |  | 2003               |        | 2002             |  | 2003 |         | 2002
|                                                                        |  |                    |        |                  |  |      |         |     
|Net income (loss) available to common
    stockholders                  |  | $                  | (487   | )                |  | $    | (13,693 | )    |  | $ | 3,941  |  |  | $ | (14,902 | )
|Weighted average number of common shares
    outstanding (in thousands) |  |                    | 20,609 |                  |  |      | 5,607   |      |  |   | 20,593 |  |  |   | 5,440   |  
|Basic earnings (loss) per share                                         |  | $                  | (0.02  | )                |  | $    | (2.44   | )    |  | $ | 0.19   |  |  | $ | (2.74   | )
|                                                                        |  |                    |        |                  |  |      |         |      |  |   |        |  |  |   |         |  
|Weighted number of diluted shares outstanding (in
    thousands)        |  |                    | 20,609 |                  |  |      | 5,607   |      |  |   | 21,226 |  |  |   | 5,440   |  
|Diluted earnings (loss) per share                                       |  | $                  | (0.02  | )                |  | $    | (2.44   | )    |  | $ | 0.19   |  |  | $ | (2.74   | )
|                                                                        |  |                    |        |                  |  |      |         |      |  |   |        |  |  |   |         |  

4.     INTANGIBLE
ASSETS

Intangible assets consist of the following:

|                              |  |          |        |              |  |   |         |  
|----------------------------- |  | -------- | ------ | ------------ |  | - | ------- | -
|                              |  | June 30, |        | December 31,
|                              |  | 2003     |        | 2002        
|                              |  |          |        |             
|Management contracts          |  | $        | 60,631 |              |  | $ | 84,163  |  
|Franchise fees                |  |          | 1,945  |              |  |   | 1,945   |  
|Deferred financing fees       |  |          | 3,334  |              |  |   | 2,882   |  
|Other                         |  |          | 464    |              |  |   | 586     |  
|                              |  |          |        |              |  |   |         |  
|                              |  |          | 66,374 |              |  |   | 89,576  |  
|Less accumulated amortization |  |          | (5,220 | )            |  |   | (23,781 | )
|                              |  |          |        |              |  |   |         |  
|                              |  | $        | 61,154 |              |  | $ | 65,795  |  
|                              |  |          |        |              |  |   |         |  

On July 1, 2002, MeriStar assigned the
leases of 47 hotels to a subsidiary of Winston Hotels, Inc.
under a provision of the REIT Modernization Act that allows
REITs to lease their owned hotels. As part of this agreement, we
had continued to operate 33 of Winstons properties. During
April 2003, Winston notified us of their intention to terminate
the management contracts. No management contract termination
fees were received from Winston. In connection with the
termination of the Winston contracts, we wrote off $587 of
unamortized management contract costs during the three months
ended June 30, 2003. This amount is included in
administrative and general expense in our statement of
operations.

MeriStar Hospitality has announced plans to sell
up to 40 of its 105 hotels, all of which we currently manage.
This represents approximately 12% of our total managed hotels.
If we are terminated as manager upon the sale of one of MeriStar
Hospitalitys hotels, we will generally receive a
termination fee equal to the remaining payments (discounted
using a 10% rate) under the then-existing term of the management
agreement. Our management agreements with other owners generally
have limited or no termination fees due

9



---



##### 



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


to us if our management agreement is terminated
upon the sale of the hotel. The termination of management
contracts as a result of hotel dispositions could have an
adverse effect on our revenues. During the second quarter of
2003, MeriStar Hospitality disposed of one hotel which we had
managed, and we wrote off $166 of unamortized management
contract costs associated with that hotel. This amount is
included in administrative and general expense in our statement
of operations.

In addition, during the second quarter:



| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | we wrote off an additional $48 of other
    unamortized management contracts terminated during the quarter,
|
| |  | we recorded $190 of additional management
    contract costs, and                                          
|
| |  | we wrote off $21,965 of fully amortized
    management contracts and related accumulated amortization.     

We incurred aggregate amortization expense of
$2,437 and $2,561 on these intangible assets for the three
months ended June 30, 2003 and 2002, respectively. We
incurred aggregate amortization expense of $5,812 and $5,070 on
these assets for the six months ended June 30, 2003 and
2002, respectively.

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

|                              |  |   |       | 
|----------------------------- |  | - | ----- | 
|Year ending December 31, 2003 |  | $ | 7,695 | 
|Year ending December 31, 2004 |  |   | 3,448 | 
|Year ending December 31, 2005 |  |   | 3,255 | 
|Year ending December 31, 2006 |  |   | 2,914 | 
|Year ending December 31, 2007 |  |   | 2,735 | 

5.     GOODWILL

At December 31, 2002, we had $91,960 of
goodwill, all of which related to the merger between Interstate
and MeriStar on July 31, 2002. During the second quarter
2003, we recorded an adjustment to the purchase price relating
to the merger on July 31, 2002, resulting in a decrease to
goodwill in the amount of $1,754. We also recognized an
additional $126 of goodwill relating to an acquisition made in
our Corporate Housing segment, also during the second quarter
2003.

Our goodwill balance as of June 30, 2003, is
$90,332. The carrying amount of goodwill by reportable segment
as of June 30, 2003 is as follows:

|                  |       |   |        |        | 
|----------------- | ----- | - | ------ | ------ | 
|Hotel Management  |       | $ | 81,131 |       
|Corporate Housing |       |   | 9,201  |       
|                  |       |   |        |       
|                  | Total |   | $      | 90,332 | 
|                  |       |   |        |       

6.     LONG-TERM
DEBT

|                               |                      |          |         |              |   |   |         |        |  
|------------------------------ | -------------------- | -------- | ------- | ------------ | - | - | ------- | ------ | -
|                               |                      | June 30, |         | December 31,
|                               |                      | 2003     |         | 2002        
|                               |                      |          |         |             
|Senior credit agreement        |                      | $        | 88,188  |              |   | $ | 74,000  |       
|Promissory note                |                      |          | 4,020   |              |   |   | 4,170   |       
|MeriStar Hospitality term loan |                      |          |        |              |   |   | 56,069  |       
|Subordinated term loan         |                      |          | 40,000  |              |   |   |        |       
|                               |                      |          |         |              |   |   |         |       
|                               |                      |          | 132,208 |              |   |   | 134,239 |       
|                               | Less current portion |          |         | (1,625       | ) |   |         | (1,625 | )
|                               |                      |          |         |              |   |   |         |       
|                               |                      | $        | 130,583 |              |   | $ | 132,614 |       
|                               |                      |          |         |              |   |   |         |       

10



---



##### 



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Senior credit agreement Effective July 31, 2002, in
connection with the closing of the MeriStar-Interstate merger,
we entered into a $113,000 senior credit agreement with a group
of banks. The senior credit agreement consists of a $65,000 term
loan and a $48,000 revolving credit facility. The term loan is
payable in quarterly installments of $406 beginning
January 1, 2003, with the balance due on July 28,
2005. The revolving credit facility is due on July 28, 2005
(with a one-year extension at our option). The interest rate on
the senior credit agreement is LIBOR plus 3.00% to 4.50%,
depending upon our meeting certain financial tests. The senior
credit facility contains certain covenants, including
maintenance of financial ratios at the end of each quarter,
compliance reporting requirements and other customary
restrictions. The senior credit agreement also includes pledges
of collateral, including the following:



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

At June 30, 2003, borrowings under the
senior credit agreement bore interest at a rate of 5.71% per
annum. We incurred $1,168 and $2,264 of interest expense on the
senior credit agreement for the three and six months ended
June 30, 2003, respectively.

Promissory note In March 2001, we entered into a
promissory note in the amount of $4,170 with FelCor Lodging
Trust Incorporated (FelCor) to fund the acquisition
of a 50% non-controlling equity interest in two partnerships
that own eight mid-scale hotels. Interest on the note is payable
monthly at the rate of 12% per annum and the outstanding
principal balance is due and payable on December 31, 2010.
For the three months ended June 30, 2003 and 2002, we
incurred $125 and $125 of interest expense on the promissory
note, respectively. For the six months ended June 30, 2003
and 2002, we incurred $250 and $250 of interest expense on the
promissory note, respectively.

In June 2003, we made a principal payment to
FelCor on the promissory note in the amount of $150. As of
June 30, 2003, the remaining balance on the promissory note
is $4,020. In connection with the payment, FelCor contributed
$150 as a partner contribution to our partnerships with FelCor.
Our ownership interest in the partnerships was therefore reduced
from 50% to 49.5%.

MeriStar Hospitality term loan In connection with the closing of the
merger, effective July 31, 2002, we converted a $75,000
unsecured credit facility between MeriStar and MeriStar
Hospitality to a $56,069 term loan due July 31, 2007. The
term loan was subordinated to borrowings under our senior credit
agreement. The MeriStar Hospitality term loan contained certain
covenants, including maintenance of financial ratios at the end
of each quarter, compliance reporting requirements and other
customary restrictions. In January 2003, we completed a
discounted repayment of the MeriStar Hospitality term loan for
$42,052. We financed part of the repayment with proceeds from a
new $40,000 subordinated term loan and funded the remainder of
the repayment out of available cash. The refinancing resulted in
a gain of $13,629. That gain is included in our statement of
operations for the six months ended June 30, 2003.

We incurred no interest expense on the MeriStar
Hospitality loan for the three months ended June 30, 2003
and $123 of interest expense on the six months ended
June 30, 2003.

Subordinated term loan In January 2003, in connection with
the discounted repayment of the MeriStar Hospitality term loan,
we entered into a $40,000 subordinated term loan that carries a
variable interest rate based on the 30-day LIBOR plus a spread
of 8.50%. The subordinated term loan matures on January 31,
2006, but if the revolving portion of our senior credit facility
is extended for an additional year, the maturity of the
subordinated term loan will also be automatically extended by
one year to January 31, 2007. This term loan is
subordinated to borrowings under the senior credit agreement and
contains certain covenants, including maintenance of financial
ratios at the end of each quarter, compliance reporting

11



---



##### 



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


requirements and other customary restrictions. At
June 30, 2003, borrowings under the subordinated term loan
bore interest at a rate of 9.88% per annum. We incurred $997 and
$1,887 of interest expense on the subordinated term loan for the
three and six months ended June 30, 2003.

Fair Value Approximately 97% of our outstanding
long-term debt is based on LIBOR rates plus an appropriate
spread. We have determined that the fair value of our
outstanding borrowings on our senior credit facility, promissory
note and subordinated term loan approximate their carrying value
at June 30, 2003.

7.     SEGMENT
INFORMATION

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

Prior to the MeriStar-Interstate merger on
July 31, 2002, we operated in two reportable segments:
(1) operations of luxury and upscale hotels and (2)
operations of mid-scale, upper economy and budget hotels.
Following the merger, we operate in the segments shown in the
table below. The Other items in the tables below represent
operating segment activity and assets for the non-reportable
segments. The non-reportable segment activity includes merger
costs in 2003 and tender offer costs and conversion incentive
payments for convertible notes in 2002. The non-reportable
segment for assets includes deferred tax assets and net deferred
financing costs. For periods prior to the merger, we have
combined our two previously reportable segments into the hotel
management operating segment for presentation in the table shown
below.

A significant portion of our assets consist of
intangible assets. Of those intangible assets, our management
contracts are amortized over their remaining terms, and, in
accordance with accounting principles generally accepted in the
United States of America, those assets are subject to
straight-line amortization. Because depreciation and
amortization are non-cash items, we believe that presentation of
EBITDA is more useful. EBITDA represents consolidated earnings
before interest expense, income taxes, depreciation and
amortization. We believe EBITDA provides useful information
regarding our financial condition and results of operations
because EBITDA is useful for evaluating our operating
performance and our capacity to incur and service debt, fund
capital expenditures and expand our business. We also use EBITDA
as one measure in determining the value of other acquisitions
and dispositions. This financial measure, however, should be
considered in addition to, not as a substitute for or as being
superior to, operating losses, cash flows, or other measures of
financial performance prepared in accordance with accounting
principles generally accepted in the United States of America.

The following table reconciles net income
(loss) to EBITDA:

|                                 |                                     |            |       |           |  |       |      |            |   |   |      |      |   |   |       |       |  
|-------------------------------- | ----------------------------------- | ---------- | ----- | --------- |  | ----- | ---- | ---------- | - | - | ---- | ---- | - | - | ----- | ----- | -
|                                 |                                     | Hotel      |       | Corporate |  |       |      | Financial 
|                                 |                                     | Management |       | Housing   |  | Other |      | Statements
|                                 |                                     |            |       |           |  |       |      |           
|Three months ended June 30, 2003 |                                     |            |       |           |  |       |      |            |   |   |      |      |   |   |       |      
|Net income (loss)                |                                     | $          | 735   |           |  | $     | (863 | )          |   | $ | (359 | )    |   | $ | (487  | )    
|Adjustments:                     |                                     |            |       |           |  |       |      |            |   |   |      |      |   |   |       |      
|                                 | Depreciation and amortization       |            |       | 3,253     |  |       |      | 413        |   |   |      |     |   |   |       | 3,666 |  
|                                 | Interest expense, net               |            |       | 2,267     |  |       |      | 252        |   |   |      |     |   |   |       | 2,519 |  
|                                 | Equity in losses of affiliates      |            |       | 218       |  |       |      |           |   |   |      |     |   |   |       | 218   |  
|                                 | Minority interest expense (benefit) |            |       | 11        |  |       |      | (12        | ) |   |      | (6   | ) |   |       | (7    | )
|                                 | Income tax expense (benefit)        |            |       | 500       |  |       |      | (584       | ) |   |      | (241 | ) |   |       | (325  | )
|                                 |                                     |            |       |           |  |       |      |            |   |   |      |      |   |   |       |      
|EBITDA                           |                                     | $          | 6,984 |           |  | $     | (794 | )          |   | $ | (606 | )    |   | $ | 5,584 |      
|                                 |                                     |            |       |           |  |       |      |            |   |   |      |      |   |   |       |      

12



---



##### 



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                     |                                                      |            |        |           |   |       |        |            |   |   |        |         |   |   |         |         |  
|------------------------------------ | ---------------------------------------------------- | ---------- | ------ | --------- | - | ----- | ------ | ---------- | - | - | ------ | ------- | - | - | ------- | ------- | -
|                                     |                                                      | Hotel      |        | Corporate |   |       |        | Financial 
|                                     |                                                      | Management |        | Housing   |   | Other |        | Statements
|                                     |                                                      |            |        |           |   |       |        |           
|Three months ended June 30,
    2002 |                                                      |            |        |           |   |       |        |            |   |   |        |         |   |   |         |        
|Net income (loss)                    |                                                      | $          | (3,323 | )         |   | $     |       |            |   | $ | (7,939 | )       |   | $ | (11,262 | )      
|Adjustments:                         |                                                      |            |        |           |   |       |        |            |   |   |        |         |   |   |         |        
|                                     | Depreciation and amortization                        |            |        | 2,582     |   |       |        |            |   |   |        |        |   |   |         | 2,582   |  
|                                     | Interest expense, net                                |            |        | 2,160     |   |       |        |           |   |   |        |        |   |   |         | 2,160   |  
|                                     | Equity in losses of affiliates                       |            |        | 416       |   |       |        |           |   |   |        |        |   |   |         | 416     |  
|                                     | Conversion incentive payment 
    convertible notes |            |        |          |   |       |        |           |   |   |        | 7,307   |   |   |         | 7,307   |  
|                                     | Minority interest expense (benefit)                  |            |        | (10       | ) |       |        |           |   |   |        | (2      | ) |   |         | (12     | )
|                                     | Income tax expense (benefit)                         |            |        | (1,299    | ) |       |        |           |   |   |        | (247    | ) |   |         | (1,546  | )
|                                     |                                                      |            |        |           |   |       |        |            |   |   |        |         |   |   |         |        
|EBITDA                               |                                                      | $          | 526    |           |   | $     |       |            |   | $ | (881   | )       |   | $ | (355    | )      
|                                     |                                                      |            |        |           |   |       |        |            |   |   |        |         |   |   |         |        
|Six months ended June 30, 2003       |                                                      |            |        |           |   |       |        |            |   |   |        |         |   |   |         |        
|Net Income (loss)                    |                                                      | $          | (212   | )         |   | $     | (2,382 | )          |   | $ | 6,535  |         |   | $ | 3,941   |        
|Adjustments:                         |                                                      |            |        |           |   |       |        |            |   |   |        |         |   |   |         |        
|                                     | Depreciation and amortization                        |            |        | 7,531     |   |       |        | 817        |   |   |        |        |   |   |         | 8,348   |  
|                                     | Interest expense, net                                |            |        | 4,345     |   |       |        | 483        |   |   |        |        |   |   |         | 4,828   |  
|                                     | Equity in loss of affiliates                         |            |        | 566       |   |       |        |           |   |   |        |        |   |   |         | 566     |  
|                                     | Gain on refinancing                                  |            |        |          |   |       |        |           |   |   |        | (13,629 | ) |   |         | (13,629 | )
|                                     | Minority interest expense (benefit)                  |            |        | (9        | ) |       |        | (97        | ) |   |        | 267     |   |   |         | 161     |  
|                                     | Income tax expense (benefit)                         |            |        | (142      | ) |       |        | (1,588     | ) |   |        | 4,357   |   |   |         | 2,627   |  
|                                     |                                                      |            |        |           |   |       |        |            |   |   |        |         |   |   |         |        
|EBITDA                               |                                                      | $          | 12,079 |           |   | $     | (2,767 | )          |   | $ | (2,470 | )       |   | $ | 6,842   |        
|                                     |                                                      |            |        |           |   |       |        |            |   |   |        |         |   |   |         |        
|Six months ended June 30, 2002       |                                                      |            |        |           |   |       |        |            |   |   |        |         |   |   |         |        
|Net income (loss)                    |                                                      | $          | (4,281 | )         |   | $     |       |            |   | $ | (8,016 | )       |   | $ | (12,297 | )      
|Adjustments:                         |                                                      |            |        |           |   |       |        |            |   |   |        |         |   |   |         |        
|                                     | Depreciation and amortization                        |            |        | 5,110     |   |       |        |           |   |   |        |        |   |   |         | 5,110   |  
|                                     | Interest expense, net                                |            |        | 3,135     |   |       |        |           |   |   |        |        |   |   |         | 3,135   |  
|                                     | Equity in losses of affiliates                       |            |        | 596       |   |       |        |           |   |   |        |        |   |   |         | 596     |  
|                                     | Conversion incentive payment 
    convertible notes |            |        |          |   |       |        |           |   |   |        | 7,307   |   |   |         | 7,307   |  
|                                     | Minority interest expense (benefit)                  |            |        | 45        |   |       |        |            |   |   |        | 7       |   |   |         | 52      |  
|                                     | Income tax expense (benefit)                         |            |        | (1,795    | ) |       |        |           |   |   |        | (298    | ) |   |         | (2,093  | )
|                                     |                                                      |            |        |           |   |       |        |            |   |   |        |         |   |   |         |        
|EBITDA                               |                                                      | $          | 2,810  |           |   | $     |       |            |   | $ | (1,000 | )       |   | $ | 1,810   |        
|                                     |                                                      |            |        |           |   |       |        |            |   |   |        |         |   |   |         |        

13



---



##### 



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Segment information:

|                                     |  |            |         |           |  |       |        |            |  |   |        |   |  |   |         |  
|------------------------------------ |  | ---------- | ------- | --------- |  | ----- | ------ | ---------- |  | - | ------ | - |  | - | ------- | -
|                                     |  | Hotel      |         | Corporate |  |       |        | Financial 
|                                     |  | Management |         | Housing   |  | Other |        | Statements
|                                     |  |            |         |           |  |       |        |           
|Three months ended June 30, 2003     |  |            |         |           |  |       |        |            |  |   |        |   |  |   |         |  
|Revenue                              |  | $          | 231,245 |           |  | $     | 28,392 |            |  | $ |       |   |  | $ | 259,637 |  
|EBITDA                               |  | $          | 6,984   |           |  | $     | (794   | )          |  | $ | (606   | ) |  | $ | 5,584   |  
|Three months ended June 30,
    2002 |  |            |         |           |  |       |        |            |  |   |        |   |  |   |         |  
|Revenue                              |  | $          | 82,970  |           |  | $     |       |            |  | $ |       |   |  | $ | 82,970  |  
|EBITDA                               |  | $          | 526     |           |  | $     |       |            |  | $ | (881   | ) |  | $ | (355    | )
|Six months ended June 30, 2003       |  |            |         |           |  |       |        |            |  |   |        |   |  |   |         |  
|Revenue                              |  | $          | 462,655 |           |  | $     | 54,211 |            |  | $ |       |   |  | $ | 516,866 |  
|EBITDA                               |  | $          | 12,079  |           |  | $     | (2,767 | )          |  | $ | (2,470 | ) |  | $ | 6,842   |  
|Total assets                         |  | $          | 262,202 |           |  | $     | 14,211 |            |  | $ | 21,051 |   |  | $ | 297,464 |  
|Six months ended June 30, 2002       |  |            |         |           |  |       |        |            |  |   |        |   |  |   |         |  
|Revenue                              |  | $          | 154,362 |           |  | $     |       |            |  | $ |       |   |  | $ | 154,362 |  
|EBITDA                               |  | $          | 2,810   |           |  | $     |       |            |  | $ | (1,000 | ) |  | $ | 1,810   |  
|Total assets                         |  | $          | 90,444  |           |  | $     |       |            |  | $ | 7,029  |   |  | $ | 97,473  |  

Revenues from foreign operations were as follows:

|               |  |                    |       |                  |  |      |     |      |  |   |        |  |  |   |     | 
|-------------- |  | ------------------ | ----- | ---------------- |  | ---- | --- | ---- |  | - | ------ |  |  | - | --- | 
|               |  |                    |       |                 
|               |  | Three months ended |       | Six months ended
|               |  | June 30,           |       | June 30,        
|               |  |                    |       |                 
|               |  | 2003               |       | 2002             |  | 2003 |     | 2002
|               |  |                    |       |                  |  |      |     |     
|Canada         |  | $                  | 2,257 |                  |  | $    | 239 |      |  | $ | 4,435  |  |  | $ | 423 | 
|United Kingdom |  |                    | 6,023 |                  |  |      |    |      |  |   | 12,059 |  |  |   |    | 
|France         |  |                    | 360   |                  |  |      |    |      |  |   | 691    |  |  |   |    | 
|Russia         |  |                    | 241   |                  |  |      | 153 |      |  |   | 443    |  |  |   | 343 | 

8.     SUPPLEMENTAL
CASH FLOW INFORMATION

|               |              |                    |   |                  |  |      |   |      |  |  |   |       |  |  |   |       | 
|-------------- | ------------ | ------------------ | - | ---------------- |  | ---- | - | ---- |  |  | - | ----- |  |  | - | ----- | 
|               |              |                    |   |                 
|               |              | Three months ended |   | Six months ended
|               |              | June 30,           |   | June 30,        
|               |              |                    |   |                 
|               |              | 2003               |   | 2002             |  | 2003 |   | 2002
|               |              |                    |   |                  |  |      |   |     
|Cash paid for: |              |                    |   |                  |  |      |   |      |  |  |   |       |  |  |   |      
|               | Interest     |                    | $ | 2,472            |  |      | $ | 894  |  |  | $ | 4,344 |  |  | $ | 1,869 | 
|               | Income taxes |                    |   | 244              |  |      |   |     |  |  |   | 506   |  |  |   | 258   | 

8.     MERGER AND
INTEGRATION COSTS

Merger and integration costs for the three and
six months ended June 30, 2003, were $606 and $2,470,
respectively, compared to $0 for the same periods of 2002. These
costs represent integration expenses, including professional
fees, travel, and other transition costs associated with the
merger of Interstate and MeriStar on July 31, 2002. This
amount is included in our statement of operations as merger and
integration costs.

9.     SUBSEQUENT
EVENTS

CNL Hospitality On May 8, 2003, CNL Hospitality
Properties, Inc. announced plans to acquire RFS Hotel Investors,
Inc; on July 10, 2003, CNL completed the acquisition of
RFS. Flagstone Hospitality Management, our wholly-owned
subsidiary, currently manages 50 of the 57 former RFS hotel
properties. We currently expect to continue to manage these
hotels for a period of time. CNL has stated, however, that they

14



---



##### 



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


expect to terminate our management contracts for
many of the former RFS properties and intend to enter into
management agreements with hotel brand management companies. We
expect the terminations of these existing contracts to occur by
December 31, 2003. Total management fees from these
properties totaled $2,599 for the six months ended June 30,
2003. We expect to incur approximately $150 for the write-off of
tangible and intangible assets, and incur approximately $100 of
restructuring costs related to this transaction. We expect
substantially all of these costs will be recorded in the 2003
fourth quarter.

EITF Topic D-42 On July 31, 2003, the Securities
and Exchange Commission issued a clarification of Emerging
Issues Task Force Topic D-42, The Effect on the
Calculation of Earnings per Share for the Redemption of Induced
Conversion of Preferred Stock. Topic D-42 provides, among
other things, that any excess of the fair value of the
consideration transferred to the holders of the preferred stock
redeemed over the carrying amount of the preferred stock should
be subtracted from net earnings to determine net earnings
available to common stockholders in the calculation of earnings
per share. The SECs clarification of the guidance in Topic
D-42 provides that the carrying amount of the preferred stock
should be reduced by the related issuance costs. The July 2003
clarification of Topic D-42 is effective for the quarter ending
September 30, 2003 and is required to be reflected
retroactively in the financial statements of prior periods. We
have not previously considered issuance costs in determining the
carrying amount of our preferred stock that was converted in
2002. The implementation of Topic D-42 increases our basic and
diluted loss per share, from $(2.44) per share to $(2.52) per
share for the three months ended June 30, 2002, and from
$(2.74) per share to $(2.82) per share for the six months ended
June 30, 2002.

15



---



##### 





|        |                                                                                                                                               
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations (dollars in
    thousands, except per share amounts)

Background

Formation of Interstate Hotels &
Resorts

MeriStar Hotels & Resorts, Inc., or MeriStar,
and Interstate Hotels Corporation, or Interstate, entered into
an Agreement and Plan of Merger, dated May 1, 2002 as
amended on June 3, 2002. In the merger transaction,
Interstate merged with and into MeriStar, and MeriStar was
renamed Interstate Hotels & Resorts, Inc. On July 31,
2002, after receiving the required stockholder approvals,
MeriStar and Interstate completed the merger. The transaction
was a stock-for-stock merger of Interstate into MeriStar in
which Interstate stockholders received 4.6 shares of common
stock for each share of Interstate stock outstanding. Holders of
MeriStar common stock and operating partnership units continued
to hold their stock and units following the merger. In
connection with the merger, the holders of Interstates
convertible debt and preferred equity shares converted those
instruments into shares of common stock of the surviving
company. Immediately following the merger we effected a
one-for-five reverse stock split.

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

The consolidated interim financial statements for
the three and six-month periods ended June 30, 2002 reflect
the historical results of operations of Interstate, the
accounting acquiror. After the merger on July 31, 2002, the
financial statements include the operating results of the
combined entity, Interstate Hotels & Resorts, Inc.

Business Summary

Overview We are the largest independent hotel
management company in the United States, measured by number of
rooms under management. We manage a portfolio of hospitality
properties and provide related services in the hotel, corporate
housing, resort, conference center, and golf markets. We also
own one hotel. Our portfolio is diversified by franchise and
brand affiliations. The related services we provide include
insurance and risk management services, purchasing and project
management services, information technology and
telecommunications services, and centralized accounting services.

As of June 30, 2003, we managed 347
properties with 75,556 rooms in 44 states, the District of
Columbia, Canada, and Russia. We wholly own one of these
properties and have non-controlling equity interests in 26 of
these hotels. In addition, at June 30, 2003, we had 3,453
apartments under lease in the United States, Canada, the United
Kingdom and France.

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

We manage all 105 properties owned by MeriStar
Hospitality Corporation, a real estate investment trust, or
REIT. We also have an intercompany agreement with MeriStar
Hospitality. That agreement provides each of us the right to
participate in certain transactions entered into by the other
company. The intercompany agreement provides MeriStar
Hospitality with the right of first refusal with respect to some
of our hotel real estate opportunities and it also provides us
with a right of first refusal with respect to some of MeriStar
Hospitalitys hotel management opportunities (excluding
hotels that MeriStar Hospitality elects to have managed by a
hotel brand).

16



---



##### 



On July 1, 2002, MeriStar assigned the
leases of 47 hotels to a subsidiary of Winston Hotels, Inc.
under a provision of the REIT Modernization Act that allows
REITs to own their hotels through taxable subsidiaries. As part
of this agreement, we had continued to operate 33 of
Winstons properties. After one year, Winston had the
option to terminate the management contracts and during April
2003 notified us of its intention to do so. In connection with
the termination of the Winston contracts, we wrote off $587 of
unamortized management contract costs during the three months
ended June 30, 2003. This amount is included in
administrative and general expense in our statement of
operations.

Outlook The sluggish economy, the war in Iraq,
health concerns for travelers, and delays and difficulties in
travel due to heightened security measures at airports continue
to have a major impact on our operating results. Because of the
significant slowdown of the economy over the past
24 months, our managed hotels have generally experienced
significant declines in occupancy and average rates charged.
Weaker hotel performance has reduced our base and incentive
management fees, and also gives rise to additional losses under
minority investments we have made in connection with some of the
hotels that we manage.

Additionally, the weaker hotel operating
environment has caused some owners of our managed hotels to sell
hotels to provide the owners with additional liquidity. When a
hotel is sold, we are usually replaced as the hotels
manager. MeriStar Hospitality has announced plans to sell up to
40 of its 105 hotels, all of which we currently manage, and
other owners may also dispose of assets. If we are terminated as
manager upon the sale of one of MeriStar Hospitalitys
hotels, we will generally receive a termination fee equal to the
remaining payments (discounted using a 10% rate) under the
then-existing term of the management agreement. Our management
agreements with other owners generally have limited or no
termination fees due to us if our management agreement is
terminated upon the sale of the hotel. Also, our management
agreements with MeriStar Hospitality and many other owners
contain performance standards. Those standards generally require
the hotel to meet certain relative or absolute financial
performance levels, often in comparison to budgeted amounts. We
generally have a period to cure any performance standards we do
not meet. In the event the hotel does not meet those performance
standards and we do not cure within the period specified in the
management contract, the hotels owner may have a right to
terminate our management contract. The termination of management
contracts as a result of hotel dispositions or our failure to
meet performance standards would have an adverse effect on our
revenues.

In conjunction with recording the
Interstate-MeriStar merger in 2002, we assigned estimated fair
values to each of the management contracts considered purchased
by Interstate, the accounting acquiror in the merger
transaction. These assigned fair values are included as
intangible assets on our balance sheet. We are amortizing these
intangible assets over the terms of the management contracts. If
one of these management contracts is terminated prior to its
full term (for example, due to the sale of a hotel or an owner
choosing to exercise a termination clause), we will record a
loss on the write-off of the unamortized intangible asset value.
During the second quarter of 2003, MeriStar Hospitality disposed
of one hotel, and we wrote off $166 of intangible assets
associated with that property. We will record additional,
similar write-offs of intangible assets in future periods when
MeriStar Hospitality sells hotels.

The overall weak economy, the war in Iraq, and
traveler health concerns have continued to negatively impact the
demand for corporate relocations and long-term assignments, two
primary drivers of our corporate housing operations.
Geopolitical difficulties and traveler health concerns have
significantly affected our European and Canadian operations. We
expect those operations to continue to be impacted until
business travel patterns are stabilized.

These events have had and are expected to
continue to have an adverse impact on our financial performance.
In response to this current operating environment, we are
continuing to work with the owners of our managed hotel
properties to implement cost reduction and control measures to
improve those properties operating results. We are also
seeking to closely monitor and control our commitments for
leased rental units in our corporate housing division, in order
to minimize our exposure to further declines in demand for
corporate housing units. We have significantly reduced our
number of leased units in corporate housing markets with the
greatest impact from the economic and traveler health issues.

17



---



##### 



On May 8, 2003, CNL Hospitality Properties,
Inc. announced plans to acquire RFS Hotel Investors, Inc; on
July 10, 2003, CNL completed the acquisition of RFS.
Flagstone Hospitality Management, our wholly-owned subsidiary,
currently manages 50 of the 57 former RFS hotel properties. We
currently expect to continue to manage these hotels for a period
of time. CNL has stated, however, that they expect to terminate
our management contracts for many of the former RFS properties
and intend to enter into management agreements with hotel brand
management companies. We expect the terminations of these
existing contracts to occur by December 31, 2003. Total
management fees from these properties totaled $2,599 for the six
months ended June 30, 2003. We expect to incur
approximately $150 for the write-off of tangible and intangible
assets, and incur approximately $100 of restructuring costs
related to this transaction. We expect substantially all of
these costs will be recorded in the 2003 fourth quarter.

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

Relationship with MeriStar
Hospitality

We manage all 105 properties owned by MeriStar
Hospitality Corporation, a real estate investment trust. We also
have an intercompany agreement with MeriStar Hospitality. That
agreement provides each of us the right to participate in
certain transactions entered into by the other company. The
intercompany agreement provides MeriStar Hospitality with the
right of first refusal with respect to some of our hotel real
estate opportunities and it also provides us with a right of
first refusal with respect to some of MeriStar
Hospitalitys hotel management opportunities (excluding
hotels that MeriStar Hospitality elects to have managed by a
hotel brand).

Historically, we have had close operating,
management and governance relationships with MeriStar
Hospitality. We manage all of MeriStar Hospitalitys hotel
properties under long-term management contracts and have, in the
past, shared several key management personnel and board members
with MeriStar Hospitality. Due to our merger with Interstate and
our resulting increased scale, we and MeriStar Hospitality have
split the management teams of the two companies although
Paul W. Whetsell continues as the Chairman and Chief
Executive Officer of both companies, and we share two other
board members with MeriStar Hospitality.

Critical Accounting Policies and
Estimates

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

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



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

18



---



##### 





| |   |                    
| | - | -------------------
| |  | revenue recognition

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

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



| |    |                                                                                                                                                       
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | Current or immediate short-term (future twelve
    months) projected cash flows are significantly less than the
    most recent historical cash flows.



| |    |                                                                                                   
| | -- | --------------------------------------------------------------------------------------------------
| | b. | A significant loss of management contracts
    without the realistic expectation of a replacement.



| |    |                                                                                                                                                                                        
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c. | The unplanned departure of an executive officer
    or other key personnel, which could adversely affect our ability
    to maintain our competitive position and manage future growth.



| |    |                                                                                                                                                                                  
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | d. | A significant adverse change in legal factors or
    an adverse action or assessment by a regulator, which could
    affect the value of the goodwill or other long-lived assets.



| |    |                                                                                                                  
| | -- | -----------------------------------------------------------------------------------------------------------------
| | e. | Events which could cause significant adverse
    changes and uncertainty in business and leisure travel patterns.

During the second quarter of 2003, we wrote off
$801 of unamortized management contract costs relating to
terminated contracts. Of this, $587 related to the termination
of the Winston hotels as previously described, $166 related to a
property terminated by MeriStar Hospitality, and $48 related to
other terminated contracts during the quarter.

Impairment of goodwill In accordance with FASB Statement
No. 142, at least annually, we perform an analysis to
determine the impairment of goodwill carrying values. To test
goodwill for impairment, we perform an analysis to compare the
fair value of the reporting unit to which the goodwill is
assigned to the carrying value of the reporting unit. We make
estimates of the discounted cash flows from the expected future
operations of the reporting unit. If the analysis indicates that
the fair value of the reporting unit is less than its carrying
value, we do an analysis to compare the implied fair value of
the reporting unit goodwill with the carrying amount of that
goodwill. The implied fair value of the goodwill is determined
by allocating the fair value of the reporting unit to all the
assets and liabilities of that unit as if the reporting unit had
been acquired in a business combination. The excess of the fair
value of reporting unit over the amounts assigned to its assets
and liabilities is the implied fair value of the goodwill. If
the implied fair value of the goodwill is less than the carrying
value, an impairment loss shall be recognized in an amount equal
to that excess. Any impairment losses are recorded as operating
expenses. We have not recognized any impairment losses for
goodwill in 2003 or 2002.

Valuation Allowances We use our judgment in determining our
provision for income taxes, our deferred tax assets and
liabilities, and any valuation allowance recorded against our
deferred tax assets. At June 30, 2003, we have recorded a
$10,800 valuation allowance to reduce our deferred tax assets to
the amount that we believe is more likely than not to be
realized. This is an allowance against some, but not all, of our
recorded deferred tax assets. We have considered estimated
future taxable income and prudent and feasible ongoing tax
planning strategies in assessing the need for a valuation
allowance. Our estimates of taxable income require us to make
assumptions about various factors that affect our operating
results, such as economic conditions, consumer demand,
competition and other factors. Our actual results may differ
from these estimates. Based on actual results or a revision in
future estimates, we might determine that we would not be able
to realize additional portions of our net deferred tax assets in
the future; if that occurred, we would record a charge to the
income tax provision in that period.

19



---



##### 



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

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

Revenue Recognition We earn revenue from hotel management
contracts and related services, corporate housing operations and
operations from our owned hotel. Our management and other fees
consist of base and incentive management fees received from
third-party owners of hotel properties, and fees for other
related services we provide.

Through the second quarter of 2002, we had
recorded incentive management fees in accordance with Staff
Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements, and Method No. 2 of Emerging
Issues Task Force or EITF Topic No. D-96, Accounting
for Management Fees Based on a Formula in which incentive
management fees are accrued as earned based on the profitability
of the hotel, subject to the specific terms of each individual
management agreement. The application of Method No. 2
resulted in the accrual of incentive management fees during
interim reporting periods throughout the annual measurement
period. The accrual would be reduced or eliminated in subsequent
interim reporting periods if the profitability of the hotel
missed performance thresholds later in the annual measurement
period.

In the third quarter of 2002, with an effective
date of January 1, 2002, we began recording the incentive
management fees in the period that it is certain the incentive
management fees are earned, which for annual incentive fee
measurements is typically in the last month of the annual
contract period. This newly adopted accounting principle is
preferable because the new method eliminates the potential that
incentive management fee revenue will be recognized in one
interim reporting period and reduced or eliminated in a future
interim reporting period. This methodology is designated as
Method No. 1 in EITF Topic No. D-96. Method No. 1
is the Securities and Exchange Commission Staffs preferred
method of accounting for incentive management fees.

This change in accounting method has no effect on
the total annual management fees earned or amount of cash we are
paid, but does affect the timing of recognizing the revenue from
these fees. However, the effect of this change in accounting
method for interim periods resulted in an adjustment of $3,050
that reduced incentive management fees recognized during the
first and second quarter of 2002. The effect of this change on
the second quarter of 2002 was to increase the net loss
available to common shareholders by $1,029 ($0.18 per share) to
a net loss available to common shareholders of $13,693 ($2.44
per share). The effect of this change on the six months ended
June 30, 2002 was to increase the net loss available to
common shareholders by $1,949 ($0.36 per share) to a net loss
available to common shareholders of $14,902 ($2.74 per share).
These changes are reflected in our statement of operations for
the three and six months ended June 30, 2002.

Results of Operations

Three Months
Ended June 30, 2003 Compared with Three Months Ended
June 30, 2002

Revenues

We earn revenue from leased hotels, management
contracts and related services, and corporate housing
operations. Our management and other fees consist of base and
incentive management fees received from third-party owners of
hotel properties, and fees for other related services we
provide. We recognize base fees and fees for other services as
revenue when earned in accordance with the individual management
contracts.

20



---



##### 



The following table shows the operating
statistics for our managed hotels on a same store basis for the
three months ended June 30 (dollars not in thousands):

|                           |  |      |       |      |  |        |        |   |  |  |        | 
|-------------------------- |  | ---- | ----- | ---- |  | ------ | ------ | - |  |  | ------ | 
|                           |  | 2003 |       | 2002 |  | Change
|                           |  |      |       |      |  |       
|Revenue per available room |  | $    | 67.83 |      |  | $      | 71.70  |   |  |  | (5.4%) | 
|Average daily rate         |  | $    | 99.35 |      |  | $      | 102.78 |   |  |  | (3.3%) | 
|Occupancy                  |  |      | 68.3  | %    |  |        | 69.8   | % |  |  | (2.1%) | 

Prior to the merger on July 31, 2002,
Interstate managed 141 hotels with 29,752 rooms. On
June 30, 2003 we managed 347 properties with 75,556 rooms.

Our total revenue increased $176,667 to $259,637
for the three months ended June 30, 2003 compared to
$82,970 in the same period of 2002. Major components of this
increase were:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lodging revenues consist of rooms, food and
    beverage and other department revenues from the Pittsburgh
    Airport Residence Inn by Marriott. These revenues increased
    $153, or 20%, from $779 for the three months ended June 30,
    2002 to $932 for the three months ended June 30, 2003. This
    increase is primarily due to the increase in revenue per
    available room, resulting from a 28% increase in occupancy and a
    6% decrease in average daily rate for this property between the
    periods presented.                                                                                                                                                                                                                                                                                                                                    
|
| |  | Revenue from management fees increased $10,395,
    or 214%, from $4,866 for the three months ended June 30,
    2002 to $15,261 for the three months ended June 30, 2003.
    An increase of $12,045 was due to the increase in number of
    managed hotels resulting from the merger on July 31, 2002,
    and additional contracts acquired since the merger. This
    increase was partially offset by a decrease in management fee
    revenues resulting from the loss of certain contracts, and the
    decrease in revenues at the managed hotels, due to the continued
    weakness in the U.S. economy and the impact of the war on travel.                                                                                                                                                                                                                     
|
| |  | Other revenue consists of insurance revenue from
    our captive insurance company subsidiary, purchasing revenue,
    accounting fees, technical services revenues, information
    technology support fees, renovation fees, and other fees. Other
    revenues decreased $2,504, or 46%, from $5,451 for the three
    months ended June 30, 2002 to $2,947 for the three months
    ended June 30, 2003. The majority of this decrease is due
    to a decline in insurance revenues from our captive insurance
    company. The remainder is due to an overall decrease in the
    other fees mentioned above.                                                                                                                                                                                                                                                        
|
| |  | Corporate housing revenue was $28,392 for the
    three months ended June 30, 2003. Corporate housing revenue
    is included in our results of operations beginning
    August 1, 2002 as a result of the merger.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | We employ the staff at our managed properties.
    Under our management agreements, the hotel owners reimburse us
    for payroll, benefits, and certain other costs related to the
    operations of the managed properties. EITF No. 01-14,
    establishes standards for accounting for reimbursable expenses
    in the income statement. Under this pronouncement, the
    reimbursement of these costs is recorded as revenue with a
    corresponding expense recorded as other expenses from
    managed properties in our statement of operations.
    Reimbursable costs increased by $140,231, or 195%, to $212,105
    for the three months ended June 30, 2003, from $71,874 for
    the same period in 2002. Substantially all of this increase is
    due to the increase in the number of employees and managed
    properties resulting from the merger.

Operating
expenses by department

Total operating expenses by department increased
$23,626 to $24,175 for the three months ended June 30, 2003
compared to $549 for the three months ended June 30, 2002.
Factors primarily affecting the increase were:



| |   |                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Corporate housing expenses were $23,511 for the
    three months ended June 30, 2003. Corporate housing
    expenses are included in the results of operations beginning on
    August 1, 2002 after the merger.
|
| |  | Lodging expenses consist of rooms, food and
    beverage, other department expenses and property operating costs
    from the Pittsburgh Airport Residence Inn by Marriott. These
    expenses increased        

21



---



##### 



| |  |                                                                                                                                                                                                                               
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $115, or 21%, from $549 for the three months
    ended June 30, 2002 to $664 for the three months ended
    June 30, 2003. This increase is a direct result of the
    increase in revenue from this hotel as described above.

Undistributed
operating expenses

Undistributed operating expenses include the
following items:



| |   |                                  
| | - | ---------------------------------
| |  | administrative and general;      
|
| |  | depreciation and amortization;   
|
| |  | merger and integration costs; and
|
| |  | tender offer costs               

Total undistributed operating expenses increased
$7,955 or 59%, to $21,439 for the three months ended
June 30, 2003, compared to $13,484 for the three months
ended June 30, 2002. Factors primarily affecting the
increase were:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Administrative and general expenses are
    associated with the management of hotels and corporate housing
    facilities and consist primarily of expenses such as corporate
    payroll and related benefits, operations management, sales and
    marketing, finance, legal, information technology support, human
    resources and other support services, as well as general
    corporate expenses. Administrative and general increased by
    $7,146 or 71%, from $10,021 for the three months ended
    June 30, 2002 to $17,167 for the three months ended
    June 30, 2003. The primary reason for this increase is
    attributable to the increase in expenses in all of the above
    departments resulting from the merger on July 31, 2002.
|
| |  | Depreciation and amortization expense increased
    by $1,084, or 42%, from $2,582 for the three months ended
    June 30, 2002, to $3,666 for the three months ended
    June 30, 2003. This increase is primarily due to the
    acquisition of certain depreciable and amortizable fixed assets
    in conjunction with the merger on July 31, 2002. These
    assets include management contracts and franchise fees. The
    amortization of deferred financing fees is included in interest
    expense.                                                                                                                                                                                                                                               
|
| |  | Under EITF 01-14, the reimbursement of payroll,
    benefits, and certain other costs is recorded as revenue with a
    corresponding expense recorded as other expenses from
    managed properties in our statement of operations.
    Reimbursable costs increased by $140,231, or 195%, to $212,105
    for the three months ended June 30, 2003, from $71,874 for
    the same period 2002. Substantially all of this increase is due
    to the increase in the number of employees and managed
    properties resulting from the merger of Interstate and MeriStar.                                                                                                                                                                                 
|
| |  | Merger and integration costs were $606 for the
    three months ended June 30, 2003, compared to $0 for the same
    period 2002. These costs include professional fees, travel,
    relocation costs and other transition costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Tender offer costs were $0 for the three months
    ended June 30, 2003, compared to $881 for the three months
    ended June 30, 2002. These costs related to the
    commencement of a partial tender offer to purchase 2,465,322
    shares of Interstates Class A Common Stock by Shaner
    Hotel Group Limited Partnership and Shaners unsolicited
    proposals to combine the operations of Interstate with Shaner
    prior to the commencement of the tender offer. These costs were
    incurred for legal and professional fees. The tender offer
    expired May 31, 2002.                                                                                                                                                                    

22



---



##### 



Net
income (loss) available to common shareholders

Net income (loss) available to common
shareholders increased $13,206 to $(487) for the three months
ended June 30, 2003, from $(13,693) for the three months
ended June 30, 2002. This increase is due to the increase
in revenues offset by the increase in expenses, as discussed
above, as well as the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Interest expense increased $359, or 17%, to
    $2,519 for the three months ended June 30, 2003, from
    $2,160 for the three months ended June 30, 2002. This
    increase is primarily due to the increase in outstanding debt
    following the merger, the increase in the amortization of
    deferred financing fees associated with the merger and the debt
    refinancing in January 2003. The amortization of deferred
    financing fees is included in interest expense.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Equity in loss of affiliates decreased $198, or
    48%, to $218 for the three months ended June 30, 2003, from
    $416 for the same period in 2002. These losses consist of our
    proportionate share of the losses incurred through our
    non-controlling equity investments in various hotels. Losses
    were incurred by the hotels owned by our equity investees
    due to the weakness in the U.S. economy during 2002 and the
    continued weakness into 2003, followed by the impact of the war
    in 2003. Future adverse changes in the hospitality industry
    market conditions or poor operating results of the underlying
    investments could result in future losses or an inability to
    recover the carrying value of these investments.                                                                                                                                                                                                                   
|
| |  | Conversion incentive payment 
    convertible notes was a one-time payment of $7,307 in 2002. In
    October 2000, Interstate had issued Series B Preferred
    Stock and 8.75% Convertible Notes to CGLH
    Partners I LP and CGLH Partners II LP
    (collectively, the Investor), entities affiliated
    with Lehman Brothers, Inc. In connection with the
    Interstate  MeriStar merger on July 31, 2002,
    the Investor agreed to convert its preferred stock and
    convertible notes into Class A common stock, subject to
    certain restrictions. As an inducement to the conversion, we
    paid the Investor a total of $9,250  $7,307 relating
    to the convertible notes, and $1,943 relating to the conversion
    of the preferred stock. The preferred stock conversion payment
    is shown as Mandatorily redeemable preferred stock
    in our statement of operations for the 2002 periods presented.
    There were no similar payments made in 2003.
|
| |  | Minority interest benefit decreased $5 to a
    benefit of $(7) for the three months ended June 30, 2003,
    compared to a benefit of $(12) for the same period 2002. This is
    due to the decrease in net loss for the period, and our increase
    in minority interest holders in connection with the merger on
    July 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Income tax benefit decreased by $1,221 to a
    benefit of $(325) for the three months ended June 30, 2003,
    from a benefit of $(1,546) for the same period 2002. This is due
    to the decrease in net loss before income taxes for the 2003
    period. Our effective tax rate was 40% in 2003 and approximately
    30% for the six months ended June 30, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

Earnings
(loss) before interest, taxes, depreciation and
amortization

A significant portion of our assets consists of
intangible assets. Of those intangible assets, our management
contracts are amortized over their remaining terms, and, in
accordance with generally accepted accounting principles, those
assets are subject to straight-line amortization. Because
depreciation and amortization are non-cash items, we believe
that presentation of earnings before interest, taxes,
depreciation and amortization, or EBITDA, is useful. EBITDA
represents consolidated earnings before interest expense, income
taxes, depreciation and amortization. We believe EBITDA provides
useful information regarding our financial condition and results
of operations because EBITDA is useful for evaluating our
operating performance and our capacity to incur and service
debt, fund capital expenditures and expand our business. We also
use EBITDA as one measure in determining the value of other
acquisitions and dispositions. This financial measure, however,
should be considered in addition to, not as a substitute for or
as being superior to, operating losses, cash flows, or other
measures of financial performance prepared in accordance with
accounting principles generally accepted in the United States of
America.

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

23



---



##### 



MeriStar-Interstate merger on July 31, 2002,
we operated in two reportable segments: (1) operations of
luxury and upscale hotels and (2) operations of mid-scale,
upper economy and budget hotels. Following the merger, we
operate in the segments shown in the table below. The Other
items in the tables below represent operating segment activity
and assets for the non-reportable segments. The non-reportable
segment activity includes merger costs in 2003 and tender offer
costs and conversion incentive payments for convertible notes in
2002. The non-reportable segment for assets includes deferred
tax assets and net deferred financing costs. For periods prior
to the merger, we have combined our two previously reportable
segments into the hotel management operating segment for
presentation in the table shown below.


The following table reconciles net income
(loss) to EBITDA:

|                                 |                                                      |            |        |           |   |       |      |            |   |   |        |       |   |   |         |        |  
|-------------------------------- | ---------------------------------------------------- | ---------- | ------ | --------- | - | ----- | ---- | ---------- | - | - | ------ | ----- | - | - | ------- | ------ | -
|                                 |                                                      | Hotel      |        | Corporate |   |       |      | Financial 
|                                 |                                                      | Management |        | Housing   |   | Other |      | Statements
|                                 |                                                      |            |        |           |   |       |      |           
|Three months ended June 30, 2003 |                                                      |            |        |           |   |       |      |            |   |   |        |       |   |   |         |       
|Net income (loss)                |                                                      | $          | 735    |           |   | $     | (863 | )          |   | $ | (359   | )     |   | $ | (487    | )     
|Adjustments:                     |                                                      |            |        |           |   |       |      |            |   |   |        |       |   |   |         |       
|                                 | Depreciation and amortization                        |            |        | 3,253     |   |       |      | 413        |   |   |        |      |   |   |         | 3,666  |  
|                                 | Interest expense, net                                |            |        | 2,267     |   |       |      | 252        |   |   |        |      |   |   |         | 2,519  |  
|                                 | Equity in losses of affiliates                       |            |        | 218       |   |       |      |           |   |   |        |      |   |   |         | 218    |  
|                                 | Minority interest expense (benefit)                  |            |        | 11        |   |       |      | (12        | ) |   |        | (6    | ) |   |         | (7     | )
|                                 | Income tax expense (benefit)                         |            |        | 500       |   |       |      | (584       | ) |   |        | (241  | ) |   |         | (325   | )
|                                 |                                                      |            |        |           |   |       |      |            |   |   |        |       |   |   |         |       
|EBITDA                           |                                                      | $          | 6,984  |           |   | $     | (794 | )          |   | $ | (606   | )     |   | $ | 5,584   |       
|                                 |                                                      |            |        |           |   |       |      |            |   |   |        |       |   |   |         |       
|Three months ended June 30, 2002 |                                                      |            |        |           |   |       |      |            |   |   |        |       |   |   |         |       
|Net income (loss)                |                                                      | $          | (3,323 | )         |   | $     |     |            |   | $ | (7,939 | )     |   | $ | (11,262 | )     
|Adjustments:                     |                                                      |            |        |           |   |       |      |            |   |   |        |       |   |   |         |       
|                                 | Depreciation and amortization                        |            |        | 2,582     |   |       |      |           |   |   |        |      |   |   |         | 2,582  |  
|                                 | Interest expense, net                                |            |        | 2,160     |   |       |      |           |   |   |        |      |   |   |         | 2,160  |  
|                                 | Equity in losses of affiliates                       |            |        | 416       |   |       |      |           |   |   |        |      |   |   |         | 416    |  
|                                 | Conversion incentive payment 
    convertible notes |            |        |          |   |       |      |           |   |   |        | 7,307 |   |   |         | 7,307  |  
|                                 | Minority interest expense (benefit)                  |            |        | (10       | ) |       |      |           |   |   |        | (2    | ) |   |         | (12    | )
|                                 | Income tax expense (benefit)                         |            |        | (1,299    | ) |       |      |           |   |   |        | (247  | ) |   |         | (1,546 | )
|                                 |                                                      |            |        |           |   |       |      |            |   |   |        |       |   |   |         |       
|EBITDA                           |                                                      | $          | 526    |           |   | $     |     |            |   | $ | (881   | )     |   | $ | (355    | )     
|                                 |                                                      |            |        |           |   |       |      |            |   |   |        |       |   |   |         |       

EBITDA increased $5,939, to $5,584 for the three
months ended June 30, 2003, from $(355) for the three
months ended June 30, 2002. Major components of this
increase were:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Hotel Management segments EBITDA increased
    by $6,458 to $6,984 for the three months ended June 30,
    2003, from $526 for the three months ended June 30, 2002.
    This increase is due to the increase in hotel management
    operations subsequent to our merger with Interstate Hotels on
    July 31, 2002, and the decrease in net loss.                                                                         
|
| |  | Corporate Housing segments EBITDA was
    $(794) for the three months ended June 30, 2003 compared to
    $0 for the same period 2002. Corporate housing operations are
    included in the results of operations beginning on
    August 1, 2002, after the merger between Interstate and
    MeriStar on July 31, 2002.                                                                                                    
|
| |  | The remaining EBITDA increased by $275, to $(606)
    for the three months ended June 30, 2003, from $(881) for
    the same period 2002. The 2002 amount represents amounts paid
    for tender offer costs included in net operating income, and the
    2003 amount represents merger and integration costs associated
    with the merger on July 31, 2002. No similar costs were
    incurred in the same period of 2002.

24



---



##### 



Six Months
Ended June 30, 2003 Compared with Six Months Ended
June 30, 2002

Revenues

The following table shows the operating
statistics for our managed hotels on a same store basis for the
six months ended June 30 (dollars not in thousands):

|                           |  |      |        |      |  |        |        |   |  |  |        | 
|-------------------------- |  | ---- | ------ | ---- |  | ------ | ------ | - |  |  | ------ | 
|                           |  | 2003 |        | 2002 |  | Change
|                           |  |      |        |      |  |       
|Revenue per available room |  | $    | 65.75  |      |  | $      | 68.18  |   |  |  | (3.6%) | 
|Average daily rate         |  | $    | 100.29 |      |  | $      | 102.83 |   |  |  | (2.5%) | 
|Occupancy                  |  |      | 65.6   | %    |  |        | 66.3   | % |  |  | (1.1%) | 

Our total revenue increased $362,504 to $516,866
for the six months ended June 30, 2003 compared to $154,362 in
the same period of 2002. Major components of this increase were:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lodging revenues consist of rooms, food and
    beverage and other department revenues from the Pittsburgh
    Airport Residence Inn by Marriott. These revenues increased
    $313, or 22%, from $1,455 for the six months ended June 30,
    2002 to $1,768 for the six months ended June 30, 2003. This
    increase is primarily due to the increase in revenue per
    available room, resulting from a 25% increase in occupancy and a
    3% decrease in average daily rate for this property between the
    periods presented.                                                                                                                                                                                                                                                                           
|
| |  | Revenue from management fees increased $20,328,
    or 223%, from $9,128 for the six months ended June 30, 2002
    to $29,456 for the six months ended June 30, 2003. An
    increase of $21,985 was due to the increase in number of managed
    hotels resulting from the merger on July 31, 2002, and
    additional contracts secured since the merger. This increase was
    partially offset by a decrease in management fee revenues
    resulting from the loss of certain contracts, and the decrease
    in revenues at the managed hotels, due to the continued weakness
    in the U.S. economy and the impact of the war on travel.                                                                                                                                                                 
|
| |  | Other revenue consist of insurance revenue from
    our captive insurance company subsidiary, purchasing revenue,
    accounting fees, technical services revenues, information
    technology support fees, renovation fees, and other fees. Other
    revenues decreased $2,635 or 28%, from $9,464 for the six months
    ended June 30, 2002 to $6,829 for the six months ended
    June 30, 2003. The majority of this decrease is due to a
    decline in insurance revenues from our captive insurance
    company. The remainder is due to an overall decrease in the
    other fees mentioned above.                                                                                                                                                                                                     
|
| |  | Corporate housing revenue was $54,211 for the six
    months ended June 30, 2003. Corporate housing revenue is
    included in our results of operations beginning August 1,
    2002 as a result of the merger.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Under EITF 01-14, the reimbursement of payroll,
    benefits, and certain other costs is recorded as revenue with a
    corresponding expense recorded as other expenses from
    managed properties in our statement of operations.
    Reimbursable costs increased by $290,287, or 216%, to $424,602
    for the six months ended June 30, 2003, from $134,315 for
    the same period in 2002. Substantially all of this increase is
    due to the increase in the number of employees and managed
    properties resulting from the merger. Additionally, our accounts
    receivable balance increased $20,513, from $13,532 at
    December 31, 2002 to $34,045 at June 30, 2003. This
    increase is primarily due to the timing of billings for
    reimbursable expenses received from hotel owners.

Operating
expenses by department

Total operating expenses by department increased
$45,887 to $46,917 for the six months ended June 30, 2003
compared to $1,030 for the six months ended June 30, 2002.
Factors primarily affecting the increase were:



| |   |                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Corporate housing expenses were $45,633 for the
    six months ended June 30, 2003. Corporate housing expenses
    are included in the results of operations beginning on
    August 1, 2002 after the merger.
|
| |  | Lodging expenses consist of rooms, food and
    beverage, other department expenses and property operating costs
    from the Pittsburgh Airport Residence Inn by Marriott. These
    expenses increased      

25



---



##### 



| |  |                                                                                                                                                                                                                               
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $254, or 25%, from $1,030 for the six months
    ended June 30, 2002 to $1,284 for the six months ended
    June 30, 2003. This increase is a direct result of the
    increase in revenue from this hotel as described above.

Undistributed
operating expenses

Undistributed operating expenses include the
following items:



| |   |                                  
| | - | ---------------------------------
| |  | administrative and general;      
|
| |  | depreciation and amortization;   
|
| |  | merger and integration costs; and
|
| |  | tender offer costs.              

Total undistributed operating expenses increased
$24,536 or 110%, to $46,853 for the six months ended
June 30, 2003, compared to $22,317 for the six months ended
June 30, 2002. Factors primarily affecting the increase
were:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Administrative and general expenses are
    associated with the management of hotels and corporate housing
    facilities and consist primarily of expenses such as corporate
    payroll and related benefits, operations management, sales and
    marketing, finance, legal, information technology support, human
    resources and other support services, as well as general
    corporate expenses. Administrative and general increased by
    $19,828 or 122%, from $16,207 for the six months ended
    June 30, 2002 to $36,035 for the six months ended
    June 30, 2003. The primary reason for this increase is
    attributable to the increase in expenses in all of the above
    departments resulting from the merger on July 31, 2002.
|
| |  | Depreciation and amortization expense increased
    by $3,238, or 63%, from $5,110 for the six months ended
    June 30, 2002, to $8,348 for the six months ended
    June 30, 2003. This increase is primarily due to the
    acquisition of certain depreciable and amortizable fixed assets
    in conjunction with the merger on July 31, 2002. These
    assets include management contracts and franchise fees. The
    amortization of deferred financing fees is included in interest
    expense.                                                                                                                                                                                                                                                 
|
| |  | Under EITF 01-14, the reimbursement of payroll,
    benefits, and certain other costs is recorded as revenue with a
    corresponding expense recorded as other expenses from
    managed properties in our statement of operations.
    Reimbursable costs increased by $290,287, or 216%, to $424,602
    for the six months ended June 30, 2003, from $134,315 for
    the same period 2002. Substantially all of this increase is due
    to the increase in the number of employees and managed
    properties resulting from the merger of Interstate and MeriStar.                                                                                                                                                                                
|
| |  | Merger and integration costs were $2,470 for the
    six months ended June 30, 2003, compared to $0 for the same
    period 2002. These include professional fees, travel, relocation
    costs and other transition costs associated with the merger on
    July 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Tender offer costs were $0 for the six months
    ended June 30, 2003, compared to $1,000 for the six months
    ended June 30, 2002. These costs related to the
    commencement of a partial tender offer to purchase 2,465,322
    shares of Interstates Class A Common Stock by Shaner
    Hotel Group Limited Partnership and Shaners unsolicited
    proposals to combine the operations of Interstate with Shaner
    prior to the commencement of the tender offer. These costs were
    incurred for legal and professional fees. The tender offer
    expired May 31, 2002.                                                                                                                                                                    

26



---



##### 



Net
income (loss) available to common shareholders

Net income (loss) available to common
shareholders increased $18,843 to $3,941 for the six months
ended June 30, 2003, from $(14,902) for the six months
ended June 30, 2002. This increase is due to the increase
in revenues partially offset by the increase in expenses, as
discussed above, as well as the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Interest expense increased $1,693, or 54%, to
    $4,828 for the six months ended June 30, 2003, from $3,135
    for the six months ended June 30, 2002. This increase is
    primarily due to the increase in outstanding debt following the
    merger, the increase in the amortization of deferred financing
    fees associated with the merger and the debt refinancing in
    January 2003. The amortization of deferred financing fees is
    included in interest expense.                                                                                                                                                                                                                                                                                
|
| |  | Equity in loss of affiliates decreased $30, or
    5%, to $566 for the six months ended June 30, 2003, from
    $596 for the same period in 2002. These losses consist of our
    proportionate share of the losses incurred through our
    non-controlling equity investees in various hotels. Losses were
    incurred by the hotels owned by our equity investments due to
    the weakness in the U.S. economy during 2002 and the continued
    weakness into 2003, followed by the impact of the war in 2003.
    Future adverse changes in the hospitality industry market
    conditions or poor operating results of the underlying
    investments could result in future losses or an inability to
    recover the carrying value of these investments.
|
| |  | Conversion incentive payment 
    convertible notes was a one-time payment to the Investor of
    $7,307 in 2002, made in connection with the Interstate-MeriStar
    merger on July 31, 2002. There were no similar payments
    made in 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Gain on refinancing was $13,629 for the six
    months ended June 30, 2003, compared to $0 for the same
    period 2002. Our $56,069 of long-term debt under the MeriStar
    Hospitality term loan at December 31, 2002 was due to mature on
    July 31, 2007. In January 2003, we completed a discounted
    repayment of the MeriStar Hospitality term loan. We refinanced
    the repayment with the proceeds from a $40,000 subordinated term
    loan and realized a gain of $13,629.                                                                                                                                                                                                                                                                       
|
| |  | Minority interest expense increased $109 to $161
    for the six months ended June 30, 2003, compared to $52 for
    the same period 2002. This is due to the increase in net income
    for the period, and our increase in minority interest holders in
    connection with the merger on July 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Income tax expense increased by $4,720 to $2,627
    for the six months ended June 30, 2003, from a benefit of
    $(2,093) for the same period 2002. This is due to the increase
    in net income before income taxes for the 2003 period, compared
    to a net loss before income taxes for the 2002 period. Our
    effective tax rate was 40% in 2003 and approximately 28% for the
    three months ended June 30, 2002.                                                                                                                                                                                                                                                                                                                                    

Earnings
(loss) before interest, taxes, depreciation and
amortization

A significant portion of our assets consists of
intangible assets. Of those intangible assets, our management
contracts are amortized over their remaining terms, and, in
accordance with generally accepted accounting principles, those
assets are subject to straight-line amortization. Because
depreciation and amortization are non-cash items, we believe
that presentation of earnings before interest, taxes,
depreciation and amortization, or EBITDA, is useful. EBITDA
represents consolidated earnings before interest expense, income
taxes, depreciation and amortization. We believe EBITDA provides
useful information regarding our financial condition and results
of operations because EBITDA is useful for evaluating our
operating performance and our capacity to incur and service
debt, fund capital expenditures and expand our business. We also
use EBITDA as one measure in determining the value of other
acquisitions and dispositions. This financial measure, however,
should be considered in addition to, not as a substitute for or
as being superior to, operating losses, cash flows, or other
measures of financial performance prepared in accordance with
accounting principles generally accepted in the United States of
America.

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

27



---



##### 



Interstate merger on July 31, 2002, we
operated in two reportable segments: (1) operations of
luxury and upscale hotels and (2) operations of mid-scale,
upper economy and budget hotels. Following the merger, we
operate in the segments shown in the table below. The Other
items in the tables below represent operating segment activity
and assets for the non-reportable segments. The non-reportable
segment activity includes merger costs in 2003 and tender offer
costs and conversion incentive payments for convertible notes in
2002. The non-reportable segment for assets includes deferred
tax assets and net deferred financing costs. For periods prior
to the merger, we have combined our two previously reportable
segments into the hotel management operating segment for
presentation in the table shown below.


The following table reconciles net income
(loss) to EBITDA:

|                               |                                                      |            |        |           |   |       |        |            |   |   |        |         |   |   |         |         |  
|------------------------------ | ---------------------------------------------------- | ---------- | ------ | --------- | - | ----- | ------ | ---------- | - | - | ------ | ------- | - | - | ------- | ------- | -
|                               |                                                      | Hotel      |        | Corporate |   |       |        | Financial 
|                               |                                                      | Management |        | Housing   |   | Other |        | Statements
|                               |                                                      |            |        |           |   |       |        |           
|Six months ended June 30, 2003 |                                                      |            |        |           |   |       |        |            |   |   |        |         |   |   |         |        
|Net Income (loss)              |                                                      | $          | (212   | )         |   | $     | (2,382 | )          |   | $ | 6,535  |         |   | $ | 3,941   |        
|Adjustments:                   |                                                      |            |        |           |   |       |        |            |   |   |        |         |   |   |         |        
|                               | Depreciation and amortization                        |            |        | 7,531     |   |       |        | 817        |   |   |        |        |   |   |         | 8,348   |  
|                               | Interest expense, net                                |            |        | 4,345     |   |       |        | 483        |   |   |        |        |   |   |         | 4,828   |  
|                               | Equity in loss of affiliates                         |            |        | 566       |   |       |        |           |   |   |        |        |   |   |         | 566     |  
|                               | Gain on refinancing                                  |            |        |          |   |       |        |           |   |   |        | (13,629 | ) |   |         | (13,629 | )
|                               | Minority interest expense (benefit)                  |            |        | (9        | ) |       |        | (97        | ) |   |        | 267     |   |   |         | 161     |  
|                               | Income tax expense (benefit)                         |            |        | (142      | ) |       |        | (1,588     | ) |   |        | 4,357   |   |   |         | 2,627   |  
|                               |                                                      |            |        |           |   |       |        |            |   |   |        |         |   |   |         |        
|EBITDA                         |                                                      | $          | 12,079 |           |   | $     | (2,767 | )          |   | $ | (2,470 | )       |   | $ | 6,842   |        
|                               |                                                      |            |        |           |   |       |        |            |   |   |        |         |   |   |         |        
|Six months ended June 30, 2002 |                                                      |            |        |           |   |       |        |            |   |   |        |         |   |   |         |        
|Net income (loss)              |                                                      | $          | (4,281 | )         |   | $     |       |            |   | $ | (8,016 | )       |   | $ | (12,297 | )      
|                               | Adjustments:                                         |            |        |           |   |       |        |            |   |   |        |         |   |   |         |         |  
|                               | Depreciation and amortization                        |            |        | 5,110     |   |       |        |           |   |   |        |        |   |   |         | 5,110   |  
|                               | Interest expense, net                                |            |        | 3,135     |   |       |        |           |   |   |        |        |   |   |         | 3,135   |  
|                               | Equity in losses of affiliates                       |            |        | 596       |   |       |        |           |   |   |        |        |   |   |         | 596     |  
|                               | Conversion incentive payment 
    convertible notes |            |        |          |   |       |        |           |   |   |        | 7,307   |   |   |         | 7,307   |  
|                               | Minority interest expense (benefit)                  |            |        | 45        |   |       |        |           |   |   |        | 7       |   |   |         | 52      |  
|                               | Income tax expense (benefit)                         |            |        | (1,795    | ) |       |        |           |   |   |        | (298    | ) |   |         | (2,093  | )
|                               |                                                      |            |        |           |   |       |        |            |   |   |        |         |   |   |         |        
|EBITDA                         |                                                      | $          | 2,810  |           |   | $     |       |            |   | $ | (1,000 | )       |   | $ | 1,810   |        
|                               |                                                      |            |        |           |   |       |        |            |   |   |        |         |   |   |         |        

EBITDA increased $5,032, to $6,842 for the six
months ended June 30, 2003, from $1,810 for the six months
ended June 30, 2002. Major components of this increase were:



| |   |                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Hotel Management segments EBITDA increased
    by $9,269 to $12,079 for the six months ended June 30,
    2003, from $2,810 for the six months ended June 30, 2002.
    This increase is due to the increase in hotel management
    operations subsequent to our merger with Interstate Hotels on
    July 31, 2002, and the decrease in net loss.
|
| |  | Corporate Housing segments EBITDA was
    $(2,767) for the six months ended June 30, 2003 compared to
    $0 for the same period 2002. Corporate housing operations are
    included in the results of operations beginning on
    August 1, 2002, after the merger between Interstate and
    MeriStar on July 31, 2002.                          
|
| |  | The remaining EBITDA decreased by $1,470, to
    $(2,470) for the six months ended June 30, 2003, from
    $(1,000) for the same period 2002. The 2002 amount represents
    amounts paid for tender offer                                                                                                                                          

28



---



##### 



| |  |                                                                                                                                                                                                                     
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | costs included in net operating income. The 2003
    amount consists of merger and integration costs associated with
    the merger on July 31, 2002. No similar costs were incurred
    in the same period of 2002.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Working Capital We had $22,911 of cash and cash
equivalents at June 30, 2003, compared to $7,054 at
December 31, 2002, and working capital deficit (current
assets less current liabilities) of $2,924 at June 30, 2003
compared to a working capital deficit of $13,115 at
December 31, 2002. This improvement in working capital of
$10,191 resulted primarily from draws on our line of credit.

Operating Activities Net cash provided by operating
activities was $9,571 for the six months ended June 30,
2003, compared to net cash used in operating activities of
$(8,867) for the six months ended June 30, 2002. The
increase in cash of $18,438 resulted primarily from the increase
in net income and the timing of accounts payable, partially
offset by the gain on refinancing and an increase in accounts
receivable for the periods presented.

If the continued weakness in the economy
continues to negatively impact the financial results of our
managed hotels and corporate housing operations, our management
fee and corporate housing revenues could decrease, and we may
incur additional losses from our minority investments. These
events and factors, along with those described in Item 5,
Other Information, could negatively impact our cash
flows from operating activities and net income.

We are required to distribute 1.6627% of cash
flows from the operations of Interstate Hotels, LLC, one of our
operating subsidiaries, to Wyndham International, Inc., based on
Wyndhams common interest in that entity. The net
distribution payable to Wyndham through June 30, 2003,
approximated $293.

Investing Activities Net cash used in investing activities
was $4,130 for the six months ended June 30, 2003, compared
to net cash used in investing activities of $2,044 for the six
months ended June 30, 2002. This increase in use of cash is
partially due to an increase in purchases of property and
equipment and intangible assets of $1,955 combined for the six
months ended June 30, 2003 compared to $44 for the same
period 2002. The increase is also due to an increase in
restricted cash of $1,588 from two of our consolidated
subsidiaries. These increases are partially offset by
merger-related costs of approximately $1,729 paid during the
first quarter of 2002.

We formerly participated in the ownership of the
Renaissance Worldgate Hotel in Kissimmee, Florida. The majority
owners and the principal lender for the hotel are affiliated
with CGLH Partners I L.P. and CGLH
Partners II L.P., which are entities affiliated with
Lehman Brothers Holdings, Inc., and several of our directors.
CGLH Partners I and CGLH Partners II are,
collectively, our largest shareholder. They have five designees
on our board of directors.

In conjunction with a restructuring of the
ownership and financing of this property in 2002, the hotel
owner issued a promissory note of $300 to us. The note bears
interest at nine percent per annum and is payable in equal
quarterly installments beginning January 1, 2003. The hotel
owner has not paid the first two installments due in 2003.
Additionally, we are owed approximately $1,180 from the hotel as
of June 30, 2003. This balance represents management fees
and amounts for unpaid certain reimbursable costs under our
management contract for the hotel. We are currently engaged in
discussions with the hotels owner regarding the payment of
these amounts due to us.

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

29



---



##### 



2003, we formed a joint venture with Northridge
Capital, a privately owned real estate investment company, to
acquire up to $400,000 of hotel assets. The joint venture will
be funded with approximately 50% equity and the balance in
secured debt. Northridge Capital will contribute up to $45,000
in equity, we will contribute up to $5,000, and up to $150,000
will come from outside investors. The joint venture is scheduled
to acquire its first hotel in August 2003.


Financing Activities Net cash provided by (used in)
financing activities was $10,411 for the six months ended
June 30, 2003, compared to $(3,757) for the six months
ended June 30, 2002. This increase in cash was due
primarily to the following:



| |   |                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | debt repayments of $68,014, including $42,052
    associated with the repayment of the MeriStar Hospitality term
    loan, and $25,962 associated with repayments of our revolving
    credit facility and note payable; offset by
|
| |  | borrowings of $80,000, consisting of $40,000
    associated with the new subordinated term loan, and $40,000 of
    borrowings from our senior credit facility; and                                                               
|
| |  | financing fees paid of $1,690 associated with the
    new subordinated term loan.                                                                                                                                                 

Senior Credit Agreement Effective July 31, 2002, in
connection with the closing with the MeriStar-Interstate merger,
we entered into a $113,000 senior credit agreement with a group
of banks. The senior credit agreement consists of a $65,000 term
loan due on July 28, 2005 and a $48,000 revolving credit
facility due on July 28, 2005 (with a one-year extension at
our option). The interest rate on the senior credit agreement is
LIBOR plus 3.00% to 4.50%, depending upon our meeting certain
financial tests. The senior credit facility contains certain
covenants, including maintenance of financial ratios at the end
of each quarter, compliance reporting requirements and other
customary restrictions. At June 30, 2003, we were in
compliance with these covenants. At June 30, 2003,
borrowings under the senior credit agreement bore interest at a
rate of 5.71% per annum. We incurred $1,168 and $2,264 of
interest expense on the senior credit agreement for the three
and six months ended June 30, 2003, respectively. As of
August 4, 2003, the total availability under our senior
credit agreement was $29,000.

MeriStar Hospitality Term Loan In January 2003, in connection with
the repayment of the MeriStar Hospitality term loan, we
completed a discounted repayment of the MeriStar Hospitality
term loan for $42,052, realizing a gain of $13,629. We financed
part of the repayment with proceeds from a $40,000 subordinated
term loan that matures on January 31, 2006, but if the
revolving portion of our senior credit facility is extended for
an additional year, the maturity of the subordinated term loan
will also be automatically extended by one year to
January 31, 2007. The subordinated term loan carries a
coupon rate of LIBOR plus a spread of 8.50%. We funded the
remainder of the repayment out of available cash.

Subordinated Term Loan In January 2003, we entered into a
$40,000 subordinated term loan with Lehman Brothers Holdings,
Inc. that carries a variable interest rate based on the 30-day
LIBOR plus a spread of 8.50%. The subordinated term loan matures
on January 31, 2006, but if the revolving portion of our
senior credit facility is extended for an additional year, the
maturity of the subordinated term loan will also be
automatically extended by one year to January 31, 2007.
This term loan is subordinated to borrowings under our senior
credit agreement and contains certain covenants, including
maintenance of financial ratios at the end of each quarter,
compliance reporting requirements and other customary
restrictions. At June 30, 2003, we were in compliance with
these covenants. At June 30, 2003, borrowings under the
subordinated term loan bore interest at a rate of 9.88% per
annum. We incurred $997 and $1,887 of interest expense on the
subordinated term loan for the three and six months ended
June 30, 2003.

Liquidity In 2003, we expect to incur additional
merger-related costs (primarily related to relocation of
employees and other business integration costs) and to make
payments on merger-related restructuring accruals we established
in 2002. We estimate the total cash outlay for restructuring and
merger and integration-related costs in 2003 to be approximately
$5,0007,000.

We believe that cash generated by our operations,
together with borrowing capacity under our senior credit
agreement, will be sufficient to fund our requirements for
working capital, capital expenditures and debt service for the
next twelve months. We expect to continue to seek acquisitions
of hotel management businesses and management contracts, and
joint venture opportunities where we can participate in the

30



---



##### 



ownership of hotels we manage. We expect to
finance future acquisitions through a combination of additional
borrowings under our credit facility and the issuance of equity
instruments (that is, common stock or operating partnership
units) or additional/replacement debt, if market conditions
permit. We believe these sources of capital will be sufficient
to provide for our long-term capital needs.


Contractual Obligations and Maturities of
Indebtedness

The following table summarizes our contractual
obligations at June 30, 2003, and the effect that those
obligations are expected to have on our liquidity and cash flows
in future periods (amounts in thousands):

|           |  |               |        |            |  |              |       |                |  |       |        |  |  |   |        |  |  |   |         | 
|---------- |  | ------------- | ------ | ---------- |  | ------------ | ----- | -------------- |  | ----- | ------ |  |  | - | ------ |  |  | - | ------- | 
|           |  | Senior credit |        | Promissory |  | Subordinated |       | Non-cancelable |  |      
|           |  | facility      |        | note       |  | Term loan    |       | leases         |  | Total
|           |  |               |        |            |  |              |       |                |  |      
|2003       |  | $             | 813    |            |  | $            |      |                |  | $     |       |  |  | $ | 20,496 |  |  | $ | 21,309  | 
|2004       |  |               | 1,625  |            |  |              |      |                |  |       |       |  |  |   | 14,998 |  |  |   | 16,623  | 
|2005       |  |               | 61,750 |            |  |              |      |                |  |       |       |  |  |   | 10,095 |  |  |   | 71,845  | 
|2006       |  |               | 24,000 |            |  |              |      |                |  |       |       |  |  |   | 8,623  |  |  |   | 32,623  | 
|2007       |  |               |       |            |  |              |      |                |  |       | 40,000 |  |  |   | 6,994  |  |  |   | 46,994  | 
|thereafter |  |               |       |            |  |              | 4,020 |                |  |       |       |  |  |   | 30,998 |  |  |   | 35,018  | 
|           |  |               |        |            |  |              |       |                |  |       |        |  |  |   |        |  |  |   |         | 
|Total      |  | $             | 88,188 |            |  | $            | 4,020 |                |  | $     | 40,000 |  |  | $ | 92,204 |  |  | $ | 224,412 | 
|           |  |               |        |            |  |              |       |                |  |       |        |  |  |   |        |  |  |   |         | 

Long-Term Debt:For
principal repayment and debt service obligations with respect to
our long-term debt, see Note 6 to our condensed
consolidated financial statements.

Lease Commitments:We lease apartments for our Corporate
Housing division and office space for our corporate offices. The
leases terminate at various times up and through 2014.

Management Agreement Commitments:Under the provisions of management
agreements with certain hotel owners, we have outstanding
commitments as of August 4, 2003, to provide an aggregate
of $5,970 to these hotel owners in the form of investments or
working capital loans. The loans may be forgiven or repaid based
upon the specific terms of each management agreement. The timing
of future investments or working capital loans to hotel owners
is currently unknown.

Equity Investment Funding:In connection with our equity
investments in hotel real estate, we are party to various
unconsolidated partnerships or limited liability companies. The
terms of such partnership or limited liability company
agreements provide that we contribute capital as specified. The
timing and amount of such contributions of capital, if any, is
currently unknown. We have non-controlling equity interests in
eight hotel real estate limited partnerships and limited
liability companies.

Item
3.     Quantitative and Qualitative
Disclosures About Market Risk

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

Our senior secured credit facility matures
July 31, 2005, with a one year extension at our option. At
June 30, 2003, we had borrowings of $88,188 outstanding on
the facility. Interest on the debt is variable, based on the
30-day London Interbank Offered Rate plus a spread of 3.0% to
4.5% depending on our meeting certain financial covenants. The
weighted average effective interest rate was 4.0% at
June 30, 2003. We have determined that the fair value of
the debt approximates its carrying value.

Our $56,069 of long-term debt under the MeriStar
Hospitality term loan at December 31, 2002 was due to
mature on July 31, 2007. In January 2003, we completed a
discounted repayment of the MeriStar Hospitality term loan. We
refinanced the repayment with the proceeds from a $40,000
subordinated term loan and realized a gain of $13,629. The
subordinated term loan carries a variable interest rate, based
on the 30-day London Interbank Offered Rate plus a spread of
8.50%. The subordinated term loan matures on January 31,
2006, but if the revolving portion of our senior credit facility
is extended for an additional year, the maturity of the
subordinated term loan will also be automatically extended by
one year to January 31, 2007. The

31



---



##### 



remainder of the repayment was funded out of
available cash. We have determined that the fair value of the
debt approximates its carrying value.


Our promissory note to FelCor with a balance of
$4,020, is due on December 31, 2010. Interest on the note
is payable monthly at the rate of 12% per annum. At
June 30, 2003, the fair value of the promissory note
approximates its carrying value.

A 1.0% change in the 30-day London Interbank
Offered Rate would have changed our interest expense by
approximately $247 and $494 for the three and six months ended
June 30, 2003, respectively.

In October 2002, we entered into a $30,000,
two-year interest rate swap agreement with a financial
institution in order to hedge against the effect future interest
rate fluctuations may have on our floating rate debt. The swap
agreement effectively fixes the 30-day London Interbank Offered
Rate at 2.50%. The fair value of the swap agreement was a
liability of $516 at June 30, 2003.

In March 2003, we entered into a $35,000,
twenty-two month interest rate cap agreement with a financial
institution in order to hedge against the effect future interest
rate fluctuations may have on our floating rate debt. The
interest rate agreement caps the 30-day London Interbank Offered
Rate at 4.50%. At June 30, 2003, the fair value of this
swap agreement was $2 in our favor.

Our international operations are subject to
foreign exchange rate fluctuations. We derived approximately
3.4% and 0.5% of our revenue for the three month periods ended
June 30, 2003 and 2002, respectively, and 3.4% and 0.5% for
the six month periods ended June 30, 2003 and 2002,
respectively, from services performed in Canada, the United
Kingdom, France, and Russia. Our foreign currency transaction
gains and losses were not material to our results of operations
for the three months ended March 31, 2003. To date, since
most of our foreign operations have been largely self-contained
or dollar-denominated, we have not been exposed to material
foreign exchange risk. Therefore, we have not entered into any
foreign currency exchange contracts or other derivative
financial instruments to hedge the effects of adverse
fluctuations in foreign currency exchange rates. In the event
that we have large transactions requiring currency conversion we
would reevaluate whether we should engage in hedging activities.

Item 4.     Controls
and Procedures

Evaluation of Disclosure Controls and
Procedures

We maintain disclosure controls and procedures
that are designed to ensure that information required to be
disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms, and that the information is
accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required
disclosure based closely on the definition of disclosure
controls and procedures in Rule 13a-1(c). In
designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no
matter how well designed and operated, can provide only
reasonable assurance of achieving the desired objectives, and
management was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
Also, we have investments in certain unconsolidated entities. As
we do not control or manage these entities, our disclosure
controls and procedures with respect to these entities are
substantially more limited than those we maintain with respect
to our consolidated subsidiaries.

We carried out an evaluation, under the
supervision and with the participation of our management,
including our chief executive officer and our chief financial
officer of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on this evaluation, it
was concluded that as of June 30, 2003, our disclosure
controls and procedures were effective.

Changes in Internal Controls

There were no significant changes in our internal
controls or in other factors that could significantly affect
these controls during the quarter ended June 30, 2003.

32



---



##### 



PART II. OTHER INFORMATION



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

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



|        |                                              
|------- | ---------------------------------------------
|Item 2. | Changes in Securities and Use of
    Proceeds

None.



|        |                                    
|------- | -----------------------------------
|Item 3. | Defaults Upon Senior
    Securities

None.



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

None.



|        |                  
|------- | -----------------
|Item 5. | Other Information

Forward-Looking Information

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



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

33



---



##### 





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

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

These risks and uncertainties, along with the
risk factors set forth in our Annual Report on Form 10-K
for the year ended December 31, 2002, should be considered
in evaluating any forward-looking statements in this quarterly
report on Form 10-Q.



|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

(a) Exhibits

|            |       |                         |  |                                                                                                                                                                                                                                                                                                                                                   
|----------- | ----- | ----------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |       | Description of Document
|            |       |                        
|            | 3.1   |                         |  | Amended and Restated Certificate of Incorporation
    of the Company, formerly MeriStar Hotels & Resorts,
    Inc. (incorporated by reference to Exhibit 3.1 to the
    Companys Form S-1/A filed with the Securities and
    Exchange Commission on July 23, 1998 (Registration
    No. 333-49881)).                                            
|            | 3.1.1 |                         |  | Certificate of Amendment of the Restated
    Certificate of Incorporation of the Company dated June 30,
    2001 (incorporated by reference to Exhibit 3.1.1 to the
    Companys Form 10-K filed with the Securities and
    Exchange Commission on April 15, 2002).                                                                             
|            | 3.1.2 |                         |  | Certificate of Merger of Interstate Hotels
    Corporation into MeriStar Hotels & Resorts, Inc.
    (incorporated by reference to Exhibit 3.1.2 to the
    Companys Form 8-A/A filed with the Securities and
    Exchange Commission on August 2, 2002).                                                                                         
|            | 3.1.3 |                         |  | Certificate of Amendment of the Restated
    Certificate of Incorporation of the Company dated July 31,
    2002 (incorporated by reference to Exhibit 3.1.3 to the
    Companys Form 8-A/A filed with the Securities and
    Exchange Commission on August 2, 2002).                                                                            
|            | 3.2   |                         |  | By-laws of the Company, formerly MeriStar
    Hotels & Resorts, Inc. (incorporated by reference to
    Exhibit 3.2 to the Companys Form S-1/A filed
    with the Securities and Exchange Commission on July 23,
    1998 (Registration No. 333-49881)).                                                                                          
|            | 3.2.1 |                         |  | Amendment to the By-laws of the Company
    (incorporated by reference to Exhibit 3.3 to the
    Companys Form 8-A/A filed with the Securities and
    Exchange Commission on August 2, 2002).                                                                                                                                                   
|            | 4.1   |                         |  | Form of Common Stock Certificate of the Company
    (incorporated by reference to Exhibit 4.1 to the
    Companys Form 8-A/A filed with the Securities and
    Exchange Commission on August 2, 2002).                                                                                                                                           
|            | 4.2   |                         |  | Preferred Share Purchase Rights Agreement, dated
    July 23, 1998, between the Company, formerly MeriStar
    Hotels & Resorts, Inc., and the Rights Agent
    (incorporated by reference to Exhibit 4.4 to the
    Companys Form S-1/A filed with the Securities and Exchange
    Commission on July 23, 1998(Registration
    No. 333-49881)).
|            | 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).                                       

34



---



##### 



|            |        |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                   
|----------- | ------ | ----------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |        | Description of Document
|            |        |                        
|            | 4.2.2  |                         |  | Second Amendment to Rights Agreement, dated
    May 1, 2002, between the Company, formerly MeriStar
    Hotels & Resorts, Inc., and the Rights Agent
    (incorporated by reference to Exhibit 4.1 to the
    Companys Form 8-K filed with the Securities and
    Exchange Commission on May 3, 2002).                                                                                           
|            | 4.3    |                         |  | Form of Rights Certificate (incorporated by
    reference to Exhibit 4.3 to the Companys
    Form S-1/A filed with the Securities and Exchange
    Commission on July 23, 1998 (Registration
    No. 333-49881)).                                                                                                                                                                                
|            | 4.4    |                         |  | Registration Rights Agreement, dated
    March 31, 1999, between the Company (formerly MeriStar
    Hotels & Resorts, Inc.), Oak Hill Capital Partners,
    L.P. and Oak Hill Capital Management Partners, L.P.
    (incorporated by reference to Exhibit 4.7 to the
    Companys Form 10-Q filed with the Securities and
    Exchange Commission for the three months ended March 31,
    1999).
|            | 9.1    |                         |  | Board Composition Agreement, dated as of
    July 31, 2002, among the Company. and certain stockholders
    of the Registrant specified therein (incorporated by reference
    to Exhibit 9.1 to the Companys Form 8-K filed
    with the Securities and Exchange Commission on August 7,
    2002)                                                                                              
|            | 10.3.2 |                         |  | Second Amendment to the Intercompany Agreement,
    dated April 1, 2003 (incorporated by reference to
    Exhibit 10.3.2 to the Companys Form 10-Q filed
    with the Securities and Exchange Commission on May 12,
    2003).                                                                                                                                                                   
|            | 31.1   |                         |  | Sarbanes-Oxley Act Section 302
    Certifications of the Chief Executive Officer                                                                                                                                                                                                                                                                                                                  
|            | 31.2   |                         |  | Sarbanes-Oxley Act Section 302
    Certifications of the Chief Financial Officer                                                                                                                                                                                                                                                                                                                  
|            | 32.1   |                         |  | Sarbanes-Oxley Act Section 906
    Certifications of Chief Executive Officer.                                                                                                                                                                                                                                                                                                                     
|            | 32.2   |                         |  | Sarbanes-Oxley Act Section 906
    Certifications of Chief Financial Officer.                                                                                                                                                                                                                                                                                                                     

(b) Reports on Form 8-K

Current report on Form 8-K (Item 12)
dated and filed May 9, 2003, regarding the first quarter
earnings press release.

Current report on Form 8-K (Item 12)
dated and filed July 30, 2003, regarding the second quarter
earnings press release.

35



---



##### 



SIGNATURE

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



| |                                  
| | ---------------------------------
| | INTERSTATE HOTELS & RESORTS, INC.
|
| | /s/ JAMES A. CALDER              
| |                                  
| | James A. Calder                  
| | Chief Financial Officer          
| | (Duly authorized officer)        
| | (Principal financial officer)    

Dated: August 12, 2003

36