##### 









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-Q


|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934 
|  
|   |  | For the quarterly period ended March 31, 2005                                               
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from           to                                             

Commission of File Number 1-14331


Interstate Hotels & Resorts, Inc.


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

www.ihrco.com




(703) 387-3100


(Registrants Telephone Number, Including Area Code)


þ


þ














---



##### 



INTERSTATE HOTELS & RESORTS, INC.


INDEX


|                              |  |                                                                                                                            |  |      |    | 
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                              |  |                                                                                                                            |  | Page |   
|                              |  |                                                                                                                            |  |      |   
|PART I. FINANCIAL INFORMATION
|                             
|Item 1:                       |  | Financial Statements (Unaudited)                                                                                           |  |      |    | 
|                              |  | Consolidated Balance Sheets  March 31, 2005 and
    December 31, 2004                                                     |  |      | 2  | 
|                              |  | Consolidated Statements of Operations and Comprehensive Income
    (Loss)  Three months ended March 31, 2005 and
    2004 |  |      | 3  | 
|                              |  | Consolidated Statements of Cash Flows  Three months
    ended March 31, 2005 and 2004                                     |  |      | 4  | 
|                              |  | Notes to Consolidated Financial Statements                                                                                 |  |      | 5  | 
|                             
|Item 2:                       |  | Managements Discussion and Analysis of Financial Condition
    and Results of Operations                                  |  |      | 14 | 
|                             
|Item 3:                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                 |  |      | 20 | 
|                             
|Item 4:                       |  | Controls and Procedures                                                                                                    |  |      | 21 | 
|PART II. OTHER INFORMATION   
|                             
|Item 1:                       |  | Legal Proceedings                                                                                                          |  |      | 23 | 
|                             
|Item 5:                       |  | Other Information                                                                                                          |  |      | 23 | 
|                             
|Item 6:                       |  | Exhibits                                                                                                                   |  |      | 23 | 

1



---



##### 



PART I. FINANCIAL INFORMATION


Item 1:     Financial
Statements


INTERSTATE HOTELS & RESORTS, INC.


CONSOLIDATED BALANCE SHEETS


(Unaudited, in thousands, except per share amounts)


|                                                            |                                                                                                                                                                                    |                                                                   |        |         |              |  |        |         |         | 
|----------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ------ | ------- | ------------ |  | ------ | ------- | ------- | 
|                                                            |                                                                                                                                                                                    | March 31,                                                         |        |         | December 31, | 
|                                                            |                                                                                                                                                                                    | 2005                                                              |        |         | 2004         | 
|                                                            |                                                                                                                                                                                    |                                                                   |        |         |              | 
|                                                            |                                                                                                                                                                                    | (Unaudited)                                                       |        |         |             
|ASSETS                                                     
|Current assets:                                             |                                                                                                                                                                                    |                                                                   |        |         |              |  |        |        
|                                                            | Cash and cash equivalents                                                                                                                                                          |                                                                   | $      | 133     |              |  | $      | 16,481  |        
|                                                            | Restricted cash                                                                                                                                                                    |                                                                   |        | 2,507   |              |  |        | 690     |        
|                                                            | Accounts receivable, net of allowance for doubtful accounts of
    $3,224 at March 31, 2005 and $3,090 at December 31,
    2004                                                    |                                                                   |        | 33,439  |              |  |        | 32,765  |        
|                                                            | Due from related parties, net of allowance for doubtful accounts
    of $793 at March 31, 2005 and $836 at December 31, 2004                                                       |                                                                   |        | 8,876   |              |  |        | 12,368  |        
|                                                            | Prepaid expenses and other current assets                                                                                                                                          |                                                                   |        | 11,836  |              |  |        | 8,929   |        
|                                                            |                                                                                                                                                                                    |                                                                   |        |         |              | 
|                                                            |                                                                                                                                                                                    | Total current assets                                              |        |         | 56,791       |  |        |         | 71,233  | 
|Marketable securities                                       |                                                                                                                                                                                    |                                                                   | 1,566  |         |              |  | 1,706  |        
|Property and equipment, net                                 |                                                                                                                                                                                    |                                                                   | 49,157 |         |              |  | 19,981 |        
|Officers and employees notes receivable                     |                                                                                                                                                                                    |                                                                   | 94     |         |              |  | 83     |        
|Investments in and advances to affiliates                   |                                                                                                                                                                                    |                                                                   | 9,655  |         |              |  | 12,155 |        
|Notes receivable                                            |                                                                                                                                                                                    |                                                                   | 5,172  |         |              |  | 5,180  |        
|Deferred income taxes                                       |                                                                                                                                                                                    |                                                                   | 19,242 |         |              |  | 18,312 |        
|Goodwill                                                    |                                                                                                                                                                                    |                                                                   | 96,809 |         |              |  | 96,802 |        
|Intangible assets, net                                      |                                                                                                                                                                                    |                                                                   | 50,835 |         |              |  | 51,162 |        
|                                                            |                                                                                                                                                                                    |                                                                   |        |         |              | 
|                                                            |                                                                                                                                                                                    | Total assets                                                      |        | $       | 289,321      |  |        | $       | 276,614 | 
|                                                            |                                                                                                                                                                                    |                                                                   |        |         |              | 
|LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS
    EQUITY
|Current liabilities:                                        |                                                                                                                                                                                    |                                                                   |        |         |              |  |        |        
|                                                            | Accounts payable                                                                                                                                                                   |                                                                   | $      | 5,819   |              |  | $      | 5,651   |        
|                                                            | Accrued expenses                                                                                                                                                                   |                                                                   |        | 63,198  |              |  |        | 61,003  |        
|                                                            | Current portion of long-term debt                                                                                                                                                  |                                                                   |        | 5,750   |              |  |        | 5,750   |        
|                                                            |                                                                                                                                                                                    |                                                                   |        |         |              | 
|                                                            |                                                                                                                                                                                    | Total current liabilities                                         |        |         | 74,767       |  |        |         | 72,404  | 
|Deferred compensation                                       |                                                                                                                                                                                    |                                                                   | 1,566  |         |              |  | 1,706  |        
|Long-term debt                                              |                                                                                                                                                                                    |                                                                   | 95,723 |         |              |  | 83,447 |        
|                                                            |                                                                                                                                                                                    |                                                                   |        |         |              | 
|                                                            |                                                                                                                                                                                    | Total liabilities                                                 |        |         | 172,056      |  |        |         | 157,557 | 
|Minority interest                                           |                                                                                                                                                                                    |                                                                   | 934    |         |              |  | 930    |        
|Commitments and contingencies                               |                                                                                                                                                                                    |                                                                   |        |         |              |  |        |        
|Stockholders equity:                                       |                                                                                                                                                                                    |                                                                   |        |         |              |  |        |        
|                                                            | Preferred stock, $.01 par value; 5,000,000 shares authorized, no
    shares issued                                                                                                 |                                                                   |        |        |              |  |        |        |        
|                                                            | Common stock, $.01 par value; 250,000,000 shares authorized;
    30,672,238 and 30,629,519 shares issued and outstanding at
    March 31, 2005 and December 31, 2004, respectively |                                                                   |        | 307     |              |  |        | 307     |        
|                                                            | Treasury stock                                                                                                                                                                     |                                                                   |        | (69     | )            |  |        | (69     | )      
|                                                            | Paid-in capital                                                                                                                                                                    |                                                                   |        | 189,074 |              |  |        | 188,865 |        
|                                                            | Accumulated other comprehensive income                                                                                                                                             |                                                                   |        | 311     |              |  |        | 892     |        
|                                                            | Accumulated deficit                                                                                                                                                                |                                                                   |        | (73,292 | )            |  |        | (71,868 | )      
|                                                            |                                                                                                                                                                                    |                                                                   |        |         |              | 
|                                                            |                                                                                                                                                                                    | Total stockholders equity                                        |        |         | 116,331      |  |        |         | 118,127 | 
|                                                            |                                                                                                                                                                                    |                                                                   |        |         |              | 
|                                                            |                                                                                                                                                                                    | Total liabilities, minority interest and stockholders
    equity |        | $       | 289,321      |  |        | $       | 276,614 | 
|                                                            |                                                                                                                                                                                    |                                                                   |        |         |              | 

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


2



---



##### 



INTERSTATE HOTELS & RESORTS, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


AND COMPREHENSIVE INCOME (LOSS)


(Unaudited, in thousands, except per share amounts)


|                                                                                |                                        |                          |        |         |         |   |        |         |         | 
|------------------------------------------------------------------------------- | -------------------------------------- | ------------------------ | ------ | ------- | ------- | - | ------ | ------- | ------- | 
|                                                                                |                                        | Three months ended       |       
|                                                                                |                                        | March 31,                |       
|                                                                                |                                        |                          |       
|                                                                                |                                        | 2005                     |        |         | 2004    |  
|                                                                                |                                        |                          |        |         |         |  
|Revenue:                                                                        |                                        |                          |        |         |         |   |        |        
|                                                                                | Lodging revenue                        |                          | $      | 2,562   |         |   | $      | 723     |        
|                                                                                | Management fees                        |                          |        | 7,380   |         |   |        | 5,713   |        
|                                                                                | Management fees-related parties        |                          |        | 6,619   |         |   |        | 7,965   |        
|                                                                                | Corporate housing                      |                          |        | 27,399  |         |   |        | 24,250  |        
|                                                                                | Other revenue                          |                          |        | 2,955   |         |   |        | 3,252   |        
|                                                                                |                                        |                          |        |         |         |  
|                                                                                |                                        |                          | 46,915 |         |         |   | 41,903 |        
|                                                                                | Other revenue from managed properties  |                          |        | 204,297 |         |   |        | 179,540 |        
|                                                                                |                                        |                          |        |         |         |  
|                                                                                |                                        | Total revenue            |        |         | 251,212 |   |        |         | 221,443 | 
|                                                                                |                                        |                          |        |         |         |  
|Operating expenses by department:                                               |                                        |                          |        |         |         |   |        |        
|                                                                                | Lodging expenses                       |                          |        | 1,950   |         |   |        | 518     |        
|                                                                                | Corporate housing                      |                          |        | 23,409  |         |   |        | 20,382  |        
|Undistributed operating expenses:                                               |                                        |                          |        |         |         |   |        |        
|                                                                                | Administrative and general             |                          |        | 18,031  |         |   |        | 17,464  |        
|                                                                                | Depreciation and amortization          |                          |        | 2,239   |         |   |        | 2,395   |        
|                                                                                | Restructuring and severance expenses   |                          |        | 2,023   |         |   |        | 127     |        
|                                                                                | Asset impairments and write-offs       |                          |        | 1,062   |         |   |        | 4,493   |        
|                                                                                |                                        |                          |        |         |         |  
|                                                                                |                                        |                          | 48,714 |         |         |   | 45,379 |        
|                                                                                | Other expenses from managed properties |                          |        | 204,297 |         |   |        | 179,540 |        
|                                                                                |                                        |                          |        |         |         |  
|                                                                                |                                        | Total operating expenses |        |         | 253,011 |   |        |         | 224,919 | 
|                                                                                |                                        |                          |        |         |         |  
|OPERATING LOSS                                                                  |                                        |                          | (1,799 | )       |         |   | (3,476 | )      
|Interest income                                                                 |                                        |                          | 138    |         |         |   | 280    |        
|Interest expense                                                                |                                        |                          | (3,932 | )       |         |   | (2,002 | )      
|Equity in earnings (losses) of affiliates                                       |                                        |                          | 2,842  |         |         |   | (776   | )      
|Gain on sale of investments                                                     |                                        |                          | 385    |         |         |   |       |        
|                                                                                |                                        |                          |        |         |         |  
|LOSS BEFORE MINORITY INTEREST AND INCOME TAXES                                  |                                        |                          | (2,366 | )       |         |   | (5,974 | )      
|Income tax benefit                                                              |                                        |                          | 924    |         |         |   | 2,554  |        
|Minority interest benefit                                                       |                                        |                          | 18     |         |         |   | 46     |        
|                                                                                |                                        |                          |        |         |         |  
|LOSS FROM CONTINUING OPERATIONS                                                 |                                        |                          | (1,424 | )       |         |   | (3,374 | )      
|Loss from discontinued operations, net                                          |                                        |                          |       |         |         |   | (370   | )      
|                                                                                |                                        |                          |        |         |         |  
|NET LOSS                                                                        |                                        |                          | (1,424 | )       |         |   | (3,744 | )      
|Other comprehensive loss, net of tax:                                           |                                        |                          |        |         |         |   |        |        
|                                                                                | Foreign currency translation loss      |                          |        | (97     | )       |   |        | (85     | )      
|                                                                                | Unrealized loss on investments         |                          |        | (484    | )       |   |        |        |        
|                                                                                |                                        |                          |        |         |         |  
|                                                                                | COMPREHENSIVE LOSS                     |                          | $      | (2,005  | )       |   | $      | (3,829  | )      
|                                                                                |                                        |                          |        |         |         |  
|Weighted average number of basic common shares outstanding (in
    thousands)   |                                        |                          | 30,656 |         |         |   | 30,070 |        
|Basic loss per share from continuing operations                                 |                                        | $                        | (0.05  | )       |         | $ | (0.11  | )      
|Basic loss per share from discontinued operations                               |                                        |                          |       |         |         |   | (0.01  | )      
|                                                                                |                                        |                          |        |         |         |  
|Basic loss per share                                                            |                                        | $                        | (0.05  | )       |         | $ | (0.12  | )      
|                                                                                |                                        |                          |        |         |         |  
|Weighted average number of diluted common shares outstanding (in
    thousands) |                                        |                          | 30,656 |         |         |   | 30,070 |        
|Diluted loss per share from continuing operations                               |                                        | $                        | (0.05  | )       |         | $ | (0.11  | )      
|Diluted loss per share from discontinued operations                             |                                        |                          |       |         |         |   | (0.01  | )      
|                                                                                |                                        |                          |        |         |         |  
|Diluted loss per share                                                          |                                        | $                        | (0.05  | )       |         | $ | (0.12  | )      
|                                                                                |                                        |                          |        |         |         |  

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


3



---



##### 



INTERSTATE HOTELS & RESORTS, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited, in thousands)


|                                                 |                                                                                               |                                                       |                                               |                                                 |        |        |         |         |        |         |        |  
|------------------------------------------------ | --------------------------------------------------------------------------------------------- | ----------------------------------------------------- | --------------------------------------------- | ----------------------------------------------- | ------ | ------ | ------- | ------- | ------ | ------- | ------ | -
|                                                 |                                                                                               | Three months ended                                    |                                              
|                                                 |                                                                                               | March 31,                                             |                                              
|                                                 |                                                                                               |                                                       |                                              
|                                                 |                                                                                               | 2005                                                  |                                               |                                                 | 2004   |       
|                                                 |                                                                                               |                                                       |                                               |                                                 |        |       
|OPERATING ACTIVITIES:                            |                                                                                               |                                                       |                                               |                                                 |        |        |         |        
|                                                 | Net loss                                                                                      |                                                       | $                                             | (1,424                                          | )      |        | $       | (3,744  | )     
|                                                 | Adjustments to reconcile net loss to net cash provided by (used
    in) operating activities: |                                                       |                                               |                                                 |        |        |         |         |       
|                                                 |                                                                                               | Depreciation and amortization                         |                                               |                                                 | 2,239  |        |         |         | 2,424  |        
|                                                 |                                                                                               | Amortization and write-off of deferred financing fees |                                               |                                                 | 2,032  |        |         |         |       |        
|                                                 |                                                                                               | Equity in losses of affiliates                        |                                               |                                                 | (2,842 | )      |         |         | 776    |        
|                                                 |                                                                                               | Asset impairments and write-offs                      |                                               |                                                 | 1,062  |        |         |         | 4,493  |        
|                                                 |                                                                                               | Minority interest                                     |                                               |                                                 | (18    | )      |         |         | (46    | )      
|                                                 |                                                                                               | Deferred income taxes                                 |                                               |                                                 | (924   | )      |         |         | (2,433 | )      
|                                                 |                                                                                               | Gain on sale of investments                           |                                               |                                                 | (385   | )      |         |         |       |        
|                                                 |                                                                                               | Changes in assets and liabilities:                    |                                               |                                                 |        |        |         |         |        |        
|                                                 |                                                                                               |                                                       | Accounts receivable, net                      |                                                 |        | (674   | )       |         |        | 5,991   |       
|                                                 |                                                                                               |                                                       | Prepaid expenses and other current assets     |                                                 |        | (2,907 | )       |         |        | 1,211   |       
|                                                 |                                                                                               |                                                       | Accounts payable and accrued expenses         |                                                 |        | 2,646  |         |         |        | (14,033 | )     
|                                                 |                                                                                               |                                                       | Due from related parties                      |                                                 |        | 3,492  |         |         |        | (2,174  | )     
|                                                 |                                                                                               |                                                       | Other changes in asset and liability accounts |                                                 |        | 295    |         |         |        | 523     |       
|                                                 |                                                                                               |                                                       |                                               |                                                 |        |       
|                                                 |                                                                                               |                                                       |                                               | Cash provided by (used in) operations           |        |        | 2,592   |         |        |         | (7,012 | )
|                                                 |                                                                                               |                                                       |                                               |                                                 |        |       
|INVESTING ACTIVITIES:                            |                                                                                               |                                                       |                                               |                                                 |        |        |         |        
|                                                 | Proceeds from the sale of investments                                                         |                                                       |                                               | 483                                             |        |        |         |        |       
|                                                 | Change in restricted cash                                                                     |                                                       |                                               | (1,817                                          | )      |        |         | 1,395   |       
|                                                 | Purchases of property and equipment                                                           |                                                       |                                               | (30,610                                         | )      |        |         | (662    | )     
|                                                 | Purchases of intangible assets                                                                |                                                       |                                               | (394                                            | )      |        |         | (162    | )     
|                                                 | Net (contributions) distributions from equity investments                                     |                                                       |                                               | 4,709                                           |        |        |         | (563    | )     
|                                                 | Change in officers and employees notes receivable, net                                        |                                                       |                                               | (11                                             | )      |        |         | (4      | )     
|                                                 |                                                                                               |                                                       |                                               |                                                 |        |       
|                                                 |                                                                                               |                                                       |                                               | Cash provided by (used in) investing activities |        |        | (27,640 | )       |        |         | 4      |  
|                                                 |                                                                                               |                                                       |                                               |                                                 |        |       
|FINANCING ACTIVITIES:                            |                                                                                               |                                                       |                                               |                                                 |        |        |         |        
|                                                 | Proceeds from borrowings                                                                      |                                                       |                                               | 106,200                                         |        |        |         | 20,000  |       
|                                                 | Repayment of borrowings                                                                       |                                                       |                                               | (93,924                                         | )      |        |         | (15,906 | )     
|                                                 | Net proceeds from issuance of common stock                                                    |                                                       |                                               | 17                                              |        |        |         | 561     |       
|                                                 | Financing fees paid                                                                           |                                                       |                                               | (3,506                                          | )      |        |         |        |       
|                                                 |                                                                                               |                                                       |                                               |                                                 |        |       
|                                                 |                                                                                               |                                                       |                                               | Cash provided by financing activities           |        |        | 8,787   |         |        |         | 4,655  |  
|                                                 |                                                                                               |                                                       |                                               |                                                 |        |       
|Effect of exchange rate on cash                  |                                                                                               |                                                       | (87                                           | )                                               |        |        | 249     |        
|Net decrease in cash and cash equivalents        |                                                                                               |                                                       | (16,348                                       | )                                               |        |        | (2,104  | )      
|Cash and cash equivalents at beginning of period |                                                                                               |                                                       | 16,481                                        |                                                 |        |        | 7,450   |        
|                                                 |                                                                                               |                                                       |                                               |                                                 |        |       
|Cash and cash equivalents at end of period       |                                                                                               | $                                                     | 133                                           |                                                 |        | $      | 5,346   |        
|                                                 |                                                                                               |                                                       |                                               |                                                 |        |       

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


4



---



##### 



INTERSTATE HOTELS & RESORTS, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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







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

General








Stock-Based Compensation




5



---



##### 



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                                                                                                                                        |                      |                    |        |       |      |   |        |       |  
|--------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ------------------ | ------ | ----- | ---- | - | ------ | ----- | -
|                                                                                                                                        |                      | Three months ended |       
|                                                                                                                                        |                      | March 31,          |       
|                                                                                                                                        |                      |                    |       
|                                                                                                                                        |                      | 2005               |        |       | 2004 |  
|                                                                                                                                        |                      |                    |        |       |      |  
|Net loss, as reported                                                                                                                   |                      | $                  | (1,424 | )     |      | $ | (3,744 | )    
|Add: Stock-based employee compensation expense included in
    reported net loss, net of tax                                            |                      |                    | 53     |       |      |   | 41     |      
|Deduct: Total stock-based employee compensation expense
    determined under the fair value based method for all awards, net
    of tax |                      |                    | (63    | )     |      |   | (66    | )    
|                                                                                                                                        |                      |                    |        |       |      |  
|Net loss, pro forma                                                                                                                     |                      | $                  | (1,434 | )     |      | $ | (3,769 | )    
|                                                                                                                                        |                      |                    |        |       |      |  
|Loss per share:                                                                                                                         |                      |                    |        |       |      |   |        |      
|                                                                                                                                        | Basic, as reported   |                    | $      | (0.05 | )    |   | $      | (0.12 | )
|                                                                                                                                        | Basic, pro forma     |                    | $      | (0.05 | )    |   | $      | (0.13 | )
|                                                                                                                                        | Diluted, as reported |                    | $      | (0.05 | )    |   | $      | (0.12 | )
|                                                                                                                                        | Diluted, pro forma   |                    | $      | (0.05 | )    |   | $      | (0.13 | )



Recent Accounting Pronouncements






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



6



---



##### 



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                                                                         |  |      |        |   |      |   |        |  
|------------------------------------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | -
|                                                                         |  | 2005 |        |   | 2004 |  
|                                                                         |  |      |        |   |      |  
|Loss from continuing operations                                          |  | $    | (1,424 | ) |      | $ | (3,374 | )
|Loss from discontinued operations, net                                   |  |      |       |   |      |   | (370   | )
|                                                                         |  |      |        |   |      |  
|Net loss                                                                 |  | $    | (1,424 | ) |      | $ | (3,744 | )
|                                                                         |  |      |        |   |      |  
|Weighted average number of basic shares outstanding (in
    thousands)   |  |      | 30,656 |   |      |   | 30,070 |  
|Basic loss per share from continuing operations                          |  | $    | (0.05  | ) |      | $ | (0.11  | )
|Basic loss per share from discontinued operations                        |  | $    |       |   |      | $ | (0.01  | )
|                                                                         |  |      |        |   |      |  
|Basic loss per share                                                     |  | $    | (0.05  | ) |      | $ | (0.12  | )
|                                                                         |  |      |        |   |      |  
|Weighted average number of diluted shares outstanding (in
    thousands) |  |      | 30,656 |   |      |   | 30,070 |  
|Diluted loss per share from continuing operations                        |  | $    | (0.05  | ) |      | $ | (0.11  | )
|Diluted loss per share from discontinued operations                      |  | $    |       |   |      | $ | (0.01  | )
|                                                                         |  |      |        |   |      |  
|Diluted loss per share                                                   |  | $    | (0.05  | ) |      | $ | (0.12  | )
|                                                                         |  |      |        |   |      |  





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



|                                    |       |           |       |       |              |   |       |        | 
|----------------------------------- | ----- | --------- | ----- | ----- | ------------ | - | ----- | ------ | 
|                                    |       | March 31, |       |       | December 31, |  
|                                    |       | 2005      |       |       | 2004         |  
|                                    |       |           |       |       |              |  
|MIP Lessee, L.P.                    |       | $         | 3,031 |       |              | $ | 4,856 |       
|S.D. Bridgeworks, LLC               |       |           | 1,004 |       |              |   | 253   |       
|CNL/IHC Partners, L.P.              |       |           | 2,483 |       |              |   | 2,477 |       
|Interconn Ponte Vedra Company, L.P. |       |           | 2,592 |       |              |   | 2,334 |       
|Other                               |       |           | 545   |       |              |   | 2,235 |       
|                                    |       |           |       |       |              |  
|                                    | Total |           | $     | 9,655 |              |   | $     | 12,155 | 
|                                    |       |           |       |       |              |  









7



---



##### 



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                                         |  |                    |        |  |      |   |        |  
|---------------------------------------- |  | ------------------ | ------ |  | ---- | - | ------ | -
|                                         |  | Three months ended |       
|                                         |  | March 31,          |       
|                                         |  |                    |       
|                                         |  | 2005               |        |  | 2004 |  
|                                         |  |                    |        |  |      |  
|Revenues                                 |  | $                  | 20,665 |  |      | $ | 30,836 |  
|Operating expenses                       |  |                    | 16,187 |  |      |   | 22,524 |  
|Net income (loss)                        |  |                    | 24,030 |  |      |   | (4,531 | )
|Our share of the above earnings (losses) |  |                    | 2,795  |  |      |   | (623   | )



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



|                                |                               |           |        |        |              |   |        |        |  
|------------------------------- | ----------------------------- | --------- | ------ | ------ | ------------ | - | ------ | ------ | -
|                                |                               | March 31, |        |        | December 31, |  
|                                |                               | 2005      |        |        | 2004         |  
|                                |                               |           |        |        |              |  
|Management contracts            |                               | $         | 52,683 |        |              | $ | 53,186 |       
|Franchise fees                  |                               |           | 1,945  |        |              |   | 1,945  |       
|Deferred financing fees         |                               |           | 2,422  |        |              |   | 2,676  |       
|Management contracts in process |                               |           | 2,269  |        |              |   | 2,018  |       
|                                |                               |           |        |        |              |  
|                                | Total cost                    |           |        | 59,319 |              |   |        | 59,825 |  
|                                | Less accumulated amortization |           |        | (8,484 | )            |   |        | (8,663 | )
|                                |                               |           |        |        |              |  
|Intangible assets, net          |                               | $         | 50,835 |        |              | $ | 51,162 |       
|                                |                               |           |        |        |              |  





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



8



---



##### 



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




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



|                                 |                                        |           |        |         |              |   |        |        | 
|-------------------------------- | -------------------------------------- | --------- | ------ | ------- | ------------ | - | ------ | ------ | 
|                                 |                                        | March 31, |        |         | December 31, |  
|                                 |                                        | 2005      |        |         | 2004         |  
|                                 |                                        |           |        |         |              |  
|Senior revolving credit facility |                                        | $         | 25,000 |         |              | $ | 27,000 |       
|Senior credit facility term loan |                                        |           | 51,750 |         |              |   | 16,474 |       
|Non-recourse promissory note     |                                        |           | 3,723  |         |              |   | 3,723  |       
|Sunstone promissory note         |                                        |           | 2,000  |         |              |   | 2,000  |       
|Subordinated term loan           |                                        |           |       |         |              |   | 40,000 |       
|Mortgage debt                    |                                        |           | 19,000 |         |              |   |       |       
|                                 |                                        |           |        |         |              |  
|                                 | Total long-term debt                   |           |        | 101,473 |              |   |        | 89,197 | 
|Less current portion             |                                        |           | (5,750 | )       |              |   | (5,750 | )     
|                                 |                                        |           |        |         |              |  
|                                 | Long-term debt, net of current portion |           | $      | 95,723  |              |   | $      | 83,447 | 
|                                 |                                        |           |        |         |              |  

Senior Credit Facility 










Non-Recourse Promissory Note 


9



---



##### 



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


Subordinated Term Loan 


Sunstone Promissory Note 


Mortgage Debt 


Interest Rate Caps 




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



|                                  |  |            |         |  |           |   |        |       |  |           |            |  |  |   |         | 
|--------------------------------- |  | ---------- | ------- |  | --------- | - | ------ | ----- |  | --------- | ---------- |  |  | - | ------- | 
|                                  |  | Hotel      |         |  | Corporate |   |        |       |  | Financial |           
|                                  |  | Management |         |  | Housing   |   |        | Other |  |           | Statements | 
|                                  |  |            |         |  |           |   |        |       |  |           |            | 
|Three months ended March 31, 2005 |  |            |         |  |           |   |        |       |  |           |            |  |  |   |         | 
|Revenue                           |  | $          | 223,813 |  |           | $ | 27,399 |       |  | $         |           |  |  | $ | 251,212 | 
|Total assets                      |  | $          | 250,778 |  |           | $ | 17,514 |       |  | $         | 21,029     |  |  | $ | 289,321 | 
|Three months ended March 31, 2004 |  |            |         |  |           |   |        |       |  |           |            |  |  |   |         | 
|Revenue                           |  | $          | 197,193 |  |           | $ | 24,250 |       |  | $         |           |  |  | $ | 221,443 | 
|Total assets                      |  | $          | 221,137 |  |           | $ | 20,433 |       |  | $         | 23,230     |  |  | $ | 264,800 | 



|               |  |      |       |  |      |   |       | 
|-------------- |  | ---- | ----- |  | ---- | - | ----- | 
|               |  | 2005 |       |  | 2004 |  
|               |  |      |       |  |      |  
|Canada         |  | $    | 1,153 |  |      | $ | 318   | 
|United Kingdom |  |      | 6,997 |  |      |   | 5,764 | 
|France         |  |      | 490   |  |      |   | 373   | 
|Russia         |  |      | 1,003 |  |      |   | 818   | 
|Portugal       |  |      | 27    |  |      |   | 151   | 



10



---



##### 



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|   |                                   
|-- | ----------------------------------
|8. | SUPPLEMENTAL CASH FLOW INFORMATION

|                                         |              |                    |   |       |      |  |   |       | 
|---------------------------------------- | ------------ | ------------------ | - | ----- | ---- |  | - | ----- | 
|                                         |              | Three months ended |  
|                                         |              | March 31,          |  
|                                         |              |                    |  
|                                         |              | 2005               |   |       | 2004 | 
|                                         |              |                    |   |       |      | 
|Cash paid for interest and income taxes: |              |                    |   |       |      |  |   |      
|                                         | Interest     |                    | $ | 1,742 |      |  | $ | 1,820 | 
|                                         | Income taxes |                    | $ | 270   |      |  | $ | 593   | 



|   |                                     
|-- | ------------------------------------
|9. | RESTRUCTURING AND SEVERANCE EXPENSES





|                                     |       |                 |       |       |      |   |     |     | 
|------------------------------------ | ----- | --------------- | ----- | ----- | ---- | - | --- | --- | 
|                                     |       | Three months    |      
|                                     |       | ended March 31, |      
|                                     |       |                 |      
|                                     |       | 2005            |       |       | 2004 |  
|                                     |       |                 |       |       |      |  
|Former corporate personnel severance |       | $               | 1,906 |       |      | $ |    |    
|Corporate housing severance          |       |                 | 117   |       |      |   | 127 |    
|                                     |       |                 |       |       |      |  
|                                     | Total |                 | $     | 2,023 |      |   | $   | 127 | 
|                                     |       |                 |       |       |      |  

Severance Costs for Former Personnel 


Corporate Housing 




|    |                                       
|--- | --------------------------------------
|10. | ASSET IMPAIRMENTS AND OTHER WRITE-OFFS



|                                        |       |                 |     |       |      |   |       |       | 
|--------------------------------------- | ----- | --------------- | --- | ----- | ---- | - | ----- | ----- | 
|                                        |       | Three Months    |    
|                                        |       | Ended March 31, |    
|                                        |       |                 |    
|                                        |       | 2005            |     |       | 2004 |  
|                                        |       |                 |     |       |      |  
|Management contract costs               |       | $               | 239 |       |      | $ | 3,296 |      
|Investment impairments                  |       |                 |    |       |      |   | 1,101 |      
|Hotel real estate investment fund costs |       |                 | 823 |       |      |   |      |      
|Other                                   |       |                 |    |       |      |   | 96    |      
|                                        |       |                 |     |       |      |  
|                                        | Total |                 | $   | 1,062 |      |   | $     | 4,493 | 
|                                        |       |                 |     |       |      |  

Management Contract Write-offs 




11



---



##### 



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


Investment Impairments 


Hotel Real Estate Investment Fund costs 




|    |                            
|--- | ---------------------------
|11. | GAIN ON SALE OF INVESTMENTS





|    |                              
|--- | -----------------------------
|12. | COMMITMENTS AND CONTINGENCIES

Insurance Matters 


Leases 


|           |       |   |        |        | 
|---------- | ----- | - | ------ | ------ | 
|2005       |       | $ | 38,758 |       
|2006       |       |   | 11,901 |       
|2007       |       |   | 7,393  |       
|2008       |       |   | 6,319  |       
|2009       |       |   | 5,641  |       
|Thereafter |       |   | 25,470 |       
|           |       |   |       
|           | Total |   | $      | 95,482 | 
|           |       |   |       



12



---



##### 



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




Management Agreement Commitments 


Termination Fees 


Contingent Liabilities Related to Partnership
Interests 




|    |                                         
|--- | ----------------------------------------
|13. | ACQUISITION AND NEW MANAGEMENT CONTRACTS



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



13



---



##### 



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




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

Forward-Looking Statements






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



14



---



##### 





Quarterly Summary


General 






Recent events


Disposition of Hotel by Our Joint Venture 


New Management Contracts 


Chief Executive Officer 


Hurricanes in Florida 


Hotel Acquisition 


15



---



##### 



Critical Accounting Policies and Estimates






Results of Operations


Three months ended
March 31, 2005 compared with three months ended
March 31, 2004.


Overview 




| |   |                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In March 2005, we began operating 22 upscale hotels recently
    acquired by a partnership consisting of a private investment
    fund managed by affiliates of Goldman Sachs and Highgate
    Holdings.                                                                             
|
| |  | In connection with our purchase of Sunstone Hotel Properties,
    Inc., we acquired management contracts for 54 properties, during
    the fourth quarter of 2004. During the first quarter of 2005, we
    transitioned 1 of these properties out of our system.                    
|
| |  | From March 31, 2004 to March 31, 2005, MeriStar
    Hospitality, sold 10 properties, 9 of which we no longer manage
    for the eventual buyers. In addition, we transitioned 32 other
    properties out of our system and added 4 properties to our
    system from various owners.



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



|                                    |  |      |        |   |      |   |       |        |  |  |     |  
|----------------------------------- |  | ---- | ------ | - | ---- | - | ----- | ------ |  |  | --- | -
|                                    |  | 2005 |        |   | 2004 |   |       | Change | 
|                                    |  |      |        |   |      |   |       |        | 
|Revenue per available room (RevPAR) |  | $    | 71.49  |   |      | $ | 65.42 |        |  |  | 9.3 | %
|Average daily rate (ADR)            |  | $    | 106.33 |   |      | $ | 99.10 |        |  |  | 7.3 | %
|Occupancy                           |  |      | 67.2   | % |      |   | 66.0  | %      |  |  | 1.8 | %



|     |  |         |    |  |          |  |       |     |  |   |           |  |  |  |       |  
|---- |  | ------- | -- |  | -------- |  | ----- | --- |  | - | --------- |  |  |  | ----- | -
|     |  | Number  |    |  | Average  |  |       |     |  |  
|     |  | of      |    |  | Number   |  |       |     |  |  
|Year |  | Markets |    |  | of Units |  |       | ADR |  |   | Occupancy | 
|     |  |         |    |  |          |  |       |     |  |   |           | 
|2005 |  |         | 17 |  |          |  | 3,035 |     |  | $ | 107.82    |  |  |  | 90.18 | %
|2004 |  |         | 19 |  |          |  | 2,964 |     |  | $ | 99.42     |  |  |  | 87.20 | %

16



---



##### 







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue from lodging increased $1,839, to $2,562 for three
    months ended March 31, 2005, from $723 for the three months
    ended March 31, 2004. Substantially all of the increase is
    due to the acquisition of the Hilton Concord hotel. Revenues
    generated by this property were $1,755 from February 11,
    2005 through March 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Revenue from management fees increased $321, or 2.3%, to $13,999
    for the three months ended March 31, 2005, from $13,678 for
    the three months ended March 31, 2004. Our RevPAR, ADR and
    occupancy have improved year over year, and the increase in
    total number of hotels under management has generated an
    increase in our total management fee revenue, which was offset
    by lost revenue from hotels that were transitioned out of our
    system.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Revenue from our corporate housing operations has increased
    $3,149, or 13.0%, to $27,399 for the three months ended
    March 31, 2005, from $24,250 for the three months ended
    March 31, 2004. This increase in revenue is partially
    attributable to an increase in ADR by approximately 8.4%, from
    $99.42 to $107.82, an increase in occupancy from 87.20% to
    90.18% and an increase in the number of units from 2,964 to
    3,035 from March 31, 2004 to March 31,2005,
    respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Reimbursable expenses, which we record as other revenue and
    other expenses from managed properties under EITF 01-14,
    increased by $24,757, or 13.8%, to $204,297 for the three months
    ended March 31, 2005, from $179,540 for the three months
    ended March 31, 2004. The primary reason for this increase
    is the increase in the number of managed hotels from
    March 31, 2004 to March 31, 2005, directly resulting
    in an increase in the number of hotel employees and in related
    reimbursable salaries and other expenses. In addition, other
    revenue from managed properties has been revised and reduced for
    the first quarter of 2004 by $14,610. Our statements of
    operations include an equal and offsetting amount 
    Other expenses from managed properties 
    which has also been revised by the same amount. These amounts
    represent the payroll and related costs, and certain other costs
    of the hotels operations that are contractually reimbursed
    to us by the hotel owners. The revisions have no impact on
    operating income (loss), net income (loss), or earnings
    (loss) per share, or our balance sheet or cash flows.



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





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lodging expenses increased $1,432, or 276.4%, from $1,950, for
    the three months ended March 31, 2005, compared to $518 for
    the three months ended March 31, 2004. The increase is
    mainly related to the acquisition of the Hilton Concord hotel in
    February 2005. The property incurred lodging expenses of $1,278
    from February 11 through March 31, 2005.                                 
|
| |  | Corporate housing expenses increased $3,027, or 14.9%, from
    $23,409, for the three months ended March 31, 2005,
    compared to $20,382 for the three months ended March 31,
    2004. The increase in corporate housing expenses is primarily
    due to an increase in apartment rental expenses and an increase
    in the number of units from 2,964 to 3,035 from March 31,
    2004 to March 31, 2005.

17



---



##### 





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





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Administrative and general expense increased $567, or 3.2%, to
    $18,031 for the three months ended March 31, 2005, from
    $17,464 for the three months ended March 31, 2004. The
    majority of this increase is due to a $2,046 increase in
    administrative and general costs from our Sunstone division,
    which we acquired in October 2004. These costs were
    partially offset by a decrease in expenses associated with an
    insurance claim of $1,000 incurred by our insurance subsidiary
    in the first quarter of 2004. In addition, during the first
    quarter of 2004, we incurred $593 of expenses following the
    closing of our Flagstone subsidiary in the fourth quarter of
    2003, with no similar expenses in the first quarter of 2005.                                              
|
| |  | Depreciation and amortization expense decreased $156, or 6.5%,
    to $2,239 for the three months ended March 31, 2005, from
    $2,395 for the three months ended March 31, 2004. This
    decrease is primarily due to a large number of management
    contracts that became fully amortized and the loss of other
    management contracts that had intangible assets associated with
    them that were written off during the first quarter of 2004. In
    addition, our corporate housing segment closed its Detroit
    office in August 2004. This decrease is partially offset by the
    additional amortization expense related to management contracts
    acquired in connection with the purchase of Sunstone and
    increased depreciation expense related to the acquisition of the
    Hilton Concord hotel.
|
| |  | Restructuring charges increased $1,896, to $2,023 for the three
    months ended March 31, 2005, from $127 for the same period
    last year. The increase is primarily due to the severance costs
    of approximately $1,800 for our former CEO in connection with
    the terms of his employment contract.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Intangible asset write-offs and other impairments decreased
    $3,431, to $1,062 for the three months ended March 31,
    2005, from $4,493 for the same period last year. These expenses
    are detailed as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|                                                    |       |                 |     |       |      |   |       |       | 
|--------------------------------------------------- | ----- | --------------- | --- | ----- | ---- | - | ----- | ----- | 
|                                                    |       | Three Months    |    
|                                                    |       | Ended March 31, |    
|                                                    |       |                 |    
|                                                    |       | 2005            |     |       | 2004 |  
|                                                    |       |                 |     |       |      |  
|Management contract write-offs                      |       | $               | 239 |       |      | $ | 3,296 |      
|Investment impairments in unconsolidated affiliates |       |                 |    |       |      |   | 1,101 |      
|Hotel real estate investment fund termination       |       |                 | 823 |       |      |   |      |      
|Other                                               |       |                 |    |       |      |   | 96    |      
|                                                    |       |                 |     |       |      |  
|                                                    | Total |                 | $   | 1,062 |      |   | $     | 4,493 | 
|                                                    |       |                 |     |       |      |  





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Reimbursable expenses, which we record as other revenue and
    other expenses from managed properties under EITF 01-14,
    increased by $24,757, or 13.8%, to $204,297 for the three months
    ended March 31, 2005, from $179,540 for the three months
    ended March 31, 2004. The primary reason for this increase
    is the increase in the number of managed hotels from
    March 31, 2004 to March 31, 2005, directly resulting
    in an increase in the number of hotel employees and in related
    reimbursable salaries and other expenses. In addition, other
    expenses from managed properties has been revised and reduced in
    2004 by $14,610. Our statements of operations include an equal
    and offsetting amount  Other revenue from
    managed properties  which has also been revised
    by the same amount. These amounts represent the payroll and
    related costs, and certain other costs of the hotels
    operations that are contractually reimbursed to us by the hotel
    owners. The revisions have no impact on operating income (loss),
    net income (loss), or earnings (loss) per share, or our
    balance sheet or cash flows.

18



---



##### 





| |         
| | --------
| | Net Loss











Liquidity and Capital Resources


Working Capital 


SOURCES AND USES OF CASH


Operating Activities 


Investing Activities 


Financing Activities 


19



---



##### 



DEBT


Senior Credit Facility 










Mortgage Debt 


Interest Rate Caps 


Sunstone Promissory Note 


Liquidity 


20



---



##### 







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

Interest Rate Risk














Exchange Rate Risk




21



---



##### 







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

Disclosure Controls and Procedures






Changes in Internal Controls






22



---



##### 



PART II. OTHER INFORMATION


Item 1.Legal
Proceedings




Item 5.Other
Information




Item 6.Exhibits


Exhibits


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

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|            |       |   |                         |                                                                                                                                                                                                                                                                                                                                                                                                      
|----------- | ----- | - | ----------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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).       
|            | 10.2  |   |                         | Form of Amended and Restated Senior Secured Credit Agreement,
    dated as of January 14, 2005, among Interstate Operating
    Company, L.P., Societe Generale, SG Americas Securities, LLC,
    and various other lenders (incorporated by reference to
    Exhibit 10.2 to the Companys Form 8-K filed with
    the Securities and Exchange Commission on January 21, 2005).                      
|            | 10.3  |   |                         | Form of Amended and Restated Security Agreement, dated as of
    January 14, 2005, among Interstate Operating Company, L.P.,
    and other Pledgors named therein and Societe Generale, as
    administrative agent for the senior creditors (incorporated by
    reference to Exhibit 10.3 to the Companys
    Form 8-K filed with the Securities and Exchange Commission
    on January 21, 2005).
|            | 10.4  |   |                         | Form of Amended and Restated Guaranty and Contribution
    Agreement, dated as of January 14, 2005, by Interstate
    Hotels & Resorts, Inc. and certain of its subsidiaries named
    as Guarantors therein (incorporated by reference to
    Exhibit 10.4 to the Companys Form 8-K filed with
    the Securities and Exchange Commission on January 21, 2005).                                    
|            | 31.1* |   |                         | Sarbanes-Oxley Act Section 302 Certifications of the Chief
    Executive Officer.                                                                                                                                                                                                                                                                                                                    
|            | 31.2* |   |                         | Sarbanes-Oxley Act Section 302 Certifications of the Chief
    Financial Officer.                                                                                                                                                                                                                                                                                                                    
|            | 32.*  |   |                         | Sarbanes-Oxley Act Section 906 Certifications of Chief Executive
    Officer and Chief Financial Officer.                                                                                                                                                                                                                                                                                            

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SIGNATURE






| |                                      
| | -------------------------------------
| | Interstate
    Hotels & Resorts, Inc.
|
| | /s/ J. William Richardson            
| |                                      
| | J. William Richardson                
| | Chief Financial Officer              



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