##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-Q

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | For the quarterly period ended March 31,
    2003                                           
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission file number 1-14331

Interstate Hotels & Resorts,
Inc.

(Exact name of registrant as specified in its
charter)


|                                                                                           |  |                                  
|------------------------------------------------------------------------------------------ |  | ---------------------------------
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|Delaware                                                                                   |  | 52-2101815                       
|(State of Incorporation)                                                                   |  | (IRS Employer Identification No.)
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|1010 Wisconsin Avenue, N.W
    Washington, D.C(Address of Principal Executive
    Offices) |  | 20007(Zip Code)                  

www.ihrco.com



Registrants telephone number, including area code:

202-965-4455


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

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

The number of shares of Common Stock, par value $0.01 per share,
outstanding at May 6, 2003 was 20,607,406.



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---

TABLE OF CONTENTS



|                                                                                                                                                                            |                                                             |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------- |  |  |  |  |  |  | 
|INDEX                                                                                                                                                                      
|PART I. FINANCIAL INFORMATION                                                                                                                                              
|INTERSTATE HOTELS & RESORTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts)                                                           
|INTERSTATE HOTELS & RESORTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS) (Unaudited, in thousands, except per share amounts)
|INTERSTATE HOTELS & RESORTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands)                                                                
|INTERSTATE HOTELS & RESORTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, dollars in thousands, except per share amounts)                         
|PART II. OTHER INFORMATION                                                                                                                                                 
|                                                                                                                                                                            | Item 1. Legal Proceedings                                  
|                                                                                                                                                                            | Item 2. Changes in Securities and Use of Proceeds          
|                                                                                                                                                                            | Item 3. Defaults Upon Senior Securities                    
|                                                                                                                                                                            | Item 4. Submission of Matters to a Vote of Security Holders
|                                                                                                                                                                            | Item 5. Other Information                                  
|                                                                                                                                                                            | Item 6. Exhibits and Reports on Form 8-K                   
|SIGNATURE                                                                                                                                                                  
|CERTIFICATIONS                                                                                                                                                             
|CERTIFICATIONS                                                                                                                                                             
|Second Amendment to Intercompany Agreement                                                                                                                                 
|Second Amendment to Non-Employee Directors Plan                                                                                                                            
|Amendment to Employee Stock Purchase Plan.                                                                                                                                 
|Certifications-Whetsell                                                                                                                                                    
|Certifications-Calder                                                                                                                                                      



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##### Table of Contents



INTERSTATE HOTELS & RESORTS, INC.






INDEX


|                              |  |                                                                                                                                            |  |      |    | 
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                              |  |                                                                                                                                            |  | Page
|                              |  |                                                                                                                                            |  |     
|                             
|                             
|                             
|                             
|PART I. FINANCIAL INFORMATION
|                             
|                             
|                             
|                             
|                             
|Item 1:                       |  | Financial Statements (unaudited)                                                                                                           |  |      |    | 
|                             
|                             
|                             
|                             
|                              |  | Condensed Consolidated Balance Sheets 
    March 31, 2003 and December 31, 2002                                                           |  |      | 2  | 
|                             
|                             
|                             
|                             
|                              |  | Condensed Consolidated Statements of Operations
    and Other Comprehensive Income (Loss)  Three months
    ended March 31, 2003 and 2002 |  |      | 3  | 
|                             
|                             
|                             
|                             
|                              |  | Condensed Consolidated Statements of Cash
    Flows  Three months ended March 31, 2003 and 2002                                           |  |      | 4  | 
|                             
|                             
|                             
|                             
|                              |  | Notes to Condensed Consolidated Financial
    Statements                                                                                   |  |      | 5  | 
|                             
|                             
|                             
|                             
|                             
|Item 2:                       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                                                  |  |      | 14 | 
|                             
|                             
|                             
|                             
|                             
|Item 3:                       |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                                             |  |      | 24 | 
|                             
|                             
|                             
|                             
|                             
|Item 4:                       |  | Controls and Procedures                                                                                                                    |  |      | 25 | 
|                             
|                             
|                             
|                             
|                             
|PART II. OTHER INFORMATION   
|                             
|                             
|                             
|                             
|                             
|Item 1:                       |  | Legal Proceedings                                                                                                                          |  |      | 26 | 
|                             
|                             
|                             
|                             
|                             
|Item 2:                       |  | Changes in Securities and Use of Proceeds                                                                                                  |  |      | 26 | 
|                             
|                             
|                             
|                             
|                             
|Item 3:                       |  | Defaults Upon Senior Securities                                                                                                            |  |      | 26 | 
|                             
|                             
|                             
|                             
|                             
|Item 4:                       |  | Submission of Matters to a Vote of Security
    Holders                                                                                    |  |      | 26 | 
|                             
|                             
|                             
|                             
|                             
|Item 5:                       |  | Other Information                                                                                                                          |  |      | 26 | 
|                             
|                             
|                             
|                             
|                             
|Item 6:                       |  | Exhibits and Reports on Form 8-K                                                                                                           |  |      | 27 | 

1



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##### Table of Contents






PART I. FINANCIAL INFORMATION

Item 1:     Financial
Statements




INTERSTATE HOTELS & RESORTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


(in thousands, except per share amounts)


|                                                             |                                                                                                                                                                       |                                                                    |         |              |         |  |         |         |         | 
|------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | ------- | ------------ | ------- |  | ------- | ------- | ------- | 
|                                                             |                                                                                                                                                                       | March 31,                                                          |         | December 31,
|                                                             |                                                                                                                                                                       | 2003                                                               |         | 2002        
|                                                             |                                                                                                                                                                       |                                                                    |         |             
|                                                             |                                                                                                                                                                       | (unaudited)                                                        |         |             
|                                                            
|                                                            
|                                                            
|                                                            
|ASSETS                                                      
|                                                            
|                                                            
|                                                            
|                                                            
|Current assets:                                              |                                                                                                                                                                       |                                                                    |         |              |         |  |         |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Cash and cash equivalents                                                                                                                                             |                                                                    | $       | 15,499       |         |  | $       | 7,054   |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Restricted cash                                                                                                                                                       |                                                                    |         | 2,019        |         |  |         | 1,366   |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Accounts receivable, net of allowance for
    doubtful accounts of $4,726 at March 31, 2003 and $4,125 at
    December 31, 2002                                       |                                                                    |         | 22,788       |         |  |         | 13,532  |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Insurance premiums receivable                                                                                                                                         |                                                                    |         | 3,916        |         |  |         | 5,638   |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Due from MeriStar Hospitality                                                                                                                                         |                                                                    |         | 10,593       |         |  |         | 10,500  |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Prepaid expenses and other current assets                                                                                                                             |                                                                    |         | 11,797       |         |  |         | 11,783  |        
|                                                             |                                                                                                                                                                       |                                                                    |         |              |         |  |         |        
|                                                             |                                                                                                                                                                       | Total current assets                                               |         |              | 66,612  |  |         |         | 49,873  | 
|                                                            
|                                                            
|                                                            
|                                                            
|Marketable securities                                        |                                                                                                                                                                       |                                                                    | 1,072   |              |         |  | 2,413   |        
|                                                            
|                                                            
|                                                            
|                                                            
|Property and equipment, net                                  |                                                                                                                                                                       |                                                                    | 24,157  |              |         |  | 24,894  |        
|                                                            
|                                                            
|                                                            
|                                                            
|Officers and employees notes receivable                      |                                                                                                                                                                       |                                                                    | 420     |              |         |  | 373     |        
|                                                            
|                                                            
|                                                            
|                                                            
|Investments in and advances to affiliates                    |                                                                                                                                                                       |                                                                    | 24,730  |              |         |  | 25,199  |        
|                                                            
|                                                            
|                                                            
|                                                            
|Deferred income taxes                                        |                                                                                                                                                                       |                                                                    | 17,190  |              |         |  | 20,174  |        
|                                                            
|                                                            
|                                                            
|                                                            
|Goodwill                                                     |                                                                                                                                                                       |                                                                    | 91,960  |              |         |  | 91,960  |        
|                                                            
|                                                            
|                                                            
|                                                            
|Intangible and other assets, net                             |                                                                                                                                                                       |                                                                    | 64,362  |              |         |  | 65,795  |        
|                                                             |                                                                                                                                                                       |                                                                    |         |              |         |  |         |        
|                                                             |                                                                                                                                                                       | Total assets                                                       |         | $            | 290,503 |  |         | $       | 280,681 | 
|                                                             |                                                                                                                                                                       |                                                                    |         |              |         |  |         |        
|                                                            
|                                                            
|                                                            
|                                                            
|LIABILITIES, MINORITY INTERESTS AND
    STOCKHOLDERS EQUITY
|                                                            
|                                                            
|                                                            
|                                                            
|Current liabilities:                                         |                                                                                                                                                                       |                                                                    |         |              |         |  |         |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Accounts payable and accrued expenses                                                                                                                                 |                                                                    | $       | 68,336       |         |  | $       | 60,363  |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Income taxes payable                                                                                                                                                  |                                                                    |         | 1,000        |         |  |         | 1,000   |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Current portion of long-term debt                                                                                                                                     |                                                                    |         | 1,625        |         |  |         | 1,625   |        
|                                                             |                                                                                                                                                                       |                                                                    |         |              |         |  |         |        
|                                                             |                                                                                                                                                                       | Total current liabilities                                          |         |              | 70,961  |  |         |         | 62,988  | 
|                                                            
|                                                            
|                                                            
|                                                            
|Deferred compensation                                        |                                                                                                                                                                       |                                                                    | 1,072   |              |         |  | 2,413   |        
|                                                            
|                                                            
|                                                            
|                                                            
|Long-term debt                                               |                                                                                                                                                                       |                                                                    | 131,139 |              |         |  | 132,614 |        
|                                                             |                                                                                                                                                                       |                                                                    |         |              |         |  |         |        
|                                                             |                                                                                                                                                                       | Total liabilities                                                  |         |              | 203,172 |  |         |         | 198,015 | 
|                                                            
|                                                            
|                                                            
|                                                            
|Minority interests                                           |                                                                                                                                                                       |                                                                    | 6,371   |              |         |  | 6,242   |        
|Commitments and contingencies                                |                                                                                                                                                                       |                                                                    |         |              |         |  |         |        
|                                                            
|                                                            
|                                                            
|                                                            
|Stockholders equity:                                        |                                                                                                                                                                       |                                                                    |         |              |         |  |         |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Common stock, $.01 par value; 50,000 shares
    authorized; 20,587 and 20,557 shares issued and outstanding at
    March 31, 2003 and December 31, 2002, respectively |                                                                    |         | 206          |         |  |         | 205     |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Treasury stock                                                                                                                                                        |                                                                    |         | (69          | )       |  |         | (46     | )      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Paid-in capital                                                                                                                                                       |                                                                    |         | 138,340      |         |  |         | 138,268 |        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Accumulated other comprehensive loss                                                                                                                                  |                                                                    |         | (192         | )       |  |         | (249    | )      
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Accumulated deficit                                                                                                                                                   |                                                                    |         | (57,325      | )       |  |         | (61,754 | )      
|                                                             |                                                                                                                                                                       |                                                                    |         |              |         |  |         |        
|                                                             |                                                                                                                                                                       | Total stockholders equity                                         |         |              | 80,960  |  |         |         | 76,424  | 
|                                                             |                                                                                                                                                                       |                                                                    |         |              |         |  |         |        
|                                                             |                                                                                                                                                                       | Total liabilities, minority interests and
    stockholders equity |         | $            | 290,503 |  |         | $       | 280,681 | 
|                                                             |                                                                                                                                                                       |                                                                    |         |              |         |  |         |        

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

2



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##### Table of Contents






INTERSTATE HOTELS & RESORTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


AND OTHER COMPREHENSIVE INCOME (LOSS)


(Unaudited, in thousands, except per share amounts)


|                                                             |                                              |                    |         |               |  |   |        |        |  
|------------------------------------------------------------ | -------------------------------------------- | ------------------ | ------- | ------------- |  | - | ------ | ------ | -
|                                                             |                                              |                   
|                                                             |                                              | Three months ended
|                                                             |                                              | March 31,         
|                                                             |                                              |                   
|                                                             |                                              | 2003               |         | 2002         
|                                                             |                                              |                    |         |              
|                                                             |                                              |                    |         | (as restated)
|                                                            
|                                                            
|                                                            
|                                                            
|Revenue:                                                     |                                              |                    |         |               |  |   |        |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Lodging revenues                             |                    | $       | 836           |  |   | $      | 676    |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Management fees                              |                    |         | 14,195        |  |   |        | 4,262  |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Corporate housing                            |                    |         | 25,819        |  |   |        |       |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Other revenue                                |                    |         | 3,881         |  |   |        | 4,013  |  
|                                                             |                                              |                    |         |               |  |   |        |       
|                                                             |                                              |                    | 44,731  |               |  |   | 8,951  |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Other revenue from managed properties        |                    |         | 212,497       |  |   |        | 62,441 |  
|                                                             |                                              |                    |         |               |  |   |        |       
|Total revenue                                                |                                              |                    | 257,228 |               |  |   | 71,392 |       
|                                                            
|                                                            
|                                                            
|                                                            
|Operating expenses by department:                            |                                              |                    |         |               |  |   |        |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Lodging expenses                             |                    |         | 620           |  |   |        | 481    |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Corporate housing                            |                    |         | 22,122        |  |   |        |       |  
|                                                            
|                                                            
|                                                            
|                                                            
|Undistributed operating expenses:                            |                                              |                    |         |               |  |   |        |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Administrative and general                   |                    |         | 18,865        |  |   |        | 6,186  |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Depreciation and amortization                |                    |         | 4,682         |  |   |        | 2,528  |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Merger and integration costs                 |                    |         | 1,865         |  |   |        |       |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Tender offer costs                           |                    |         |              |  |   |        | 119    |  
|                                                             |                                              |                    |         |               |  |   |        |       
|                                                             |                                              |                    | 48,154  |               |  |   | 9,314  |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Other expenses from managed properties       |                    |         | 212,497       |  |   |        | 62,441 |  
|                                                             |                                              |                    |         |               |  |   |        |       
|Total operating expenses                                     |                                              |                    | 260,651 |               |  |   | 71,755 |       
|                                                             |                                              |                    |         |               |  |   |        |       
|Net operating loss                                           |                                              |                    | (3,423  | )             |  |   | (363   | )     
|                                                            
|                                                            
|                                                            
|                                                            
|Interest expense, net                                        |                                              |                    | 2,309   |               |  |   | 975    |       
|                                                            
|                                                            
|                                                            
|                                                            
|Equity in losses of affiliates                               |                                              |                    | 348     |               |  |   | 180    |       
|                                                            
|                                                            
|                                                            
|                                                            
|Gain on refinancing                                          |                                              |                    | (13,629 | )             |  |   |       |       
|                                                             |                                              |                    |         |               |  |   |        |       
|Income (loss) before minority interests and
    income taxes |                                              |                    | 7,549   |               |  |   | (1,518 | )     
|                                                            
|                                                            
|                                                            
|                                                            
|Minority interest expense                                    |                                              |                    | 168     |               |  |   | 64     |       
|                                                            
|                                                            
|                                                            
|                                                            
|Income tax expense (benefit)                                 |                                              |                    | 2,952   |               |  |   | (601   | )     
|                                                             |                                              |                    |         |               |  |   |        |       
|Net income (loss)                                            |                                              |                    | 4,429   |               |  |   | (981   | )     
|                                                            
|                                                            
|                                                            
|                                                            
|Mandatorily redeemable preferred stock:                      |                                              |                    |         |               |  |   |        |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Dividends                                    |                    |         |              |  |   |        | 159    |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Accretion                                    |                    |         |              |  |   |        | 15     |  
|                                                             |                                              |                    |         |               |  |   |        |       
|Net income (loss) available to common
    shareholders       |                                              | $                  | 4,429   |               |  | $ | (1,155 | )     
|                                                             |                                              |                    |         |               |  |   |        |       
|Other comprehensive income, net of tax:                      |                                              |                    |         |               |  |   |        |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Foreign currency translation gain            |                    |         | 42            |  |   |        |       |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Unrealized net gain on investments and other |                    |         | 15            |  |   |        |       |  
|                                                             |                                              |                    |         |               |  |   |        |       
|Comprehensive income (loss)                                  |                                              | $                  | 4,486   |               |  | $ | (1,155 | )     
|                                                             |                                              |                    |         |               |  |   |        |       
|Weighted average number of:                                  |                                              |                    |         |               |  |   |        |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Basic shares outstanding                     |                    |         | 20,577        |  |   |        | 5,272  |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Diluted shares outstanding                   |                    |         | 20,846        |  |   |        | 5,272  |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Net income (loss) per basic share            |                    | $       | 0.22          |  |   | $      | (0.22  | )
|                                                             |                                              |                    |         |               |  |   |        |       
|                                                             | Net income (loss) per diluted share          |                    | $       | 0.21          |  |   | $      | (0.22  | )
|                                                             |                                              |                    |         |               |  |   |        |       

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

3



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##### Table of Contents






INTERSTATE HOTELS & RESORTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited, in thousands)


|                                                         |                                                                                          |                                           |        |               |        |   |        |        |        |  
|-------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ----------------------------------------- | ------ | ------------- | ------ | - | ------ | ------ | ------ | -
|                                                         |                                                                                          |                                          
|                                                         |                                                                                          | Three months ended                       
|                                                         |                                                                                          | March 31,                                
|                                                         |                                                                                          |                                          
|                                                         |                                                                                          | 2003                                      |        | 2002         
|                                                         |                                                                                          |                                           |        |              
|                                                         |                                                                                          |                                           |        | (as restated)
|                                                        
|                                                        
|                                                        
|                                                        
|Cash flows from operating activities:                    |                                                                                          |                                           |        |               |        |   |        |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Net income (loss)                                                                        |                                           | $      | 4,429         |        |   | $      | (981   | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Adjustments to reconcile net income
    (loss) to net cash used in operating activities: |                                           |        |               |        |   |        |        |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Depreciation and amortization                                                            |                                           |        | 4,682         |        |   |        | 2,528  |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Gain on refinancing                                                                      |                                           |        | (13,629       | )      |   |        |       |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Equity in loss of affiliates                                                             |                                           |        | 348           |        |   |        | 180    |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Minority interest                                                                        |                                           |        | 168           |        |   |        | 64     |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Deferred income taxes                                                                    |                                           |        | 2,984         |        |   |        | (1,030 | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Amortization of mandatorily redeemable preferred
    stock                               |                                           |        |              |        |   |        | 188    |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Other                                                                                    |                                           |        | 422           |        |   |        | 381    |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Changes in assets and liabilities:                                                       |                                           |        |               |        |   |        |        |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                          | Accounts receivable, net                  |        |               | (7,535 | ) |        |        | (3,038 | )
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                          | Prepaid expenses and other current assets |        |               | (498   | ) |        |        | 142    |  
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                                          | Accounts payable and accrued expenses     |        |               | 7,867  |   |        |        | (499   | )
|                                                         |                                                                                          |                                           |        |               |        |   |        |       
|Net cash used in operating activities                    |                                                                                          |                                           | (762   | )             |        |   | (2,065 | )     
|                                                         |                                                                                          |                                           |        |               |        |   |        |       
|Cash flows from investing activities:                    |                                                                                          |                                           |        |               |        |   |        |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Change in restricted cash                                                                |                                           |        | (653          | )      |   |        | 266    |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Purchase of property and equipment, net                                                  |                                           |        | (834          | )      |   |        | (4     | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Purchases of intangible assets                                                           |                                           |        | (265          | )      |   |        |       |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Purchases of marketable securities                                                       |                                           |        |              |        |   |        | (1,110 | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Proceeds from sale of marketable securities                                              |                                           |        |              |        |   |        | 755    |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Net cash received from equity investments in
    hotel real estate                       |                                           |        | 6             |        |   |        | 96     |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Change in officers and employees notes
    receivable, net                               |                                           |        | (47           | )      |   |        | (115   | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Change in advances to affiliates, net                                                    |                                           |        | 103           |        |   |        | (74    | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Merger-related acquisition costs                                                         |                                           |        |              |        |   |        | (422   | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Deposits and other                                                                       |                                           |        |              |        |   |        | (63    | )     
|                                                         |                                                                                          |                                           |        |               |        |   |        |       
|Net cash used in investing activities                    |                                                                                          |                                           | (1,690 | )             |        |   | (671   | )     
|                                                         |                                                                                          |                                           |        |               |        |   |        |       
|Cash flows from financing activities:                    |                                                                                          |                                           |        |               |        |   |        |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Borrowings under subordinated term loan                                                  |                                           |        | 40,000        |        |   |        |       |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Borrowings under senior revolver                                                         |                                           |        | 28,000        |        |   |        |       |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Repayment of term loan                                                                   |                                           |        | (42,052       | )      |   |        | (776   | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Repayments on senior revolver                                                            |                                           |        | (13,406       | )      |   |        |       |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Proceeds from issuance of common stock                                                   |                                           |        | 63            |        |   |        | (42    | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Financing fees paid                                                                      |                                           |        | (1,690        | )      |   |        | (159   | )     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Common stock repurchased                                                                 |                                           |        | (23           | )      |   |        |       |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Other                                                                                    |                                           |        |              |        |   |        | (2     | )     
|                                                         |                                                                                          |                                           |        |               |        |   |        |       
|Net cash provided by (used in) financing
    activities  |                                                                                          |                                           | 10,892 |               |        |   | (979   | )     
|                                                         |                                                                                          |                                           |        |               |        |   |        |       
|Effect of exchange rate on cash                          |                                                                                          |                                           | 5      |               |        |   |       |       
|                                                        
|                                                        
|                                                        
|                                                        
|Net increase (decrease) in cash and cash
    equivalents |                                                                                          |                                           | 8,445  |               |        |   | (3,715 | )     
|                                                        
|                                                        
|                                                        
|                                                        
|Cash and cash equivalents at beginning of period         |                                                                                          |                                           | 7,054  |               |        |   | 39,040 |       
|                                                         |                                                                                          |                                           |        |               |        |   |        |       
|Cash and cash equivalents at end of period               |                                                                                          | $                                         | 15,499 |               |        | $ | 35,325 |       
|                                                         |                                                                                          |                                           |        |               |        |   |        |       

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

4



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##### Table of Contents






INTERSTATE HOTELS & RESORTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


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


1.     ORGANIZATION

Formation of Interstate Hotels & Resorts

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

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

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

Business Summary

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

As of March 31, 2003, we managed 383 properties with 81,309
rooms in 44 states, the District of Columbia, Canada, and
Russia. We wholly own one of these properties. We have
non-controlling equity interests in 25 of these hotels. In
addition, at March 31, 2003, we had 3,190 apartments under
lease in the United States, Canada, the United Kingdom and
France.

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

We manage all 107 properties owned by MeriStar Hospitality
Corporation, a real estate investment trust. We also have an
intercompany agreement with MeriStar Hospitality. That agreement
provides each of us the right to participate in certain
transactions entered into by the other company. The intercompany
agreement provides MeriStar Hospitality with the right of first
refusal with respect to some of our hotel real estate
opportunities and it also provides us with a right of first
refusal with respect to some of MeriStar Hospitalitys
hotel management opportunities (excluding hotels that MeriStar
Hospitality elects to have managed by a hotel brand).

5



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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


2.     SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

General

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

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

Stock-Based Compensation

In December 2002, the FASB issued SFAS No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure, to provide alternative methods
of transition for a voluntary change to the expense recognition
provisions of the fair value based method of accounting for
stock-based employee compensation. Effective January 1,
2003, we have elected to adopt the fair-value method of
accounting for stock options under SFAS No. 148, using the
prospective method. We will record in our statement of
operations the expense related to stock options issued after
January 1, 2003. This accounting treatment had no effect on
our statement of operations for the three months ended
March 31, 2003.

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

Pro forma information regarding net income and earnings per
share has been determined as if we had accounted for our
employee stock options using the fair value method. Had
compensation cost for stock options been determined based on the
fair value at the grant date for awards under our plans, our net
loss and per share amounts would have been reduced to the pro
forma amounts indicated as follows:

|                               |                                                                                                                     |                    |         |        |  |   |        |       | 
|------------------------------ | ------------------------------------------------------------------------------------------------------------------- | ------------------ | ------- | ------ |  | - | ------ | ----- | 
|                               |                                                                                                                     |                   
|                               |                                                                                                                     | Three months ended
|                               |                                                                                                                     | March 31,         
|                               |                                                                                                                     |                   
|                               |                                                                                                                     | 2003               |         | 2002  
|                               |                                                                                                                     |                    |         |       
|Net income (loss), as reported |                                                                                                                     | $                  | 4,429   |        |  | $ | (981   | )    
|                              
|                              
|                              
|                              
|                               | Add: Stock-based employee compensation
    expense included in reported net income                                  |                    |         |       |  |   |        |      | 
|                              
|                              
|                              
|                              
|                               | Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards |                    |         | 14,452 |  |   |        | 2,730 | 
|                               |                                                                                                                     |                    |         |        |  |   |        |      
|Net loss, pro forma            |                                                                                                                     | $                  | (10,023 | )      |  | $ | (3,711 | )    
|                               |                                                                                                                     |                    |         |        |  |   |        |      

6



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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                           |                      |                    |   |       |   |  |   |       |  
|-------------------------- | -------------------- | ------------------ | - | ----- | - |  | - | ----- | -
|                           |                      |                   
|                           |                      | Three months ended
|                           |                      | March 31,         
|                           |                      |                   
|                           |                      | 2003               |   | 2002 
|                           |                      |                    |   |      
|Earnings (loss) per share: |                      |                    |   |       |   |  |   |      
|                          
|                          
|                          
|                          
|                           | Basic, as reported   |                    | $ | 0.22  |   |  | $ | (0.22 | )
|                          
|                          
|                          
|                          
|                           | Basic, pro forma     |                    | $ | (0.49 | ) |  | $ | (0.70 | )
|                          
|                          
|                          
|                          
|                           | Diluted, as reported |                    | $ | 0.21  |   |  | $ | (0.22 | )
|                          
|                          
|                          
|                          
|                           | Diluted, pro forma   |                    | $ | (0.49 | ) |  | $ | (0.70 | )

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

Revenue Recognition

Through the second quarter of 2002, we had recorded incentive
management fees in accordance with Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial
Statements, and Method No. 2 of Emerging Issues Task
Force or EITF Topic No. D-96, Accounting for
Management Fees Based on a Formula in which incentive
management fees are accrued as earned based on the profitability
of the hotel, subject to the specific terms of each individual
management agreement. The application of Method No. 2
resulted in the accrual of incentive management fees during
interim reporting periods throughout the annual measurement
period. The accrual would be reduced or eliminated in subsequent
interim reporting periods if the profitability of the hotel
missed performance thresholds later in the annual measurement
period. This is an acceptable method of accounting for incentive
management fees because the termination provisions specified in
the management contracts provide for payment of prorated
incentive management fees if the contract were to be terminated
at any point within the year.

In our first quarter 2003 press release, we included financial
information for the three months ended March 31, 2002. This
information was derived from the first quarter 2002 press
release and Form 10-Q of Interstate Hotels Corporation. The
financial information for the consolidated statement of
operations and comprehensive income (loss) presented in
this Form 10-Q for the three months ended March 31,
2002 differs from the information presented in our first quarter
press release, in that management fee revenue shown in the
statement of operations and comprehensive income (loss) is
less than management fee revenue presented in our first quarter
press release. This is because during the third quarter of 2002,
with an effective date of January 1, 2002, we began
recording incentive management fees in accordance with Method
No. 1 of EITF Topic No. D-96, Accounting for
Management Fees Based on a Formula, in which incentive
management fees are recorded in the period that it is certain
the incentive management fees are earned, which for annual
incentive fee measurements typically is in the last month of the
annual contract period. This change in accounting method had no
effect on the total annual management fees earned or amount of
cash we were paid but did affect the timing of recognizing the
revenue from these fees and resulted in the restatement of
management fee revenues for the three months ended
March 31, 2002. The effect of this change on the first
quarter of 2002 was to increase the net loss available to common
shareholders by $0.9 million ($0.16 per share) to a net
loss available to common shareholders of $1.2 million
($0.22 per share), as opposed to the net loss available to
common shareholders of $0.3 million presented in our first
quarter press release. This change is reflected in our statement
of operations for the three months ended March 31, 2002.

7



---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Other Items

In April 2002, the FASB issued SFAS No. 145
Rescission of FASB Statements No. 4, 44 and 64, Amendment
of SFAS No. 13, Technical Corrections. This statement
rescinds FASB Statement No. 4, Reporting Gains and
Losses from Extinguishment of Debt, and also amends other
existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability
under changed conditions. We adopted this amendment during 2002.
In accordance with the guidelines, we accounted for our gain on
debt refinancing in income (loss) before minority interests
and income taxes, rather than as an extraordinary item.

FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, (FIN
45), an interpretation of FASB Statements No. 5, 57
and 107 and rescission of FASB Interpretation No. 34, was
issued in November 2002. FIN 45 elaborates on the disclosures to
be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002
irrespective of the guarantors fiscal year-end. The
disclosure requirements in FIN 45 are effective for financial
statements of interim or annual periods ending after
December 15, 2002. The adoption of FIN 45 had no material
impact on our financial position or results of operations.

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

3.     EARNINGS PER SHARE

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

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

8



---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The details of basic and diluted earnings (loss) per common
share for the three-month periods ended March 31, 2003 and
2002 were as follows:

|                                                                                 |                                    |                    |        |      |  |   |        |       |  
|-------------------------------------------------------------------------------- | ---------------------------------- | ------------------ | ------ | ---- |  | - | ------ | ----- | -
|                                                                                 |                                    |                   
|                                                                                 |                                    | Three months ended
|                                                                                 |                                    | March 31,         
|                                                                                 |                                    |                   
|                                                                                 |                                    | 2003               |        | 2002
|                                                                                 |                                    |                    |        |     
|Net income (loss) available to common
    shareholders                           |                                    | $                  | 4,429  |      |  | $ | (1,155 | )    
|                                                                                 |                                    |                    |        |      |  |   |        |      
|Weighted average number of common shares
    outstanding (in thousands)          |                                    |                    | 20,577 |      |  |   | 5,272  |      
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Basic earnings (loss) per share:                                                 |                                    | $                  | 0.22   |      |  | $ | (0.22  | )    
|                                                                                 |                                    |                    |        |      |  |   |        |      
|Weighted average number of dilutive common shares
    outstanding (in thousands) |                                    |                    | 20,846 |      |  |   | 5,272  |      
|                                                                                 |                                    |                    |        |      |  |   |        |      
|                                                                                 | Dilutive earnings (loss) per share |                    | $      | 0.21 |  |   | $      | (0.22 | )
|                                                                                 |                                    |                    |        |      |  |   |        |      

4.     INTANGIBLE ASSETS

Intangible assets consist of the following:

|                              |  |           |         |              |  |   |         |  
|----------------------------- |  | --------- | ------- | ------------ |  | - | ------- | -
|                              |  | March 31, |         | December 31,
|                              |  | 2003      |         | 2002        
|                              |  |           |         |             
|Management contracts          |  | $         | 83,306  |              |  | $ | 84,163  |  
|                             
|                             
|                             
|                             
|Franchise fees                |  |           | 1,945   |              |  |   | 1,945   |  
|                             
|                             
|                             
|                             
|Deferred financing fees       |  |           | 4,568   |              |  |   | 2,882   |  
|                             
|                             
|                             
|                             
|Other                         |  |           | 809     |              |  |   | 586     |  
|                              |  |           |         |              |  |   |         |  
|                              |  |           | 90,628  |              |  |   | 89,576  |  
|                             
|                             
|                             
|                             
|Less accumulated amortization |  |           | (26,266 | )            |  |   | (23,781 | )
|                              |  |           |         |              |  |   |         |  
|                              |  | $         | 64,362  |              |  | $ | 65,795  |  
|                              |  |           |         |              |  |   |         |  

During the first quarter of 2003 the following transactions
occurred:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | We incurred $1,690 of financing fees associated with our new
    subordinated term loan.
|
| |  | We wrote-off $890 of management contracts that were fully
    amortized.                

We incurred aggregate amortization expense of $3,375 and $2,509
on these assets for the three months ended March 31, 2003
and 2002, respectively.

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

|                              |  |   |       | 
|----------------------------- |  | - | ----- | 
|                             
|                             
|                             
|                             
|Year ending December 31, 2003 |  | $ | 4,078 | 
|                             
|                             
|                             
|                             
|Year ending December 31, 2004 |  |   | 3,305 | 
|                             
|                             
|                             
|                             
|Year ending December 31, 2005 |  |   | 3,107 | 
|                             
|                             
|                             
|                             
|Year ending December 31, 2006 |  |   | 2,875 | 
|                             
|                             
|                             
|                             
|Year ending December 31, 2007 |  |   | 2,721 | 

The carrying amount of goodwill by reportable segment as of
March 31, 2003 is as follows:

|                  |       |   |        |        | 
|----------------- | ----- | - | ------ | ------ | 
|                 
|                 
|                 
|                 
|Hotel Management  |       | $ | 82,885 |       
|                 
|                 
|                 
|                 
|Corporate Housing |       |   | 9,075  |       
|                  |       |   |        |       
|                  | Total |   | $      | 91,960 | 
|                  |       |   |        |       

9



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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


5.     LONG-TERM DEBT

|                               |                      |           |         |              |   |   |         |        |  
|------------------------------ | -------------------- | --------- | ------- | ------------ | - | - | ------- | ------ | -
|                               |                      | March 31, |         | December 31,
|                               |                      | 2003      |         | 2002        
|                               |                      |           |         |             
|Senior credit agreement        |                      | $         | 88,594  |              |   | $ | 74,000  |       
|                              
|                              
|                              
|                              
|Promissory note                |                      |           | 4,170   |              |   |   | 4,170   |       
|                              
|                              
|                              
|                              
|MeriStar Hospitality term loan |                      |           |        |              |   |   | 56,069  |       
|                              
|                              
|                              
|                              
|Subordinated term loan         |                      |           | 40,000  |              |   |   |        |       
|                               |                      |           |         |              |   |   |         |       
|                               |                      |           | 132,764 |              |   |   | 134,239 |       
|                              
|                              
|                              
|                              
|                               | Less current portion |           |         | (1,625       | ) |   |         | (1,625 | )
|                               |                      |           |         |              |   |   |         |       
|                               |                      | $         | 131,139 |              |   | $ | 132,614 |       
|                               |                      |           |         |              |   |   |         |       

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



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

At March 31, 2003, borrowings under the senior credit
agreement bore interest at a rate of 5.26% per annum. We
incurred $1,096 of interest expense on the senior credit
agreement for the three months ended March 31, 2003.

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

MeriStar Hospitality term loan In connection
with the closing of the merger, effective July 31, 2002, we
converted a $75,000 unsecured credit facility between MeriStar
and MeriStar Hospitality to a $56,069 term loan due
July 31, 2007. The term loan was subordinated to borrowings
under our senior credit agreement. The MeriStar Hospitality term
loan contained certain covenants, including maintenance of
financial ratios at the end of each quarter, compliance
reporting requirements and other customary restrictions. We
incurred $123 of interest expense on the MeriStar Hospitality
loan for the three months ended March 31, 2003.

In January 2003, we completed a discounted repayment of the
MeriStar Hospitality term loan for $42,052. We financed part of
the repayment with proceeds from a new $40,000 subordinated term
loan and funded the remainder of the repayment out of available
cash. The refinancing resulted in a gain of $13,629. That gain
is included in our statement of operations for the three months
ended March 31, 2003.

Subordinated term loan  In January 2003, in
connection with the discounted repayment of the MeriStar
Hospitality term loan, we entered into a $40,000 subordinated
term loan with Lehman Brothers Holdings, Inc. that carries a
variable interest rate based on the 30-day LIBOR plus a spread
of 8.50%. The

10



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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


subordinated term loan matures on January 31, 2006, but if
the revolving portion of our senior credit facility is extended
for an additional year, the maturity of the subordinated term
loan will also be automatically extended by one year to
January 31, 2007. This term loan is subordinated to
borrowings under our senior credit agreement and contains
certain covenants, including maintenance of financial ratios at
the end of each quarter, compliance reporting requirements and
other customary restrictions. At March 31, 2003, borrowings
under the subordinated term loan bore interest at a rate of
9.88% per annum. We incurred $890 of interest expense on the
subordinated term loan for the three months ended March 31,
2003.

Fair Value  Approximately 97% of our
outstanding long-term debt is based on LIBOR rates plus an
appropriate spread. We have determined that the fair value of
our outstanding borrowings on our senior credit facility,
promissory note and subordinated term loan approximate their
carrying value at March 31, 2003.

7.     SEGMENT INFORMATION

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

Prior to the MeriStar-Interstate merger on July 31, 2002,
we operated in two reportable segments: (1) operations of
luxury and upscale hotels and (2) operations of mid-scale, upper
economy and budget hotels. Following the merger, we operate in
the segments shown in the table below. For periods prior to the
merger, we have combined our two previously reportable segments
into the hotel management operating segment.

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

|                                      |                               |            |       |           |  |       |        |            |  |   |        |   |  |   |        |       | 
|------------------------------------- | ----------------------------- | ---------- | ----- | --------- |  | ----- | ------ | ---------- |  | - | ------ | - |  | - | ------ | ----- | 
|                                      |                               | Hotel      |       | Corporate |  |       |        | Financial 
|                                      |                               | Management |       | Housing   |  | Other |        | Statements
|Three months ended March 31, 2003     |                               |            |       |           |  |       |        |           
|Net Operating Income (loss)           |                               | $          | 821   |           |  | $     | (2,379 | )          |  | $ | (1,865 | ) |  | $ | (3,423 | )    
|                                     
|                                     
|                                     
|                                     
|Add back:                             |                               |            |       |           |  |       |        |            |  |   |        |   |  |   |        |      
|                                     
|                                     
|                                     
|                                     
|                                      | Depreciation and amortization |            |       | 4,278     |  |       |        | 404        |  |   |        |  |  |   |        | 4,682 | 
|                                      |                               |            |       |           |  |       |        |            |  |   |        |   |  |   |        |      
|EBITDA                                |                               | $          | 5,099 |           |  | $     | (1,975 | )          |  | $ | (1,865 | ) |  | $ | 1,259  |      
|                                      |                               |            |       |           |  |       |        |            |  |   |        |   |  |   |        |      
|Three months ended March 31,
    2002 |                               |            |       |           |  |       |        |            |  |   |        |   |  |   |        |      
|                                     
|                                     
|                                     
|                                     
|Net Operating Loss                    |                               | $          | (244  | )         |  | $     |       |            |  | $ | (119   | ) |  | $ | (363   | )    
|                                     
|                                     
|                                     
|                                     
|Add back:                             |                               |            |       |           |  |       |        |            |  |   |        |   |  |   |        |      
|                                     
|                                     
|                                     
|                                     
|                                      | Depreciation and amortization |            |       | 2,528     |  |       |        |           |  |   |        |  |  |   |        | 2,528 | 
|                                      |                               |            |       |           |  |       |        |            |  |   |        |   |  |   |        |      
|EBITDA                                |                               | $          | 2,284 |           |  | $     |       |            |  | $ | (119   | ) |  | $ | 2,165  |      
|                                      |                               |            |       |           |  |       |        |            |  |   |        |   |  |   |        |      

11



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Segment information:

|                                      |  |            |         |           |  |       |        |            |  |   |        |   |  |   |         | 
|------------------------------------- |  | ---------- | ------- | --------- |  | ----- | ------ | ---------- |  | - | ------ | - |  | - | ------- | 
|                                      |  | Hotel      |         | Corporate |  |       |        | Financial 
|                                      |  | Management |         | Housing   |  | Other |        | Statements
|                                      |  |            |         |           |  |       |        |           
|Three months ended March 31,
    2003 |  |            |         |           |  |       |        |            |  |   |        |   |  |   |         | 
|                                     
|                                     
|                                     
|                                     
|Revenue                               |  | $          | 231,409 |           |  | $     | 25,819 |            |  | $ |       |   |  | $ | 257,228 | 
|                                     
|                                     
|                                     
|                                     
|EBITDA                                |  | $          | 5,099   |           |  | $     | (1,975 | )          |  | $ | (1,865 | ) |  | $ | 1,259   | 
|                                     
|                                     
|                                     
|                                     
|Total assets                          |  | $          | 256,626 |           |  | $     | 14,223 |            |  | $ | 19,654 |   |  | $ | 290,503 | 
|                                     
|                                     
|                                     
|                                     
|Three months ended March 31,
    2002 |  |            |         |           |  |       |        |            |  |   |        |   |  |   |         | 
|                                     
|                                     
|                                     
|                                     
|Revenues                              |  | $          | 71,392  |           |  | $     |       |            |  | $ |       |   |  | $ | 71,392  | 
|                                     
|                                     
|                                     
|                                     
|EBITDA                                |  | $          | 2,284   |           |  | $     |       |            |  | $ | (119   | ) |  | $ | 2,165   | 
|                                     
|                                     
|                                     
|                                     
|Total assets                          |  | $          | 95,075  |           |  | $     |       |            |  | $ | 10,947 |   |  | $ | 106,022 | 

The Other items in the tables above represent operating segment
activity and assets for the non-reportable segments. The
non-reportable segment activity includes merger costs in 2003
and tender offer costs in 2002. The non-reportable segment for
assets includes deferred tax assets and net deferred financing
costs.

Revenues from foreign operations were as follows:

|               |  |                 |       |      |  |   |     | 
|-------------- |  | --------------- | ----- | ---- |  | - | --- | 
|               |  |                
|               |  | Three months   
|               |  | ended March 31,
|               |  |                
|               |  | 2003            |       | 2002
|               |  |                 |       |     
|Canada         |  | $               | 2,178 |      |  | $ | 184 | 
|              
|              
|              
|              
|United Kingdom |  | $               | 6,036 |      |  | $ |    | 
|              
|              
|              
|              
|France         |  | $               | 331   |      |  | $ |    | 
|              
|              
|              
|              
|Russia         |  | $               | 202   |      |  | $ | 190 | 

8.     SUPPLEMENTAL CASH FLOW
INFORMATION

|                                         |              |                 |   |       |  |  |   |     | 
|---------------------------------------- | ------------ | --------------- | - | ----- |  |  | - | --- | 
|                                         |              |                
|                                         |              | Three months   
|                                         |              | ended March 31,
|                                         |              |                
|                                         |              | 2003            |   | 2002 
|                                         |              |                 |   |      
|Cash paid for interest and income taxes: |              |                 |   |       |  |  |   |    
|                                        
|                                        
|                                        
|                                        
|                                         | Interest     |                 | $ | 1,872 |  |  | $ | 975 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Income taxes |                 | $ | 262   |  |  | $ |    | 

9.     MERGER AND INTEGRATION
COSTS

Merger costs for the three months ended March 31, 2003,
were $1,865, compared to $0 for the same period of 2002. These
costs represent integration expenses, including professional
fees, travel, and other transition costs associated with the
MeriStar-Interstate merger on July 31, 2002. This amount is
included in our statement of operations as merger and
integration costs.

10.     SUBSEQUENT EVENTS

MeriStar Hospitality  MeriStar Hospitality has
announced plans to dispose of 34 non-core hotels, all of which
we currently manage. This represents approximately 32% of our
managed hotels owned by MeriStar Hospitality, and approximately
9% of our total managed hotels. If we are terminated as manager
upon the sale of one of MeriStar Hospitalitys hotels, we
will generally receive a termination fee equal to the remaining
payments (discounted using a 10% rate) under the then-existing
term of the management agreement. Our management agreements with
other owners generally have limited or no termination fees due
to us if our management agreement is terminated upon the sale of
the hotel. The termination of management contracts as a result
of hotel dispositions could have an adverse effect on our
revenues.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Winston Hotels  On July 1, 2002, MeriStar
assigned the leases of 47 hotels to a subsidiary of Winston
Hotels under a provision of the REIT Modernization Act that
allows REITs to lease their owned hotels. As part of this
agreement, we currently operate 33 of Winstons properties.
After one year, Winston has the option to terminate the
management contracts and during April 2003 notified us of its
intention to do so. We expect to incur one-time cash charges of
approximately $0.2 million for lease and personnel-related
costs, and approximately $0.7 million of non-cash charges
for the write-off of related tangible and intangible assets. We
expect substantially all of these costs will be recorded in the
2003 second quarter.

RFS Hotel Investors  On May 8, 2003, CNL
Hospitality Properties, Inc. announced plans to acquire RFS
Hotel Investors, Inc. Flagstone Hospitality Management, a
wholly-owned subsidiary of ours, currently manages substantially
all RFSs hotel properties. We currently expect to continue
to manage the majority of hotels in the RFS hotel portfolio
following the closing of CNLs acquisition of RFS.

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

Background

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

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

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

Business Summary

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

As of March 31, 2003, we managed 383 properties with 81,309
rooms in 44 states, the District of Columbia, Canada, and
Russia. We wholly own one of these properties. We have
non-controlling equity interests in 25 of these hotels. In
addition, at March 31, 2003, we had 3,190 apartments under
lease in the United States, Canada, the United Kingdom and
France.

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

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

Additionally, the weaker hotel operating environment has caused
some owners of our managed hotels to sell hotels to provide the
owners with additional liquidity. When a hotel is sold, we are
usually replaced as the hotels manager. MeriStar
Hospitality has announced plans to dispose of 34 non-core
hotels, all of which we currently manage, and other owners may
also dispose of assets. If we are terminated as manager upon the
sale

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

On July 1, 2002, MeriStar assigned the leases of 47 hotels
to a subsidiary of Winston Hotels under a provision of the REIT
Modernization Act that allows REITs to lease their owned hotels.
As part of this agreement, we currently operate 33 of
Winstons properties. After one year, Winston has the
option to terminate the management contracts and during April
2003 notified us of its intention to do so. We expect to incur
one-time cash charges of approximately $0.2 million for
lease and personnel-related costs, and approximately
$0.7 million of non-cash charges for the write-off of
related tangible and intangible assets. We expect substantially
all of these costs will be recorded in the 2003 second quarter.

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

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

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

Relationship with MeriStar Hospitality

We manage all 107 properties owned by MeriStar Hospitality
Corporation, a real estate investment trust. We also have an
intercompany agreement with MeriStar Hospitality. That agreement
provides each of us the

15



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

Critical Accounting Policies and Estimates

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

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



| |   |                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| |  | the evaluation of impairment of certain long-lived assets and
    intangible assets with determinable lives;           
|
| |  | the evaluation of impairment of goodwill;                                                                              
|
| |  | estimation of valuation allowances, specifically those related
    to income taxes and allowance for doubtful accounts;
|
| |  | estimates of restructuring and other accruals;                                                                         
|
| |  | the evaluation of the fair value of our derivative instruments;
    and                                                
|
| |  | revenue recognition                                                                                                    

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

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



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



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



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



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



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

16



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

Valuation Allowances We use our judgment in
determining our provision for income taxes, our deferred tax
assets and liabilities, and any valuation allowance recorded
against our deferred tax assets. At March 31, 2003, we have
recorded a $10.8 million valuation allowance to reduce our
deferred tax assets to the amount that we believe is more likely
than not to be realized. This is an allowance against some, but
not all, of our recorded deferred tax assets. We have considered
estimated future taxable income and prudent and feasible ongoing
tax planning strategies in assessing the need for a valuation
allowance. Our estimates of taxable income require us to make
assumptions about various factors that affect our operating
results, such as economic conditions, consumer demand,
competition and other factors. Our actual results may differ
from these estimates. Based on actual results or a revision in
future estimates, we might determine that we would not be able
to realize additional portions of our net deferred tax assets in
the future; if that occurred, we would record a charge to the
income tax provision in that period.

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

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

Derivative Instruments and Hedging Activities We enter into derivative instruments for cash flow hedging
purposes to limit the impact of interest rate changes on
earnings and cash flows. We have designated our interest rate
swap agreements as hedges against changes in future cash flows
associated with the interest payments of our variable rate debt
obligations. Accordingly, we reflect the interest rate swap
agreements at fair value in our consolidated balance sheet and
we record in stockholders equity the related unrealized
gains and losses on these contracts. We assess interest rate
cash flow risk by continually identifying and monitoring changes
in interest rate exposures that may adversely impact expected
future cash flows and by evaluating hedging opportunities.

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

Through the second quarter of 2002, we had recorded incentive
management fees in accordance with Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial
Statements, and Method No. 2 of Emerging Issues Task
Force or EITF Topic No. D-96, Accounting for
Management Fees Based on a Formula in which incentive
management fees are accrued as earned based on the profitability
of the hotel,

17



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

This change in accounting method has no effect on the total
annual management fees earned or amount of cash we are paid, but
does affect the timing of recognizing the revenue from these
fees. However, the effect of this change in accounting method
for interim periods resulted in an adjustment of $3.1 million
that reduced incentive management fees recognized during the
first and second quarter of 2002 and resulted in the restatement
of management fee revenues for the three months ended
March 31, 2002. The effect of the change on the first
quarter of 2002 was to increase the net loss available to common
shareholders by $0.9 million ($0.16 per share) to a
net loss available to common shareholders of $1.2 million
($0.22 per share). This change is reflected in our
statement of operations for the three months ended
March 31, 2002.

Results of Operations

Three Months Ended
March 31, 2003 Compared with Three Months Ended
March 31, 2002

Revenues

The following table shows the operating statistics for our
managed hotels on a same store basis for the three months ended
March 31:

|                           |  |      |       |      |  |        |        |   |  |  |      |   
|-------------------------- |  | ---- | ----- | ---- |  | ------ | ------ | - |  |  | ---- | --
|                           |  | 2003 |       | 2002 |  | Change
|                           |  |      |       |      |  |       
|Revenue per available room |  | $    | 61.42 |      |  | $      | 62.81  |   |  |  | (2.2 | %)
|                          
|                          
|                          
|                          
|Average daily rate         |  | $    | 98.23 |      |  | $      | 100.46 |   |  |  | (2.2 | %)
|                          
|                          
|                          
|                          
|Occupancy                  |  |      | 62.5  | %    |  |        | 62.5   | % |  |  | 0    | % 

Prior to the merger on July 31, 2002, Interstate managed
141 hotels with 29,752 rooms. On March 31, 2003 we managed
383 properties with 81,309 rooms.

Our total revenue increased $185.8 million to
$257.2 million for the three months ended March 31,
2003 compared to $71.4 million in the same period of 2002.
Major components of this increase were:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lodging revenues consist of rooms, food and beverage and other
    department revenues from the Pittsburgh Airport Residence Inn by
    Marriott. These revenues increased $0.1 million, or 24%,
    from $0.7 million for the three months ended March 31,
    2002 to $0.8 million for the three months ended
    March 31, 2003. This increase is a result of an increase in
    occupancy of about 22%, and an increase in average daily rate of
    approximately 2% in this property between the periods presented.                                                                                                                                                                                                                                                 
|
| |  | Revenue from management fees increased $9.9 million, or
    233%, from $4.3 million for the three months ended
    March 31, 2002 to $14.2 million for the three months
    ended March 31, 2003. An increase of $9.9 million was
    due to the increase in number of managed hotels resulting from
    the merger with Interstate on July 31, 2002. Additionally,
    an increase of $1.4 million was due to the reversal of 2002
    incentive fees recorded by Interstate prior to the merger. In
    the third quarter of 2002, with an effective date of
    January 1, 2002, we began recording the incentive
    management fees in the period that it is certain the incentive
    management fees are earned, which for annual incentive fee
    measurements is

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | typically in the last month of the annual contract period. These
    fees were recognized in the fourth quarter of 2002. These
    increases were offset by a decrease in lease and incentive fees
    resulting from a decrease in hotel revenues of the hotels we
    manage.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Other revenue consists of insurance revenue from our captive
    insurance company subsidiary, purchasing revenue, accounting
    fees, technical services, information technology support fees,
    renovation fees, and other fees. Other revenues decreased
    $0.1 million, or 3%, from $4.0 million for the three
    months ended March 31, 2002 to $3.9 million for the
    three months ended March 31, 2003. This amount is
    consistent with the 2002 period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Corporate housing revenue was $25.8 million for the three
    months ended March 31, 2003. Corporate housing revenue is
    included in our results of operations beginning August 1,
    2002 as a result of the merger.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | We employ the staff at our managed properties. Under our
    management agreements, the hotel owners reimburse us for
    payroll, benefits, and certain other costs related to the
    operations of the managed properties. EITF No. 01-14
    Income Statement Characteristics of Reimbursements for
    Out-of-pocket Expenses establishes standards for
    accounting for reimbursable expenses in the income statement.
    Under this pronouncement, the reimbursement of other costs is
    recorded as revenue with a corresponding expense recorded as
    other expenses from managed properties on the
    statement of operations. Reimbursable costs increased by
    $150.1 million, or 240%, to $212.5 million for the
    three months ended March 31, 2003, from $62.4 million
    for the same period 2002. Substantially all of this increase is
    due to the increase in the number of employees and managed
    properties resulting from the merger.

Operating expenses by
department

Total operating expenses by department increased
$22.2 million to $22.7 million for the three months
ended March 31, 2003 compared to $0.5 million for the
three months ended March 31, 2002. Factors primarily
affecting the increase were:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Corporate housing expenses were $22.1 million for the three
    months ended March 31, 2003. Corporate housing expenses are
    included in the results of operations beginning on
    August 1, 2002 after the merger.                                                                                                                                                                                                                                      
|
| |  | Lodging expenses consist of rooms, food and beverage, other
    department expenses and property operating costs from the
    Pittsburgh Airport Residence Inn by Marriott. These expenses
    increased $0.1 million, from $0.5 million for the
    three months ended March 31, 2002 to $0.6 million for
    the three months ended March 31, 2003. This increase is a
    direct result of the increase in revenue from this hotel as
    described above.



| |                                 
| | --------------------------------
| | Undistributed operating expenses

Undistributed operating expenses include the following items:



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

Total undistributed operating expenses increased
$16.6 million, or 189%, to $25.4 million for the three
months ended March 31, 2003, compared to $8.8 for the three
months ended March 31, 2002. Factors primarily affecting
the increase were:



| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Administrative and general expenses are associated with the
    management of hotels and corporate housing facilities and
    consist primarily of expenses such as corporate payroll and
    related benefits,

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | operations management, sales and marketing, finance, legal,
    information technology support, human resources and other
    support services, as well as general corporate expenses.
    Administrative and general increased by $12.7 million, or
    204%, from $6.2 million for the three months ended
    March 31, 2002 to $18.9 million for the three months
    ended March 31, 2003. The primary reason for this increase
    is attributable to the increase in expenses in all of the above
    departments resulting from the merger with Interstate on
    July 31, 2002.                                                                                                             
|
| |  | Depreciation and amortization expense increased by
    $2.2 million, or 85%, from $2.5 million for the three
    months ended March 31, 2002, to $4.7 million for the
    three months ended March 31, 2003. This increase is
    primarily due to the acquisition of certain depreciable and
    amortizable fixed assets in conjunction with the merger on
    July 31, 2002. These assets include management contracts
    and franchise fees. The amortization of deferred financing fees
    is included in interest expense.                                                                                                                                                                  
|
| |  | We employ the staff at our managed properties. Under our
    management agreements, the hotel owners reimburse us for
    payroll, benefits, and certain other costs related to the
    operations of the managed properties. Under EITF No. 01-14,
    we recorded those costs as other expenses from managed
    properties on our statement of operations. Reimbursable
    costs increased by $150.1 million, or 240%, to
    $212.5 million for the three months ended March 31,
    2003, from $62.4 million for the same period in 2002.
    Substantially all of this increase is due to the increase in the
    number of employees and managed properties resulting from the
    merger.
|
| |  | Merger and integration costs were $1.9 million for the
    three months ended March 31, 2003, compared to $0 for the
    same period 2002. These costs include professional fees, travel,
    relocation costs other transition costs associated with the
    merger on July 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Tender offer costs were $0 for the three months ended
    March 31, 2003, compared to $0.1 million for the three
    months ended March 31, 2002. These costs related to the
    commencement of a partial tender offer to purchase 2,465,322
    shares of Interstates Class A Common Stock by Shaner
    Hotel Group Limited Partnership and Shaners unsolicited
    proposals to combine the operations of Interstate with Shaner
    prior to the commencement of the tender offer. These costs were
    incurred for legal and professional fees. The tender offer
    expired May 31, 2002.                                                                                                 



| |                                                   
| | --------------------------------------------------
| | Net income (loss) available to common shareholders

Net income (loss) available to common shareholders
increased $5.6 million to $4.4 million for the three
months ended March 31, 2003, from $(1.2) million for
the three months ended March 31, 2002. This increase is due
to the increase in revenues offset by the increase in expenses,
as discussed above, as well as the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Interest expense increased $1.3 million, or 137%, to
    $2.3 million for the three months ended March 31,
    2003, from $1.0 million for the three months ended
    March 31, 2002. This increase is primarily due to the
    increase in outstanding debt following the merger, and the
    increase in the amortization of deferred financing fees
    associated with the merger and the debt refinancing in
    January 2003. The amortization of these deferred financing
    fees is included in interest expense.            
|
| |  | Equity in loss of affiliates increased $0.2 million, or
    93%, to $0.4 million for the three months ended
    March 31, 2003, from $0.2 million for the same period
    in 2002. These losses consist of our proportionate share of the
    losses incurred through our non-controlling equity investments
    in various hotels. These losses increased for the periods
    presented as our non-controlling equity investments losses
    increased in connection with the merger, reflecting the
    continued sluggish economy.
|
| |  | In January 2003, we completed a discounted repayment of the term
    loan with MeriStar Hospitality for $42.1 million. We
    financed part of the repayment with proceeds from a
    $40.0 million subordinated term loan and funded the
    remainder of the repayment out of available cash. The
    refinancing resulted in a gain of $13.6 million and is
    included in our statement of operations.                                                                                                                           

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##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Minority interest expense increased $0.1 to $0.2 million,
    or 162%, for the three months ended March 31, 2003,
    compared to $0.1 million for the same period 2002. This is
    due to our increase in net income for the period, and our
    increase in minority interest holders in connection with the
    merger on July 31, 2002.
|
| |  | Income tax expense increased by $3.6 million to
    $3.0 million for the three months ended March 31,
    2003, from a benefit of $(0.6) for the same period 2002. This is
    due to the increase in net income for the 2003 period. Also, our
    effective tax rate was 40% in 2003 and 38% in 2002.                                     



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

A significant portion of our assets consist of intangible
assets. Of those intangible assets, our management contracts are
amortized over their remaining terms, and, in accordance with
generally accepted accounting principles, those assets are
subject to straight-line amortization. Because depreciation and
amortization are non-cash items, we believe that presentation of
earnings before interest, taxes, depreciation and amortization,
or EBITDA, is more useful. EBITDA represents consolidated
earnings before interest expense, income taxes, depreciation and
amortization. We believe EBITDA provides useful information
regarding our financial condition and results of operations
because EBITDA is useful for evaluating our operating
performance and our capacity to incur and service debt, fund
capital expenditures and expand our business. We also use EBITDA
as one measure in determining the value of other acquisitions
and dispositions. The following table reconciles net operating
income (loss) to EBITDA:

|                                      |                               |            |       |           |  |       |        |            |  |   |        |   |  |   |        |       | 
|------------------------------------- | ----------------------------- | ---------- | ----- | --------- |  | ----- | ------ | ---------- |  | - | ------ | - |  | - | ------ | ----- | 
|                                      |                               | Hotel      |       | Corporate |  |       |        | Financial 
|                                      |                               | Management |       | Housing   |  | Other |        | Statements
|                                      |                               |            |       |           |  |       |        |           
|Three months ended March 31,
    2003 |                               |            |       |           |  |       |        |            |  |   |        |   |  |   |        |      
|                                     
|                                     
|                                     
|                                     
|Net Operating Income (loss)           |                               | $          | 821   |           |  | $     | (2,379 | )          |  | $ | (1,865 | ) |  | $ | (3,423 | )    
|                                     
|                                     
|                                     
|                                     
|Add back:                             |                               |            |       |           |  |       |        |            |  |   |        |   |  |   |        |      
|                                     
|                                     
|                                     
|                                     
|                                      | Depreciation and amortization |            |       | 4,278     |  |       |        | 404        |  |   |        |  |  |   |        | 4,682 | 
|                                      |                               |            |       |           |  |       |        |            |  |   |        |   |  |   |        |      
|EBITDA                                |                               | $          | 5,099 |           |  | $     | (1,975 | )          |  | $ | (1,865 | ) |  | $ | 1,259  |      
|                                      |                               |            |       |           |  |       |        |            |  |   |        |   |  |   |        |      
|Three months ended March 31,
    2002 |                               |            |       |           |  |       |        |            |  |   |        |   |  |   |        |      
|                                     
|                                     
|                                     
|                                     
|Net Operating Income (loss)           |                               | $          | (244  | )         |  | $     |       |            |  | $ | (119   | ) |  | $ | (363   | )    
|                                     
|                                     
|                                     
|                                     
|Add back:                             |                               |            |       |           |  |       |        |            |  |   |        |   |  |   |        |      
|                                     
|                                     
|                                     
|                                     
|                                      | Depreciation and amortization |            |       | 2,528     |  |       |        |           |  |   |        |  |  |   |        | 2,528 | 
|                                      |                               |            |       |           |  |       |        |            |  |   |        |   |  |   |        |      
|EBITDA                                |                               | $          | 2,284 |           |  | $     |       |            |  | $ | (119   | ) |  | $ | 2,165  |      
|                                      |                               |            |       |           |  |       |        |            |  |   |        |   |  |   |        |      

EBITDA decreased $0.9 million, or 41%, to $1.3 million
for the three months ended March 31, 2003, from
$2.2 million for the three months ended March 31,
2002. Major components of this decrease were:



| |   |                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Hotel Management segments EBITDA increased by
    $2.8 million to $5.1 million for the three months ended
    March 31, 2003, from $2.3 million for the three months
    ended March 31, 2002. This increase is due to the increase
    in hotel management operations subsequent to our merger with
    Interstate Hotels on July 31, 2002.                     
|
| |  | Corporate Housing segments EBITDA was $(2.0) million
    for the three months ended March 31, 2003 compared to $0
    for the same period 2002. Corporate housing operations are
    included in the results of operations beginning on
    August 1, 2002, after the merger between Interstate and
    MeriStar on July 31, 2002.                               
|
| |  | The remaining EBITDA decreased by $1.8 million, from
    $(0.1) million for the three months ended March 31,
    2003, to $(1.9) million for the same period 2002. This increase
    is due to $1.9 million of merger and integration costs
    included in the first quarter of 2003, compared to
    $0.1 million of tender offer costs in the same period 2002.

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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Working Capital We had $15.5 million of
cash and cash equivalent assets at March 31, 2003, compared
to $7.1 million at December 31, 2002, and working
capital deficit (current assets less current liabilities) of
$(4.3) million at March 31, 2003 compared to
$(13.1) million at December 31, 2002. This improvement
in working capital of $8.8 million resulted primarily from
timing of accounts receivable and accounts payable transactions.

Operating Activities Net cash used in
operating activities was $0.8 million for the three months
ended March 31, 2003, compared to $2.1 million for the
three months ended March 31, 2002. The increase in cash of
$1.3 million resulted primarily from the increase in net
income for the periods presented, and timing of accounts
receivable and accounts payable.

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

Investing Activities Net cash used in
investing activities was $1.7 million for the three months
ended March 31, 2003, compared to net cash used in
investing activities of $0.7 million for the three months
ended March 31, 2002. This increase in use of cash is
partially due to an increase in purchases of property and
equipment and intangible assets of $1.1 million combined in
the first quarter of 2003 compared to $0 for the same period
2002. The increase is also due to an increase in restricted cash
of $0.9 million from two of our consolidated subsidiaries.
These increases are offset by merger-related costs of
approximately $0.4 million paid during the first quarter of
2002.

On February 21, 2002, we participated in restructuring of
the ownership and financing for the Renaissance Worldgate Hotel
in Kissimmee, Florida in order to address the hotels
financial difficulties. As part of this restructuring, the
following occurred:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The majority owners of the hotel redeemed our 20%
    non-controlling equity interest in exchange for mutual releases
    with respect to the obligations of the hotel, and we received a
    payment of $0.9 million towards the accounts receivable
    owed to us by the hotel.                                                                                                                                           
|
| |  | The hotel owner also issued a promissory note of
    $0.3 million to us for the remaining accounts receivable we
    were owed. This note bears interest at the rate of nine percent
    per annum and is payable in equal quarterly installments
    beginning January 1, 2003. The hotel owner did not pay the
    first installment when due on January 1, 2003, or the
    second installment when due on April 30, 2003.
|
| |  | We and the hotel owner amended the management agreement for the
    hotel. We waived our management fees for the period from
    July 1, 2001 through February 21, 2002 and agreed to
    reduce our base management fee for periods following
    February 21, 2002.                                                                                                                                                        

The majority owners and the principal lender for the hotel are
affiliated with CGLH Partners I L.P. and CGLH
Partners II L.P., which are entities affiliated with
Lehman Brothers Holdings, Inc, and several of our directors.
CGLH Partners I and CGLH Partners II are,
collectively, our largest shareholder. They have five designees
on our board of directors.

We believe our accounts and notes receivable, net of any
allowances for estimated uncollectible accounts, represent
accounts we ultimately expect to realize or collect. We will
continue to evaluate the collectibility of the accounts
receivable on a quarterly basis.

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

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Financing Activities Net cash provided by
(used in) financing activities was $10.9 million for the
three months ended March 31, 2003, compared to
$(1.0) million for the three months ended March 31,
2002. This increase in cash was due primarily to the following:



| |   |                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | debt repayments of $55.5 million, including
    $42.1 million associated with the repayment of the MeriStar
    Hospitality term loan, and $13.4 million associated with
    repayments of our revolving credit facility; offset by
|
| |  | borrowings of $68.0 million, consisting of
    $40.0 million associated with the new subordinated term
    loan, and $28.0 of borrowings from our senior credit facility;
    and                                                  
|
| |  | financing fees paid of $1.7 million associated with the new
    subordinated term loan.                                                                                                                                            

We are required to distribute 1.6627% of cash flows from the
operations of Interstate Hotels, LLC, one of our operating
subsidiaries, to Wyndham International, Inc.
(Wyndham), based on Wyndhams common interest
in that entity. The net distribution payable to Wyndham through
March 31, 2003, approximated $0.3 million.

Senior Credit Agreement Effective
July 31, 2002, in connection with the closing with the
MeriStar-Interstate merger, we entered into a
$113.0 million senior credit agreement with a group of
banks. The senior credit agreement consists of a
$65.0 million term loan due on July 28, 2005 and a
$48.0 million revolving credit facility due on
July 28, 2005 (with a one-year extension at our option).
The interest rate on the senior credit agreement is LIBOR plus
3.00% to 4.50%, depending upon our meeting certain financial
tests. The senior credit facility contains certain covenants,
including maintenance of financial ratios at the end of each
quarter, compliance reporting requirements and other customary
restrictions. At March 31, 2003, we were in compliance with
these covenants. At March 31, 2003, borrowings under the
senior credit agreement bore interest at a rate of 5.26% per
annum. We incurred $1.1 million of interest expense on the
senior credit agreement for the three months ended
March 31, 2003. As of May 5, 2003, the total
availability under our senior credit agreement was
$27.0 million.

MeriStar Hospitality Term Loan In January
2003, in connection with the repayment of the MeriStar
Hospitality term loan, we completed a discounted repayment of
the MeriStar Hospitality term loan for $42.1 million,
realizing a gain of $13.6 million. We financed part of the
repayment with proceeds from a $40.0 million subordinated
term loan that matures in January 2007 and carries a coupon
rate of LIBOR plus a spread of 8.50%. We funded the remainder of
the repayment out of available cash.

Subordinated Term Loan In January 2003, we
entered into a $40.0 subordinated term loan with Lehman
Brothers Holdings, Inc. that carries a variable interest rate
based on the 30-day LIBOR plus a spread of 8.50%. The
subordinated term loan matures on January 31, 2006, but if
the revolving portion of our senior credit facility is extended
for an additional year, the maturity of the subordinated term
loan will also be automatically extended by one year to
January 31, 2007. This term loan is subordinated to
borrowings under our senior credit agreement and contains
certain covenants, including maintenance of financial ratios at
the end of each quarter, compliance reporting requirements and
other customary restrictions. At March 31, 2003, we were in
compliance with these covenants. At March 31, 2003,
borrowings under the subordinated term loan bore interest at a
rate of 9.88% per annum. We incurred $0.9 million of
interest expense on the subordinated term loan for the three
months ended March 31, 2003.

Liquidity In 2003, we expect to incur
additional merger-related costs (primarily related to relocation
of employees and other business integration costs) and to make
payments on merger-related restructuring accruals we established
in 2002. We estimate the total cash outlay for restructuring and
merger-related costs in 2003 to be approximately
$6.08.0 million.

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

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##### Table of Contents





Contractual Obligations and Maturities of Indebtedness

The following table summarizes our contractual obligations at
March 31, 2003, and the effect that those obligations are
expected to have on our liquidity and cash flows in future
periods (amounts in thousands):

|           |  |               |        |            |  |              |       |                |  |       |        |  |  |   |        |  |  |   |         | 
|---------- |  | ------------- | ------ | ---------- |  | ------------ | ----- | -------------- |  | ----- | ------ |  |  | - | ------ |  |  | - | ------- | 
|           |  | Senior credit |        | Promissory |  | Subordinated |       | Non-cancelable |  |      
|           |  | facility      |        | note       |  | Term loan    |       | leases         |  | Total
|           |  |               |        |            |  |              |       |                |  |      
|2003       |  | $             | 1,219  |            |  | $            |      |                |  | $     |       |  |  | $ | 22,559 |  |  | $ | 23,778  | 
|          
|          
|          
|          
|2004       |  |               | 1,625  |            |  |              |      |                |  |       |       |  |  |   | 11,498 |  |  |   | 13,123  | 
|          
|          
|          
|          
|2005       |  |               | 61,750 |            |  |              |      |                |  |       |       |  |  |   | 9,199  |  |  |   | 70,949  | 
|          
|          
|          
|          
|2006       |  |               | 24,000 |            |  |              |      |                |  |       |       |  |  |   | 8,032  |  |  |   | 32,032  | 
|          
|          
|          
|          
|2007       |  |               |       |            |  |              |      |                |  |       | 40,000 |  |  |   | 7,154  |  |  |   | 47,154  | 
|          
|          
|          
|          
|thereafter |  |               |       |            |  |              | 4,170 |                |  |       |       |  |  |   | 17,419 |  |  |   | 21,589  | 
|           |  |               |        |            |  |              |       |                |  |       |        |  |  |   |        |  |  |   |         | 
|Total      |  | $             | 88,594 |            |  | $            | 4,170 |                |  | $     | 40,000 |  |  | $ | 75,861 |  |  | $ | 208,625 | 
|           |  |               |        |            |  |              |       |                |  |       |        |  |  |   |        |  |  |   |         | 

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

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

Management Agreement Commitments:Under the provisions of
management agreements with certain hotel owners, we have
outstanding commitments as of May 7, 2003, to provide an
aggregate of $4.2 million to these hotel owners in the form
of investments or working capital loans. The loans may be
forgiven or repaid based upon the specific terms of each
management agreement. The timing of future investments or
working capital loans to hotel owners is currently unknown.

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



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

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

Our senior secured credit facility matures July 31, 2005,
with a one year extension at our option. At March 31, 2003,
we had borrowings of $88.6 million outstanding on the
facility. Interest on the debt is variable, based on the 30-day
London Interbank Offered Rate plus a spread of 3.0% to 4.5%
depending on our meeting certain financial covenants. The
weighted average effective interest rate was 5.26% at
March 31, 2003. We have determined that the fair value of
the debt approximates its carrying value.

Our $56.1 million of long-term debt under the MeriStar
Hospitality term loan at December 31, 2002 was due to
mature on July 31, 2007. In January 2003, we completed
a discounted repayment of the MeriStar Hospitality term loan. We
refinanced the repayment with the proceeds from a
$40.0 million subordinated term loan and realized a gain of
$13.6 million. The subordinated term loan carries a
variable interest rate, based on

24



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##### Table of Contents





A 1.0% change in the 30-day London Interbank Offered Rate would
have changed our interest expense by approximately
$0.2 million for the three months ended March 31, 2003.

In October 2002, we entered into a $30.0 million, two-year
interest rate swap agreement with a financial institution in
order to hedge against the effect future interest rate
fluctuations may have on our floating rate debt. The swap
agreement effectively fixes the 30-day London Interbank Offered
Rate at 2.50%. The fair value of the swap agreement was a
liability of $(0.4) million at March 31, 2003.

In March 2003, we entered into a $35.0 million, twenty-two
month interest rate cap agreement with a financial institution
in order to hedge against the effect future interest rate
fluctuations may have on our floating rate debt. The interest
rate agreement caps the 30-day London Interbank Offered Rate at
4.50%. At March 31, 2003, the fair value of the swap
agreement was not material.

Our international operations are subject to foreign exchange
rate fluctuations. We derived approximately 3.4% and 1.4% of our
revenue for the three month periods ended March 31, 2003
and 2002, respectively from services performed in Canada, the
United Kingdom, France, and Moscow. Our foreign currency
transaction gains and losses were not material to our results of
operations for the three months ended March 31, 2003. To
date, since most of our foreign operations have been largely
self-contained or dollar-denominated, we have not been exposed
to material foreign exchange risk. Therefore, we have not
entered into any significant foreign currency exchange contracts
or other derivative financial instruments to hedge the effects
of adverse fluctuations in foreign currency exchange rates. In
the event that we have large transactions requiring currency
conversion we would reevaluate whether we should engage in
hedging activities.



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

Evaluation of Disclosure Controls and Procedures

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

Within 90 days prior to the date of this report, we carried
out an evaluation, under the supervision and with the
participation of our management, including our chief executive
officer and our chief financial officer of the effectiveness of
the design and operation of our disclosure controls and
procedures. Based on this evaluation, it was concluded that our
disclosure controls and procedures were effective.

Changes in Internal Controls

Subsequent to the date of our evaluation, there were no
significant changes in our internal controls or in other factors
that could significantly affect these controls.

25



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##### Table of Contents






PART II. OTHER INFORMATION






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

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






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

In connection with the merger transaction between MeriStar and
Interstate, which closed on July 31, 2002, we effected a
one-for-five reverse split of our common stock, par value $0.01
per share. All financial information in this report, including
per share data, has been calculated giving effect to the reverse
stock split.






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

None.






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

None.






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

Forward-Looking Information

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



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

26



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##### Table of Contents





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

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

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






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

(a) Exhibits

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

27



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##### Table of Contents



|            |         |                         |  |                                                                                                                                                                                                                                                                                                                                                                                               
|----------- | ------- | ----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |         | Description of Document
|            |         |                        
|            | 4.2.1   |                         |  | Amendment to Rights Agreement, dated December 8, 2000,
    between the Company, formerly MeriStar Hotels & Resorts,
    Inc., and the Rights Agent (incorporated by reference to
    Exhibit 4.1 to the Companys Form 8-K filed with
    the Securities and Exchange Commission on December 12,
    2000).                                                                                   
|            | 4.2.2   |                         |  | Second Amendment to Rights Agreement, dated May 1, 2002,
    between the Company, formerly MeriStar Hotels & Resorts,
    Inc., and the Rights Agent (incorporated by reference to
    Exhibit 4.1 to the Companys Form 8-K filed with
    the Securities and Exchange Commission on May 3, 2002).                                                                                           
|            | 4.3     |                         |  | Form of Rights Certificate (incorporated by reference to
    Exhibit 4.3 to the Companys Form S-1/ A filed
    with the Securities and Exchange Commission on July 23,
    1998 (Registration No. 333-49881)).                                                                                                                                                                               
|            | 4.4     |                         |  | Registration Rights Agreement, dated March 31, 1999,
    between the Company (formerly MeriStar Hotels & Resorts,
    Inc.), Oak Hill Capital Partners, L.P. and Oak Hill Capital
    Management Partners, L.P. (incorporated by reference to
    Exhibit 4.7 to the Companys Form 10-Q filed with
    the Securities and Exchange Commission for the three months
    ended March 31, 1999).
|            | 9.1     |                         |  | Board Composition Agreement, dated as of July 31, 2002,
    among the Company. and certain stockholders of the Registrant
    specified therein (incorporated by reference to Exhibit 9.1
    to the Companys Form 8-K filed with the Securities
    and Exchange Commission on August 7, 2002)                                                                                              
|            | 10.2.2  |                         |  | Second Amendment to the Senior Credit Agreement dated
    January 10, 2003.                                                                                                                                                                                                                                                                                                                   
|            | 10.3.2  |                         |  | Second Amendment to the Intercompany Agreement.                                                                                                                                                                                                                                                                                                                                               
|            | 10.6    |                         |  | Subordinated Unsecured Term Loan Agreement, dated as of
    January 10, 2003, made by Lehman Commercial Paper, Inc., as
    Administrative Agent, to MeriStar H&R Operating Company, L.P.                                                                                                                                                                                                     
|            | 10.9.2  |                         |  | Second Amendment to the Non-employee Directors Incentive
    Plan.                                                                                                                                                                                                                                                                                                                           
|            | 10.10.1 |                         |  | Amendment to the Employee Stock Purchase Plan.                                                                                                                                                                                                                                                                                                                                                
|            | 99.1    |                         |  | Sarbanes-Oxley Act Section 906 Certifications of Chief
    Executive Officer.                                                                                                                                                                                                                                                                                                                 
|            | 99.2    |                         |  | Sarbanes-Oxley Act Section 906 Certifications of Chief
    Financial Officer.                                                                                                                                                                                                                                                                                                                 

(b) Reports on Form 8-K

Current report on Form 8-K (Item 5 and 7) dated
and filed on February 12, 2003.

28



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##### Table of Contents






SIGNATURE

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



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

Dated: May 12, 2003

29



---



##### Table of Contents






CERTIFICATIONS

I, Paul W. Whetsell, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                                   
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this quarterly report on Form 10-Q of
    Interstate Hotels & Resorts, Inc.;                                                                                                                                                                                                                                                      
|
| | 2. | Based on my knowledge, this quarterly report does not contain
    any untrue statement of a material fact or omit to state a
    material fact necessary to make the statements made, in light of
    the circumstances under which such statements were made, not
    misleading with respect to the period covered by this quarterly
    report;
|
| | 3. | Based on my knowledge, the financial statements, and other
    financial information included in this quarterly report, fairly
    present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this quarterly report;                       
|
| | 4. | The registrants other certifying officer and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act
    Rules 13a14 and 15d14) for the registrant and
    have:                                                                                                             



| |    |                                                                                                                                                                                                                                                                                                                
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | designed such disclosure controls and procedures to ensure that
    material information relating to the registrant, including its
    consolidated subsidiaries, is made known to us by others within
    those entities, particularly during the period in which this
    quarterly report is being prepared.



| |    |                                                                                                                                                                                                          
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b. | evaluated the effectiveness of the registrants disclosure
    controls and procedures as of a date within 90 days prior
    to the filing date of this quarterly report (the
    Evaluation Date); and



| |    |                                                                                                                                                                                
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c. | presented in this quarterly report our conclusions about the
    effectiveness of the disclosure controls and procedures based on
    our evaluation as of the Evaluation Date;



| |    |                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officer and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | all significant deficiencies in the design or operation of
    internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and



| |    |                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b. | any fraud, whether or not material, that involves management or
    other employees who have a significant role in the
    registrants internal controls: and



| |    |                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officer and I have
    indicated in this quarterly report whether there were
    significant changes in internal controls or in other factors
    that could significantly affect internal controls subsequent to
    the date of our most recent evaluation, including any corrective
    actions with regard to significant deficiencies and material
    weaknesses.



| |                        
| | -----------------------
| | /s/ PAUL W. WHETSELL   
| |                        
| | Paul W. Whetsell       
| | Chief Executive Officer

Dated: May 12, 2003

30



---



##### Table of Contents






CERTIFICATIONS

I, James A. Calder, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                                   
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this quarterly report on Form 10-Q of
    Interstate Hotels & Resorts, Inc.;                                                                                                                                                                                                                                                      
|
| | 2. | Based on my knowledge, this quarterly report does not contain
    any untrue statement of a material fact or omit to state a
    material fact necessary to make the statements made, in light of
    the circumstances under which such statements were made, not
    misleading with respect to the period covered by this quarterly
    report;
|
| | 3. | Based on my knowledge, the financial statements, and other
    financial information included in this quarterly report, fairly
    present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this quarterly report;                       
|
| | 4. | The registrants other certifying officer and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act
    Rules 13a14 and 15d14) for the registrant and
    have:                                                                                                             



| |    |                                                                                                                                                                                                                                                                                                                
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | designed such disclosure controls and procedures to ensure that
    material information relating to the registrant, including its
    consolidated subsidiaries, is made known to us by others within
    those entities, particularly during the period in which this
    quarterly report is being prepared.



| |    |                                                                                                                                                                                                          
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b. | evaluated the effectiveness of the registrants disclosure
    controls and procedures as of a date within 90 days prior
    to the filing date of this quarterly report (the
    Evaluation Date); and



| |    |                                                                                                                                                                                
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c. | presented in this quarterly report our conclusions about the
    effectiveness of the disclosure controls and procedures based on
    our evaluation as of the Evaluation Date;



| |    |                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officer and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | all significant deficiencies in the design or operation of
    internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and



| |    |                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b. | any fraud, whether or not material, that involves management or
    other employees who have a significant role in the
    registrants internal controls: and



| |    |                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officer and I have
    indicated in this quarterly report whether there were
    significant changes in internal controls or in other factors
    that could significantly affect internal controls subsequent to
    the date of our most recent evaluation, including any corrective
    actions with regard to significant deficiencies and material
    weaknesses.



| |                        
| | -----------------------
| | /s/ JAMES A. CALDER    
| |                        
| | James A. Calder        
| | Chief Financial Officer

Dated: May 12, 2003

31