##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2002 or ______

[  ] 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. 20007
(Address of Principal Executive Offices)(Zip Code)

202-965-4455
(Registrants Telephone Number, Including Area Code)

MeriStar Hotels and Resorts, Inc.
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)

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 [X]      No

The number of shares of Common Stock, par value $0.01 per share, outstanding at
November 11, 2002 was 20,303,540.

1



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INTERSTATE HOTELS & RESORTS, INC.

INDEX

Page

|                                         |  |                                                                                                                                                        |  |   
|---------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --
|PART I. FINANCIAL INFORMATION            |  |                                                                                                                                                       
|ITEM 1: FINANCIAL
STATEMENTS
(UNAUDITED) |  |                                                                                                                                                       
|                                         |  | Condensed Consolidated Balance Sheets -
September 30, 2002 and December 31, 2001                                                                       |  | 3 
|                                         |  | Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss) 
Three Months and Nine Months Ended September 30, 2002 and 2001 |  | 4 
|                                         |  | Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2002 and 2001                                                        |  | 5 
|                                         |  | Notes to Condensed Consolidated Financial Statements                                                                                                   |  | 6 
|ITEM 2:                                  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                                                  |  | 18
|ITEM 3:                                  |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                                             |  | 29
|ITEM 4:                                  |  | CONTROLS AND PROCEDURES                                                                                                                                |  | 29
|PART II.
OTHER
INFORMATION               |  |                                                                                                                                                       
|ITEM 1:                                  |  | LEGAL PROCEEDINGS                                                                                                                                      |  | 30
|ITEM 2:                                  |  | CHANGES IN SECURITIES                                                                                                                                  |  | 30
|ITEM 4:                                  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                                                    |  | 30
|ITEM 5:                                  |  | OTHER INFORMATION                                                                                                                                      |  | 32
|ITEM 6:                                  |  | EXHIBITS AND REPORTS ON FORM 8-K                                                                                                                       |  | 33

2



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##### 



PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS

INTERSTATE HOTELS & RESORTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

|                                                                                   |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         |                                                                                                                |     |               |         |              |    |        |         |  
|---------------------------------------------------------------------------------- | ------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------- | --- | ------------- | ------- | ------------ | -- | ------ | ------- | -
|                                                                                   |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         |                                                                                                                |     | September 30, |         | December 31,
|                                                                                   |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         |                                                                                                                |     | 2002          |         | 2001        
|                                                                                   |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         |                                                                                                                |     |               |         |             
|                                                                                   |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         |                                                                                                                |     | (unaudited)   |         |              |    |       
|Assets                                                                             |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         |                                                                                                                |     |               |         |             
|Current Assets:                                                                    |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         |                                                                                                                |     |               |         |             
|                                                                                   |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         | Cash and cash equivalents                                                                                      |     | $             | 12,937  |              |    | $      | 39,040  |  
|                                                                                   |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         | Accounts receivable, net of allowance for doubtful
accounts of $3,896 and $227, in 2002 and 2001, respectively |     |               | 23,776  |              |    |        | 9,080   |  
|                                                                                   |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         | Due from MeriStar Hospitality                                                                                  |     |               | 9,954   |              |    |        |        |  
|                                                                                   |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         | Deferred income taxes                                                                                          |     |               |        |              |    |        | 2,204   |  
|                                                                                   |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         | Prepaid expenses and other                                                                                     |     |               | 10,715  |              |    |        | 1,941   |  
|                                                                                   |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         |                                                                                                                |     |               |         |             
|Total current assets                                                               |              |                                                                                                                                                                                         | 57,382                                                                                                                                                                                                                                  |                                                                                                                |     |               | 52,265  |             
|Restricted cash                                                                    |              |                                                                                                                                                                                         | 1,049                                                                                                                                                                                                                                   |                                                                                                                |     |               | 1,348   |             
|Marketable securities                                                              |              |                                                                                                                                                                                         | 2,186                                                                                                                                                                                                                                   |                                                                                                                |     |               | 2,548   |             
|Property and equipment, net                                                        |              |                                                                                                                                                                                         | 27,975                                                                                                                                                                                                                                  |                                                                                                                |     |               | 14,390  |             
|Officers and employees notes receivable                                            |              |                                                                                                                                                                                         | 217                                                                                                                                                                                                                                     |                                                                                                                |     |               | 2,028   |             
|Investments in and advances to affiliates, net of reserve of $666 in 2002
and 2001 |              |                                                                                                                                                                                         | 28,852                                                                                                                                                                                                                                  |                                                                                                                |     |               | 12,938  |             
|Deferred income taxes                                                              |              |                                                                                                                                                                                         | 15,264                                                                                                                                                                                                                                  |                                                                                                                |     |               | 5,479   |             
|Goodwill                                                                           |              |                                                                                                                                                                                         | 90,750                                                                                                                                                                                                                                  |                                                                                                                |     |               |        |             
|Intangible and other assets, net of accumulated amortization                       |              |                                                                                                                                                                                         | 69,535                                                                                                                                                                                                                                  |                                                                                                                |     |               | 17,673  |             
|                                                                                   |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         |                                                                                                                |     |               |         |             
|                                                                                   | Total assets |                                                                                                                                                                                         | $                                                                                                                                                                                                                                       | 293,210                                                                                                        |     |               | $       | 108,669      |   
|                                                                                   |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         |                                                                                                                |     |               |         |             
|Liabilities, Minority Interests, and Stockholders Equity                          |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         |                                                                                                                |     |               |         |             
|Current Liabilities:                                                               |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         |                                                                                                                |     |               |         |             
|                                                                                   |              |                                                                                                                                                                                         | Accounts payable and accrued expenses                                                                                                                                                                                                   |                                                                                                                | $   | 67,365        |         |              | $  | 17,602 |        
|                                                                                   |              |                                                                                                                                                                                         | Income taxes payable                                                                                                                                                                                                                    |                                                                                                                |     | 547           |         |              |    |       |        
|                                                                                   |              |                                                                                                                                                                                         | Long-term debt, current portion                                                                                                                                                                                                         |                                                                                                                |     | 1,219         |         |              |    | 1,601  |        
|                                                                                   |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         |                                                                                                                |     |               |         |             
|Total current liabilities                                                          |              |                                                                                                                                                                                         | 69,131                                                                                                                                                                                                                                  |                                                                                                                |     |               | 19,203  |             
|Deferred compensation                                                              |              |                                                                                                                                                                                         | 2,186                                                                                                                                                                                                                                   |                                                                                                                |     |               | 2,548   |             
|Long-term debt, excluding current portion                                          |              |                                                                                                                                                                                         | 136,020                                                                                                                                                                                                                                 |                                                                                                                |     |               | 39,380  |             
|                                                                                   |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         |                                                                                                                |     |               |         |             
|Total liabilities                                                                  |              |                                                                                                                                                                                         | 207,337                                                                                                                                                                                                                                 |                                                                                                                |     |               | 61,131  |             
|                                                                                   |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         |                                                                                                                |     |               |         |             
|Minority interests                                                                 |              |                                                                                                                                                                                         | 6,859                                                                                                                                                                                                                                   |                                                                                                                |     |               | 433     |             
|Mandatorily redeemable preferred stock                                             |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                        |                                                                                                                |     |               | 5,070   |             
|Stockholders equity:                                                              |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         |                                                                                                                |     |               |         |             
|                                                                                   |              |                                                                                                                                                                                         | Preferred stock, par value $0.01 per share; 1,000,000 shares authorized; 0 and 725,000
shares issued and outstanding and classified as mandatorily redeemable preferred stock
at September 30, 2002 and December 31, 2001, respectively |                                                                                                                |     |              |         |              |    |       |        
|                                                                                   |              | Common stock, par value $0.01 per share; 50,000,000 shares authorized;
20,273,480 and 5,730,440 shares issued and outstanding at September 30,
2002 and December 31, 2001, respectively |                                                                                                                                                                                                                                         |                                                                                                                | 203 |               |         |              | 57 |       
|                                                                                   |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         | Paid-in capital                                                                                                |     |               | 137,135 |              |    |        | 64,955  |  
|                                                                                   |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         | Accumulated deficit                                                                                            |     |               | (58,358 | )            |    |        | (22,977 | )
|                                                                                   |              | Accumulated other comprehensive income                                                                                                                                                  |                                                                                                                                                                                                                                         |                                                                                                                | 34  |               |         |              |   |       
|                                                                                   |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         |                                                                                                                |     |               |         |             
|Total stockholders equity                                                         |              |                                                                                                                                                                                         | 79,014                                                                                                                                                                                                                                  |                                                                                                                |     |               | 42,035  |             
|                                                                                   |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         |                                                                                                                |     |               |         |             
|Total liabilities, minority interests and stockholders equity                     |              | $                                                                                                                                                                                       | 293,210                                                                                                                                                                                                                                 |                                                                                                                |     | $             | 108,669 |             
|                                                                                   |              |                                                                                                                                                                                         |                                                                                                                                                                                                                                         |                                                                                                                |     |               |         |             

See accompanying notes to condensed consolidated financial statements.

3



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##### 



INTERSTATE HOTELS & RESORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

|                                                                                                                 |                                           |   |                    |         |                   |   |        |        |      |   |         |         |   |   |         |         |  
|---------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | - | ------------------ | ------- | ----------------- | - | ------ | ------ | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                                                                                                 |                                           |   | Three Months Ended |         | Nine Months Ended
|                                                                                                                 |                                           |   | September 30,      |         | September 30,    
|                                                                                                                 |                                           |   |                    |         |                  
|                                                                                                                 |                                           |   | 2002               |         | 2001              |   | 2002   |        | 2001
|                                                                                                                 |                                           |   |                    |         |                   |   |        |        |     
|Revenue:                                                                                                         |                                           |   |                    |         |                   |   |        |        |      |   |         |         |   |   |         |        
|                                                                                                                 | Lodging                                   |   | $                  | 832     |                   |   | $      | 1,223  |      |   | $       | 2,287   |   |   | $       | 3,747   |  
|                                                                                                                 | Corporate housing                         |   |                    | 19,779  |                   |   |        |       |      |   |         | 19,779  |   |   |         |        |  
|                                                                                                                 | Management and other fees                 |   |                    | 15,688  |                   |   |        | 8,837  |      |   |         | 34,095  |   |   |         | 29,662  |  
|                                                                                                                 |                                           |   |                    |         |                   |   |        |        |      |   |         |         |   |   |         |         |  
|                                                                                                                 |                                           |   | 36,299             |         |                   |   | 10,060 |        |      |   | 56,161  |         |   |   | 33,409  |        
|                                                                                                                 | Other revenue from managed properties     |   |                    | 163,347 |                   |   |        | 67,816 |      |   |         | 297,662 |   |   |         | 207,674 |  
|                                                                                                                 |                                           |   |                    |         |                   |   |        |        |      |   |         |         |   |   |         |         |  
|Total revenue                                                                                                    |                                           |   | 199,646            |         |                   |   | 77,876 |        |      |   | 353,823 |         |   |   | 241,083 |        
|                                                                                                                 |                                           |   |                    |         |                   |   |        |        |      |   |         |         |   |   |         |         |  
|Operating expenses by department:                                                                                |                                           |   |                    |         |                   |   |        |        |      |   |         |         |   |   |         |        
|                                                                                                                 | Lodging                                   |   |                    | 575     |                   |   |        | 918    |      |   |         | 1,606   |   |   |         | 2,636   |  
|                                                                                                                 | Corporate housing                         |   |                    | 15,327  |                   |   |        |       |      |   |         | 15,327  |   |   |         |        |  
|Undistributed operating expenses:                                                                                |                                           |   |                    |         |                   |   |        |        |      |   |         |         |   |   |         |        
|                                                                                                                 | Administrative and general                |   |                    | 14,803  |                   |   |        | 7,261  |      |   |         | 30,010  |   |   |         | 23,827  |  
|                                                                                                                 | Depreciation and amortization             |   |                    | 4,024   |                   |   |        | 2,685  |      |   |         | 9,133   |   |   |         | 8,085   |  
|                                                                                                                 | Merger costs                              |   |                    | 3,430   |                   |   |        |       |      |   |         | 5,653   |   |   |         |        |  
|                                                                                                                 | Restructuring expenses                    |   |                    | 12,820  |                   |   |        |       |      |   |         | 12,820  |   |   |         |        |  
|                                                                                                                 | Tender offer costs                        |   |                    |        |                   |   |        |       |      |   |         | 1,000   |   |   |         |        |  
|                                                                                                                 |                                           |   |                    |         |                   |   |        |        |      |   |         |         |   |   |         |         |  
|                                                                                                                 |                                           |   | 50,979             |         |                   |   | 10,864 |        |      |   | 75,549  |         |   |   | 34,548  |        
|Other expenses from managed properties                                                                           |                                           |   | 163,347            |         |                   |   | 67,816 |        |      |   | 297,662 |         |   |   | 207,674 |        
|                                                                                                                 |                                           |   |                    |         |                   |   |        |        |      |   |         |         |   |   |         |         |  
|Total operating expenses                                                                                         |                                           |   | 214,326            |         |                   |   | 78,680 |        |      |   | 373,211 |         |   |   | 242,222 |        
|                                                                                                                 |                                           |   |                    |         |                   |   |        |        |      |   |         |         |   |   |         |         |  
|Net operating loss                                                                                               |                                           |   | (14,680            | )       |                   |   | (804   | )      |      |   | (19,388 | )       |   |   | (1,139  | )      
|Interest expense, net                                                                                            |                                           |   | 1,562              |         |                   |   | 560    |        |      |   | 3,474   |         |   |   | 792     |        
|Equity in loss of affiliates                                                                                     |                                           |   | 1,074              |         |                   |   | 2,556  |        |      |   | 1,670   |         |   |   | 2,222   |        
|Loss on impairment of investment in hotel real estate                                                            |                                           |   |                   |         |                   |   | 3,026  |        |      |   |        |         |   |   | 3,026   |        
|                                                                                                                 |                                           |   |                    |         |                   |   |        |        |      |   |         |         |   |   |         |         |  
|Loss before minority interests and
income taxes                                                                  |                                           |   | (17,316            | )       |                   |   | (6,946 | )      |      |   | (24,532 | )       |   |   | (7,179  | )      
|Minority interests                                                                                               |                                           |   | 243                |         |                   |   | 39     |        |      |   | 295     |         |   |   | 130     |        
|Income tax expense (benefit)                                                                                     |                                           |   | 1,818              |         |                   |   | (2,794 | )      |      |   | 641     |         |   |   | (2,924  | )      
|                                                                                                                 |                                           |   |                    |         |                   |   |        |        |      |   |         |         |   |   |         |         |  
|Net loss                                                                                                         |                                           |   | (19,377            | )       |                   |   | (4,191 | )      |      |   | (25,468 | )       |   |   | (4,385  | )      
|Mandatorily redeemable preferred stock:                                                                          |                                           |   |                    |         |                   |   |        |        |      |   |         |         |   |   |         |        
|                                                                                                                 | Dividends                                 |   |                    |        |                   |   |        | 158    |      |   |         | 307     |   |   |         | 476     |  
|                                                                                                                 | Accretion                                 |   |                    |        |                   |   |        | 16     |      |   |         | 356     |   |   |         | 46      |  
|                                                                                                                 | Conversion incentive payments             |   |                    |        |                   |   |        |       |      |   |         | 9,250   |   |   |         |        |  
|                                                                                                                 |                                           |   |                    |         |                   |   |        |        |      |   |         |         |   |   |         |         |  
|Net loss available to common shareholders                                                                        |                                           |   | (19,377            | )       |                   |   | (4,365 | )      |      |   | (35,381 | )       |   |   | (4,907  | )      
|Other comprehensive income (loss):                                                                               |                                           |   |                    |         |                   |   |        |        |      |   |         |         |   |   |         |        
|                                                                                                                 | Foreign currency translation adjustment   |   |                    | 33      |                   |   |        |       |      |   |         | 33      |   |   |         |        |  
|                                                                                                                 | Unrealized gain on investments            |   |                    | 1       |                   |   |        |       |      |   |         | 1       |   |   |         |        |  
|                                                                                                                 |                                           |   |                    |         |                   |   |        |        |      |   |         |         |   |   |         |         |  
|Comprehensive loss                                                                                               |                                           | $ | (19,343            | )       |                   | $ | (4,365 | )      |      | $ | (35,347 | )       |   | $ | (4,907  | )      
|                                                                                                                 |                                           |   |                    |         |                   |   |        |        |      |   |         |         |   |   |         |         |  
|Basic and diluted loss per common share:                                                                         |                                           |   |                    |         |                   |   |        |        |      |   |         |         |   |   |         |        
|                                                                                                                 | Net loss available to common shareholders |   | $                  | (1.12   | )                 |   | $      | (0.78  | )    |   | $       | (3.14   | ) |   | $       | (0.84   | )
|Pro forma amounts assuming the new incentive management
fee revenue recognition method is applied retroactively: |                                           |   |                    |         |                   |   |        |        |      |   |         |         |   |   |         |        
|                                                                                                                 | Net loss available to common shareholders |   | $                  | (19,377 | )                 |   | $      | (6,036 | )    |   | $       | (35,381 | ) |   | $       | (9,848  | )
|                                                                                                                 | Net loss per basic and diluted share      |   | $                  | (1.12   | )                 |   | $      | (1.08  | )    |   | $       | (3.14   | ) |   | $       | (1.68   | )

See accompanying notes to condensed consolidated financial statements.

4



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##### 



INTERSTATE HOTELS & RESORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED (IN THOUSANDS)

|                                                                           |                                                          |                                          |                                                                           |                                                               |         |                   |         |        |        |        |         |  
|-------------------------------------------------------------------------- | -------------------------------------------------------- | ---------------------------------------- | ------------------------------------------------------------------------- | ------------------------------------------------------------- | ------- | ----------------- | ------- | ------ | ------ | ------ | ------- | -
|                                                                           |                                                          |                                          |                                                                           |                                                               |         | Nine Months Ended
|                                                                           |                                                          |                                          |                                                                           |                                                               |         | September 30,    
|                                                                           |                                                          |                                          |                                                                           |                                                               |         |                  
|                                                                           |                                                          |                                          |                                                                           |                                                               |         | 2002              |         | 2001  
|                                                                           |                                                          |                                          |                                                                           |                                                               |         |                   |         |       
|Cash flows from operating activities:                                      |                                                          |                                          |                                                                           |                                                               |         |                   |         |       
|                                                                           |                                                          | Net loss                                 |                                                                           | $                                                             | (25,468 | )                 |         | $      | (4,385 | )     
|Adjustments to reconcile net loss to net cash
used in operating activities |                                                          |                                          |                                                                           |                                                               |         |                   |         |       
|                                                                           |                                                          |                                          | Depreciation and amortization                                             |                                                               |         | 9,133             |         |        |        | 8,085  |        
|                                                                           |                                                          |                                          | Forgiveness of officers and employees notes receivable                    |                                                               |         | 1,866             |         |        |        |       |        
|                                                                           |                                                          |                                          | Write off of deferred financing fees                                      |                                                               |         | 2,465             |         |        |        |       |        
|                                                                           |                                                          |                                          | Equity in loss of affiliates                                              |                                                               |         | 1,670             |         |        |        | 2,258  |        
|                                                                           |                                                          |                                          | Loss on impairment of equity investment in hotel real estate              |                                                               |         |                  |         |        |        | 3,026  |        
|                                                                           |                                                          |                                          | Minority interests                                                        |                                                               |         | 295               |         |        |        | 130    |        
|                                                                           |                                                          |                                          | Deferred income taxes                                                     |                                                               |         | 2,119             |         |        |        | (3,601 | )      
|                                                                           |                                                          |                                          | Amortization of mandatorily redeemable preferred stock                    |                                                               |         | 1,375             |         |        |        | 563    |        
|                                                                           |                                                          |                                          | Other                                                                     |                                                               |         | 1,830             |         |        |        | 385    |        
|                                                                           |                                                          |                                          | Changes in operating assets and liabilities, excluding effects of merger: |                                                               |         |                   |         |        |        |        |        
|                                                                           |                                                          |                                          |                                                                           | Accounts receivable, net                                      |         |                   | 551     |        |        |        | 2,805   |  
|                                                                           |                                                          |                                          |                                                                           | Prepaid expenses and other current assets                     |         |                   | 1,137   |        |        |        | 388     |  
|                                                                           |                                                          |                                          |                                                                           | Accounts payable, accrued expenses and other liabilities      |         |                   | (3,126  | )      |        |        | (16,075 | )
|                                                                           |                                                          |                                          |                                                                           | Due to MeriStar Hospitality Corporation                       |         |                   | (2,081  | )      |        |        |        |  
|                                                                           |                                                          |                                          |                                                                           |                                                               |         |                   |         |       
|                                                                           | Net cash used in operating activities                    |                                          |                                                                           | (8,234                                                        | )       |                   |         | (6,421 | )     
|                                                                           |                                                          |                                          |                                                                           |                                                               |         |                   |         |       
|                                                                           | Cash flows from investing activities:                    |                                          |                                                                           |                                                               |         |                   |         |        |       
|                                                                           |                                                          | Changes in restricted cash               |                                                                           |                                                               | 299     |                   |         |        | 825    |       
|                                                                           |                                                          | Purchases of property and equipment, net |                                                                           |                                                               | (528    | )                 |         |        | (469   | )     
|                                                                           |                                                          | Purchases of franchise agreements        |                                                                           |                                                               | (483    | )                 |         |        |       |       
|                                                                           |                                                          | Merger-related acquisition costs         |                                                                           |                                                               | (3,486  | )                 |         |        |       |       
|                                                                           |                                                          | Cash acquired in merger transaction      |                                                                           |                                                               | 1,766   |                   |         |        |       |       
|                                                                           |                                                          |                                          |                                                                           | Purchases of marketable securities                            |         |                   | (2,080  | )      |        |        | (2,475  | )
|                                                                           |                                                          |                                          |                                                                           | Proceeds from sale of marketable securities                   |         |                   | 1,911   |        |        |        | 2,791   |  
|                                                                           |                                                          |                                          |                                                                           | Net cash invested for equity investments in hotel real estate |         |                   | (1,360  | )      |        |        | (8,112  | )
|                                                                           | Change in officers and employees notes receivable, net   |                                          |                                                                           | (145                                                          | )       |                   |         | 1,085  |       
|                                                                           | Net investment in management contracts                   |                                          |                                                                           |                                                              |         |                   |         | (471   | )     
|                                                                           | Change in advances to affiliates                         |                                          |                                                                           | 217                                                           |         |                   |         | 8,001  |       
|                                                                           | Deposits and other                                       |                                          |                                                                           | 110                                                           |         |                   |         | (1,200 | )     
|                                                                           |                                                          |                                          |                                                                           |                                                               |         |                   |         |       
|Net cash used in investing activities                                      |                                                          |                                          | (3,779                                                                    | )                                                             |         |                   | (25     | )     
|                                                                           |                                                          |                                          |                                                                           |                                                               |         |                   |         |       
|Cash flows from financing activities:                                      |                                                          |                                          |                                                                           |                                                               |         |                   |         |       
|                                                                           | Proceeds from issuance of long-term debt                 |                                          |                                                                           | 22,000                                                        |         |                   |         | 4,169  |       
|                                                                           | Principal payments on long-term debt                     |                                          |                                                                           | (26,811                                                       | )       |                   |         | (8,325 | )     
|                                                                           | Financing fees paid                                      |                                          |                                                                           | (42                                                           | )       |                   |         | (1,491 | )     
|                                                                           | Proceeds from issuances of common stock                  |                                          |                                                                           | 320                                                           |         |                   |         | 214    |       
|                                                                           | Dividends paid on mandatorily redeemable preferred stock |                                          |                                                                           | (307                                                          | )       |                   |         | (476   | )     
|                                                                           | Accounts payable  related parties                       |                                          |                                                                           |                                                              |         |                   |         | (1     | )     
|                                                                           | Conversion incentive payments                            |                                          |                                                                           | (9,250                                                        | )       |                   |         |       |       
|                                                                           | Common stock repurchased and retired                     |                                          |                                                                           |                                                              |         |                   |         | (2,000 | )     
|                                                                           |                                                          |                                          |                                                                           |                                                               |         |                   |         |       
|Net cash used in financing activities                                      |                                                          |                                          | (14,090                                                                   | )                                                             |         |                   | (7,910  | )     
|                                                                           |                                                          |                                          |                                                                           |                                                               |         |                   |         |       
|Effect of exchange rate changes on cash                                    |                                                          |                                          |                                                                          |                                                               |         |                   |        |       
|                                                                           |                                                          |                                          |                                                                           |                                                               |         |                   |         |       
|Net decrease in cash and cash equivalents                                  |                                                          |                                          | (26,103                                                                   | )                                                             |         |                   | (14,356 | )     
|Cash and cash equivalents, beginning of period                             |                                                          |                                          | 39,040                                                                    |                                                               |         |                   | 51,327  |       
|                                                                           |                                                          |                                          |                                                                           |                                                               |         |                   |         |       
|Cash and cash equivalents, end of period                                   |                                                          | $                                        | 12,937                                                                    |                                                               |         | $                 | 36,971  |       
|                                                                           |                                                          |                                          |                                                                           |                                                               |         |                   |         |       

See accompanying notes to condensed consolidated financial statements.

5



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INTERSTATE HOTELS & RESORTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

The merger included the following significant related transactions:



| |  | Interstates principal investor group agreed to convert their Series B
preferred stock and convertible notes into Class A common stock.                                                                                      
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Interstate repaid the outstanding balance on their promissory notes held by
Wyndham International, Inc. on July 30, 2002 and repaid the remaining
principal balance of their limited recourse mortgage note on July 31, 2002;
| 
| |  | We entered into a new $113,000 senior credit agreement with a group of banks;                                                                                                                                                
| 
| |  | We converted MeriStars unsecured credit facility and term note with
MeriStar Hospitality Operating Partnership, or MHOP, to a term loan and
repaid $3,000 under that loan; and                                              
| 
| |  | We effected a one-for-five reverse split of our common stock.                                                                                                                                                                

In accordance with generally accepted accounting principles, 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. The merger is accounted for as a
reverse acquisition with Interstate as the accounting acquirer and MeriStar as
the surviving company for legal purposes.

The consolidated interim financial statements for the three- and nine-month
periods ended September 30, 2002 and 2001, include the historical results of
operations of Interstate, the accounting acquiror. After the
MeriStar-Interstate merger on July 31, 2002, the financial statements include
the operating results of the combined entity, Interstate Hotels & Resorts, Inc.

Business Summary

The MeriStar-Interstate merger combined the two largest independent hotel
management companies in the United States, measured by number of rooms under
management. We manage and operate a portfolio of hospitality properties and
provide related services in the hotel, corporate housing, resort, conference
center, and golf markets. 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 September 30, 2002, we managed 401 hotels with 85,587 rooms in 45 states,
the District of Columbia, Canada, and Russia. We wholly own one of these
properties, and have non-controlling equity interests in 25 of these hotels.
In addition, at September 30, 2002, we had 3,485 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, one of our
directors 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 108 hotels 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

6



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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). We also provide each other with certain services
including administrative, renovation supervision, corporate, accounting,
finance, risk management, legal, tax, information technology, human resources,
acquisition identification and diligence and operational services.

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
Corporations Annual Report on Form 10-K, as amended, for the year ended
December 31, 2001. Certain 2001 amounts have been reclassified to conform to
the 2002 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.

Change in Accounting Policy

Under our management contracts with hotel owners, we generally earn a
combination of base and incentive management fees. Base management fees are
usually calculated as set percentages of gross revenues of a hotel property,
while incentive fees are calculated annually based on various financial or
other measures established within the management contract.

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 the third quarter of 2002, with an effective date of January 1, 2002, we
will record 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 in our circumstances
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.

The pro forma amounts reflect the effect of
retroactive application on management fees that would have been made
in 2001 had the new method been in effect. The effect of the change on the first
quarter of 2002 was to increase the net loss available to common shareholders by $1,396 ($0.26 per share) to a
net loss available to common shareholders of $1,685 ($0.32 per share); the effect of the change on the second
quarter of 2002 was to increase the net loss available to common shareholders by $1,654 ($0.29 per share) to a
net loss available to common shareholders of $14,318 ($2.55 per share); 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.

New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board or FASB issued SFAS No.
141, Business Combination. This standard requires that all business
combinations be accounted for using the purchase method of accounting. The
initial adoption of this statement, on January 1, 2002, did not have an impact
on our financial position or results of operations. We applied SFAS No. 141 in
accounting for the acquisition of MeriStar.

In June 2001, the FASB issued Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets. This standard requires among
other things, that companies no longer amortize goodwill, but instead test
goodwill for impairment at least annually. In addition, SFAS 142 requires that
we identify reporting units for the purposes of assessing potential future
impairments of goodwill, reassess the useful lives of our existing recognized
intangible assets, and cease amortization of intangible assets with an
indefinite useful life. An intangible asset with an indefinite useful life
should be tested for impairment in accordance with the guidance in SFAS 142.
SFAS 142 requires us to complete a transitional goodwill impairment test six
months from the date of

7



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adoption. We are also required to reassess the useful lives of our intangible
assets within the first quarter after adoption. The initial adoption of this
statement, on January 1, 2002, did not have an impact on our financial position
or results of operations.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement establishes standards for accounting for
obligations associated with the retirement of tangible long-lived assets. The
implementation of the provisions of SFAS No. 143 is required effective January
1, 2003. We do not expect the implementation of this statement to have a
significant impact on our financial position or results of operations.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement addresses financial accounting
and reporting for the impairment and disposal of long-lived assets. The
adoption of this statement, on January 1, 2002, did not have an impact on our
financial position or results of operations.

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



| |  | Current or immediate short-term (future twelve months) projected cash flows are significantly less than the most recent
historical cash flows.                               
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | A significant loss of management contracts.                                                                                                                                  
| 
| |  | The unplanned departure of an executive officer or other key personnel that could adversely affect our ability to maintain
our competitive position and manage future growth.
| 
| |  | A significant adverse change in legal factors or an adverse action or assessment by a regulator, which could affect the
value of our long-lived assets.                      
| 
| |  | Events that could cause significant adverse changes and uncertainty in business and leisure travel patterns.                                                                 

We make estimates of the undiscounted cash flows from the expected future
operations of the asset. In projecting the expected future operations of the
asset, we base our estimates on projected amounts of future earnings before
interest expense, income taxes, depreciation and amortization, or EBITDA. We
use growth assumptions to project these estimated future EBITDA amounts out
over the expected life of the underlying asset. Our impairment analysis
considers various factors, such as the current operating performance of the
underlying assets, our future forecast for operations, funding requirements or
obligations we may have to an affiliate, and the estimated fair value of our
investment based on liquidation preferences and priorities within an affiliate
ownership structure.

Effective January 1, 2002, we adopted the provisions of EITF Issue No. 01-14 Income Statement Characterization of Reimbursements
Received for Out-of-Pocket Expenses Incurred. This issue establishes standards
for accounting for reimbursements received for out-of-pocket expenses incurred
and the characterization as revenue and expense in the statement of operations.
In accordance with this issue, we have included in operating revenues and
expenses the reimbursement of costs we incur on behalf of the third-party
owners of our managed hotels. These costs relate primarily to payroll and
benefit costs at managed hotels where we are the employer. We receive
reimbursements for these costs based upon our costs with no added margin.
Therefore, the adoption of this issue did not impact our operating income,
earnings per share, cash flows or financial position. We adopted this issue by
retroactively applying it to all periods presented in our accompanying
financial statements. The effect of adopting this issue was an increase in our
operating revenues and expenses of $163,347 and $67,816 and for the three month
periods ended September 30, 2002 and 2001, respectively, and $297,662 and
$207,674 for the nine month periods ended September 30, 2002 and 2001,
respectively.

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. We plan to
adopt this statement on January 1, 2003.

In July 2002, the FASB issued SFAS No. 146 Accounting for Costs Associated
with Exit or Disposal Activities. The provisions of this statement are to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. If we enter into these transactions after that date, we will account
for those transactions in accordance with the new statement.

8



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##### 



3.     EARNINGS PER SHARE

We calculated our basic earnings per common share by dividing net 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. The details of basic and diluted earnings per common share for
the three month and nine month periods ended September 30, 2002 and 2001 were
as follows:

|                                                                    |                                           |   |         |                    |   |                   |        |       |   |      |         |       |   |   |        |       |   | 
|------------------------------------------------------------------- | ----------------------------------------- | - | ------- | ------------------ | - | ----------------- | ------ | ----- | - | ---- | ------- | ----- | - | - | ------ | ----- | - | 
|                                                                    |                                           |   |         | Three Months Ended |   | Nine Months Ended
|                                                                    |                                           |   |         | September 30,      |   | September 30,    
|                                                                    |                                           |   |         |                    |   |                  
|                                                                    |                                           |   |         | 2002               |   | 2001              |        | 2002  |   | 2001
|                                                                    |                                           |   |         |                    |   |                   |        |       |   |     
|Net loss available to common shareholders                           |                                           | $ | (19,377 | )                  |   | $                 | (4,365 | )     |   | $    | (35,381 | )     |   | $ | (4,907 | )    
|Weighted average number of common shares outstanding
(in thousands) |                                           |   | 17,270  |                    |   |                   | 5,575  |       |   |      | 11,277  |       |   |   | 5,849  |      
|                                                                    |                                           |   |         |                    |   |                   |        |       |   |      |         |       |   |   |        |      
|Basic and diluted loss per common share:                            |                                           |   |         |                    |   |                   |        |       |   |      |         |       |   |   |        |      
|                                                                    | Net loss available to common shareholders |   | $       | (1.12              | ) |                   | $      | (0.78 | ) |      | $       | (3.14 | ) |   | $      | (0.84 | )
|                                                                    |                                           |   |         |                    |   |                   |        |       |   |      |         |       |   |   |        |      

On July 31, 2002, in the merger transaction, 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 above is presented assuming the conversion
of Interstate stock and the reverse stock split occurred on January 1, 2001.

4.     INTANGIBLE ASSETS

Intangible assets consist of the following:

|                        |  |                    |        |                   |  |                |         |              |  |   |        |  |  |   |         |  
|----------------------- |  | ------------------ | ------ | ----------------- |  | -------------- | ------- | ------------ |  | - | ------ |  |  | - | ------- | -
|                        |  | September 30, 2002 |        | December 31, 2001
|                        |  |                    |        |                  
|                        |  | Gross Carrying     |        | Accumulated       |  | Gross Carrying |         | Accumulated 
|                        |  | Value              |        | Amortization      |  | Value          |         | Amortization
|                        |  |                    |        |                   |  |                |         |             
|Goodwill                |  | $                  | 90,750 |                   |  | $              |        |              |  | $ |       |  |  | $ |        |  
|Management Contracts    |  |                    | 84,881 |                   |  |                | (19,185 | )            |  |   | 25,938 |  |  |   | (11,896 | )
|Franchise Fees          |  |                    | 1,945  |                   |  |                | (9      | )            |  |   | 62     |  |  |   | (7      | )
|Deferred Financing Fees |  |                    | 1,576  |                   |  |                | (73     | )            |  |   | 3,787  |  |  |   | (725    | )
|Other                   |  |                    | 400    |                   |  |                |        |              |  |   | 514    |  |  |   |        |  

We incurred aggregate amortization expense of $3,017 and $2,611 on these assets
for the three months ended September 30, 2002 and 2001, respectively. We
incurred aggregate amortization expense of $7,941 and $7,581 on these assets
during the nine months ended September 30, 2002, and 2001, respectively.

As part of the purchase accounting for the MeriStar-Interstate merger, we
recorded the following additions to intangible assets:



| |  | $90,750 of goodwill            
|- |  | -------------------------------
| 
| |  | $58,199 of management contracts

As a result of the merger and the termination of Interstates previous
revolving credit facility, we wrote-off $1,241 and $2,465 of

9



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deferred financing fees during the three-month and nine-month periods ended
September 30, 2002. These amounts are included as part of merger costs on our
statement of operations. Additionally, and in connection with the closing of the merger and the execution of the new senior credit agreement, we incurred $1,513 of deferred financing fees.

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

|                              |  |   |        | 
|----------------------------- |  | - | ------ | 
|Year ending December 31, 2002 |  | $ | 11,335 | 
|Year ending December 31, 2003 |  | $ | 7,547  | 
|Year ending December 31, 2004 |  | $ | 3,941  | 
|Year ending December 31, 2005 |  | $ | 3,738  | 
|Year ending December 31, 2006 |  | $ | 3,345  | 

The carrying amount of goodwill by reportable segment as of September 30, 2002 is as follows:

|                  |       |   |        |        | 
|----------------- | ----- | - | ------ | ------ | 
|Hotel Management  |       | $ | 81,675 |       
|Corporate Housing |       |   | 9,075  |       
|                  |       |   |        |       
|                  | Total |   | $      | 90,750 | 
|                  |       |   |        |       

5.     INVESTMENTS IN AND ADVANCES TO AFFILIATES

Our investments in and advances to joint ventures and affiliated companies
consist of the following:

|                                              |  |               |        |              |  |   |        | 
|--------------------------------------------- |  | ------------- | ------ | ------------ |  | - | ------ | 
|                                              |  | September 30, |        | December 31,
|                                              |  | 2002          |        | 2001        
|                                              |  |               |        |             
|MIP Lessee, L.P.                              |  | $             | 7,559  |              |  | $ |       | 
|CapStar Hallmark Company, L.L.C               |  |               | 2,695  |              |  |   |       | 
|CapStar San Diego HGI Associates              |  |               | 4,390  |              |  |   |       | 
|FCH/IHC Hotels L.P. and FCH/IHC Leasing, L.P. |  |               | 7,168  |              |  |   | 7,983  | 
|CNL IHC Partners, L.P.                        |  |               | 2,141  |              |  |   | 2,201  | 
|Other                                         |  |               | 4,899  |              |  |   | 2,754  | 
|                                              |  |               |        |              |  |   |        | 
|                                              |  | $             | 28,852 |              |  | $ | 12,938 | 
|                                              |  |               |        |              |  |   |        | 

Prior to the merger, MeriStar had investments in and advances to MIP Lessee,
L.P., CapStar Hallmark Company, L.L.C., CapStar San Diego HGI Associates,
and certain other joint ventures and affiliates.  These investments in and
advances to affiliates were recorded at fair value at the acquisition date.

Whenever events or changes in circumstances indicate that the carrying values
of a long-lived asset (including an intangible asset) 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 and the loss is other than
temporary, we write down the asset to its estimated fair value and record an
impairment loss. Any impairment losses are recorded as operating expenses.

Our review of long-lived assets as of September 30, 2002 did not indicate that
any of our long-lived assets were impaired. The future carrying value of these
items is, however, dependent upon operating results of our operating segments
or the underlying real estate investments. Future adverse changes in the
hospitality and lodging industry, market conditions or poor operating results
of the underlying investments could result in future losses or the inability to
recover the carrying value of these long-lived assets.

In 2001, we formed two limited partnerships (FCH/IHC Hotels, L.P. and
FCH/IHC Leasing, L.P.) with FelCor Lodging Trust. These partnerships
own eight mid-scale hotels, and we manage those eight hotels. The
partnership entities are owned 50% by FelCor and 50% by us. These hotels
are located in Atlanta, Georgia (2 hotels); Dallas, Texas (1 hotel);
Houston, Texas (4 hotels); and Scottsdale, Arizona (1 hotel). The
partnerships business plan calls for the renovation of the hotels
through an extensive capital expenditure program. To-date, the
partnerships have spent approximately $8.5 million in connection with
this capital expenditure program. Because of the renovation program,
the hotel portfolio has had approximately 3.3% of its rooms out of
service in 2002. As a result of the rooms out of service and the
weaker-than-expected economic conditions in the hotels markets, the
operating results of the hotels are lower than what we originally
forecasted when we formed the partnerships with FelCor. In addition, we
are in discussions with FelCor about the possible restructuring of the
partnership and future commitments of the partners. We cannot currently
predict the ultimate outcome of those discussions. We will continue to
monitor on a quarterly basis the performance of the partnerships
hotels, and review the carrying value of our investment in relation to
the estimated fair value of the underlying hotel assets. If a review in
a future period shows that our investment carrying value exceeds the
estimated fair value, then we would record an impairment loss to reduce
the carrying value of our investment to the estimated fair value.

10



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6.     SUPPLEMENTAL CASH FLOW INFORMATION

|                                         |                                                                          |                                          |   |       |         | 
|---------------------------------------- | ------------------------------------------------------------------------ | ---------------------------------------- | - | ----- | ------- | 
|Cash paid for interest and income taxes: |                                                                          |                                          |   |      
|                                         | Interest                                                                 |                                          | $ | 4,036 |        
|                                         | Income taxes                                                             |                                          | $ | 508   |        
|Non-cash activities                      |                                                                          |                                          |   |      
|                                         | Operating assets and liabilities acquired in connection with the merger: |                                          |   |       |        
|                                         |                                                                          | Accounts receivable, net                 |   |       | 15,650  | 
|                                         |                                                                          | Due from MeriStar Hospitality            |   |       | 7,873   | 
|                                         |                                                                          | Prepaid expenses                         |   |       | 7,593   | 
|                                         |                                                                          | Deposits and other                       |   |       | 2,374   | 
|                                         |                                                                          | Fixed assets, net                        |   |       | 14,841  | 
|                                         |                                                                          | Investment in and advances to affiliates |   |       | 16,956  | 
|                                         |                                                                          | Intangible assets, net                   |   |       | 59,712  | 
|                                         |                                                                          | Deferred tax assets                      |   |       | 9,700   | 
|                                         |                                                                          |                                          |   |      
|                                         |                                                                          | Total operating assets acquired          |   | $     | 134,699 | 
|                                         |                                                                          |                                          |   |      
|                                         |                                                                          | Accounts payable & accrued expenses      |   | $     | 51,135  | 
|                                         |                                                                          | Long-term debt, current portion          |   |       | 1,219   | 
|                                         |                                                                          | Income taxes payable                     |   |       | 624     | 
|                                         |                                                                          | Long-term debt                           |   |       | 124,850 | 
|                                         |                                                                          | Minority interests                       |   |       | 6,244   | 
|                                         |                                                                          |                                          |   |      
|                                         |                                                                          | Total liabilities acquired               |   | $     | 184,072 | 
|                                         |                                                                          |                                          |   |      

7.     CONVERSION OF SECURITIES

On October 20, 2000, we executed the following transactions:



| |  |  | We issued 500,000 shares of our Series B convertible preferred
stock, par value $.01 per share for $5,000 and 8.75% subordinated
convertible notes for $25,000. These securities were issued to an
investor group affiliated with Lehman Brothers Holdings Inc.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We issued 225,000 shares of our Series B preferred stock to
three of our executives as deferred compensation. This stock was
subject to a three-year forfeiture period.                                                                                        

Initially, the Series B preferred stock was mandatorily redeemable on October
20, 2007 for $10 per share and the convertible notes matured on October 20,
2007. Each share of the Series B convertible preferred stock was convertible
into 2.5 shares of our Class A common stock, and the convertible notes were
convertible into our Class A common stock at a rate of $4.00 per share.

In connection with the MeriStar-Interstate merger, the following transactions
occurred related to the securities described in this footnote:



| |  |  | The investor group agreed to convert their Series B preferred
stock and convertible notes into Class A common stock. On June 26,
2002, the investor group converted all but 10 shares of their Series
B preferred stock into 1,249,975 shares of the Class A common stock
and approximately $18,757 in aggregate principal amount of the
convertible notes into 4,689,165 shares of Class A common stock. As
an inducement for this conversion, we paid the principal investor
group $9,250. We recorded the payment of this conversion incentive as
a charge to the loss available to common shareholders in the second
quarter of 2002. On July 31, 2002, the merger was completed, and we
completed a one-for-five reverse split of our common stock. On August
2, 2002, the investor group converted the remaining 10 shares of its
Series B preferred stock and the remaining $6,243 principal amount of
convertible notes, along with its 5,939,140 shares of Class A common
stock, in exchange for 6,900,000 shares of post-split common stock.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The three executives agreed to convert their series B preferred
stock into class A common stock. The three executives converted all
of their Series B preferred stock into an aggregate 562,500 shares of
Class A common stock. We recorded the accelerated vesting of their
Series B preferred stock as a merger cost of $1,000 in the second
quarter of 2002. For the three-month and nine-month periods ended
September 30, 2002, we incurred $49 and $1,120 of interest expense on
the convertible notes, respectively. For the three-month and
nine-month periods ended September 30, 2001, we incurred $547 and
$1,641 of interest expense on the convertible notes, respectively.                                                                                                                                                                                                                                                                                                                                                              

11



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##### 



8.     LONG TERM DEBT

Our long-term debt consisted of the following:

|                                    |                      |   |               |        |              |   |        |        |  
|----------------------------------- | -------------------- | - | ------------- | ------ | ------------ | - | ------ | ------ | -
|                                    |                      |   | September 30, |        | December 31,
|                                    |                      |   |               |        |             
|                                    |                      |   | 2002          |        | 2001        
|                                    |                      |   |               |        |             
|Senior credit agreement             |                      | $ | 77,000        |        |              | $ |       |       
|MHOP term loan                      |                      |   | 56,069        |        |              |   |       |       
|Promissory note                     |                      |   | 4,170         |        |              |   | 4,170  |       
|8.75% subordinate convertible notes |                      |   |              |        |              |   | 25,000 |       
|Wyndham redemption notes            |                      |   |              |        |              |   | 4,432  |       
|Limited recourse mortgage note      |                      |   |              |        |              |   | 7,379  |       
|                                    |                      |   |               |        |              |   |        |       
|                                    |                      |   | 137,239       |        |              |   | 40,981 |       
|                                    | Less current portion |   |               | (1,219 | )            |   |        | (1,601 | )
|                                    |                      |   |               |        |              |   |        |       
|                                    |                      | $ | 136,020       |        |              | $ | 39,380 |       
|                                    |                      |   |               |        |              |   |        |       

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 31, 2005. The revolving credit facility is due on July 31,
2005 (with a one-year renewal at our option). The interest rate on the senior
credit agreement will be 30-day 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.
As September 30, 2002, borrowings under the senior credit agreement bore
interest at a rate of 5.8125% per annum. We incurred $798 of interest expense
on the senior credit agreement for the three and nine months ending September
30, 2002.

MHOP Term Loan In connection with the closing of the merger, effective July
31, 2002, a $75,000 unsecured credit facility between MeriStar and MHOP was
converted to a $56,069 term loan due at July 31, 2007. Immediately preceding
the conversion, $3,000 was repaid on the credit facility. The term loan is
subordinate to borrowings under our senior credit agreement. The MHOP term
loan contains certain covenants, including maintenance of financial ratios at
the end of each quarter, compliance reporting requirements and other customary
restrictions. The term loan does not permit any additional future borrowings,
and does not require MHOP to provide any additional borrowings. At September 30, 2002, the term loan bore interest at 8.32%. We incurred
$790 of interest expense on the MHOP loan for the three and nine months ended
September 30, 2002.

We are currently in discussions with MHOP about possible early repayment of
this term loan. Our ability to repay this note would, however, be dependent on
our ability to find an alternative source of financing to provide cash for a
repayment. An early repayment of the term loan, if completed, would likely be
at a discount to the current face amount of the term loan. MHOP has not
reached a conclusion as to what, if any, discount they would accept as part of
a repayment transaction.

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-month and nine-month periods ended September 30, 2002,
we incurred $125 and $375, respectively, of interest expense on the promissory
note. For the three- and nine-month periods ended September 30, 2001, we
incurred $83 and $215, respectively, of interest expense on the promissory
note.

Wyndham Redemption NotesThe Wyndham Redemption Notes balance of $4,432 at
December 31, 2001 bore interest at a fixed rate of 9.75%. Initially, principal
payments of $750 and $3,682 were due on July 1, 2002 and July 1, 2004,
respectively. In conjunction with negotiating the MeriStarInterstate merger
agreement, we repaid $750 to Wyndham on May 2, 2002 and agreed to repay the
$3,682 remaining outstanding principal amount prior to closing the merger. We
repaid this amount on July 30, 2002. For the three-month and nine-month
periods ended September 30, 2002, we incurred $30 and $235, respectively, of
interest expense on the Wyndham notes. For the three-month and nine-month
periods ended September 30, 2001, we incurred $120 and $393, respectively, of
interest expense on the Wyndham notes.

Wyndham also holds a 1.6627% noncontrolling economic interest in one of our
operating subsidiaries. In conjunction with negotiating the merger, we also
accelerated the timing of Wyndhams right to require us to redeem this
interest. As of July 30, 2002, Wyndham has the right to require us to redeem
this interest. The estimated value of this interest at September 30, 2002 is
$433.

Limited Recourse Mortgage NoteIn February 2000, we entered into a
limited-recourse mortgage note with a bank. The proceeds from the note, which
originally was to mature February 2003, were $7,560. Monthly payments were due
based on a 25-year amortization schedule for principal, with interest based on
variable rate options using the prime rate for the LIBOR rate. The note was
collateralized by the Pittsburgh Airport Residence Inn by Marriott, a hotel we
acquired on November 1, 1999. In connection with the

12



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##### 



merger, we repaid the $6,575 remaining principal balance of the note on July
31, 2002. For the three-month and nine-month periods ended September 30, 2002,
we incurred $26 and $184, respectively, of interest expense on the mortgage
note. For the three-month and nine-month periods ended September 30, 2001 we
incurred $108 and $376, respectively, of interest expense on the mortgage note.

We have determined that the fair value of our outstanding borrowings on our
senior credit facility, MHOP term loan, and promissory note approximate their
carrying value at September 30, 2002.

9.     SEGMENT INFORMATION

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

|                                                                |  |            |         |           |  |       |        |            |  |           |         |   |  |   |         |  
|--------------------------------------------------------------- |  | ---------- | ------- | --------- |  | ----- | ------ | ---------- |  | --------- | ------- | - |  | - | ------- | -
|                                                                |  | Hotel      |         | Corporate |  |       |        |            |  | Financial
|                                                                |  | Management |         | Housing   |  | Other |        | Statements
|                                                                |  |            |         |           |  |       |        |           
|Three months ended September 30, 2002                           |  |            |         |           |  |       |        |            |  |           |         |   |  |   |         |  
|Revenues                                                        |  | $          | 179,867 |           |  | $     | 19,779 |            |  | $         |        |   |  | $ | 199,646 |  
|Earnings before interest, taxes, depreciation,
and amortization |  | $          | 4,861   |           |  | $     | 733    |            |  | $         | (16,250 | ) |  | $ | (10,656 | )
|Three months ended September 30, 2001                           |  |            |         |           |  |       |        |            |  |           |         |   |  |   |         |  
|Revenues                                                        |  | $          | 77,876  |           |  | $     |       |            |  | $         |        |   |  | $ | 77,876  |  
|Earnings before interest, taxes, depreciation,
and amortization |  | $          | 1,881   |           |  | $     |       |            |  | $         |        |   |  | $ | 1,881   |  
|Nine months ended September 30, 2002                            |  |            |         |           |  |       |        |            |  |           |         |   |  |   |         |  
|Revenues                                                        |  | $          | 334,044 |           |  | $     | 19,779 |            |  | $         |        |   |  | $ | 353,823 |  
|Earnings before interest, taxes, depreciation,
and amortization |  | $          | 8,485   |           |  | $     | 733    |            |  | $         | (19,473 | ) |  | $ | (10,255 | )
|Total assets                                                    |  | $          | 245,273 |           |  | $     | 31,170 |            |  | $         | 16,767  |   |  | $ | 293,210 |  
|Nine months ended September 30, 2001                            |  |            |         |           |  |       |        |            |  |           |         |   |  |   |         |  
|Revenues                                                        |  | $          | 241,083 |           |  | $     |       |            |  | $         |        |   |  | $ | 241,083 |  
|Earnings before interest, taxes, depreciation,
and amortization |  | $          | 6,946   |           |  | $     |       |            |  | $         |        |   |  | $ | 6,946   |  
|Total assets                                                    |  | $          | 97,924  |           |  | $     |       |            |  | $         | 10,745  |   |  | $ | 108,669 |  

The other items in the tables above represent operating segment activity and
assets for the non-reportable segments. The non-operating segment activity
includes merger costs, restructuring costs and tender offer costs. The
non-operating segment assets include deferred tax assets and deferred financing
costs.

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 above. For periods prior
to the merger, we have combined our two previously reportable segments into the
hotel management operating segment for presentation in the table shown above.

Revenues for foreign operations for the three months ended September 30 were as follows:

|               |  |      |       |      |  |   |     | 
|-------------- |  | ---- | ----- | ---- |  | - | --- | 
|               |  | 2002 |       | 2001
|               |  |      |       |     
|Canada         |  | $    | 1,838 |      |  | $ | 337 | 
|United Kingdom |  | $    | 4,418 |      |  | $ |    | 
|France         |  | $    | 129   |      |  | $ |    | 
|Russia         |  | $    | 410   |      |  | $ | 908 | 

13



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##### 



Revenues for foreign operations for the nine months
ended September 30 were as follows:

|               |  |      |       |      |  |   |       | 
|-------------- |  | ---- | ----- | ---- |  | - | ----- | 
|               |  | 2002 |       | 2001
|               |  |      |       |     
|Canada         |  | $    | 2,261 |      |  | $ | 1,301 | 
|United Kingdom |  | $    | 4,418 |      |  | $ |      | 
|France         |  | $    | 129   |      |  | $ |      | 
|Russia         |  | $    | 2,268 |      |  | $ | 2,544 | 

10. MERGER

Allocation of Purchase Price

On July 31 2002, the merger between MeriStar and Interstate was completed.
MeriStar issued 37,188,574 shares of its common stock with a value of $38,527.
The value of the MeriStar shares issued was
determined based on the average market price of MeriStars common shares over
the 2-day periods before and after the merger was announced.
Additionally, MeriStars stock options with a fair value of $953 vested in
connection with the merger.

We accounted for the merger as a purchase of MeriStar by Interstate.
Accordingly, we have included the operating results of MeriStar in our
condensed consolidated financial statements since July 31, 2002, the effective
date of the merger. The following summarizes the merger:

|                                  |                           |   |          |        | 
|--------------------------------- | ------------------------- | - | -------- | ------ | 
|MeriStar common stock issued      |                           | $ | 38,527   |       
|MeriStar stock options            |                           |   | 953      |       
|Transaction costs                 |                           |   | 3,663    |       
|                                  |                           |   |          |       
|                                  | Total cost of acquisition |   |          | 43,143 | 
|                                 
|Fair value of liabilities assumed |                           |   | 184,072  |       
|Fair value of assets acquired     |                           |   | (136,465 | )     
|                                  |                           |   |          |       
|Goodwill                          |                           | $ | 90,750   |       
|                                  |                           |   |          |       

The following table summarizes the initial allocation of the amounts assigned to each major
asset and liability caption at the date of acquisition:

|                       |                                   |   |         |         | 
|---------------------- | --------------------------------- | - | ------- | ------- | 
|Current Assets         |                                   | $ | 35,256  |        
|Intangible Assets      |                                   |   | 59,712  |        
|Other Long-Term Assets |                                   |   | 41,497  |        
|                       |                                   |   |         |        
|                       | Fair
value of assets acquired     |   | $       | 136,465 | 
|                       |                                   |   |         |        
|Current Liabilities    |                                   | $ | 51,759  |        
|Long term debt         |                                   |   | 126,069 |        
|Minority interest      |                                   |   | 6,244   |        
|                       |                                   |   |         |        
|                       | Fair
value of liabilities assumed |   | $       | 184,072 | 
|                       |                                   |   |         |        

Of the $59,712 of intangible assets acquired, $58,199 relates to management
contracts, amortized over an 18 year weighted-average useful life.

The $90,750 of goodwill was assigned to the hotel management and corporate
housing segments in the amounts of $81,675 and $9,075 respectively, none of
which is expected to be deductible for tax purposes.

Pro Forma Information

The following pro forma information is presented assuming the merger and the
one-for-five reverse stock split had been completed as of the beginning of the
periods presented. In managements opinion, all pro forma adjustments
necessary to reflect the material effects of these transactions have been made.
The pro forma information does not purport to present what the actual results
of operations would have been if the merger had occurred on such dates, nor to
project the results of operations for any future period.

Pro Forma Information (Unaudited)

|               |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |         |  
|-------------- |  | ------------------ | ------- | ----------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|               |  | Three Months Ended |         | Nine Months Ended
|               |  | September 30,      |         | September 30,    
|               |  |                    |         |                  
|               |  | 2002               |         | 2001              |  | 2002 |         | 2001
|               |  |                    |         |                   |  |      |         |     
|Total Revenue  |  | $                  | 274,882 |                   |  | $    | 283,275 |      |  | $ | 841,948 |   |  | $ | 881,847 |  
|Net loss       |  | $                  | (10,140 | )                 |  | $    | (6,880  | )    |  | $ | (6,692  | ) |  | $ | (19,991 | )
|Loss per share |  | $                  | (0.50   | )                 |  | $    | (0.34   | )    |  | $ | (0.33   | ) |  | $ | (0.99   | )

14



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The above pro forma results for the three- and nine-months ended September 30,
2002 include the following material, non-recurring items:

|                                                                                               |  |                                  |         |                                      |  |      |      |   |  |   |         |      |  |  |  |  |  |   |         |   |  |  |  | 
|---------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | ------------------------------------ |  | ---- | ---- | - |  | - | ------- | ---- |  |  |  |  |  | - | ------- | - |  |  |  | 
|                                                                                               |  | Three Months Ended September 30, |         | Nine Months Ended September 30, 2002
|                                                                                               |  |                                  |         |                                     
|                                                                                               |  | 2002                             |         | 2001                                 |  | 2002 |      |   |  |   |         | 2001 |  |  |  | 
|                                                                                               |  |                                  |         |                                      |  |      |      |   |  |   |         |      |  |  |  | 
|Gain on lease conversion                                                                       |  | $                                |        |                                      |  | $    |     |   |  | $ | 7,229   |      |  |  |  |  |  | $ |        |  
|Merger costs                                                                                   |  | $                                | (3,295  | )                                    |  | $    | 146  |   |  | $ | (4,296  | )    |  |  |  |  |  | $ | (4,239  | )
|Restructuring expenses                                                                         |  | $                                | (12,820 | )                                    |  | $    | (918 | ) |  | $ | (13,502 | )    |  |  |  |  |  | $ | (1,830  | )
|Tender offer costs                                                                             |  | $                                |        |                                      |  | $    |     |   |  | $ | (1,000  | )    |  |  |  |  |  | $ |        |  
|Charges to investments
in and advances to
affiliates, accounts
and notes receivable,
and other |  | $                                |        |                                      |  | $    | (800 | ) |  | $ |        |      |  |  |  |  |  | $ | (16,098 | )

Gain on lease conversionUntil June 28, 2002, MeriStar had leased 47 hotels
from Winston Hotels, and managed 39 of these hotels. On June 30, 2002, the
leases were assigned to a subsidiary of Winston. As of September 30, 2002, we
continue to manage 38 of these hotels under five-year contracts, terminable on
the sale of an asset or for any reason after 12 months. MeriStar received
$15,850 of cash on June 30, 2002 and an additional $3,266 of cash as of July
31, 2002. Net assets of $2,116 were transferred to the subsidiary of Winston
and MeriStar wrote down $9,771 of goodwill and intangibles, resulting in a gain
of $7,229.

Merger costsDuring 2001, MeriStar mailed a proxy to its shareholders seeking
approval of a merger agreement with American Skiing Company, which the parties
subsequently mutually agreed to terminate. For the nine months ended September 30,
2001, $4,239 of expenses were incurred relating to the proposed merger.

During 2002, MeriStar incurred $4,296 related of costs related to the merger and
integration costs between Interstate and MeriStar. These costs include
professional fees, travel and other transition costs.

Restructuring expensesDuring 2001, MeriStar incurred $855 of restructuring
costs related to the proposed merger between MeriStar and American Skiing.
MeriStar also incurred $975 of restructuring costs related to closing several
underperforming corporate housing markets.

During the third quarter of 2002, in connection with the MeriStar-Interstate merger, we incurred
restructuring charges related to personnel changes primarily as a result of
relocation and elimination of certain job functions that are no longer needed
under the combined company. Restructuring costs also includes estimates for
non-cancelable lease costs associated with certain offices we plan to close.
The restructuring is expected to generate annual savings of approximately $8
million to $10 million.

15



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##### 



As a result of the restructuring, we recorded charges of $12,820 in the third
quarter of 2002. A detail of the costs comprising the
total charges is as follows:

|                                                                 |  |   |        | 
|---------------------------------------------------------------- |  | - | ------ | 
|Severance for former Interstate employees                        |  | $ | 10,470 | 
|Non-cancelable lease cost for former Interstate office locations |  |   | 2,350  | 
|                                                                 |  |   |        | 
|Total                                                            |  | $ | 12,820 | 
|                                                                 |  |   |        | 

During the third quarter of 2002, approximately $1,883 in severance was applied against the restructuring accrual.

Tender offer costsPrior to the merger, on April 11, 2002, Shaner Hotel Group
Limited Partnership commenced an unsolicited partial tender offer to purchase
2,465,322 shares of Interstates Class A Common Stock for $3.00 per share. The
tender offer was subject to various conditions, including redemption of
Interstates preferred stock purchase rights in accordance with Interstates
Shareholder Rights Agreement, or Shaner being satisfied that those rights did
not apply to the tender offer.

Prior to the commencement of the tender offer, Interstate received unsolicited
proposals from Shaner to combine its operations with Shaners. These proposals
also provided for Shaners purchase of a portion of shares of Interstates
common stock. Interstates board of directors unanimously voted to reject the
proposals.

On April 24, 2002, Interstates full board of directors and a Special Committee
of its independent directors concluded that the tender offer was financially
inadequate and was not in the best interests of Interstates stockholders.
Therefore, they unanimously recommended that Interstates stockholders reject
the tender offer and not tender their shares pursuant to the tender offer. The
tender offer expired on May 31, 2002.

We incurred approximately $1,000 of costs related to the tender offer
and the unsolicited proposals during the first six months of 2002. These costs are included in the accompanying consolidated
statement of operations.

Charges to investments in and advances to affiliates, accounts and notes
receivable, and otherDuring 2001, MeriStar recorded a charge in the amount of
$16,098 to record an allowance for accounts and notes receivables and to
write-off the remaining book values of impaired and abandoned assets.

11.     MERGER COSTS

Merger costs included in our statement of operations for the three- and
nine-month periods ended September 30, 2002 consist of the following:

|                                                   |       |   |                    |       |                    |   |       |       | 
|-------------------------------------------------- | ----- | - | ------------------ | ----- | ------------------ | - | ----- | ----- | 
|                                                   |       |   | Three months ended |       | Nine months ended 
|                                                   |       |   | September 30, 2002 |       | September 30, 2002
|                                                   |       |   |                    |       |                   
|Write-off of deferred financing fees               |       | $ | 1,241              |       |                    | $ | 2,464 |      
|Write-off of officer and employee notes receivable |       |   | 1,866              |       |                    |   | 1,866 |      
|Accelerated vesting of preferred stock             |       |   |                   |       |                    |   | 1,000 |      
|Integration costs                                  |       |   | 323                |       |                    |   | 323   |      
|                                                   |       |   |                    |       |                    |   |       |      
|                                                   | Total |   | $                  | 3,430 |                    |   | $     | 5,653 | 
|                                                   |       |   |                    |       |                    |   |       |      

16



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##### 



12.     INCOME TAXES

In the third quarter of 2002, we recorded a $9,040 valuation allowance
against our deferred tax assets to reduce our deferred tax assets to an
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.

Excluding the $9,040 valuation allowance, our income tax benefit would
have been $7,222 and $8,399 for the three and nine months ended September
30, 2002. Our effective tax rate would have been 42.3% and 33.8% for the
three and nine months ended September 30, 2002.

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Background

Formation of Interstate Hotels & Resorts

MeriStar Hotels & Resorts, Inc., or MeriStar, and Interstate Hotels
Corporation, or Interstate, entered into an Agreement and Plan of Merger, dated
May 1, 2002 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.

The merger included the following significant related transactions:



| |  | Interstates principal investor group agreed to convert their Series B preferred
stock and convertible notes into Class A common stock.                                                                                      
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Interstate repaid the outstanding balance on their promissory notes held by
Wyndham International, Inc. on July 30, 2002 and repaid the remaining principal
balance of their limited recourse mortgage note on July 31, 2002;
| 
| |  | We entered into a new $113 million senior credit agreement with a group of banks;                                                                                                                                            
| 
| |  | We converted MeriStars unsecured credit facility and term note with MeriStar
Hospitality Operating Partnership, or MHOP, to a term loan and repaid $3 million
under that loan; and                                          
| 
| |  | We effected a one-for-five reverse split of our common stock.                                                                                                                                                                

In accordance with generally accepted accounting principles, 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. The merger is accounted for as a
reverse acquisition with Interstate as the accounting acquirer and MeriStar as
the surviving company for legal purposes.

The consolidated interim financial statements for the three- and nine-month
periods ended September 30, 2002 and 2001, include the historical results of
operations of Interstate, the accounting acquiror. After the
MeriStar-Interstate merger on July 31, 2002, the financial statements include
the operating results of the combined entity, Interstate Hotels & Resorts, Inc.

Business Summary

The MeriStar-Interstate merger combined the two largest independent hotel
management companies in the United States, measured by number of rooms under
management. We manage and operate a portfolio of hospitality properties and
provide related services in the hotel, corporate housing, resort, conference
center, and golf markets. 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 September 30, 2002, we managed 401 hotels with 85,587 rooms in 45 states,
the District of Columbia, Canada, and Russia. We own one of these
properties, and have non-controlling equity interests in 25 of these hotels.
In addition, at September 30, 2002, we had 3,485 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, one of our
directors 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 108 hotels 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). We also

17



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provide each other with certain services including administrative, renovation
supervision, corporate, accounting, finance, risk management, legal, tax,
information technology, human resources, acquisition identification and
diligence and operational services.

The sluggish economy and delays and difficulties in travel due to heightened
security measures at airports continue to have a major impact on our operating
results. Since the slowdown of the economy over the past 18 months,
accelerated by the terrorist attacks on September 11, 2001, our managed hotels
have experienced significant short-term declines in occupancy. Weaker hotel
performance has caused reduced management fees and also gives rise to
additional losses under minority investments that were made in connection with
hotels that we manage. The overall weak economy has also negatively impacted
the demand for corporate relocations and long-term assignments, two primary
drivers of our corporate housing operations. 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

Historically, MeriStar has had close operating, management and governance
relationships with MeriStar Hospitality Corporation, the owner of 108 hotel
properties. We manage all of MeriStar Hospitalitys hotel properties under
long-term management contracts. We have shared several key management
personnel with MeriStar Hospitality, and their board of directors has four
members who also serve on MeriStar Hospitalitys board of directors. Due to
the merger of MeriStar and Interstate and our resulting increased scale and
size, we and MeriStar Hospitality plan to separate more completely the
management teams of the two companies. This separation of management will
eliminate all but one shared management position between the two companies. It
will allow each company to provide additional, dedicated resources for the
management of each respective company. Paul W. Whetsell will remain Chairman
and Chief Executive Officer of both companies, but we do not expect any other
management positions to be shared between the companies. This plan to further
separate the management teams will mainly affect the legal, finance and
accounting, and development departments. On November 4, 2002, MeriStar
Hospitality announced that Donald D. Olinger will join their company as chief
financial officer in December. John Emery previously performed the duties of
chief financial officer for MeriStar Hospitality. On November 5, 2002, it was
announced that John Emery, MeriStar Hospitalitys president and chief operating
officer, would resign from those positions. Mr. Emery will continue to serve
as our president and chief operating officer. Mr. Olinger will also serve as
MeriStar Hospitalitys chief accounting officer. James A. Calder, their
current accounting officer, will resign from that position. Mr. Calder will
continue to serve as our chief financial officer. We expect to complete the
separation of all other management positions by the first quarter of 2003.

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 the Companys consolidated
financial statements relate to:



| |  |  | the evaluation of impairment of certain long-lived assets;                                                         
| | - |  | -------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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                                                                                                
|
| |  |  | insurance receivables and reserves                                                                                 

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 (intangibles 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 did not recognize any impairment losses in accordance with SFAS
No. 144 in 2002 or 2001.

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

18



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##### 





| | 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.                                                                                                                                    
|
| | 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.                                                                  

In accordance with FASB Statement No. 142, Goodwill and Other Intangible
Assets, at least annually, we perform an analysis to determine the impairment
of goodwill and intangible assets (with indefinite lives) carrying values. To
test intangible assets with indefinite lives for impairment, we perform an
analysis to compare the fair value of the intangible asset to its carrying
value. We make estimates of the fair value of the intangible asset using
discounted cash flows from the expected future operations of the assets. If
the analysis indicates that the fair value is less than the carrying value, the
asset is written down to the estimated fair value and an impairment loss is
recognized. 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 on intangible
assets are recorded as operating expenses. We did not recognize any impairment losses
on intangible assets in 2002 or 2001.

We make estimates of the undiscounted cash flows from the expected future
operations of the asset. In projecting the expected future operations of the
asset, we base our estimates on projected amounts of future earnings before
interest expense, income taxes, depreciation and amortization, or EBITDA. We
use growth assumptions to project these estimated future EBITDA amounts out
over the expected life of the underlying asset. Our impairment analysis
considers various factors, such as the current operating performance of the
underlying assets, our future forecast for operations, funding requirements or
obligations we may have to an affiliate, and the estimated fair value of our
investment based on liquidation preferences and priorities within an affiliate
ownership structure.

In 2001, we formed two limited partnerships (FCH/IHC Hotels, L.P. and
FCH/IHC Leasing, L.P.) with FelCor Lodging Trust. These partnerships
own eight mid-scale hotels, and we manage those eight hotels. The
partnership entities are owned 50% by FelCor and 50% by us. These hotels
are located in Atlanta, Georgia (2 hotels); Dallas, Texas (1 hotel);
Houston, Texas (4 hotels); and Scottsdale, Arizona (1 hotel). The
partnerships business plan calls for the renovation of the hotels
through an extensive capital expenditure program. To-date, the
partnerships have spent approximately $8.5 million in connection with
this capital expenditure program. Because of the renovation program,
the hotel portfolio has had approximately 3.3% of its rooms out of
service in 2002. As a result of the rooms out of service and the
weaker-than-expected economic conditions in the hotels markets, the
operating results of the hotels are lower than what we originally
forecasted when we formed the partnerships with FelCor. In addition, we
are in discussions with FelCor about the possible restructuring of the
partnership and future commitments of the partners. We cannot currently
predict the ultimate outcome of those discussions. We will continue to
monitor on a quarterly basis the performance of the partnerships
hotels, and review the carrying value of our investment in relation to
the estimated fair value of the underlying hotel assets. If a review in
a future period shows that our investment carrying value exceeds the
estimated fair value, then we would record an impairment loss to reduce
the carrying value of our investment to the estimated fair value.

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. In the third quarter of 2002, we recorded a $9.0 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. We also might determine that we
would be able to realize all or part of the deferred tax assets covered by the
existing valuation allowance; if that occurred, we would record a credit to the
income tax provision in that period.

19



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##### 



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 customers ability and willingness 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.

Restructuring and Other Accruals

During the third quarter of 2002, weve recorded restructuring charges of $12.8
million in conjunction with the MeriStar-Interstate merger. This charge
includes estimated severance costs for Interstate employees whose positions have been
relocated or eliminated and estimates on non-cancelable lease costs at certain Interstate
offices which will be closed down. We accrued the total estimated cost of the
restructuring at the time the plans were finalized and communicated to our
employees. These estimates require our judgment as to the outcome of net lease
costs. If actual results differ from our estimates, we will be required to
adjust our financial statements when we identify the differences.

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 accumulated other comprehensive income (loss) 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. Effective October 1, 2002, we entered
into an interest rate swap agreement with a fair value of $0.2 million.

Revenue Recognition

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

Through the second quarter of 2002, we had recorded incentive management fees
in accordance with Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements, and Method No. 2 of Emerging Issues Task Force or EITF
Topic No. D-96, Accounting for Management Fees Based on a Formula in which
incentive management fees are accrued as earned based on the profitability of
the hotel, subject to the specific terms of each individual management
agreement. The application of Method No. 2 resulted in the accrual of
incentive management fees during interim reporting periods throughout the
annual measurement period. The accrual would be reduced or eliminated in
subsequent interim reporting periods if the profitability of the hotel missed
performance thresholds later in the annual measurement period. 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 the third quarter of 2002, with an effective date of January 1, 2002, we
will record 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 in our circumstances
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.

The effect of this change in accounting method results in a cumulative
adjustment of $3,050 that reduces incentive management fees recognized during
the first and second quarter of 2002. The effect of the change on the first
quarter of 2002 was to increase the net loss available to common
shareholders by $1,396 ($0.26 per share) to a
net loss available to common
shareholders of $1,685 ($0.32 per share); the effect of the change on the second
quarter of 2002 was to increase the net loss available to common
shareholders by $1,654 ($0.29 per share) to a
net loss available to common
shareholders of $14,318 ($2.55 per share); 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.

Insurance Receivables and Reserves

We earn insurance revenues through reinsurance premiums, direct premiums
written and reinsurance premiums ceded. Reinsurance premiums are recognized
when policies are written and any unearned portions of the premium are
recognized to account for the unexpired term of the policy. Direct premiums
written are recognized in accordance with the underlying policy and reinsurance
premiums ceded are recognized on a pro-rata basis over the life of the related
policies. Losses, at present value, are provided for reported claims, claims
incurred but not reported and claims settlement expenses. Claims incurred but
not reported are estimated based on historical experience and other various
factors that are believed to be reasonable under the circumstances. Actual
liabilities may differ from estimated amounts and any changes in estimated
losses ad settlements are reflected in current earnings.

20



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Results of Operations

Three Months Ended September 30, 2002 Compared with Three Months Ended
September 30, 2001

Revenues

We earn revenue from hotel management contracts and related services, corporate
housing operations and one 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.

Our revenue from our corporate housing segment consists of fees received for
our accommodations along with specialized services we offer. The length of a
guests stay can range from a few nights to more than a year, with the typical
stay ranging from 30 to 45 days. We lease substantially all of our corporate
housing accommodations through flexible, short-term leasing arrangements in
order to match our supply of accommodations with client demand.

In connection with FASB issued topic D-103, Income Statement Characterization
of Reimbursements for Out-of Pocket Expenses Incurred, we have reported
revenue and expenses from managed properties in our reported results beginning
January 1, 2002. These amounts relate primarily to payroll costs at the
managed properties where we are the employer, and the reimbursement to us for
those costs. The 2001 revenue and expenses have been reclassified to conform
to the 2002 presentation.

The following table shows the operating statistics for our managed hotels on a
same store basis for the three months ended September 30:

|                           |  |      |       |      |  |        |       |   |  |   |       |  
|-------------------------- |  | ---- | ----- | ---- |  | ------ | ----- | - |  | - | ----- | -
|                           |  | 2002 |       | 2001 |  | Change
|                           |  |      |       |      |  |       
|Revenue per available room |  | $    | 63.75 |      |  | $      | 64.42 |   |  | $ | (0.67 | )
|Average daily rate         |  | $    | 94.63 |      |  | $      | 98.16 |   |  | $ | (3.53 | )
|Occupancy                  |  |      | 67.4  | %    |  |        | 65.6  | % |  |   | 2.7   | %

Prior to the MeriStar-Interstate merger on July 31, 2002, we managed 141 hotels
with 29,752 rooms. Subsequent to the merger, we manage 401 hotels with 85,587
rooms.

Our total revenue increased $121.7 million to $199.6 million in the third
quarter of 2002 compared to $77.9 million in the third quarter of 2001. Major
components of this increase were:



| |  |  | Corporate housing revenue of $19.8 million is included in the results of operations
beginning August 1, 2002 as a result of the merger between Interstate
and MeriStar on July 31, 2002.                                                                                                                                                                                                            
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Revenue from management fees and other fees increased $6.9
million, from $8.8 million in the third quarter 2001 to $15.7 million
in the third quarter 2002. This increase is a due to the increase in
number of managed hotels resulting from the merger between Interstate
and MeriStar on July 31, 2002.                                                                                          
|
| |  |  | Other revenues from managed hotels (consisting of payroll and
related costs reimbursed to us by the hotels we manage) increased
$95.5 million, from $67.8 million in the third quarter 2001 to $163.3
million in the third quarter 2002, of which $93.8 million is due to
the increase in operations resulting from the merger between
Interstate and MeriStar on July 31, 2002; partially offset by
|
| |  |  | Lodging revenues consist of rooms, food and beverage and other
department revenues from the Pittsburgh Airport Residence Inn by
Marriott. These lodging revenues decreased $0.4 million, from $1.2
million in the third quarter 2001 to $0.8 in the third quarter 2002,
resulting from the decrease in revenue per available room in this
property for the periods presented.                       

21



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Operating Expenses by department

Total operating expenses by department increased $15.0 million, to $15.9
million for the third quarter of 2002 compared to $0.9 million for the third
quarter of 2001. Factors primarily affecting the increase were:



| |  |  | Corporate housing expenses of $15.3 million are included in the results of operations
beginning on August 1, 2002 after the merger between Interstate
and MeriStar on July 31, 2002; partially offset by                                                                                          
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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 decreased $0.3
million, which is a direct result of the decrease 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 costs; and             
|
| |  |  | restructuring expenses.       

Total undistributed operating expenses increased $25.2 million to $35.1 million
for the third quarter of 2002 compared to $9.9 for the third quarter of 2001.
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 operations management, sales and marketing, finance,
information technology support, human resources and other support
services, as well as general corporate expenses. Administrative and
general expenses increased by $7.5 million from $7.3 million in the
third quarter of 2001 to $14.8 million in the third quarter of 2002.
An increase of $8.5 million is attributable to the increase in
expenses resulting from the merger of Interstate and MeriStar on July
31, 2002. This is offset by a decrease of $1.0 million attributable
to cost containment initiatives relating to business travel and
relocation and development.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Depreciation and amortization expense increased by $1.3 million from
$2.7 million in the third quarter of 2001 to $4.0 million in the third
quarter of 2002. This increase is due to the acquisition of certain
depreciable and amortizable assets in conjunction with the merger on
July 31, 2002, including management contracts, franchise fees and
deferred financing fees.                                                                                                                                                                                                                                                                                                                                                                                                                     
| 
| |  | Merger costs are $3.4 million for the third quarter of 2002. Merger
costs consists of the write off of $1.2 million of deferred financing
fees related to the repayment and retirement of the Lehman senior
credit facility and the repayment of the limited recourse mortgage
note. Also included in merger costs is a $1.9 million charge for the
forgiveness of certain employee and officer notes receivables. The
remaining $0.3 million are integration costs incurred in connection
with the merger.                                                                                                                                                                                                                                                                                         
| 
| |  | Restructuring costs are $12.8 million in the third quarter of 2002.
Restructuring costs consist of $10.5 million of estimated severance
costs to be paid to Interstate employees whose positions are being relocated or
eliminated as a result of the merger. The remaining $2.3 million of
restructuring costs are estimates of noncancelable lease costs in
certain Interstate offices that we intend to close as a result of the merger.                                                                                                                                                                                                                                                                                                                                                         

Other expenses from managed properties

In connection with EITF No. 01-14, Income Statement Characterization of
Reimbursements for Out-of-Pocket Expenses Incurred, we have reported results
beginning January 1, 2002. These amounts relate primarily to payroll costs at
the managed properties where we are the employer, and the reimbursement to us
for those costs. The 2001 revenue and expenses have been reclassified to
conform to the 2002 presentation. These costs increased by $95.5 million to
$163.3 million in the third quarter of 2002 from $67.8 million in the third
quarter 2001, of which $93.8 million is due to the increase in operations
resulting from the merger between Interstate and MeriStar on July 31, 2002.

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

Earnings (loss) before interest, taxes, depreciation and amortization decreased
$12.6 million to $(10.7) million in the third quarter of 2002 from $1.9 million
in the third quarter of 2001. Major components of this increase were:



| |  |  | Corporate housing
segments EBITDA of $0.7 million is included in the results of operations beginning on August 1, 2002 after the merger
between Interstate and MeriStar on July 31, 2002.                                                                     
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Hotel management segments EBITDA increased by $3.7 million to $4.9 million in the third quarter of 2002 from $1.2 million
in the third quarter of 2001 due to increase in operation subsequent to the merger between Interstate and MeriStar on July
31, 2002.

22



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| |  |  | The remaining EBITDA decreased by $16.3 million due to the merger and restructuring costs described above.
| | - |  | ----------------------------------------------------------------------------------------------------------

Net loss available to common shareholders

Net loss available to common shareholders increased
$15.0 million to a $19.4
million in the third quarter of 2002 from $4.4 million in the third quarter of
2001. This increase is due to the decrease of $12.6 million of EBITDA and the
increase of $1.3 million in depreciation and amortization expense as discussed
above. The following contributed to the remainder of the increase:



| |  |  | Interest expense increased $1.0 million to $1.6 million in
the third quarter of 2002 from $0.6 million in the third
quarter of 2001 due to the increase in outstanding debt
during those periods.                                                                                                                                                                                   
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Income tax expense increased by $4.6 million to $1.8
million in the third quarter of 2002 from a benefit of
$(2.8) million in the third quarter of 2001. In 2002,
following the MeriStar-Interstate merger, we recorded
$9.0 million of income tax expense as a valuation
allowance on certain of our deferred tax assets that are
not anticipated to be realized in future periods.
|

These increases are offset by:



| |  |  | Equity in loss of affiliates decreased $1.5 million to
$1.1 million in the third quarter of 2002 from $2.6
million in the third quarter of 2001. These losses
consist of our proportionate share of the losses incurred
through our non-controlling equity investments in various
hotels. During 2001 and 2002, theses losses were incurred
by the hotels due to the weakness in the U.S. economy and
significant declines in occupancy. Future adverse changes
in the hospitality and lodging industry market conditions
or poor operating results of the underlying investments
could result in future losses or an inability to recover
the carrying value of these investments. During 2001,
our 10% non-controlling equity interest in Interconn Ponte
Verde Company, L.L.C. was written to zero after recording
our proportionate share of the losses incurred by that
entity. Thereafter, we no longer record equity in losses from this investment. This contributed to the decrease in losses from
2001 to 2002.         
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We incurred a loss on impairment of investments of hotel
real estate in the third quarter of 2001 of $3.0 million.
This loss represents a non-cash impairment charge related
to our 20% non-controlling equity interest in a
partnership that owns the Renaissance Worldgate Hotel in
Kissimmee, Florida. The impairment loss was a result of
the impairment of the future profitability of this hotel.
Since the acquisition in the fourth quarter of 2000, the
hotel had experienced lower than expected operating cash
flows, primarily due to the decreased occupancy rates and
average daily room rates that affected this hotel and the
Orlando lodging market in general. In addition, the
weakness in the U.S. economy during 2001 coupled with the
severe downturn in the Florida lodging market after the
September 11th terrorist attacks had resulted in
significant financial difficulties for the hotel. As a
result, the hotel was unable to satisfy debt service
obligations, which resulted in mortgage defaults.

Nine Months Ended September 30, 2002 Compared with Nine Months Ended September
30, 2001

Revenues

The following table shows the operating statistics for our managed hotels on a
same store basis for the nine months ended September 30:

|                           |  |      |       |      |  |        |        |   |  |   |       |  
|-------------------------- |  | ---- | ----- | ---- |  | ------ | ------ | - |  | - | ----- | -
|                           |  | 2002 |       | 2001 |  | Change
|                           |  |      |       |      |  |       
|Revenue per available room |  | $    | 66.42 |      |  | $      | 70.04  |   |  | $ | (3.62 | )
|Average daily rate         |  | $    | 97.29 |      |  | $      | 103.24 |   |  | $ | (5.95 | )
|Occupancy                  |  |      | 68.3  | %    |  |        | 67.8   | % |  |   | 0.1   | %

Prior to the merger on July 31, 2002, Interstate Hotels Corporation managed 141
hotels with 29,752 rooms. Subsequent to the merger, on September 30, 2002 we
manage 401 hotels with 85,587 rooms.

Our total revenue increased $112.7 million to
$353.8 million for the nine
months ended September 30, 2002 compared to $241.1 million for the same period
2001. Major components of this increase were:



| |  | Corporate housing revenue of $19.8 million is included in the
results of operations beginning August 1, 2002 as a result of the merger between
Interstate and MeriStar on July 31, 2002.                                                                                                                                                             
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Revenue from management fees
and other increased $4.3 million, from
$29.7 million for the first nine months of 2001 to $34.0 million for
the first nine months of 2002. The majority of this increase, $6.0
million, is a due to the increase in number of managed hotels
resulting from the merger between Interstate and MeriStar on July 31,
2002.

23



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##### 



|  |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Other revenues from managed hotels (consisting of payroll and related
costs reimbursed to us by the hotels we manage) increased $90.0
million, from $207.7 million in the first nine months of 2001 to
$297.7 million in the same period 2002, of which $93.8 million is due
to the increase on in operations resulting from the merger between
Interstate and MeriStar on July 31, 2002; partially offset by
| 
| |  | Lodging revenues consist of rooms, food and beverage and other
department revenues from the Pittsburgh Airport Residence Inn by
Marriott. These revenues decreased $1.4 million, from $3.7 million
for the first nine months of 2001 to $2.3 million for the first nine
months of 2002, resulting from the decrease revenue per available room
in this property for the periods presented.                   

Operating expenses by department

Total operating expenses by department increased $14.3 million; to $16.9
million for nine months ended September 30, 2002 compared to $2.6 million for
nine months ended September 30, 2001. Factors primarily affecting the increase
were:



| |  | Corporate housing
expenses of $15.3 million are included in the results of
operations beginning on August 1, 2002
after the merger between Interstate and
MeriStar on July 31, 2002; partially
offset by                                                                                   
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Lodging expenses consist of rooms, food
and beverage, other department expenses
and property operating costs from the
Pittsburgh Airport Residence Inn by
Marriott. This decreased of $1.0 million,
which is a direct result of the decrease
in revenue from this hotel as described
above.

Undistributed operating expenses

Undistributed operating expenses include the following items:



| |  | administrative and general;  
|- |  | -----------------------------
| 
| |  | depreciation andamortization;
| 
| |  | merger costs;                
| 
| |  | restructuring expenses; and  
| 
| |  | tender offer costs           

Total undistributed operating expenses increased $26.7 million to $58.6 million
for the nine months ended September 30, 2002 compared to $31.9 for the nine
months ended September 30, 2001. 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 operations management, sales and marketing, finance,
information technology support, human resources and other support
services, as well as general corporate expenses. Administrative and
general increased by $6.2 million. An increase of $8.5 million is
attributable to the increase in expenses resulting from the merger of
Interstate and MeriStar on July 31, 2002. This is offset by a
decrease of $2.3 million attributable to cost containment initiatives
relating to business travel and relocation and development.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Depreciation and amortization expense increased by $1.0 million. This
increase is primarily due to the acquisition of certain depreciable
and amortizable assets in conjunction with the merger on July 31, 2002,
including management contracts, franchise fees and deferred financing
fees.                                                                                                                                                                                                                                                                                                                                                                                                 
| 
| |  | Merger costs are $5.7 million for the nine months ended September 30,
2002. Merger costs consist of the write off of $2.4 million of
deferred financing fees related to the repayment and retirement of the
Lehman senior credit facility and the repayment of the limited
recourse mortgage note. Also included in merger costs is a $1.9
million charge for the forgiveness of certain employee and officer
notes receivables, and a $1.0 million charge relating to the
accelerated vesting of preferred stock. The remaining $0.3 million
are integration costs incurred in connection with the merger.                                                                                   
| 
| |  | Restructuring costs are $12.8 million in the third quarter of 2002.
Restructuring costs consist of $10.5 million of estimated severance
costs to be paid to Interstate employees whose positions are being relocated or
eliminated as a result of the merger. The remaining $2.3 million of
restructuring costs are estimates of noncancelable lease costs in
certain Interstate offices that we intend to close as a result of the merger.                                                                                                                                                                                                                                                   
| 
| |  | Tender offer costs represent 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
(Shaner) 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.                                                                                                                                                                                                                                       

Other expenses from managed properties

In connection with EITF No. 01-14, Income Statement Characterization of
Reimbursements for Out-of-Pocket Expenses Incurred, we have reported results
beginning January 1, 2002. These amounts relate primarily to payroll costs at
the managed properties where

24



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##### 



we are the employer, and the reimbursement to us for those costs. The 2001
revenue and expenses have been reclassified to conform to the 2002
presentation. These costs increased by $90.0 million to $297.7 million for the
nine months ended September 30, 2002 from $207.7 million for the nine months
ended September 30, 2001, of which $93.8 million is due to the increase on in
operations resulting from the merger between Interstate and MeriStar on July
31, 2002.

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

Earnings (loss) before interest, taxes, depreciation and amortization or EBITDA
decreased $17.2 million to $(10.3) million for the nine months ended September
30, 2002 from $6.9 million for the nine months ended September 30, 2001. Major
components of this increase were:



| |  |  | Corporate housing
segments EBITDA of $0.7 million is included in
the results of operations beginning on August 1, 2002 after the
merger between Interstate and MeriStar on July 31, 2002.                                                                                                                            
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Hotel management segments EBITDA increased by $1.5 million to
$8.4 million for the nine months ended September 30, 2002 from $6.9
million for the nine months ended September 30, 2001. This increase
is due to the increase in operations subsequent to the merger between
Interstate and MeriStar on July 31, 2002.
|
| |  |  | The remaining EBITDA decreased by $19.5 due to the merger,
restructuring costs and tender offer described above.                                                                                                                                                                                                      

Net loss available to common shareholders

Net loss increased $30.5 million to a $35.4 million for the nine months ended
September 30, 2002 from $4.9 million for the nine months ended September 30,
2001. This increase is due to the decrease of $17.2 million of EBITDA and the
increase of $1.0 million in depreciation and amortization expense as discussed
above. The following contributed to the remainder of the increase:



| |  |  | Interest expense increased $2.7 million to $3.5 million for the
nine months ended September 30, 2002 from $0.8 million for the nine
months ended September 30, 2001 due to the increase in outstanding
debt during those periods.                                                                                                                                                                                                     
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Income tax expense increased by $3.5 million to $0.6 million
for the nine months ended September 30, 2002 from a benefit of $(2.9)
million for the nine months ended September 30, 2001. In third
quarter of 2002, we recorded $9.0 million of income tax expense as a
valuation allowance on certain deferred tax assets that are not
anticipated to be realized in future periods.                                                  
|
| |  |  | We recorded a $9.3 million charge related to the conversion of
a portion of Interstates Investor Notes and Preferred Stock on June
26, 2002. We paid the investor an incentive payment of $9.3 million
and issued the investor an aggregate of 5,939,140 shares of Class A
Common Stock. In addition, three members of senior management
converted their preferred stock into an aggregate of 562,500 shares
of Class A Common Stock.

These increases are offset by:



| |  |  | Equity in loss of affiliates decreased $0.5 million to $1.7
million in the nine months ended September 30, 2002 from $2.2 million
in the same period in 2001. These losses consist of our
proportionate share of the losses incurred through our
non-controlling equity investments in various hotels. During 2001
and 2002, theses losses were incurred by the hotels due to the
weakness in the U.S. economy and significant declines in occupancy.
Future adverse changes in the hospitality and lodging industry market
conditions or poor operating results of the underlying investments
could result in future losses or an inability to recover the carrying
value of these investments. During 2001, our 10% non-controlling
equity interest in Interconn Ponte Verde Company, L.L.C. was written
to zero after recording our proportionate share of the losses
incurred by that entity. Thereafter, we no longer record equity in losses from this investment.
This contributed to the decrease in losses from 2001 to 2002.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We incurred a loss on impairment of investments of hotel real
estate in the third quarter of 2001 of $3.0 million. This loss
represents a non-cash impairment charge related to our 20%
non-controlling equity interest in a partnership that owns the
Renaissance Worldgate Hotel in Kissimmee, Florida. The impairment
loss was a result of the impairment of the future profitability of
this hotel. Since the acquisition in the fourth quarter of 2000, the
hotels had experienced lower than expected operating cash flows,
primarily due to the decreased occupancy rates and average daily room
rates that affected this hotel and the Orlando lodging market in
general. In addition, the weakness in the U.S. economy during 2001
coupled with the severe downturn in the Florida lodging market after
the September 11th terrorist attacks had resulted in significant
financial difficulties for the hotel. As a result, the hotels were
unable to satisfy debt service obligations, which resulted in
mortgage defaults. 

25



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##### 



LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Working CapitalWe had $12.9 million of cash and cash equivalent assets at
September 30, 2002 compared to $39.0 million at December 31, 2001, and working
capital (current assets less current liabilities) of $(11.7) million at
September 30, 2002 compared to $33.1 million at December 31, 2001. This
decrease in working capital of $44.8 million resulted primarily from the
accounts payable and accrued liabilities assumed as a result of the merger and
the decrease in cash as a result of the payment of the $9.3 million conversion
incentive to the principal investor group, the repayment of the Wyndham
redemption notes and the payment of the limited recourse mortgage note. This
is partially offset by the accounts receivable purchased as a result of the
merger.

Operating ActivitiesOur net cash used in operating activities was $8.2 million
during the nine months ended September 30, 2002 compared to $6.4 million during
the same period of 2001. The increase of $1.8 million resulted primarily from a
decrease in operating income (adjusted for non-cash items) of $8.1 million and
offset by a decrease of $9.4 million in cash used in changes in assets and
liabilities, primarily as a result of the payment of accrued rent and other
current liabilities in the six-month period of 2001 associated with 75 hotels
that were previously leased. These leases were terminated on January 1, 2001.

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 could negatively
impact our cash flows from operations and net income.

Investing ActivitiesOur net cash used in investing activities was $3.8 million
during the nine months ended September 30, 2002 compared to net cash used in
investing activities of $0 million during the nine months ended September 30,
2001. During the nine-month period of 2002, we paid merger-related acquisition
costs of approximately $3.5 million. During the nine-month period of 2001, we
invested $8.7 million for a 50% non-controlling equity interest in eight
hotels.

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.  
|
| |  |  | 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. CGLH Partners I and CGLH Partners II are,
collectively, our largest shareholder. They have 5 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 in discussions to possibly establish a new joint venture to acquire
hotel properties that we would then manage. The amount and timing of our
investment, if any, in such an entity has not yet been determined.

26



---



##### 



Financing ActivitiesOur net cash used in financing activities was $14.1
million during the nine months ended September 30, 2002 compared to net $7.9
million during the nine months ended September 30, 2001. This decline was due
primarily to the following:



| |  |  | $9.3 million payment to induce conversion of the Series B preferred stock and the convertible notes.
| | - |  | ----------------------------------------------------------------------------------------------------
|
| |  |  | $4.5 million of repayments of long-term debt to Wyndham.                                            
|
| |  |  | $1.4 million of repayments on a limited recourse mortgage note.                                     

We are required to distribute 1.6627% of cash flows from the operations of
Interstate Hotels, LLC, one of our operating subsidiaries, to Wyndham based on
Wyndhams common interest in that entity The net distribution payable to
Wyndham through September 30, 2002 approximated $0.2 million.

Senior Credit AgreementEffective July 31, 2002 in connection with the closing
with the MeriStar-Interstate merger, we entered into a $113 million senior
credit agreement with a group of banks. The senior credit agreement consists
of a $65 million term loan due on July 31, 2005 and a $48 million revolving
credit facility due on July 31, 2005 (with a one-year renewal at our option).
The interest rate on the senior credit agreement will be 30-day 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. As September 30, 2002, borrowings under the senior
credit agreement bore interest at a rate of 5.8125% per annum. We incurred
$0.8 million of interest expense on the senior credit agreement for the three and
nine months ending September 30, 2002. As of November 13, 2002, the total
availability under our senior credit agreement was $36 million.

Liquidity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. We expect to continue to seek acquisitions of hotel management
businesses and management contracts. We expect to finance future acquisitions
through a combination of additional borrowings under our credit facility and
the issuance of equity instruments (that is, common stock or operating
partnership units). We believe these sources of capital will be sufficient to
provide for our long-term capital needs.

Contractual Obligations and Maturities of Indebtedness

The following table summarizes our contractual obligations at September 30,
2002 and the effect that those obligations are expected to have on our
liquidity and cash flows in future periods (amounts in thousands):

|               |  |                 |        |           |  |            |        |                |  |       |       |  |  |   |        |  |  |   |         | 
|-------------- |  | --------------- | ------ | --------- |  | ---------- | ------ | -------------- |  | ----- | ----- |  |  | - | ------ |  |  | - | ------- | 
|               |  | Senior          |        | MHOP      |  | Promissory |        | Non-cancelable |  |       |       | 
|               |  | Credit Facility |        | Term Loan |  | Note       |        | leases         |  | Total
|               |  |                 |        |           |  |            |        |                |  |      
|2002           |  | $               |       |           |  | $          |       |                |  | $     |      |  |  | $ | 24,081 |  |  | $ | 24,081  | 
|2003           |  |                 | 1,625  |           |  |            |       |                |  |       |      |  |  |   | 6,659  |  |  |   | 8,284   | 
|2004           |  |                 | 1,625  |           |  |            |       |                |  |       |      |  |  |   | 5,479  |  |  |   | 7,104   | 
|2005           |  |                 | 61,750 |           |  |            |       |                |  |       |      |  |  |   | 5,115  |  |  |   | 66,865  | 
|2006           |  |                 | 12,000 |           |  |            |       |                |  |       |      |  |  |   | 4,030  |  |  |   | 16,030  | 
|2007           |  |                 |       |           |  |            | 56,069 |                |  |       |      |  |  |   | 3,022  |  |  |   | 59,091  | 
|and thereafter |  |                 |       |           |  |            |       |                |  |       | 4,170 |  |  |   | 16,111 |  |  |   | 20,281  | 
|               |  |                 |        |           |  |            |        |                |  |       |       |  |  |   |        |  |  |   |         | 
|Total          |  | $               | 77,000 |           |  | $          | 56,069 |                |  | $     | 4,170 |  |  | $ | 64,497 |  |  | $ | 201,736 | 
|               |  |                 |        |           |  |            |        |                |  |       |       |  |  |   |        |  |  |   |         | 

Long-Term Debt:For principal repayment and debt service obligations with
respect to our long-term debt, see note 8 to our condensed consolidated
financial statements.

Lease Commitments:We have entered into leases of office space and various
pieces of equipment. The leases expire at varying times through 2005.

Management Agreement Commitments:Under the provisions of management agreements
with certain hotel owners, we have outstanding commitments to provide an
aggregate of $4.1 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 five hotel real estate limited partnerships
and limited liability companies.

27



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##### 



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. At September 30,
2002, we had borrowings of $77 million outstanding on the facility. Interest
on the debt is variable, based on the 30-day London Interbank Offered Rate plus
400 basis points. The weighted average effective interest rate was 5.81% at
September 30, 2002. We have determined that the fair value of the debt
approximates its carrying value.

Our $56 million of long-term debt under the MHOP term loan matures July 31,
2007. Interest on the debt is variable, based on the 30-day London Interbank
Offered Rate plus 650 basis points. The weighted average effective interest
rate was 8.32% at September 30, 2002. We have determined that the fair value
of the debt approximates its carrying value.

A 1.0% change in the 30-day London Interbank Offered Rate would have changed
our interest expense by approximately $0.3 million during the three months ended
September 30, 2002 and $1.03 million during the nine months ended September 30,
2002.

In October 2002, we entered into a $30 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
was $0.2 million at October 1, 2002.

Our international operations are subject to foreign exchange rate fluctuations.
We derived approximately 3% of our revenue for the three and nine
months ended September 30, 2002 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 and nine months
ended September 30, 2002. To date, since most of our foreign operations have
been largely self-contained 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 accounting
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 accounting 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
N/A

29



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##### 



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 Interstate
Hotels & Resorts. Based on currently available facts, we believe that the
disposition of matters pending or asserted will not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity.

ITEM 2. CHANGES IN SECURITIES

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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our annual meeting of the stockholders was held on July 31, 2002.

At that meeting, the following matters were submitted to a vote of our
stockholders:

ITEM No. 1

To approve and adopt the merger agreement between MeriStar and Interstate and
the transactions contemplated by it.

|        |  |  |            | 
|------- |  |  | ---------- | 
|For     |  |  | 28,270,222 | 
|Against |  |  | 903,031    | 

ITEM No. 2

To approve the issuance of shares of MeriStar common stock in connection with
the merger.

|        |  |  |            | 
|------- |  |  | ---------- | 
|For     |  |  | 28,265,995 | 
|Against |  |  | 907,898    | 

ITEM No. 3

To elect 13 members of the new Board of Directors to serve for staggered terms
expiring at the Annual Meetings in 2003, 2004 and 2005.

|                            |  |     |            |         |  |  |           | 
|--------------------------- |  | --- | ---------- | ------- |  |  | --------- | 
|Election of Directors       |  | For |            | Against
|Karim J. Albhai (2003)      |  |     | 28,310,162 |         |  |  | 17,665    | 
|Joseph J. Flannery (2003)   |  |     | 28,310,262 |         |  |  | 17,665    | 
|Raymon C. Mikulich (2003)   |  |     | 25,761,601 |         |  |  | 2,566,226 | 
|Mahmood J. Khimji (2003)    |  |     | 28,309,595 |         |  |  | 18,232    | 
|Sherwood M. Weiser (2003)   |  |     | 25,757,959 |         |  |  | 2,569,868 | 
|Steven D. Jorns (2004)      |  |     | 25,600,411 |         |  |  | 2,727,416 | 
|James B. McCurry (2004)     |  |     | 25,758,858 |         |  |  | 2,568,969 | 
|John J. Russell, Jr. (2004) |  |     | 28,304,290 |         |  |  | 23,537    | 
|Leslie R. Doggett (2004)    |  |     | 25,755,318 |         |  |  | 2,572,509 | 
|Paul W. Whetsell (2005)     |  |     | 28,318,769 |         |  |  | 9,058     | 
|Thomas F. Hewitt (2005)     |  |     | 25,757,959 |         |  |  | 2,569,868 | 
|John Emery (2005)           |  |     | 28,301,344 |         |  |  | 26,483    | 
|J. Taylor Crandall (2005)   |  |     | 28,311,095 |         |  |  | 16,732    | 

ITEM No. 4

To amend our certificate of incorporation and bylaws, as provided in the merger
agreement, which amendments provide for the changing of the name of MeriStar to
Interstate Hotels & Resorts, Inc., fixing the size of the board of directors
of the combined company at 13 for the next 18 months, insuring the nomination
of the slate of directors proposed in the joint proxy statement and

30



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##### 



prospectus at all the stockholder meetings during the next 18 months and
increasing the authorized number of shares of capital stock to 255 million, of
which 250 million shares will be common stock and 5 million shares will be
preferred stock.

|        |  |  |            | 
|------- |  |  | ---------- | 
|For     |  |  | 28,043,998 | 
|Against |  |  | 1,122,702  | 

ITEM No. 5

To amend our certificate of incorporation to effect a five to one reverse stock
split of the outstanding shares of common stock, with the board of directors of
MeriStar having discretion to determine whether the reverse stock split will
actually be effected and the timing of the reverse stock split, so long as any
reverse stock split shall occur not later than 12 months after the MeriStar
annual meeting, and to authorize the board of directors to take all action to
give effect to the reverse stock split.

|        |  |  |            | 
|------- |  |  | ---------- | 
|For     |  |  | 35,923,570 | 
|Against |  |  | 559,185    | 

ITEM No. 6

To ratify the amended and restated incentive plan to clarify the maximum number
of shares issuable under the plan, to increase the individual award limits from
750,000 to 1,000,000, to amend the conditions for vesting upon change of
control, to limit the incentive stock options issuable under the plan to
1,000,000, to clarify the default vesting period for awards, to clarify the
default option term and to add provisions under which participants in the plan
will be required to pay MeriStar amounts in respect of required tax withholding
and payroll taxes in respect to awards under the plan.

|        |  |  |            | 
|------- |  |  | ---------- | 
|For     |  |  | 30,896,473 | 
|Against |  |  | 5,585,154  | 

ITEM No. 7

To amend the employee stock purchase plan to fix the number of shares that may
be purchased under the plan at 1,500,000 shares.

|        |  |  |            | 
|------- |  |  | ---------- | 
|For     |  |  | 32,692,297 | 
|Against |  |  | 3,804,176  | 

ITEM No. 8

To amend the non-employee directors incentive plan to fix the maximum number
of shares that may be granted under the plan at 500,000 and to fix the size of
the option awards to be granted in the future at 7,500 shares upon initial
commencement of service and 5,000 shares after each annual meeting of
stockholders.

|        |  |  |            | 
|------- |  |  | ---------- | 
|For     |  |  | 31,208,117 | 
|Against |  |  | 5,274,775  | 

ITEM No. 9

To elect nominees for director who will serve only in the event that the merger
does not occur.

|                          |  |     |            |         |  |  |           | 
|------------------------- |  | --- | ---------- | ------- |  |  | --------- | 
|Election of Directors     |  | For |            | Against
|S. Kirk Kinsell (2005)    |  |     | 28,326,095 |         |  |  | 1,732     | 
|James B. McCurry (2005)   |  |     | 25,777,434 |         |  |  | 2,550,393 | 
|J. Taylor Crandall (2005) |  |     | 28,323,586 |         |  |  | 4,241     | 
|Leslie R. Doggett (2004)  |  |     | 25,773,925 |         |  |  | 2,553,902 | 
|John Emery (2004)         |  |     | 28,319,820 |         |  |  | 8,007     | 

31



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##### 



ITEM 5. FORWARD-LOOKING INFORMATION

Information both included in and incorporated by reference in this Form 10Q may
contain forward-looking statements within the meaning of Section 27A of the
Securities Exchange Act of 1934, and as such 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, intent, 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, changes in:



| |  |  | slowdown of the national economy;                                                                                 
| | - |  | ------------------------------------------------------------------------------------------------------------------
|
| |  |  | economic conditions generally and the real estate market specifically;                                            
|
| |  |  | the impact of the September 11, 2001 terrorist attacks or other terrorist attacks;                                
|
| |  |  | the threat or actual outbreak of hostility;                                                                       
|
| |  |  | legislative/regulatory changes, including changes to laws governing the taxation of real estate investment trusts;
|
| |  |  | disruptions to or restrictions on air travel;                                                                     
|
| |  |  | our ability of the Registrant to integrate the business of Interstate and MeriStar;                               
|
| |  |  | availability of capital;                                                                                          
|
| |  |  | interest rates;                                                                                                   
|
| |  |  | competition;                                                                                                      
|
| |  |  | supply and demand for lodging facilities in our current and proposed market areas; and                            
|
| |  |  | general accounting principals, policies and guidelines applicable to real estate investment trusts.               

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, 2001 and our joint
proxy statement and prospectus filed on July 2, 2002, should be considered in
evaluating any forward-looking statements in this Form 10-Q.

32



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##### 



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

3.1      Amended and Restated Certificate of Incorporation of MeriStar Hotels &
Resorts, Inc. (incorporated by reference to Exhibit 3.1 to MeriStar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,
dated June 30, 2001 (incorporated by reference to Exhibit 3.1.1 to MeriStars
Form 10-K filed with the Securities and Exchange Commission for the year ended
December 31, 2001).

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

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

3.3      Certificate of Merger, dated July 31, 2002 (incorporated by reference to
Exhibit 3.1.2 to the Registrants Form 8-A/A filed with the Securities and
Exchange Commission on August 2, 2002)

4.5      Form of Interstate Hotels & Resorts Common Stock Certificate (incorporated
by reference to Exhibit 4.1 to the Registrants Form 8-A/A filed with the
Securities and Exchange Commission on August 2, 2002)

9.1      Board Composition Agreement, dated as of July 31, 2002, among the
Registrant and certain stockholders of the Registrant specified therein
(incorporated by reference to Exhibit 9.1 to the Registrants Form 8-K filed
with the Securities and Exchange Commission on August 7, 2002)

10.16      Registration Rights Agreement, dated as of July 31, 2002, among the
Registrant and certain stockholders of the Registrant specified therein
(incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K filed
with the Securities and Exchange Commission on August 7, 2002)

10.17      Second Amended and Restated Employment Agreement, dated as of July 30,
2002, between the Registrant and Thomas F. Hewitt (incorporated by reference to
Exhibit 10.2 to the Registrants Form 8-K filed with the Securities and
Exchange Commission on August 7, 2002)

10.18      Senior Credit Agreement (Senior Credit Agreement), dated as of July 31,
2002, among the Registrant, MeriStar H & R Operating Company, L.P., Societe
Generale, SG Cowen Securities Corporation, Salomon Smith Barney Inc., Lehman
Brothers, Inc., Credit Lyonnais New York Branch and various other lenders
(incorporated by reference to Exhibit 10.3 to the Registrants Form 8-K filed
with the Securities and Exchange Commission on August 7, 2002)

10.18.1      First Amendment to the Senior Credit Agreement, dated as of August 15,
2002, among the Registrant, MeriStar H & R Operating Company, L.P., Societe
Generale, SG Cowen Securities Corporation, Salomon Smith Barney Inc., Lehman
Brothers, Inc., Credit Lyonnais New York Branch and various other lenders.

10.19      Revolving Credit Agreement (the Revolving Credit Agreement), dated as
of August 3, 1998, by and between MeriStar H&R Operating Company, L.P. and
MeriStar Hospitality Operating Partnership, L.P. (incorporated by reference to
Exhibit 10.9 to MeriStars Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1998).

10.19.1      Amendment to Revolving Credit Agreement (incorporated by reference to
Exhibit 10.13 to the Companys Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1999).

10.19.2      Second Amendment to Revolving Credit Agreement (incorporated by
reference to Exhibit 10.4.2 to MeriStars Form 10-K filed with the Securities
and Exchange Commission for the year ended December 31, 2001).

33



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##### 



10.19.3      Third Amendment to Revolving Credit Agreement, dated as of July 31,
2002, by and between MeriStar H&R Operating Company, L.P. and MeriStar
Hospitality Operating Partnership, L.P. (incorporated by reference to Exhibit
10.4 to the Registrants Form 8-K filed with the Securities and Exchange
Commission on August 7, 2002)

10.19.4      Fourth Amendment to Revolving Credit Agreement, dated as of August 15,
2002, by and between MeriStar H&R Operating Company, L.P. and MeriStar
Hospitality Operating Partnership, L.P.

10.20      Amended and Restated Incentive Plan (incorporated by reference to Exhibit
10.5 to the Registrants Form 8-K filed with the Securities and Exchange
Commission on August 7, 2002).

10.21      Amendments to the Registrants Employee Stock Purchase Plan (incorporated
by reference to Exhibit 10.6 to the Registrants Form 8-K filed with the
Securities and Exchange Commission on August 7, 2002).

10.22      Amendments to the Registrants Non-Employee Directors Incentive Plan
(incorporated by reference to Exhibit 10.7 to the Registrants Form 8-K filed
with the Securities and Exchange Commission on August 7, 2002).

18.1      
Preferability letter from KPMG LLP related to change in accounting principle.

99.1      Press Release, dated as of November 4, 2002 (incorporated by reference to
Exhibit 99.1 to Interstate Hotels & Resorts, Inc. Form 8-K filed with the
Securities and Exchange Commission on November 4, 2002).

(b)  Reports on Form 8-K

Current report on Form 8-K dated and filed July 2, 2002 regarding the press
release announcing the assignment of leases to Winston Hotels.

Current report on Form 8-K dated and filed August 7, 2002 regarding the merger
between MeriStar Hotels and Resorts, Inc. and Interstate Hotels Corporation.

Current report on Form 8-K dated and filed on August 8, 2002 regarding the
second quarter earnings press release.

Current report of Form 8-K dated and filed August 9, 2002 regarding the slide
presentation on Interstate Hotels & Resorts, Inc. posted on the website.

34



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##### 



SIGNATURES

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.

Dated: November 14, 2002



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

35



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##### 



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 officers 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 officers 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 function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 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 officers and I have indicated in this
quarterly report whether or not 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.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: November 14, 2002

/s/ Paul W. Whetsell

---

36



---



##### 



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 officers 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 officers 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 function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 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 officers and I have indicated in this
quarterly report whether or not 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.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: November 14, 2002

/s/ James A. Calder

---

37



---



##### 



SARBANES-OXLEY ACT SECTION 906 CERTIFICATIONS

In connection with the Quarterly Report of Interstate Hotels & Resorts, Inc.,
(the Registrant) on Form 10-Q for the period ending September 30, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
Report), I, Paul W. Whetsell, Chief Executive Officer of Interstate Hotels &
Resorts, Inc., certify pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to
ss. 906 of the Sarbanes-Oxley Act of 2002 that:



| | 1) |  | The Report fully complies with the requirements of section 13 (a) or
15 (d) of the Securities and Exchange Act of 1934; and                            
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2) |  | The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Registrant.

/s/ Paul W. Whetsell
Paul W. Whetsell
Chief Executive Officer
November 14, 2002

38



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##### 



SARBANES-OXLEY ACT SECTION 906 CERTIFICATIONS

In connection with the Quarterly Report of Interstate Hotels & Resorts, Inc.,
(the Registrant) on Form 10-Q for the period ending September 30, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
Report), I, James A. Calder, Chief Financial Officer of Interstate Hotels &
Resorts, Inc., certify pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to
ss. 906 of the Sarbanes-Oxley Act of 2002 that:



| | 1) |  | The Report fully complies with the requirements of section 13 (a) or
15 (d) of the Securities and Exchange Act of 1934; and                            
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2) |  | The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Registrant.

/s/ James A. Calder
James A. Calder
Chief Financial Officer
November 14, 2002

39