10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2004
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from           to

Commission File Number 1-14331

Interstate Hotels & Resorts, Inc.

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

www.ihrco.com

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

(703) 387-3100

(Registrant’s Telephone Number, Including Area Code)

     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. þ

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). o

      The number of shares of Common Stock, par value $0.01 per share, outstanding at August 6, 2004 was 30,631,001.

INTERSTATE HOTELS & RESORTS, INC.

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1:	Financial Statements (unaudited)
	Consolidated Balance Sheets — June 30, 2004 and December 31, 2003		2
	Consolidated Statements of Operations and Comprehensive Income (Loss) — Three and six months ended June 30, 2004 and 2003		3
	Consolidated Statements of Cash Flows — Six months ended June 30, 2004 and 2003		4
	Notes to Consolidated Financial Statements		5
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3:	Quantitative and Qualitative Disclosures About Market Risk		33
Item 4:	Controls and Procedures		34
PART II. OTHER INFORMATION
Item 1:	Legal Proceedings		36
Item 2:	Changes in Securities and Use of Proceeds		36
Item 3:	Defaults Upon Senior Securities		36
Item 4:	Submission of Matters to a Vote of Security Holders		36
Item 5:	Other Information		36
Item 6:	Exhibits and Reports on Form 8-K		38

1

PART I. FINANCIAL INFORMATION

Item 1:     Financial Statements

INTERSTATE HOTELS & RESORTS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

			June 30,			December 31,
			2004			2003
			(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	2,521		$	7,450
	Restricted cash			1,828			3,250
	Accounts receivable, net of allowance for doubtful accounts of $3,135 at June 30, 2004 and $3,529 at December 31, 2003			33,612			25,531
	Insurance premiums receivable			3,014			—
	Due from related parties			15,621			14,649
	Prepaid expenses and other current assets			11,021			9,342
		Total current assets		67,617			60,222
Marketable securities				1,668			2,556
Property and equipment, net				24,586			27,056
Notes receivable				5,809			6,044
Officers and employees notes receivable				76			86
Investments and advances to affiliates				11,413			15,825
Deferred income taxes				22,160			18,673
Goodwill				92,123			92,123
Intangible assets, net				48,347			55,338
		Total assets	$	273,799		$	277,923
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable and accrued expenses		$	63,746		$	66,513
	Accounts payable — related parties			433			433
	Current portion of long-term debt			1,625			1,625
		Total current liabilities		65,804			68,571
Deferred compensation				1,668			2,556
Long-term debt				88,384			84,696
		Total liabilities		155,856			155,823
Minority interests				914			3,388
Commitments and contingencies
Stockholders’ equity:
	Preferred stock, $0.01 par value; 5,000 shares authorized			—			—
	Common stock, $.01 par value; 250,000 shares authorized; 30,629 and 29,951 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively			307			300
	Treasury stock			(69	)		(69	)
	Paid-in capital			188,604			183,849
	Accumulated other comprehensive income, net of tax			787			837
	Accumulated deficit			(72,600	)		(66,205	)
		Total stockholders’ equity		117,029			118,712
		Total liabilities, minority interests and stockholders’ equity	$	273,799		$	277,923

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

2

INTERSTATE HOTELS & RESORTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands, except per share amounts)

		Three months ended						Six months ended
		June 30,						June 30,
		2004			2003			2004			2003
Revenue:
	Lodging revenues	$	848		$	932		$	1,571		$	1,768
	Management fees		6,248			7,516			11,961			14,399
	Management fees-related parties		8,720			7,882			16,685			15,364
	Corporate housing		27,555			26,323			51,805			50,282
	Other revenue		3,102			2,947			6,354			6,829
			46,473			45,600			88,376			88,642
	Other revenue from managed properties		206,831			212,105			400,981			424,602
Total revenue			253,304			257,705			489,357			513,244
Operating expenses by department:
	Lodging expenses		566			664			1,084			1,284
	Corporate housing		21,903			21,396			42,285			41,627
Undistributed operating expenses:
	Administrative and general		17,626			16,160			35,090			34,896
	Depreciation and amortization		2,338			3,618			4,733			8,259
	Merger and integration costs		—			606			—			2,470
	Restructuring charges		3,312			—			3,439			—
	Asset impairments and other write-offs		1,698			801			6,191			801
			47,443			43,245			92,822			89,337
	Other expenses from managed properties		206,831			212,105			400,981			424,602
Total operating expenses			254,274			255,350			493,803			513,939
Net operating income (loss)			(970	)		2,355			(4,446	)		(695	)
Interest income			(411	)		(233	)		(690	)		(442	)
Interest expense			1,979			2,750			3,980			5,267
Equity in losses of affiliates			165			218			941			566
Gain on refinancing term loan from related party			—			—			—			(13,629	)
Income (loss) from continuing operations before minority interest and income taxes			(2,703	)		(380	)		(8,677	)		7,543
Income tax expense (benefit)			(996	)		(325	)		(3,444	)		2,627
Minority interest expense (benefit)			(29	)		(7	)		(75	)		161
Income (loss) from continuing operations			(1,678	)		(48	)		(5,158	)		4,755
Loss from discontinued operations			(973	)		(439	)		(1,237	)		(814	)
Net income (loss)		$	(2,651	)	$	(487	)	$	(6,395	)	$	3,941
Other comprehensive income (loss), net of tax:
	Foreign currency translation gain (loss)		(21	)		208			(105	)		234
	Unrealized gain on investments and other		56			(55	)		56			(46	)
Comprehensive income (loss)		$	(2,616	)	$	(334	)	$	(6,444	)	$	4,129
Basic earnings (loss) per share from continuing operations			(0.06	)		(0.00	)		(0.17	)		0.23
Basic earnings (loss) per share from discontinued operations			(0.03	)		(0.02	)		(0.04	)		(0.04	)
Basic earnings (loss) per share		$	(0.09	)	$	(0.02	)	$	(0.21	)	$	0.19
Diluted earnings (loss) per share from continuing operations			(0.06	)		(0.00	)		(0.17	)		0.23
Diluted earnings (loss) per share from discontinued operations			(0.03	)		(0.02	)		(0.04	)		(0.04	)
Diluted earnings (loss) per share		$	(0.09	)	$	(0.02	)	$	(0.21	)	$	0.19
Weighted average number of basic shares outstanding			30,587			20,609			30,328			20,593
Weighted average number of diluted shares outstanding			30,828			20,972			30,569			21,226

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

3

INTERSTATE HOTELS & RESORTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

				Six months ended
				June 30,
				2004			2003
Cash flows from operating activities:
	Net income (loss)			$	(6,395	)	$	3,941
	Adjustments to reconcile net income (loss) to net cash used in operating activities:
		Depreciation and amortization			4,781			8,348
		Gain on refinancing			—			(13,629	)
		Equity in loss of affiliates			941			566
		Minority interest			(75	)		143
		Deferred income taxes			(3,545	)		1,885
		Write-off of assets			5,721			1,415
		Other			299			9
		Grant of stock for severance			3,181			—
		Loss on disposal of assets for discontinued operations			376			—
		Changes in assets and liabilities:
			Accounts receivable, net		(11,009	)		(12,274	)
			Due from related parties		(972	)		1,039
			Prepaid expenses and other current assets		(1,679	)		901
			Accounts payable and accrued expenses		(2,700	)		17,227
Net cash provided by (used in) operating activities					(11,076	)		9,571
Cash flows from investing activities:
	Change in restricted cash				1,422			(1,616	)
	Purchases of property and equipment, net				(1,073	)		(1,722	)
	Purchases of intangible assets				(223	)		(580	)
	Net cash (invested in) received from equity investments in hotel real estate				(451	)		(87	)
	Change in officers and employees notes receivable, net				10			10
	Change in advances to affiliates, net				2,861			(482	)
Net cash provided by (used in) investing activities					2,546			(4,477	)
Cash flows from financing activities:
	Borrowings under long-term debt				34,000			80,000
	Repayments of long-term debt				(30,312	)		(68,014	)
	Proceeds from issuance of common stock				717			138
	Cash paid for redemption of preferred operating partnership units				(1,310	)		—
	Financing fees paid				—			(1,690	)
	Common stock repurchased				—			(23	)
Net cash provided by financing activities					3,095			10,411
Effect of exchange rate on cash					506			352
Net increase (decrease) in cash and cash equivalents					(4,929	)		15,857
Cash and cash equivalents at beginning of period					7,450			7,054
Cash and cash equivalents at end of period				$	2,521		$	22,911

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

4

INTERSTATE HOTELS & RESORTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     ORGANIZATION

Background

      On July 31, 2002, MeriStar Hotels & Resorts, or MeriStar, and Interstate Hotels Corporation, or Interstate, merged, and MeriStar changed its name to “Interstate Hotels & Resorts, Inc.” The transaction was a stock-for-stock merger of Interstate into MeriStar in which Interstate stockholders received 4.6 shares of MeriStar common stock for each share of Interstate stock outstanding. Holders of MeriStar common stock and partnership units in its operating partnership continued to hold their stock and units following the merger. In connection with the merger, the holders of Interstate’s convertible debt and preferred stock converted those instruments into shares of MeriStar common stock. Immediately following the merger, we effected a one-for-five reverse stock split.

      In accordance with accounting principles generally accepted in the United States of America, we treated the merger as a purchase for financial reporting purposes, and Interstate was considered the acquiring enterprise. Interstate established a new accounting basis for MeriStar’s assets and liabilities based upon their fair values as of July 31, 2002, the effective date of the merger. We accounted for the merger as a reverse acquisition, with Interstate as the accounting acquiror and MeriStar as the surviving company for legal purposes.

Business Summary

      We are the largest independent U.S. hotel management company not affiliated with a hotel brand, measured by number of rooms under management. We manage a portfolio of hospitality properties and provide related services in the hotel, corporate housing, resort, conference center and golf markets. We also own one hotel property and hold non-controlling equity interests in 11 joint ventures which hold ownership interests in 28 of our managed properties. Our portfolio is diversified by franchise and brand affiliations. The related services we provide include insurance and risk management services, purchasing and project management services, information technology and telecommunications services and centralized accounting services.

      As of June 30, 2004, we managed 269 properties, with 60,430 rooms in 40 states, the District of Columbia, Canada, Russia and Portugal. As of June 30, 2004, we had 3,130 apartments under lease or management through our BridgeStreet corporate housing division in the United States, France and the United Kingdom.

      We have two operating divisions, hotel management and corporate housing, both of which are reportable operating segments. Each division is managed separately because of its distinct products and services.

      Our subsidiary operating partnership indirectly holds substantially all of our assets. We are the sole general partner of that operating partnership. We, one of our directors, our chief accounting officer and certain independent third parties are limited partners of the partnership. The interests of those third parties are reflected in minority interests on our balance sheet. The partnership agreement gives the general partner full control over the business and affairs of the partnership.

      We manage all but two of the properties owned by MeriStar Hospitality Corporation, a real estate investment trust, or REIT. As of June 30, 2004, MeriStar Hospitality owned 78 properties, seven of which MeriStar Hospitality has stated it intends to dispose of. Our relationship with MeriStar Hospitality has been governed in part by an intercompany agreement. That agreement provided each of us the right to participate in certain transactions entered into by the other company.

      Effective July 1, 2004, MeriStar Hospitality and we have agreed to terminate the intercompany agreement. We believe the termination of the intercompany agreement is an important step in our efforts to pursue our strategy of increasing our investment in hotels and resorts since we can now pursue real estate

5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

investment opportunities without first having to offer the opportunity to MeriStar Hospitality. In connection with the termination of the intercompany agreement we have agreed to modify the management agreements under which we manage the MeriStar Hospitality hotels as follows:

•  MeriStar Hospitality may terminate management agreements each year representing up to 600 rooms with the payment of a termination fee equal to 18 months of management fees and, if all 600 rooms are not terminated in a given year, the remaining portion of the 600 rooms may be terminated in the subsequent year with the same termination fee;

•  MeriStar Hospitality may terminate a management agreement if we make an investment, in the form of debt or equity, in a hotel that is in the competitive set of the MeriStar Hospitality hotel (provided that the termination can only occur between 12 and 18 months following the date the investment is made); and

•  the period during which termination fees are paid (other than as described in the first bullet point above) is extended from 30 months to 48 months; provided that the period during which MeriStar Hospitality may reduce the termination fee by providing a new hotel for us to manage to replace the terminated hotel will remain 30 months.

      In addition, in connection with the termination of the intercompany agreement, MeriStar Hospitality and we have resolved our $5,000 dispute over the calculation of termination fees. We have agreed to calculate the termination fees based upon an average of the present value of remaining management fees due to us under the contract (a) discounted as individual monthly payments and (b) discounted based on a lump sum payment at the end of the contract term. We have agreed to provide MeriStar Hospitality with a $2,500 credit against termination fees owed for hotels to be sold by MeriStar Hospitality in the future (other than the seven hotels MeriStar Hospitality intended to sell as of June 30, 2004). The termination of the intercompany agreement and the resolution of the dispute over the calculation of the termination fees did not have any accounting consequences on the second quarter.

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

      We have prepared these unaudited interim financial statements according to the rules and regulations of the Securities and Exchange Commission. We have omitted certain information and footnote disclosures that are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America. These interim financial statements should be read in conjunction with the financial statements, accompanying notes and other information included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2003. Certain 2003 amounts have been reclassified to conform to the 2004 presentation.

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

Stock-Based Compensation

      The Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” to

6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

provide alternative methods of transition for a voluntary change to the expense recognition provisions of the fair value based method of accounting for stock-based employee compensation. Effective January 1, 2003, we elected to adopt the fair-value method of accounting for stock options under SFAS No. 148, using the prospective method.

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

		Three months ended						Six months ended
		June 30,						June 30,
		2004			2003			2004			2003
Net income (loss), as reported		$	(2,651	)	$	(487	)	$	(6,395	)	$	3,941
Add: Stock-based employee compensation expense included in reported net income (loss), net of tax			69			10			132			10
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax			(93	)		(161	)		(205	)		(308	)
Net income (loss), pro forma		$	(2,675	)	$	(638	)	$	(6,468	)	$	3,643
Earnings per share:
	Basic, as reported	$	(0.09	)	$	(0.02	)	$	(0.21	)	$	0.19
	Basic, pro forma	$	(0.09	)	$	(0.03	)	$	(0.21	)	$	0.18
	Diluted, as reported	$	(0.09	)	$	(0.02	)	$	(0.21	)	$	0.19
	Diluted, pro forma	$	(0.09	)	$	(0.03	)	$	(0.21	)	$	0.17

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

Recent Accounting Pronouncements

      In December 2003, the FASB issued a revision of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“VIE”s), an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, (“FIN 46R”) to clarify some of its provisions. The revision results in multiple effective dates based on the nature as well as the creation date of the VIE. VIE’s created after January 31, 2003, but prior to January 1, 2004, may be accounted for either based on the original interpretations or the revised interpretations. However, VIE’s created after January 1, 2004 must be accounted for under FIN 46R. FIN 46R is effective beginning in the first quarter of 2004. We have evaluated our equity method investees and concluded that these entities do not meet the definition of a VIE.

3.     EARNINGS PER SHARE

      We calculate our basic earnings (loss) per common share by dividing net income (loss) 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. In periods in which there is a loss, diluted shares outstanding will equal basic shares outstanding to avoid anti-dilution.

7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Basic and diluted earnings per common share for the three and six months ended June 30 are as follows:

	Three months ended						Six months ended
	June 30,						June 30,
	2004			2003			2004			2003
Income (loss) from continuing operations	$	(1,678	)	$	(48	)	$	(5,158	)	$	4,755
Loss from discontinued operations		(973	)		(439	)		(1,237	)		(814	)
Net income (loss)	$	(2,651	)	$	(487	)	$	(6,395	)	$	3,941
Weighted average number of basic shares outstanding		30,587			20,609			30,328			20,593
Basic earnings (loss) per share from continuing operations	$	(0.06	)	$	(0.00	)	$	(0.17	)	$	0.23
Basic earnings (loss) per share from discontinued operations		(0.03	)		(0.02	)		(0.04	)		(0.04	)
Basic earnings (loss) per share	$	(0.09	)	$	(0.02	)	$	(0.21	)	$	0.19
Weighted average number of diluted shares outstanding		30,828			20,972			30,569			21,226
Diluted earnings (loss) per share from continuing operations	$	(0.06	)	$	(0.00	)	$	(0.17	)	$	0.23
Diluted earnings (loss) per share from discontinued operations		(0.03	)		(0.02	)		(0.04	)		(0.04	)
Diluted earnings (loss) per share	$	(0.09	)	$	(0.02	)	$	(0.21	)	$	0.19

      Potentially dilutive securities (options and operating partnership units) not included in the above diluted share count (in thousands) were 187 and 272 for the three months ended June 30, 2004 and 2003, respectively, and 211 for the six months ended June 30, 2004. The six month period of 2003 includes all dilutive shares.

4.     INVESTMENTS AND ADVANCES TO AFFILIATES

      Our investments and advances to our joint ventures consist of the following:

		June 30,		December 31,
		2004		2003
MIP Lessee, L.P.		$	4,096	$	5,681
S.D. Bridgeworks, LLC			598		3,389
CNL/ IHC Partners, L.P.			2,407		2,382
Interconn Ponte Vedra Company, L.L.C.			1,848		1,210
Other			2,464		3,163
	Total	$	11,413	$	15,825

      We also own 100% of the Pittsburgh Airport Residence Inn by Marriott. This investment is consolidated in our financial statements.

      In the first quarter of 2004, it was determined that our investment in MIP Lessee, L.P. was impaired based on purchase offers we received on two hotels owned by the joint venture that were held for sale. Accordingly, we recorded an impairment charge of $563 to reduce the carrying amount of the investment to its estimated fair value. This amount is included in asset impairments and other write-offs in our statements of operations.

8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      In addition, during the first quarter of 2004 we wrote-off our remaining investment in our joint venture that owns the Residence Inn Houston Astrodome Medical Center. The hotel has been underperforming and in the first quarter of 2004 the joint venture was notified that it had defaulted on its bank loan. We do not expect to recover our investment in this joint venture, therefore we wrote-off the remaining carrying value of $538. This amount is included in asset impairments and other write-offs in our statements of operations. Subsequent to June 30, 2004, and in connection with the refinancing of the hotel, we have agreed to contribute an additional $250 to the joint venture. In addition, one of our directors holds a 22.46% ownership interest in this hotel.

      In June 2004, S.D. Bridgeworks, L.L.C. paid us $2,687 in repayment of its note payable owed to us, plus $300 of accumulated interest.

      Our review of our other investments and advances to affiliates did not indicate that any other investments or advances were impaired. The recoverability of the carrying values of our investments and advances is, however, dependent upon operating results of 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.

      We are not responsible for, and do not guarantee the debt or other obligations of any of these investees.

      Presented below is the combined summarized financial information of certain of our investments for the six months ended June 30, 2004. Summarized profit and loss information for these investments is required by Regulation S-X to be disclosed in interim periods, as they have met certain financial tests in relation to our consolidated financial position and results of operations. The summarized information is as follows:

	Six months ended,			Six months ended,
	June 30, 2004			June 30, 2003
Revenue	$	73,448		$	72,041
Operating expenses	$	57,394		$	55,728
Net loss	$	(6,493	)	$	(8,182	)
Our share of the above losses	$	(555	)	$	(1,027	)

5.     INTANGIBLE ASSETS

      Intangible assets consist of the following:

		June 30,			December 31,
		2004			2003
Management contracts		$	51,130		$	56,913
Franchise fees			1,945			1,945
Deferred financing fees			2,430			2,378
Other			—			946
	Total cost		55,505			62,182
	Less accumulated amortization		(7,158	)		(6,844	)
Intangible assets, net		$	48,347		$	55,338

      We amortize the value of our intangible assets over their estimated useful lives, which generally equal the terms of the corresponding management, franchise, or financing agreement.

      We incurred aggregate amortization expense of $936 and $1,902 on these assets for the three and six months ended June 30, 2004, and $2,437 and $5,812 for the three and six months ended June 30, 2003; with the decrease attributable to a large group of management contracts that were fully amortized in the second quarter of 2003. Amortization of deferred financing fees is included in interest expense.

9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      During the six months ended June 30, 2004, in connection with its asset disposition plan, our largest client, MeriStar Hospitality, sold 15 hotels that we managed, four of which were sold in the second quarter. We wrote-off $4,388 of unamortized management contract costs associated with these disposed hotels, of which $1,092 related to second quarter dispositions. This amount is included in asset impairments and other write-offs in our statements of operations.

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

Year ending December 31, 2004	$	3,757
Year ending December 31, 2005		3,434
Year ending December 31, 2006		3,147
Year ending December 31, 2007		2,552
Year ending December 31, 2008		2,523

6.     LONG-TERM DEBT

      Our long-term debt consists of the following:

		June 30,			December 31,
		2004			2003
Senior credit agreement		$	46,286		$	42,598
Non-recourse promissory note			3,723			3,723
Subordinated term loan			40,000			40,000
			90,009			86,321
	Less current portion		(1,625	)		(1,625	)
Total long-term debt		$	88,384		$	84,696

      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 initially consisted of a $65,000 term loan and a $48,000 revolving credit facility. The term loan is payable in quarterly installments of $406 that began January 1, 2003, with the balance due on July 31, 2005. During the fourth quarter of 2003, using the proceeds from a public equity offering, we repaid $45,276 of the term loan. 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 ranges from LIBOR plus 3.00% to 4.50%, depending upon the results of certain financial tests. The senior credit facility contains certain covenants, including maintenance of financial ratios at the end of each quarter, compliance reporting requirements and other customary restrictions. At June 30, 2004, we were in compliance with these covenants. The senior credit agreement also includes pledges of collateral, including the following:

•  Ownership interests of all existing subsidiaries and unconsolidated entities as well as any future material subsidiary or unconsolidated entity;

•  Owned hospitality properties; and

•  Other collateral that is not previously prohibited from being pledged by any of our existing contracts/agreements.

      At June 30, 2004, borrowings under the senior credit agreement bore interest at a rate of 5.59% per annum, which is the 30-day LIBOR plus 3.50%. We are currently in the process of negotiating the refinancing of this facility, which we expect to complete during the third quarter of 2004.

      We incurred $592 and $1,200 of interest expense on the senior credit agreement for the three and six months ended June 30, 2004, and $1,168 and $2,264 for the three and six months ended June 30, 2003. The

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

decrease in interest expense resulted from our prepayment of $45,276 of our term loan with proceeds from our November 2003 public equity offering.

      Non-recourse promissory note — In March 2001, we entered into a non-recourse promissory note in the amount of $4,170 with FelCor Lodging Trust Incorporated (“FelCor”) to fund the acquisition of a 50% non-controlling equity interest in two partnerships that own eight mid-scale hotels. Interest on the note is payable monthly at the rate of 12% per annum and the outstanding principal balance is due and payable on December 31, 2010. For the three and six months ended June 30, 2004, we incurred $112 and $223 of interest expense on the promissory note, respectively. For the three and six months ended June 30, 2003, we incurred $125 and $250 of interest expense on the promissory note, respectively.

      In June 2003, we made unscheduled principal payments totaling $447 on the note. As of June 30, 2004, the remaining balance on the promissory note is $3,723. In connection with one of the payments, our ownership interest in the partnership was reduced from 50% to 49.5% as FelCor made an additional contribution to the partnership at that time. After notifying FelCor, we suspended further principal and interest payments on this non-recourse promissory note and, accordingly, we are in default under the note. We expect that we will ultimately transfer ownership of our equity interests in these joint ventures to FelCor in return for the extinguishment of the debt.

      Subordinated term loan — In January 2003, we entered into a $40,000 subordinated term loan that carries a variable interest rate based on the 30-day LIBOR plus a spread of 8.50%. The subordinated term loan matures on January 31, 2006, but if the revolving portion of our senior credit facility is extended for an additional year, the maturity of the subordinated term loan will also be automatically extended by one year to January 31, 2007. This term loan is subordinated to borrowings under the senior credit agreement and contains certain covenants, including maintenance of financial ratios at the end of each quarter, compliance reporting requirements and other customary restrictions. At June 30, 2004, we were in compliance with these covenants. At June 30, 2004, borrowings under the subordinated term loan bore interest at a rate of 9.63% per annum. We incurred $973 and $1,946 of interest expense on the subordinated term loan for the three and six months ended June 30, 2004, respectively, and $997 and $1,887 of interest expense on the subordinated term loan for the three and six months ended June 30, 2003 respectively.

      Fair Value — Our outstanding long-term debt is based on LIBOR rates. We have determined that the fair value of our outstanding borrowings on our senior credit facility and subordinated term loan approximated their carrying values at June 30, 2004. The fair value of our swap agreement was a liability of approximately $104 at June 30, 2004. We believe that our non-recourse promissory note would have no value to a third party. We intend to exchange the non-recourse promissory note for our equity interests in the related FelCor joint venture, as discussed above. In addition, the carrying values of these investments have been previously written down to zero.

7.     SEGMENT INFORMATION

      We are organized into two operating divisions: hotel management and corporate housing. Both of these divisions are reportable operating segments. Each division is managed separately because of its distinct products and services. We evaluate the performance of each division based on earnings before interest, taxes, depreciation and amortization, equity in earnings (losses) of affiliates, discontinued operations and in 2003, a gain on refinancing (“Adjusted EBITDA”).

      The other items in the tables below represent operating segment activity and assets for the non-reportable segments. Adjusted EBITDA from other activities includes merger and integration costs, restructuring charges and asset impairments and other write-offs. Other assets include deferred tax assets and net deferred financing costs.

11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      We use Adjusted EBITDA to evaluate the performance of our segments. The tables below reconcile Adjusted EBITDA to net income (loss) for each of the periods presented.

		Hotel		Corporate
		Management		Housing			Other			Total
Three months ended June 30, 2004
Net income (loss)		$	1,808	$	(846	)	$	(3,613	)	$	(2,651	)
Adjustments:
	Depreciation and amortization		1,979		359			—			2,338
	Interest expense, net		1,170		398			—			1,568
	Equity in losses of affiliates		165		—			—			165
	Discontinued operations		—		973			—			973
	Minority interest expense (benefit)		20		(9	)		(40	)		(29	)
	Income tax expense (benefit)		679		(318	)		(1,357	)		(996	)
Adjusted EBITDA		$	5,821	$	557		$	(5,010	)	$	1,368
Three months ended June 30, 2003
Net income (loss)		$	1,442	$	(1,092	)	$	(837	)	$	(487	)
Adjustments:
	Depreciation and amortization		3,205		413			—			3,618
	Interest expense, net		1,887		630			—			2,517
	Equity in losses of affiliates		218		—			—			218
	Discontinued operations		—		439			—			439
	Minority interest expense (benefit)		21		(16	)		(12	)		(7	)
	Income tax expense (benefit)		962		(729	)		(558	)		(325	)
Adjusted EBITDA		$	7,735	$	(355	)	$	(1,407	)	$	5,973
Six months ended June 30, 2004
Net income (loss)		$	1,961	$	(2,144	)	$	(6,212	)	$	(6,395	)
Adjustments:
	Depreciation and amortization		3,980		753			—			4,733
	Interest expense, net		2,455		835			—			3,290
	Equity in losses of affiliates		941		—			—			941
	Discontinued operations		—		1,237			—			1,237
	Minority interest expense (benefit)		23		(25	)		(73	)		(75	)
	Income tax expense (benefit)		1,056		(1,155	)		(3,345	)		(3,444	)
Adjusted EBITDA		$	10,416	$	(499	)	$	(9,630	)	$	287

12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

		Hotel			Corporate
		Management			Housing			Other			Total
Six months ended June 30, 2003
Net income (loss)		$	(412	)	$	(2,805	)	$	7,158		$	3,941
Adjustments:
	Depreciation and amortization		7,442			817			—			8,259
	Interest expense, net		3,619			1,206			—			4,825
	Equity in losses of affiliates		566			—			—			566
	Discontinued operations		—			814			—			814
	Gain on refinancing term loan from related party		—			—			(13,629	)		(13,629	)
	Minority interest expense (benefit)		(17	)		(115	)		293			161
	Income tax expense (benefit)		(274	)		(1,870	)		4,771			2,627
Adjusted EBITDA		$	10,924		$	(1,953	)	$	(1,407	)	$	7,564

	Hotel		Corporate
	Management		Housing			Other			Total
Three months ended June, 30, 2004
Revenue	$	225,749	$	27,555		$	—		$	253,304
Adjusted EBITDA	$	5,821	$	557		$	(5,010	)	$	1,368
Three months ended June, 30, 2003
Revenue	$	231,382	$	26,323		$	—		$	257,705
Adjusted EBITDA	$	7,735	$	(355	)	$	(1,407	)	$	5,973
Six months ended June, 30, 2004
Revenue	$	437,552	$	51,805		$	—		$	489,357
Adjusted EBITDA	$	10,416	$	(499	)	$	(9,630	)	$	287
Total assets	$	231,825	$	17,919		$	24,055		$	273,799
Six months ended June, 30, 2003
Revenue	$	462,962	$	50,282		$	—		$	513,244
Adjusted EBITDA	$	10,924	$	(1,953	)	$	(1,407	)	$	7,564
Total assets	$	255,883	$	20,648		$	20,933		$	297,464

      Revenues from foreign operations were as follows for the three and six months ended June 30:

	Three months ended				Six months ended
	June 30,				June 30,
	2004		2003		2004		2003
United Kingdom	$	5,335	$	6,023	$	11,099	$	12,059
France		421		360		794		691
Russia		375		241		758		443
Canada		253		188		464		506

      Included in discontinued operations is revenue from our Toronto operation which was disposed of in June 2004, amounting to $893 and $2,233 for the three and six months ended June 30, 2004, and $2,069 and $3,929 for the three and six months ended June 30, 2003, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

8.     SUPPLEMENTAL CASH FLOW INFORMATION

		Three months ended				Six months ended
		June 30,				June 30,
		2004		2003		2004		2003
Cash paid for interest and income taxes:
	Interest	$	1,693	$	2,472	$	3,513	$	4,344
	Income taxes		173		244		766		506

9.     RESTRUCTURING EXPENSES

      We have recorded $3,312 and $3,439 of restructuring expenses for the three and six months ended June 30, 2004, respectively.

      These charges consist of the following:

	Three months ended		Six months ended
	June 30,		June 30,
Former CEO’s severance	$	3,312	$	3,312
Corporate Housing restructuring		—		127
Total	$	3,312	$	3,439

      Severance Agreement — Effective April 2, 2004, we and our chairman, Paul W. Whetsell entered into an agreement to conclude his employment as our chief executive officer as Steve Jorns had assumed that role. Mr. Whetsell was granted 250,000 shares of common stock, $0.01 par value, with a market value of $5.82 per share (the April 2, 2004 closing price) and paid $130 in cash. Pursuant to the agreement, these shares along with 156,542 previously granted unvested shares which vested in connection with the agreement, may not be sold or otherwise transferred during a restricted period unless Mr. Whetsell gives us the right of first refusal to purchase the restricted shares proposed to be sold or transferred at the price of $0.01 per share. The restricted period ends on specified dates through 2006 with respect to specified numbers of restricted shares as set forth in the agreement. However, under certain circumstances, the restricted period may be extended to January 1, 2010. Because the shares were granted in lieu of a contractually required cash severance payment, Mr. Whetsell is not required to perform any additional services to earn the stock. Consequently, we have recorded the entire severance amount in the period the stock was granted. In addition, in exchange for Mr. Whetsell’s agreement to accept the payment in stock rather than cash, we agreed to reimburse him for taxes he incurs with respect to the stock as the trading restrictions on the stock lapse. The total cost of this severance payment, based on the value of the stock on April 2, 2004 and our liability for Mr. Whetsell’s taxes based on the value of the stock as of that date, was approximately $3,312, and is included in restructuring expenses in our statement of operations. This cost may be adjusted in the future to reflect the amount of our actual liability for taxes based on the value of the stock on the dates the restrictions lapse.

      Corporate Housing — During the first quarter of 2004, we incurred charges of approximately $127 related to severance for former personnel related to restructuring within our corporate housing operation.

10.     ASSET IMPAIRMENTS AND OTHER WRITE-OFFS

      We have recorded $1,698 and $6,191 of asset impairments and other write-offs for the three and six months ended June 30, 2004, respectively, and $801 of asset impairments and other write-offs for the three and six months ended June 30, 2003.

14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      These charges consist of the following:

	Three months ended				Six months ended
	June 30,				June 30,
	2004		2003		2004		2003
Management contract write-offs	$	1,092	$	801	$	4,388	$	801
Investment impairments		—		—		1,101		—
Cost of uncompleted merger		606		—		606		—
Other		—		—		96		—
Total	$	1,698	$	801	$	6,191	$	801

      Management contract write-offs — In connection with its asset disposition plan, MeriStar Hospitality disposed of 3 hotels during the second quarter of 2003, and 15 hotels in the first half of 2004, four of which occurred in the second quarter. Consequently, we wrote off approximately $214 of unamortized management contract costs in June 2003, and $1,092 and $4,388 for the three and six months ended June 30, 2004, respectively.

      In June 2003, we wrote off $587 of unamortized management contract costs connection with the termination of 33 management contracts with Winston Hotels, Inc.

      Investment impairments — During the first quarter of 2004, it was determined that our investment in MIP Lessee, L.P. was impaired based on purchase offers we received on two of the joint venture’s hotels. Accordingly, we recorded an impairment charge of $563 to reduce the carrying amount of our investment to its estimated fair value. In addition, during the first quarter of 2004, we wrote-off our remaining investment in our joint venture that owns the Residence Inn Houston Astrodome Medical Center. The hotel has been underperforming and in the first quarter the joint venture was notified that it had defaulted on its bank loan. We do not expect to recover our investment in this joint venture, therefore we wrote-off the remaining carrying value of $538. One of our directors holds a 22.46% ownership interest in this hotel.

      Cost of Uncompleted Merger — During the second quarter of 2004, we pursued a merger with a company which owns a portfolio of hotels. We incurred approximately $606 relating to legal fees and due diligence costs related to this potential merger. These costs were expensed in June 2004, when we determined that the merger would not be consummated.

11.     DISCONTINUED OPERATIONS

      In June 2004, we completed the disposal of BridgeStreet Canada, Inc., the owner of our corporate housing operation in Toronto. The Toronto operation had incurred operating losses, primarily due to long-term lease commitments that did not allow us to adjust our inventory as easily as in other markets. In exchange for the Toronto operation, the buyer assumed our obligations, including the long-term lease commitments. Operations for the three and six month periods and comparative periods are presented as discontinued operations in our statements of operations. We recorded approximately $698 in asset write-offs and costs associated with this disposal, comprised of the following:

Fixed asset write-offs	$	376
Severance expense		100
Closing costs		171
Other		51
Total	$	698

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Discontinued operations include the following:

	Three months						Six months
	ended						ended
	June 30,						June 30,
	2004			2003			2004			2003
Revenue	$	893		$	2,069		$	2,233		$	3,929
Closing costs		(698	)		—			(698	)		—
Operating income (loss)	$	(275	)	$	(439	)	$	(539	)	$	(814	)

12.     RELATED PARTIES

      Related parties, as defined in SFAS 57 “Related Party Disclosures”, include MeriStar Hospitality, the hotels included in our real estate joint ventures, and a small number of hotels which are affiliated with certain of our directors. Total management fees from related parties amounted to $8,720 and $16,685 for the three and six months ended June 30, 2004, and $7,882 and $15,364 for the three and six months ended June 30, 2003, respectively. In addition, included in accounts payable-related parties is the minority interest owed to Wyndham International Inc., which holds a 1.6627% non-controlling economic interest in one of our operating subsidiaries.

13.     SUBSEQUENT EVENTS

      Shelf Registration Statement — In August 2004 we expect to file a Form S-3 shelf registration statement registering up to $150,000 of debt securities, preferred stock, common stock and warrants. The registration statement also registers the 6,313,324 shares of our common stock held by CGLH Partners I, LP and CGLH Partners II, LP which are beneficially owned by certain of our directors. The CGLH Partnerships have the right to include their shares in the registration statement pursuant to a registration rights agreement they executed with us at the time of our July 2002 merger with Interstate Hotels.

      Termination of Intercompany Agreement — Effective July 1, 2004, MeriStar Hospitality and we have agreed to terminate the intercompany agreement. We believe the termination of the intercompany agreement is an important step in our efforts to pursue our strategy of increasing our investment in hotels and resorts since we can now pursue real estate investment opportunities without first having to offer the opportunity to MeriStar Hospitality. See Footnote 1 for details.

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

Background

      On July 31, 2002, MeriStar Hotels & Resorts, or MeriStar, and Interstate Hotels Corporation, or Interstate, merged, and MeriStar changed its name to “Interstate Hotels & Resorts, Inc.” The transaction was a stock-for-stock merger of Interstate into MeriStar in which Interstate stockholders received 4.6 shares of MeriStar common stock for each share of Interstate stock outstanding. Holders of MeriStar common stock and partnership units in its operating partnership continued to hold their stock and units following the merger. In connection with the merger, the holders of Interstate’s convertible debt and preferred stock converted those instruments into shares of MeriStar common stock. Immediately following the merger, we effected a one-for-five reverse stock split.

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

Business Overview

      General — We are the largest independent U.S. hotel management company not affiliated with a hotel brand, measured by number of rooms under management. We manage a portfolio of hospitality properties and provide related services in the hotel, corporate housing, resort, conference center and golf markets. We also own one hotel property and hold non-controlling equity interests in 11 joint ventures which hold ownership interests in 28 of our managed properties. Our portfolio is diversified by franchise and brand affiliations. The related services we provide include insurance and risk management services, purchasing and project management services, information technology and telecommunications services and centralized accounting services.

      As of June 30, 2004, we managed 269 properties, with 60,430 rooms in 40 states, the District of Columbia, Canada, Russia and Portugal. As of June 30, 2004, we had 3,130 apartments under lease or management through our BridgeStreet corporate housing division in the United States, France and the United Kingdom.

      We have two operating divisions, hotel management and corporate housing, both of which are reportable operating segments. Each division is managed separately because of its distinct products and services.

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

      We manage all but 2 of the properties owned by MeriStar Hospitality, a real estate investment trust, or REIT. As of June 30, 2004, MeriStar Hospitality owned 78 properties, seven of which MeriStar Hospitality has stated it intended to dispose of. Our relationship with MeriStar Hospitality has been governed in part by an intercompany agreement. That agreement provided each of us the right to participate in certain transactions entered into by the other company.

      Effective July 1, 2004, MeriStar Hospitality and we have agreed to terminate the intercompany agreement. We believe the termination of the intercompany agreement is an important step in our efforts to pursue our strategy of increasing our investment in hotels and resorts since we can now pursue real estate investment opportunities without first having to offer the opportunity to MeriStar Hospitality. In connection

17

with the termination of the intercompany agreement we have agreed to modify the management agreements under which we manage the MeriStar Hospitality hotels as follows:

•  MeriStar Hospitality may terminate management agreements each year representing up to 600 rooms with the payment of a termination fee equal to 18 months of management fees and, if all 600 rooms are not terminated in a given year, the remaining portion of the 600 rooms may be terminated in the subsequent year with the same termination fee;

•  MeriStar Hospitality may terminate a management agreement if we make an investment, in the form of debt or equity, in a hotel that is in the competitive set of the MeriStar Hospitality hotel (provided that the termination can only occur between 12 and 18 months following the date the investment is made); and

•  the period during which termination fees are paid (other than as described in the first bullet point above) is extended from 30 months to 48 months; provided that the period during which MeriStar Hospitality may reduce the termination fee by providing a new hotel for us to manage to replace the terminated hotel will remain 30 months.

      In addition, in connection with the termination of the intercompany agreement, MeriStar Hospitality and we have resolved our $5,000 dispute over the calculation of termination fees. We have agreed to calculate the termination fees based upon an average of the present value of remaining management fees due to us under the contract (a) discounted as individual monthly payments and (b) discounted based on a lump sum payment at the end of the contract term. We have agreed to provide MeriStar Hospitality with a $2,500 credit against termination fees owed for hotels to be sold by MeriStar Hospitality in the future (other than the seven hotels MeriStar Hospitality intends to sell as of June 30, 2004). The termination of the intercompany agreement and the resolution of the dispute over the calculation of the termination fees did not have any accounting consequences on the second quarter.

      Revenue — Our revenue consists of:

•  management fee revenue, which consists of management fees earned under our management agreements and includes termination fees as they are earned;

•  corporate housing revenue, which consists of revenues from our BridgeStreet corporate housing division;

•  lodging revenue, which consists of rooms, food and beverage and other department revenues from our owned hotel; and

•  other revenue, which consists of insurance revenue from Northridge Insurance Company, purchasing revenue, accounting fees, technical services fees, information technology support fees, purchasing fees, and other fees.

      We employ the staff at our managed properties. Under our management agreements, the hotel owners reimburse us for payroll, benefits, and certain other costs related to the operations of the managed properties. Emerging Issues Task Force, (“EITF”) No. 01-14, “Income Statement Characteristics of Reimbursements for Out-of-pocket Expenses,” establishes standards for accounting for reimbursable expenses in our income statement. Under this pronouncement, the reimbursement of payroll, benefits and related costs is reported as “other revenue from managed properties”, with a corresponding expense reported as “other expenses from managed properties” in our statement of operations.

      Operating Expenses — Our operating expenses consist of operating expenses by department and undistributed operating expenses. Operating expenses by department include expenses associated with our corporate housing division and our lodging operations. Corporate housing expenses include apartment rent, furniture, utilities and housekeeping, and lodging expenses include costs associated with rooms, food and beverage and other department expenses and property operating costs related to our owned hotel.

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      Undistributed operating expenses include the following items:

•  administrative and general expenses, which are associated with the management of hotels and corporate housing facilities and consist primarily of expenses such as corporate payroll and related benefits, operations management, sales and marketing, finance, legal, information technology support, human resources and other support services, as well as general corporate expenses;

•  depreciation and amortization; and

•  other costs, such as merger and integration costs, asset impairments and other write-offs, restructuring charges and other costs that are not allocable to hotel management or corporate housing.

Recent events

      Termination of Intercompany Agreement — Effective July 1, 2004, MeriStar Hospitality and we have agreed to terminate our intercompany agreement, as discussed above.

      Termination of Management Agreements — In connection with the merger of MeriStar and Interstate in 2002, we assigned estimated fair values to each of the management agreements considered purchased by Interstate, the accounting acquiror in the merger. These assigned fair values are included as intangible assets on our balance sheet. We are amortizing these intangible assets over the terms of the management agreements. If one of these management agreements is terminated prior to its full term, for example, due to the sale of a hotel or an owner choosing to exercise a termination clause, we will record a loss on the write-off of the related unamortized intangible asset value. The hotel operating environment has caused some owners of our managed hotels to sell hotels. When a hotel is sold, we are usually replaced as the hotel’s manager. During the first half of 2004, MeriStar Hospitality sold 15 hotels that we had managed, including four in the second quarter. We wrote-off $4,388 of unamortized management contract costs associated with the disposed hotels for the six months ended June 30, 2004, with $1,092 relating to second quarter dispositions. This amount is included in asset impairments and other write-offs in our statements of operations. As of June 30, 2004, MeriStar Hospitality has stated its intention to sell an additional seven hotels as part of its asset disposition plan, all of which we manage. When they are sold, we estimate that we will write off an additional $2,757 in management contract intangibles.

      Generally, if we are terminated as manager upon the sale of one of MeriStar Hospitality’s hotels, we will receive a termination fee equal to the discounted value of remaining payments as defined in the management agreement. Historically, any termination fee was to be paid in thirty equal monthly installments, without interest, commencing the month following the termination. In connection with the termination of the Intercompany Agreement in July 2004, we extended this payment period to 48 months. MeriStar Hospitality will be able to credit against any termination payments still due at the time, the discounted value of projected fees, as defined in the management agreements, of any new management agreements entered into with us during the thirty-month period following the contract termination. As of June 30, 2004, we would be entitled to receive approximately $12,641 of termination fees relating to hotels sold by MeriStar Hospitality, and approximately $2,764 relating to the seven hotels that MeriStar Hospitality intends to sell as of June 30, 2004, assuming no new contracts are executed and used as offsets to the termination fees due us.

      Our management agreements with other owners generally provide for limited termination fees if our management agreement is terminated upon the sale of the hotel. We record termination fees as management fee revenue as they are earned. We have recorded $1,534 and $2,621 of termination fees included in our statement of operations for the three and six months ended June 30, 2004, with no like revenue in the same periods of 2003.

      Insurance Matters — As part of our management services to a hotel owner, we generally obtain casualty (workers compensation and liability) insurance coverages for the hotel. In December 2002, one of the carriers we used to obtain casualty insurance coverages was downgraded significantly by rating agencies. In January 2003, we negotiated a transfer of that carrier’s current policies to a new carrier. We are working with the prior carrier to facilitate a timely and efficient close-out of the claims outstanding under the prior carrier’s casualty policies. The prior carrier has primary responsibility for settling those claims from its assets. If the prior

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carrier’s assets are not sufficient to settle these outstanding claims, and the claims exceed amounts available under state guaranty funds, we may be required to settle those claims. Although we are indemnified under our management agreements for such amounts, we would be responsible contractually for claims in historical periods when we leased (in addition to managed) certain hotels. Based on the information currently available, we believe the ultimate resolution of this situation will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

Related Party Transactions

      Related parties, as defined in SFAS 57 “Related Party Disclosures”, include MeriStar Hospitality, the hotels included in our real estate joint ventures, and a small number of hotels which are affiliated with certain of our directors. Total management fees from related parties amounted to $8,720 and $16,685 for the three and six months ended June 30, 2004, and $7,882 and $15,364 for the three and six months ended June 30, 2003, respectively.

Critical Accounting Policies and Estimates

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

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

•  the evaluation of impairment of certain long-lived assets and intangible assets with determinable lives;

•  the evaluation of impairment of goodwill;

•  estimation of valuation allowances, specifically those related to income taxes and allowance for doubtful accounts; and

•  revenue recognition.

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

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

•  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 without the realistic expectation of a replacement;

•  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;

•  a significant adverse change in legal factors or an adverse action or assessment by a regulator, which could affect the value of the long-lived assets; or

•  events that could cause significant adverse changes and uncertainty in business and leisure travel patterns.

      During the second quarter of 2004, we wrote off $1,092 of unamortized management contract costs relating to terminated contracts. We did not record any asset impairments during the second quarter.

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      Impairment of Goodwill — In accordance with SFAS No. 142, annually, or as circumstances warrant, we perform an analysis to determine whether the carrying value of our goodwill has been impaired. 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’s 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 is recognized in an amount equal to that excess. Any impairment losses are recorded as operating expenses. We did not recognize any impairment losses for goodwill in the second quarter of 2004 or during 2003.

      Valuation Allowances — We use our judgment in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. At June 30, 2004, we have a $13,000 valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. The valuation allowance has not changed from the amount recorded at December 31, 2003. 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 occurs, we would record a charge to the income tax provision in that period.

      The utilization of our net operating loss carryforwards will be limited by the 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 hotel owners to make required payments. Our judgments in determining customer ability and willingness to pay are based on past experience with hotel owners and our assessment of the current and future operating environments for hotel owners. If a customer’s financial condition deteriorates or a management contract is terminated in the future, this could decrease a hotel owner’s ability, willingness or obligation to make payments. If that occurs, we might have to make additional allowances, which could reduce our earnings.

Non-GAAP Financial Measures

      Adjusted EBITDA represents earnings (losses) before interest, income tax expense (benefit), depreciation and amortization, equity in earnings (losses) of affiliates, discontinued operations, and in 2003, a gain on refinancing.

      We use Adjusted EBITDA as a measure of operating performance. Adjusted EBITDA should not be considered as an alternative to net income under accounting principles generally accepted in the United States of America for purposes of evaluating our results of operations, and does not represent cash flow from operations as defined by generally accepted accounting principles and is not necessarily indicative of cash available to fund all cash flow needs.

      We believe Adjusted EBITDA is useful to an investor in evaluating our operating performance because:

•  A significant portion of our assets consists of intangible assets. Of those intangible assets, our management contracts are amortized over their remaining terms, and, in accordance with generally accepted accounting principles, those assets are subject to straight-line amortization. Because depreci-

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	ation and amortization are non-cash items, we believe that presentation of Adjusted EBITDA is a useful supplemental measure of our operating performance;
•	Adjusted EBITDA is widely used in the hotel industry to measure operating performance without regard to items such as depreciation and amortization; and
•	We believe Adjusted EBITDA helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our asset base (primarily depreciation and amortization) from our operating results.

      Our management uses Adjusted EBITDA:

•  as a measurement of operating performance because it assists us in comparing our operating performance on a consistent basis as it removes the impact of our asset base (primarily depreciation and amortization) from our operating results;

•  in presentations to our Board of Directors to enable it to have the same measurement of operating performance used by management;

•  for planning purposes, including the preparation of our annual operating budget;

•  for compensation purposes, including the basis for bonuses and other incentives for certain employees;

•  as a valuation measure for evaluating our operating performance and our capacity to incur and service debt, fund capital expenditures and expand our business; and

•  as one measure in determining the value of other acquisitions and dispositions.

      There are material limitations to using a measure such as Adjusted EBITDA, including the difficulty associated with comparing results among more than one company and the inability to analyze certain significant items, including depreciation and interest expense, that directly affect our net income or loss. Management compensates for these limitations by considering the economic effect of the excluded expense items independently as well as in connection with its analysis of net income.

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

      The other items in the tables below represent operating segment activity and assets for the non-reportable segments. Adjusted EBITDA from other activities includes merger and integration costs, restructuring charges, asset impairments and other write-offs and discontinued operations. The table shown below reconciles Adjusted EBITDA to net income (loss) for the periods presented.

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      Adjusted EBITDA should be considered in addition to, not as a substitute for or as being superior to, operating income (losses), cash flows, or other measures of financial performance prepared in accordance with accounting principles generally accepted in the United States of America.

		Hotel		Corporate
		Management		Housing			Other			Total
Three months ended June 30, 2004
Net income (loss)		$	1,808	$	(846	)	$	(3,613	)	$	(2,651	)
Adjustments:
	Depreciation and amortization		1,979		359			—			2,338
	Interest expense, net		1,170		398			—			1,568
	Equity in losses of affiliates		165		—			—			165
	Discontinued operations		—		973			—			973
	Minority interest expense (benefit)		20		(9	)		(40	)		(29	)
	Income tax expense (benefit)		679		(318	)		(1,357	)		(996	)
Adjusted EBITDA		$	5,821	$	557		$	(5,010	)	$	1,368
Three months ended June 30, 2003
Net income (loss)		$	1,442	$	(1,092	)	$	(837	)	$	(487	)
Adjustments:
	Depreciation and amortization		3,205		413			—			3,618
	Interest expense, net		1,887		630			—			2,517
	Equity in losses of affiliates		218		—			—			218
	Discontinued operations		—		439			—			439
	Minority interest expense (benefit)		21		(16	)		(12	)		(7	)
	Income tax expense (benefit)		962		(729	)		(558	)		(325	)
Adjusted EBITDA		$	7,735	$	(355	)	$	(1,407	)	$	5,973
Six months ended June 30, 2004
Net income (loss)		$	1,961	$	(2,144	)	$	(6,212	)	$	(6,395	)
Adjustments:
	Depreciation and amortization		3,980		753			—			4,733
	Interest expense, net		2,455		835			—			3,290
	Equity in losses of affiliates		941		—			—			941
	Discontinued operations		—		1,237			—			1,237
	Minority interest expense (benefit)		23		(25	)		(73	)		(75	)
	Income tax expense (benefit)		1,056		(1,155	)		(3,345	)		(3,444	)
Adjusted EBITDA		$	10,416	$	(499	)	$	(9,630	)	$	287

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		Hotel			Corporate
		Management			Housing			Other			Total
Six months ended June 30, 2003
Net income (loss)		$	(412	)	$	(2,805	)	$	7,158		$	3,941
Adjustments:
	Depreciation and amortization		7,442			817			—			8,259
	Interest expense, net		3,619			1,206			—			4,825
	Equity in losses of affiliates		566			—			—			566
	Discontinued operations		—			814			—			814
	Gain on refinancing term loan from related party		—			—			(13,629	)		(13,629	)
	Minority interest expense (benefit)		(17	)		(115	)		293			161
	Income tax expense (benefit)		(274	)		(1,870	)		4,771			2,627
Adjusted EBITDA		$	10,924		$	(1,953	)	$	(1,407	)	$	7,564

Results of Operations

      Outlook — Through the end of 2003, the sluggish economy, the conflict in Iraq, fear of terrorist acts, health concerns for travelers, and delays and difficulties in travel due to heightened security measures at airports had a major impact on our operating results. Because of the significant slowdown of the economy over the past three years, our managed hotels generally experienced significant declines in occupancy and average daily rates. Weaker hotel performance reduced our base and incentive management fees, and also gave rise to additional losses from minority investments we had made in connection with some of the hotels that we manage.

      The economy, the conflict in Iraq and traveler health concerns due to SARS negatively impacted the demand for corporate relocations and long-term assignments, two primary drivers of our corporate housing operations. The second quarter of 2004 demonstrated encouraging Adjusted EBITDA improvement compared to second quarter 2003, as we continue to focus on stronger markets such as New York, Washington, DC, Chicago and London. In addition, we have reduced our inventory in areas where demand is weak or declining, as evidenced by the disposal of the Toronto market in June 2004, where long-term leases have previously not permitted us to adjust our inventory as flexibly as in other markets. Our goal going forward is to shorten the length of our lease commitments where possible and look for more opportunities to convert higher risk apartment blocks into management arrangements. This disposal of the Toronto operation eliminated a significant drag on the corporate housing operation’s Adjusted EBITDA, and we expect this will have a positive effect on the operations going forward.

      In our hotel management operations, the six month period ending June 30, 2004 was the first period in the last several years in which our operating statistics demonstrated significant improvement. Revenue per available room (RevPAR) has improved 6.2%, occupancy is up 2.5% and average daily rate (ADR) is up 3.6%, all compared to the same period of the prior year. These improvements are primarily attributable to the improvement in the U.S. economy. The gross domestic product rose at an annual rate of 3% in the second quarter of 2004, after a 4.2% rise in the first quarter, and a 4.1% rise in the fourth quarter of 2003. In addition, excluding managed hotels that are held for sale by the owner or undergoing extensive renovations, during the first six months of 2004, RevPAR improved 9.8%, occupancy rose 4.4% and ADR increased 5.2%, all compared to the same period of prior year. We are encouraged by these improvements and expect that our operations will improve if these trends continue.

Three months ended June 30, 2004 compared with three months ended June 30, 2003

      Overview — At June 30, 2004 we managed 269 properties, with 60,430 guest rooms, compared to 347 properties with 75,556 guest rooms at June 30, 2003, and 295 properties with 65,250 guest rooms at

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December 31, 2003. Hotels under management were reduced by a net of 78 from June 30 of preceding year, with the majority of the reductions due to the following:

•  The sale of 27 properties by MeriStar Hospitality since June 30, 2003, in connection with its asset disposition plan. (See Termination of Management Contracts above for detail).

•  In July of 2003, CNL Hospitality (“CNL”) acquired RFS Hotel Investors, Inc. (“RFS”), for whom we managed 50 properties. CNL terminated our management contracts for 28 of these properties. We retained management of the remaining 22 hotels, with market-based management fees.

      Although our total number of managed hotels has decreased, our Adjusted EBITDA has not been materially negatively impacted, as most of the terminated contracts were significantly less advantageous to us economically than the contracts which we retained or added. For example, we are entitled to termination fees from MeriStar Hospitality (see Termination of Management Contracts above for detail of termination fees), and the majority of hotels that we have retained or added are higher quality, upscale properties generating more revenue than those that were not retained. The majority of the properties terminated by CNL were select-service and therefore did not generate significant Adjusted EBITDA. In addition, these management contracts had limits on the amount of revenue we could earn, whereas the new management contracts for the retained properties do not.

Revenue

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

	2004			2003			Change
Revenue per available room (RevPAR)	$	74.37		$	69.27			7.4	%
Average daily rate (ADR)	$	105.03		$	100.09			4.9	%
Occupancy		70.8	%		69.2	%		2.3	%

      Our total revenue decreased $4,401, or 1.7%, to $253,304 for the three months ended June 30, 2004 compared to $257,705 for the three months ended June 30, 2003. Major components of this decrease were:

•  Revenue from managed properties, which we record as revenue under EITF 01-14 decreased by $5,279. This decrease is directly related to the decreased number of hotel employees and related reimbursable salary and other expenses resulting from a lower number of managed hotels.

•  Revenue from our corporate housing operations has increased $1,232, or 4.5%, to $27,555 for the three months ended June 30, 2004 from $26,323 for the three months ended June 30, 2003. This increase in revenue is attributable to several offsetting factors. We experienced significant increases in revenue in our Chicago, New York and Washington, D.C. markets due to an increase in units rented combined with strong average daily rates. This increase was almost entirely offset by the reduction of operations in our Raleigh market, and the disposal of operations in our Toronto market, plus a reduction of units rented in our London market.

•  Revenues from management fees remained fairly stable with a decrease of approximately $430, or 2.8%, to $14,968 for the three months ended June 30, 2004 compared to $15,398 for the three months ended June 30, 2003, resulting from a decrease in number of managed hotels. This was offset by termination fees of $1,534 we earned, with the majority from properties terminated by MeriStar Hospitality.

Operating expenses by department

      Total operating expenses by department increased $409, or 1.9%, to $22,469 for the three months ended June 30, 2004 compared to $22,060 for the three months ended June 30, 2003. Operating expenses by department include expenses that are related to lodging from our owned hotel, and to our corporate housing division. This increase is primarily due to an increase in corporate housing expenses, due to a focus on unit growth in high potential markets, including New York, London, Chicago and Washington D.C.

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Undistributed operating expenses

      Total undistributed operating expenses increased $3,789 or 17.9%, to $24,974 for the three months ended June 30, 2004, compared to $21,185 for the three months ended June 30, 2003. Major factors affecting the increase were:

•  Restructuring charges were $3,312 for the three months ended June 30, 2004, with no similar expense in the same period last year. In the second quarter of 2004, we recorded $3,312 related to severance costs for our former CEO.

•  Administrative and general expenses increased $1,466, or 9.1%, to $17,626 for the three months ended June 30, 2004, from $16,160 for the three months ended June 30, 2003. Our administrative and general expenses are fairly consistent with the prior year, with the largest increase being in incentive compensation, as last June we recorded an adjustment to reduce this accrual in order to align it with our then updated 2003 projections. In addition, professional fees have increased primarily related to the compliance with the Sarbanes-Oxley legislation. Partially offsetting this is a decrease in expenses following the closing of our Flagstone subsidiary, in the fourth quarter of 2003, in connection with the termination of the CNL management contracts.

•  Asset impairments and other write-offs increased $897, to $1,698 for the three months ended June 30, 2004, from $801 for the same period last year. The majority of this expense is due to the write-off of management contract costs, mainly related to hotel properties sold by MeriStar Hospitality, in connection with its announced asset disposition plan. We wrote-off $1,092 of management contracts, all of which were related to properties sold by MeriStar Hospitality during the second quarter of 2004, as compared to $801 in second quarter of 2003. Of the 2003 amount, $214 related to properties sold by MeriStar Hospitality and $587 related to 33 properties sold by Winston Hotels, Inc. In addition, during the second quarter of 2004, we pursued a merger with a company with a significant portfolio of hotels, which was not completed. We incurred approximately $606 relating to legal and accounting fees and due diligence costs related to this potential merger.

•  Merger and integration costs were $606 for the three months ended June 30, 2003, with no similar expense for the three months ended June 30, 2004. These costs include professional fees, travel, relocation costs and other transition costs that were incurred in connection with the merger of MeriStar and Interstate in July of 2002.

•  This increase was offset partially by a decrease in depreciation and amortization expense of $1,280, or 35.4%, to $2,338 for the three months ended June 30, 2004, from $3,618 for the three months ended June 30, 2003. This decrease is primarily due to a large number of management contracts that became fully amortized during the second quarter of 2003 and the loss of certain management contracts during the year. This decrease was partially offset by the increase in purchases of property, plant and equipment during mid-2003 related to the relocation of our corporate office, and the increase in depreciation recorded on those assets.

      Reimbursable costs, which we record as expense under EITF 01-14, decreased by $5,274, or 2.5%, to $206,831 for the three months ended June 30, 2004, from $212,105 for the three months ended June 30, 2003. The primary reason for this is the decrease in the number of managed hotels from June 30, 2003 to June 30, 2004, directly resulting in a decreased number of hotel employees and related reimbursable salaries and other expenses.

Loss from discontinued operations

      Loss from discontinued operations increased $534, to $973 for the three months ended June 30, 2004, from $439 for the same period of 2003. Discontinued operations relates to the disposal of the Toronto operation within our corporate housing division, which occurred in June of 2004. The increase in loss is partially attributable to expenses incurred of $698 in June of 2004, comprised of fixed asset write-offs, severance and other closing costs associated with the disposal. In addition, the Toronto operation experienced

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lower occupancy with a fixed cost structure due to long-term lease commitments, contributing to lower profit margins.

Net loss

      Net loss increased $2,164 to $(2,651) for the three months ended June 30, 2004, from $(487) for the three months ended June 30, 2003. This increase in net loss is due to the decrease in net operating income of $3,325, due to the increased expenses as discussed above, specifically the restructuring charges and asset impairments and write-offs. This decrease in net operating income is partially offset by the following:

•  Net interest expense decreased $949 to $1,568 for the three months ended June 30, 2004, from $2,517 for the same period in 2003. We incurred less interest expense on our senior credit facility as we repaid $45,276 in the fourth quarter of 2003, using proceeds from a public equity offering. In addition, we incurred less interest expense on our non-recourse promissory note as we made two principal payments during the third quarter of 2003.

•  Our equity in losses of affiliates decreased $53 to $165 for the three months ended June 30, 2004, compared to $218 for the same period in 2003. These losses consist of our proportionate share of the net losses incurred by our non-controlling equity investments. We incurred greater losses in the 2004 period from our MIP Lessee, L.P. investment as the hotels were not performing as anticipated. This was offset by income from equity in earnings from our other joint ventures, including the 12% return we receive on our preferred investment in Interconn Ponte Vedra Company, LLC.

•  Income tax benefit was $996 for the three months ended June 30, 2004, compared to $325 for the three months ended June 30, 2003. The main reason for this fluctuation is that we incurred a greater loss in the 2004 period, as opposed to the 2003 period. Our effective tax rate is approximately 35% at June 30, 2004 and 40% at June 30, 2003.

Adjusted EBITDA

      Adjusted EBITDA decreased $4,605, to $1,368 for the three months ended June 30, 2004, from $5,973 for the three months ended June 30, 2003. This decrease is due to the following:

•  Net income from hotel management operations increased $366, to $1,808 for the three months ended June 30, 2004, from $1,442 for the three months ended June 30, 2003. Hotel management’s Adjusted EBITDA decreased $1,914 to $5,821 for the three months ended June 30, 2004, from $7,735 for the three months ended June 30, 2003. The main reason for the decrease is an adjustment in 2003 to reduce the incentive compensation accrual based on revised annual projections at that time, offset by the stable growth in revenue quarter over quarter and the absence of expenses related to our Flagstone subsidiary, beginning in the fourth quarter of 2003, as discussed above.

•  Net loss from corporate housing operations decreased $246, to $846 for the three months ended June 30, 2004, from $1,092 for the same period of 2003. Corporate housing’s Adjusted EBITDA increased $912, to $557 for the three months ended June 30, 2004, from $(355) for the same period of 2003. The increase in Adjusted EBITDA is primarily attributed to improved rental rates and margins, reduced overhead costs and disposal of underperforming markets.

•  Net loss from other activities increased $2,776, to $3,613 for the three months ended June 30, 2004, from $837 for the three months ended June 30, 2003. Adjusted EBITDA from other activities decreased $3,603, to $(5,010) for the three months ended June 30, 2004, from $(1,407) for the three months ended June 30, 2003. In 2004, other activity includes restructuring charges of $3,312 relating to severance for our former CEO, and $1,698 of asset impairments and other write-offs, compared to the 2003 period which only includes asset impairments and other write-offs of $801. The reason for the increase in asset impairments and write-offs in 2004 is that MeriStar Hospitality disposed of more hotels in the second quarter of 2004 than 2003, resulting in more management contract write-offs. Also included in the second quarter 2004 asset impairments and write-offs is $606 of costs relating to a potential merger that was not completed. There was no similar expense in 2003.

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Six months ended June 30, 2004 compared with six months ended June 30, 2003

Revenue

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

	2004			2003			Change
Revenue per available room (RevPAR)	$	70.86		$	66.73			6.2	%
Average daily rate (ADR)	$	104.30		$	100.66			3.6	%
Occupancy		67.9	%		66.3	%		2.4	%

      Our total revenue decreased $23,887, or 4.7%, to 489,357 for the six months ended June 30, 2004 compared to $513,244 for the six months ended June 30, 2003. Major components of this decrease were:

•  Revenue from management fees decreased $1,117, or 3.8%, to $28,646 for the six months ended June 30, 2004, from $29,763 for the six months ended June 30, 2003. While our RevPAR, ADR and occupancy have improved year over year, the decrease in total number of hotels under management has caused a slight decrease in our total management fee revenue. (See Overview above for detail of terminated contracts). The decrease due to the terminated management contracts was offset by termination fees of $2,261 for the six months of 2004, with the majority relating the properties sold by MeriStar Hospitality.

•  Revenue from our corporate housing operations has increased $1,523, or 3.0%, to $51,805 for the six months ended June 30, 2004 from $50,282 for the six months ended June 30, 2003. This increase in revenue is attributable to several factors. We experienced significant increases in revenue in our Chicago, New York and Washington, D.C. markets due to an increase in units rented combined with strong average daily rates. This increase was offset by the reduction of operations in our Raleigh market, and the disposal of operations in our Toronto market, plus a reduction of units rented in our London market.

•  Reimbursable costs, which we record as revenue under EITF 01-14, decreased by $23,621, or 5.6%, to $400,981 for the six months ended June 30, 2004, from $424,602 for the six months ended June 30, 2003. The primary reason for this is the decrease in number of managed hotels from June 30, 2003 to June 30, 2004, directly resulting in a decreased number of hotel employees and related reimbursable salaries and other expenses.

Operating expenses by department

      Total operating expenses by department increased $458, or 1.1%, to $43,369 for the three months ended June 30, 2004 compared to $42,911 for the three months ended June 30, 2003. Operating expenses by department include expenses that are related to lodging from our owned hotel, and to our corporate housing division. This increase is primarily due to an increase in corporate housing expenses, due to a focus on unit growth in high potential markets, including New York, London, Chicago and Washington D.C.

Undistributed operating expenses

      Total undistributed operating expenses increased $3,027 or 6.5%, to $49,453 for the six months ended June 30, 2004, compared to $46,426 for the six months ended June 30, 2003. Major factors affecting the increase were:

•  Asset impairments and write-offs were $6,191 for the six months ended June 30, 2004, compared $801 for the same period of 2003. The majority of this expense is due to the write-off of management contract costs, mostly related to hotel properties sold by MeriStar Hospitality, in connection with its announced asset disposition plan. We wrote-off $1,092 of intangible assets associated with these terminated management contracts during the second quarter, compared to $801 in 2003. Of the $801, $214 related to properties sold by MeriStar Hospitality, and $587 related to properties sold by Winston

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	Hotels, Inc. Also included in this amount for the 2004 period is a $563 write-off of a portion of our investment in MIP, Lessee, L.P., as it was deemed partially impaired based on purchase offers received for two of the hotels owned by the joint venture. We also wrote-off $538, representing our remaining investment in our joint venture that owns the Residence Inn Houston Astrodome Medical Center, as it was determined that the carrying value would not be recovered due to the hotel’s underperformance. The remaining $96 of expense relates to fixed asset write-offs associated with closing of our subsidiary that managed properties purchased by CNL (see Overview above).
•	Restructuring charges were $3,439 for the six months ended June 30, 2004, with no similar expense in the same period last year. In the second quarter of 2004 we recorded $3,312 related to severance costs for our former CEO, and in the first quarter we incurred $127 of severance costs associated with restructuring within our corporate housing division.
•	Administrative and general expenses increased $194, or 0.1%, to $35,090 for the six months ended June 30, 2004, compared to $34,896 for the six months ended June 30, 2003. Part of the increase is due to the increase in insurance expense. Northridge Insurance Company provides reinsurance on certain lines of coverage in order to improve the terms and conditions of insurance available to our clients. We incurred $1,300 of losses on our property reinsurance program, including one claim which reached our maximum per occurrence exposure of $1,000. Claims of this magnitude are unusual. Nonetheless, we have lowered our maximum per occurrence loss limit to $500 in order to reduce our exposure on future claims. In addition there was an increase in incentive compensation, as last June we recorded an adjustment to reduce this accrual in order to align it with our then updated 2003 projections. Professional fees have increased primarily related to the compliance with the Sarbanes-Oxley legislation. Offsetting this is a decrease in expenses following the closing of our Flagstone subsidiary in the fourth quarter of 2003, in connection with the termination of the CNL management contracts.

      The increase in the above was offset by the following:

•  Depreciation and amortization expense decreased $3,526, or 42.7%, to $4,733 for the six months ended June 30, 2004, from $8,259 for the six months ended June 30, 2003. This decrease is primarily due to a large number of management contracts that became fully amortized during the second quarter of 2003 and the loss of certain management contracts during the year. This decrease was partially offset by the increase in purchases of property, plant and equipment during mid-2003 relating to the relocation of our corporate office, and the related increase in depreciation on those assets.

•  Merger and integration costs were $2,470 for the six months ended June 30, 2003, with no similar expense for the six months ended June 30, 2004. These costs include professional fees, travel, relocation costs and other transition costs that were incurred in connection with merger of MeriStar and Interstate in July of 2002.

      Reimbursable costs, which we record as expense under EITF 01-14, decreased by $23,621, or 5.6%, to $400,981 for the six months ended June 30, 2004, from $424,602 for the six months ended June 30, 2003. The primary reason for this is the decrease in the number of managed hotels from June 30, 2003 to June 30, 2004, directly resulting in a decreased number of hotel employees and related reimbursable salaries and other expenses.

Loss from discontinued operations

      Loss from discontinued operations increased $423, to $1,237 for the six months ended June 30, 2004, from $814 for the same period of 2003. Discontinued operations relates to the disposal of the Toronto operation within our corporate housing division, which occurred in June of 2004. The increase in loss is partially attributable to expenses incurred of $698 in June of 2004, comprised of fixed asset write-offs, severance and other closing costs associated with the disposal. In addition, the Toronto operation experienced lower occupancy with a fixed cost structure due to long-term lease commitments, contributing to lower profit margins.

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Net income (loss)

      Net income (loss) decreased $10,336 to $(6,395) for the six months ended June 30, 2004, from $3,941 for the six months ended June 30, 2003. In addition to the decrease in net operating income of $3,751, the most significant factor in the decrease in net income (loss) is the gain on debt refinancing in the amount of $13,629 recorded in the first quarter of 2003, with no similar item in 2004. At December 31, 2002, we had $56,069 of long-term debt under a term loan due to MeriStar Hospitality, which was due to mature on July 31, 2007. MeriStar Hospitality, seeking additional liquidity, approached us in late 2002 regarding a negotiated discounted repayment of the MeriStar Hospitality term loan. We repaid the note for a discounted amount of $42,056 in January 2003. We financed part of the repayment with the proceeds from a $40,000 subordinated term loan and realized a gain of $13,629.

      In addition, our equity in losses of affiliates increased $375, or 66.3%, to $941 for the six months ended June 30, 2004, compared to $566 for the same period in 2003. These losses consist of our proportionate share of the net losses incurred by our non-controlling equity investments. We incurred greater losses in the 2004 period from our MIP Lessee, L.P. investment as the hotels were not performing as anticipated. These were partially offset by income from equity in earnings from our other joint ventures, including the 12% return we receive on our preferred investment in Interconn Ponte Vedra Company, LLC.

      Offsetting these items, net interest expense decreased $1,535, or 31.8%, to $3,290 for the six months ended June 30, 2004, from $4,825 for the same period in 2003. We incurred less interest expense on our senior credit facility as we made repayments of $45,276 in the fourth quarter of 2003, using proceeds from a public equity offering. In addition, we incurred less interest expense on our non-recourse promissory note as we made two principal payments during the third quarter of 2003.

      Income tax expense (benefit) was $(3,444) for the six months ended June 30, 2004, compared to $2,627 for the six months ended June 30, 2003. The main reason for this fluctuation is that we incurred a loss in the 2004 period, as opposed to income in the 2003 period. Our effective tax rate is approximately 35% in the 2004 period and was approximately 40% in the 2003 period.

Adjusted EBITDA

      Adjusted EBITDA decreased $7,277, to $287 for the six months ended June 30, 2004, from $7,564 for the six months ended June 30, 2003. This decrease is due to the following:

•  Net loss from corporate housing operations decreased $661, to $2,144 for the six months ended June 30, 2004, from $2,805 for the same period of 2003. Corporate housing’s Adjusted EBITDA increased $1,454, to $(499) for the six months ended June 30, 2004, from $(1,953) for the same period 2003. The increase in Adjusted EBITDA can be primarily attributed to the improved rental rates and margins, reduced overhead costs and disposal of underperforming markets.

•  Net income (loss) from other activities decreased $13,370, to $(6,212) for the six months ended June 30, 2004, from $7,158 for the six months ended June 30, 2003. Adjusted EBITDA from other activities decreased $8,223, to $(9,630) for the six months ended June 30, 2004, from $(1,407) for the six months ended June 30, 2003. In 2004, other activity includes restructuring charges of $3,312 relating to severance costs for our former CEO, and $6,191 of asset impairments and write-offs, compared to the 2003 period which only includes asset impairments and other write-offs of $801, as discussed above.

      These decreases were offset by an increase in net income from hotel management operations of $2,373, to $1,961 for the six months ended June 30, 2004, from $(412) for the six months ended June 30, 2003. Hotel management’s Adjusted EBITDA decreased $508, to $10,416 for the six months ended June 30, 2004, from $10,924 for the six months ended June 30, 2003. The main reason for the decrease is the adjustment in 2003 to reduce the incentive compensation accrual, based on revised annual projections at that time, offset by the stable growth in revenue, increased insurance expense, and an absence of expenses related to our Flagstone subsidiary, beginning in the fourth quarter of 2003, as discussed above.

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Liquidity and Capital Resources

      Working Capital — We had $2,521 of cash and cash equivalents at June 30, 2004, compared to $7,450 at December 31, 2003, and working capital (current assets less current liabilities) of $1,813 at June 30, 2004 compared to a deficit of $8,349 at December 31, 2003.

      Operating Activities — Net cash used in operating activities was $11,076 for the six months ended June 30, 2004 compared to net cash provided by operating activities of $9,571 for the six months ended June 30, 2003. The increased use of cash resulted primarily from reductions in the accounts payable and accrued liabilities balances, specifically the payments of incentive compensation and severance amounts during 2004, as well as timing of collections of accounts receivable.

      If economic conditions, travel patterns or other factors negatively impact the financial results of our managed hotels and corporate housing operations, our management fee and corporate housing revenues could decrease, and we may incur additional losses from our minority investments. These events and factors could negatively impact our cash flows from operating activities and net income or loss.

      Investing Activities — Net cash provided by (used in) investing activities was $2,546 for the six months ended June 30, 2004 compared to $(4,477) for the six months ended June 30, 2003. One factor contributing to this increase in cash relates to the decrease in restricted cash during the first half of 2004 from our purchasing subsidiary. That subsidiary’s restricted cash consists of advances for capital expansion and renovation projects, and these amounts are used as the projects are performed. The decrease relates to the continuation of projects, as well as timing of advances. Another factor contributing to the increase in cash is the collections on certain of our advances to affiliates, primarily a note repaid by S.D.Bridgeworks in the amount of $2,687. Lastly, in 2003 we spent more on fixed asset purchases, when we moved our corporate offices from Washington, D.C. to Arlington, VA.

      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 operating the properties.

      Financing Activities — Net cash provided by financing activities was $3,095 for the six months ended June 30, 2004, compared $10,411 for the same period of 2003. This decrease in cash provided is mainly due to net borrowings and repayments of long-term debt. We had net borrowings of $3,688 in 2004, as opposed to $11,986 in 2003. In January 2003, we entered into a new $40,000 subordinated term loan, and repaid the MeriStar Hospitality term loan, realizing a gain of $13,629. In addition, in the second quarter of 2004 we redeemed 78,431 preferred operating partnership units for cash consideration, totaling $1,310, at a redemption price of $16.70 per unit. The preferred units were held by an affiliate of Mahmood J. Khimji, one of our directors.

      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 initially consisted of a $65,000 term loan and a $48,000 revolving credit facility. The term loan is payable in quarterly installments of $406 that began January 1, 2003, with the balance due on July 31, 2005. During the fourth quarter of 2003, using the proceeds from a public equity offering, we repaid $45,276 of the term loan. The revolving credit facility is due on July 28, 2005 (with a one-year renewal at our option). The interest rate on the senior credit agreement is LIBOR plus 3.00% to 4.50%, depending upon the results of certain financial tests. The senior credit facility contains certain covenants, including maintenance of financial ratios at the end of each quarter, compliance reporting requirements and other customary restrictions. At June 30, 2004, we were in compliance with these covenants. The senior credit agreement also includes pledges of collateral, including the following:

•  Ownership interests of all existing subsidiaries and unconsolidated entities as well as any future material subsidiary or unconsolidated entity;

•  Owned hospitality properties; and

•  Other collateral that is not previously prohibited from being pledged by any of our existing contracts/agreements.

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      At June 30, 2004, borrowings under the senior credit agreement bore interest at a rate of 5.59% per annum, which is the 30-day LIBOR plus 3.50%. We are currently in the process of negotiating the refinancing of this facility, which we expect to complete during the third quarter of 2004.

      We incurred $592 and $1,200 of interest expense on the senior credit facility for the three and six months ended June 30, 2004, and $1,168 and $2,264 for the three and six months ended June 30, 2003. The decrease in interest expense resulted from our prepayment of $45,276 of our term loan with proceeds from our November 2003 public equity offering. As of August 6, 2004, the total availability under our senior credit agreement was $21,000.

      Non-recourse promissory note — In March 2001, we entered into a non-recourse 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 and six months ended June 30, 2004, we incurred $112 and $223 of interest expense on the promissory note, respectively. For the three and six months ended June 30, 2003, we incurred $125 and $250 of interest expense on the promissory note, respectively.

      In June 2003, we made unscheduled principal payments totaling $447 on the note. As of June 30, 2004 the remaining balance on the promissory note is $3,723. In connection with one of the payments, our ownership interest in the partnership was reduced from 50% to 49.5% as FelCor made an additional contribution to the partnership at that time. After notifying FelCor, we have suspended further principal and interest payments on this non-recourse promissory note and, accordingly, we are in default under the note. We expect that we will ultimately transfer ownership of our equity interests in these joint ventures to FelCor in return for the extinguishment of the debt. We wrote off the investment in these partnerships in 2003.

      Subordinated term loan — In January 2003, in order to finance our repayment of our debt to MeriStar Hospitality at a discount, we entered into a $40,000 subordinated term loan that carries a variable interest rate based on the 30-day LIBOR plus a spread of 8.50%. The subordinated term loan matures on January 31, 2006, but if the revolving portion of our senior credit facility is extended for an additional year, the maturity of the subordinated term loan will also be automatically extended by one year to January 31, 2007. This term loan is subordinated to borrowings under the senior credit agreement and contains certain covenants, including maintenance of financial ratios at the end of each quarter, compliance reporting requirements and other customary restrictions. At June 30, 2004, we were in compliance with these covenants. At June 30, 2004, borrowings under the subordinated term loan bore interest at a rate of 9.63% per annum. We incurred $973 and $1,946 of interest expense on the subordinated term loan for the three and six months ended June 30, 2004, respectively, and $997 and $1,887 of interest expense on the subordinated term loan for the three and six months ended June 30, 2003 respectively.

      Public equity offering — On November 26, 2003, in a public equity offering, we sold 8,500,000 shares of our common stock, par value $0.01 per share, at a price of $5.25 per share. An additional 500,000 shares of common stock were offered by our principal investor group. On December 16, 2003, the underwriters exercised their over-allotment option for an additional 601,900 shares.

      Our total proceeds from this equity offering, net of the underwriting discount but prior to deducting other expenses, amounted to approximately $45,276. We did not receive any proceeds from the sale of shares by the principal investor group. The total proceeds were used to repay our term loan under our senior credit facility.

      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, required capital expenditures and debt service for the next twelve months. We expect to continue to seek acquisitions of hotel management businesses and management contracts, and joint venture opportunities where we can participate in the ownership of hotels we manage. We expect to finance future acquisitions through a combination of additional borrowings under our credit facility and the issuance of equity instruments, including common stock or operating partnership units, or additional/replacement debt, if market conditions permit. We believe these sources of capital will be sufficient to provide for our long-term capital needs.

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Contractual Obligations and Maturities of Indebtedness

      The following table summarizes our contractual obligations at June 30, 2004 and the effect that those obligations are expected to have on our liquidity and cash flows in future periods:

	Payment terms
			Less than						More than
	Total		1 year		1-3 years		3-5 years		5 years
Senior credit facility	$	46,286	$	1,625	$	44,661	$	—	$	—
Promissory Note		3,723		—		—		—		3,723
Subordinated Term-loan		40,000		—		40,000		—		—
Non-cancelable leases		143,012		70,286		37,727		10,483		24,516
Wyndham interest		433		433		—		—		—
Total	$	233,454		72,344		122,388		10,483		28,239

      Long-Term Debt — For principal repayment and debt service obligations with respect to our long-term debt, see Note 7 to our consolidated financial statements.

      Lease Commitments — We lease apartments for our Corporate Housing division and office space for our corporate offices. The leases run through 2014 and are included in the table above.

      Management Agreement Commitments — Under the provisions of management agreements with certain hotel owners, we have outstanding commitments to provide an aggregate of $3,222 to these hotel owners in the form of investments or loans, if requested. 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 as it is at the hotel owner’s discretion.

      Letter of Credit — We have a $2,500 letter of credit outstanding from Interstate Operating Co. L.P. and Northridge Insurance Company in favor of our property insurance carrier. The letter of credit expires on June 25, 2005.

      Equity Investment Funding — In connection with our equity investments in hotel real estate, we are partners or members of various unconsolidated partnerships or limited liability companies. The terms of such partnership or limited liability company agreements provide that we contribute capital as specified. The timing and amount of such contributions of capital, if any, is currently unknown and is therefore not reflected in the chart set forth above. We have minority equity interests in 11 hotel real estate limited partnerships and limited liability companies. We do not guarantee the debt or other obligations of any of these investments.

      Wyndham interest — Wyndham International, Inc., (“Wyndham”) holds a 1.6627% non-controlling economic interest in one of our operating subsidiaries. In conjunction with the MeriStar-Interstate merger, we accelerated the timing of Wyndham’s right to require us to redeem this interest. Effective July 20, 2002, Wyndham has the right to require us to redeem this interest. The estimated value of this interest at June 30, 2004 is $433 and is included in accounts payable-related parties in our consolidated balance sheet.

      Redeemable Preferred Operating Partnership Units — At June 30, 2004, we had 247,122 Class A units outstanding in our subsidiary operating partnership, Interstate Operating Company, L.P. This partnership indirectly holds substantially all of our assets. We had outstanding preferred units that were held by an affiliate of Mahmood J. Khimji, one of our directors. On May 3, 2004, we redeemed all 78,431 preferred units for cash consideration, totaling $1,310, at a redemption price of $16.70 per unit, which was paid to Mr. Khimji’s affiliates.

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.

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      Our senior secured credit facility matures July 31, 2005, with a one year extension of the revolving portion at our option. At June 30, 2004, we had borrowings of $46,286 outstanding on the facility. Interest on the debt is variable, based on the 30-day LIBOR plus a spread of 3.0% to 4.5% depending on the results of certain financial tests. At June 30, 2004, the senior credit facility bore interest at a rate of 5.59% per annum, which is the 30-day LIBOR plus 3.50%. We have determined that the fair value of the debt approximates its carrying value. We are currently in the process of refinancing this facility. We expect to complete the refinancing in the third quarter of 2004. We expect to write off approximately $990 of net deferred financing costs associated with this facility at the time of the refinancing.

      Our subordinated term loan matures on January 31, 2006, but if the revolving portion of our senior credit facility is extended for an additional year, at our option, the maturity of the subordinated term loan will also be automatically extended by one year to January 31, 2007. Interest on the debt is based on the 30-day LIBOR plus 850 basis points. At June 30, 2004, borrowings under the subordinated term loan bore interest at a rate of 9.63% per annum. We have determined that the fair value of the debt approximates its carrying value.

      Our non-recourse promissory note to FelCor with a balance of $3,723 is due on December 31, 2010. Interest on the note is payable monthly at the rate of 12% per annum. We believe that our non-recourse promissory note would have no value to a third party. We intend to exchange the non-recourse promissory note for our equity interests in the related joint ventures, as discussed in Note 6. The carrying value of our investments in these partnerships have been previously written down to zero.

      In October 2002, we entered into a $30,000, two-year interest rate swap agreement with a financial institution in order to hedge against the effect that future interest rate fluctuations may have on our floating rate debt. The swap agreement effectively fixes the 30-day LIBOR at 2.50%. The fair value of the swap agreement was a liability of $104 at June 30, 2004.

      In March 2003, we entered into a $35,000, twenty-two month interest rate cap agreement with a financial institution in order to hedge against the effect that future interest rate fluctuations may have on our floating rate debt. The interest rate agreement caps the 30-day LIBOR at 4.50%. At June 30, 2004, the fair value of this cap agreement was insignificant.

      Giving effect to our interest rate hedging activities, a 1.0% change in the 30-day LIBOR would have changed our interest expense by approximately $155 and $307 for the three and six months ended June 30, 2004, respectively, and by approximately $247 and $494 for the three and six months ended June 30, 2003, respectively.

      Our international operations are subject to foreign exchange rate fluctuations. We derived approximately 2.9% and 3.1% of our total revenue for the three and six months ended June 30, 2004, respectively, from services performed in Canada, the United Kingdom, France, and Russia. Our foreign currency transaction gains and losses were $(21) and $(105) for the three and six months ended June 30, 2004, respectively, and are included in accumulated comprehensive income (loss) on our statements and other comprehensive income (loss) of operations, net of tax. To date, since most of our foreign operations have been largely self-contained or dollar-denominated, we have not been exposed to material foreign exchange risk. Therefore, we have not entered into any foreign currency exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates. In the event that we have large transactions requiring currency conversion we would reevaluate whether we should engage in hedging activities.

Item 4.     Controls and Procedures

Disclosure Controls and Procedures

      We maintain disclosure controls and procedures that are designed to ensure that information that is 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, chief financial officer, and chief accounting officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the

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definition of “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) and 15-d–15(e)).

      We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer, our chief financial officer and our chief accounting officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, we concluded that our disclosure controls and procedures were adequate and effective in ensuring that material information relating to us and our consolidated subsidiaries would be made known to us by others within those entities, particularly during the period in which this report was being prepared.

Changes in Internal Controls

      There has not been any material change in our internal control over financial reporting that has occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

      It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving their stated goals under all potential future conditions. 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.

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

Item 2.     Changes in Securities and Use of Proceeds

      None.

Item 3.     Defaults Upon Senior Securities

      None.

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

      Our annual meeting of stockholders was held on May 27, 2004.

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

      Item No. 1

      To approve the re-election as directors of the Company to serve three-year terms expiring at the Annual Meeting in 2007 and until their successors are duly elected and qualified.

	For		Withheld
John J. Russell, Jr.		21,392,827		84,160
Leslie R. Doggett		15,993,403		5,483,584
James B. McCurry		21,372,969		104,018

      Item No. 2

      To approve the appointment of KPMG LLP as independent auditors for the Company for the fiscal year ending December 31, 2004.

For	21,430,464
Against	43,753
Abstain	2,770

Item 5.     Other Information

Forward-Looking Information

      Information both included in and incorporated by reference in this quarterly report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of our company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe”, “intend”, or “project” or the negative thereof or other variations thereon or comparable terminol-

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ogy. Factors which could have a material adverse effect on our operations and future prospectus include, but are not limited to:

•  changes in national, regional and local economic conditions;

•  changes in local real estate market conditions;

•  the impact of the September 11, 2001 terrorist attacks and actual or threatened future terrorist incidents or hostilities;

•  the aftermath of the war with Iraq, continuing conflicts in that geographic region and related ongoing U.S. involvement;

•  international geopolitical difficulties or health concerns;

•  uncertainties associated with obtaining additional financing for future real estate projects and to undertake future capital improvements;

•  the creditworthiness of the owners of the hotels that we manage and the risk of bankruptcy by hotel owners;

•  demand for, and costs associated with, real estate development and hotel rooms, market conditions affecting the real estate industry, seasonality of resort and hotel revenues and fluctuations in operating results;

•  changes in interest rates and in the availability, cost and terms of financing;

•  changes in laws and regulations applicable to us, including federal, state or local hotel, resort, restaurant or land use regulations, employment, labor or disability laws and regulations and laws governing the taxation of real estate investment trusts;

•  legislative/regulatory changes, including changes to laws governing the taxation of REITs;

•  present or future environmental legislation;

•  failure to renew essential management contracts or business leases;

•  uninsured property, casualty and other losses;

•  competition from other hotels, resorts and recreational properties, some of which may have greater marketing and financial resources than we or the owners of the properties we manage have;

•  limitations on our ability to quickly dispose of investments and respond to changes in the economic or competitive environment due to the illiquidity of real estate assets;

•  the ability of any joint venture in which we invest to service any debt they incur and the risk of foreclosure associated with that debt;

•  construction or renovation delays and cost overruns;

•  our ability to adjust our leases for corporate housing units to match market demand;

•  variations in lease and room rental rates;

•  changes in the market for particular types of assets;

•  labor disturbances or shortages of labor; and

•  loss of any executive officer or failure to hire and retain highly qualified employees.

      These factors and the risk factors referred to above could cause actual results or outcomes to differ materially from our historical results and those expressed in any forward-looking statements made or incorporated by reference in this registration statement. You should not place undue reliance on any of these forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made and we do not undertake to amend or update any forward-looking statement or statements to reflect

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events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

      These risks and uncertainties, along with the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2003, should be considered in evaluating any forward-looking statements in this quarterly report on Form 10-Q.

Item 6.     Exhibits and Reports on Form 8-K

      (a) Exhibits

Exhibit No.			Description of Document
	3.1		Amended and Restated Certificate of Incorporation of the Company, formerly MeriStar Hotels & Resorts, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form S-1/A filed with the Securities and Exchange Commission on July 23, 1998 (Registration No. 333-49881)).
	3.1.	1	Certificate of Amendment of the Restated Certificate of Incorporation of the Company dated June 30, 2001 (incorporated by reference to Exhibit 3.1.1 to the Company’s Form 10-K filed with the Securities and Exchange Commission on April 15, 2002).
	3.1.	2	Certificate of Merger of Interstate Hotels Corporation into MeriStar Hotels & Resorts, Inc. (incorporated by reference to Exhibit 3.1.2 to the Company’s Form 8-A/A filed with the Securities and Exchange Commission on August 2, 2002).
	3.1.	3	Certificate of Amendment of the Restated Certificate of Incorporation of the Company dated July 31, 2002 (incorporated by reference to Exhibit 3.1.3 to the Company’s Form 8-A/A filed with the Securities and Exchange Commission on August 2, 2002).
	3.2		By-laws of the Company, formerly MeriStar Hotels & Resorts, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Form S-1/A filed with the Securities and Exchange Commission on July 23, 1998 (Registration No. 333-49881)).
	3.2.	1	Amendment to the By-laws of the Company (incorporated by reference to Exhibit 3.3 to the Company’s Form 8-A/A filed with the Securities and Exchange Commission on August 2, 2002).
	4.1		Form of Common Stock Certificate of the Company (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-A/A filed with the Securities and Exchange Commission on August 2, 2002).
	4.2		Preferred Share Purchase Rights Agreement, dated July 23, 1998, between the Company, formerly MeriStar Hotels & Resorts, Inc., and the Rights Agent (incorporated by reference to Exhibit 4.4 to the Company’s Form S-1/A filed with the Securities and Exchange Commission on July 23, 1998(Registration No. 333-49881)).
	4.2.	1	Amendment to Rights Agreement, dated December 8, 2000, between the Company, formerly MeriStar Hotels & Resorts, Inc., and the Rights Agent (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 12, 2000).
	4.2.	2	Second Amendment to Rights Agreement, dated May 1, 2002, between the Company, formerly MeriStar Hotels & Resorts, Inc., and the Rights Agent (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on May 3, 2002).
	4.3		Form of Rights Certificate (incorporated by reference to Exhibit 4.3 to the Company’s Form S-1/A filed with the Securities and Exchange Commission on July 23, 1998 (Registration No. 333-49881)).

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Exhibit No.		Description of Document
	4.4	Registration Rights Agreement, dated June 30, 1999, between the Company (formerly MeriStar Hotels & Resorts, Inc.), Oak Hill Capital Partners, L.P. and Oak Hill Capital Management Partners, L.P. (incorporated by reference to Exhibit 4.7 to the Company’s Form 10-Q filed with the Securities and Exchange Commission for the three months ended June 30, 1999).
	10.1	Termination of the Intercompany Agreement between the Company and MeriStar Hospitality Corporation.
	10.2	Form of William Richardson’s employment agreement with the Company.
	10.3	Separation Agreement, dated as of April 1, 2004, between the Company and Paul W. Whetsell.
	31.1	Sarbanes-Oxley Act Section 302 Certifications of the Chief Executive Officer.
	31.2	Sarbanes-Oxley Act Section 302 Certifications of the Chief Financial Officer.
	32.1	Sarbanes-Oxley Act Section 906 Certifications of Chief Executive Officer.
	32.2	Sarbanes-Oxley Act Section 906 Certifications of Chief Financial Officer.

      (b) Reports on Form 8-K

      Current report on Form 8-K (Item 12) dated and filed May 5, 2004, regarding the first quarter earnings press release.

      Current report on Form 8-K (Item 12) dated and filed August 4, 2004, regarding the second quarter earnings press release.

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SIGNATURE

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

INTERSTATE HOTELS & RESORTS, INC.

/s/ J. WILLIAM RICHARDSON

J. William Richardson

Chief Financial Officer

(Duly authorized officer)

(Principal financial and accounting officer)

Dated: August 9, 2004

40 EX-10.1 2 w99944exv10w1.htm EXHIBIT 10.1

EXHIBIT 10.1

TERMINATION AGREEMENT

     THIS TERMINATION AGREEMENT (this “Agreement”) is entered into as of this 1st day of July, 2004 (the “Termination Date”) by and among MeriStar Hospitality Corporation, a Maryland corporation (“MSH”), MeriStar Hospitality Operating Partnership, L.P., a Delaware limited partnership (“MSH OP”), MeriStar Hotel Lessee, Inc., a Delaware corporation (“Leasing” and, together with MSH and MSH OP, the “MSH Parties”), Interstate Hotels & Resorts, Inc., a Delaware corporation and formerly known as MeriStar Hotels & Resorts, Inc. (“OPCO”) and Interstate Operating Company, L.P., a Delaware limited partnership and formerly known as MeriStar H&R Operating Company, L.P. (“OPCO OP” and, together with OPCO, the “OPCO Parties”).

RECITALS:

     WHEREAS, MSH, MSH OP and the OPCO Parties entered into that certain Intercompany Agreement, dated as of August 3, 1998, as amended January 1, 2001 and April, 2003 (the “Intercompany Agreement”);

     WHEREAS, the Board of Directors of each of MSH and OPCO have determined that it is in the best interests of their respective corporations, and their respective shareholders, to terminate the Intercompany Agreement in light of the current relationship between the corporations contemporaneously with amending certain provisions of other agreements among the parties and their respective affiliates.

     NOW, THEREFORE, for the mutual covenants and consideration herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

     1. Defined Terms. Any capitalized term not specifically defined in this Agreement shall have the definition given such term in the Intercompany Agreement.

     2. Date of Termination. The Intercompany Agreement shall terminate effective as of the Termination Date and the parties shall have no further obligations thereunder. In addition, each of the parties fully releases and discharges the other from and against any and all claims, damages, liabilities, costs or expenses arising out of, or relating to, the Intercompany Agreement or the termination hereof.

     3. Construction. Each party hereby acknowledges that it has participated equally in the drafting of this Agreement, with assistance of counsel, and therefore that no court construing this Agreement should construe it more stringently against one party than the other.

     4. Cumulative Remedies. All rights, benefits and remedies provided to the parties by this Agreement, or any instruments or documents executed pursuant to this Agreement, are cumulative and shall not be exclusive of any other of the rights, remedies and benefits allowed by law or equity to the parties.

     5. Governing Law. This Agreement shall be governed by, and construed under, the laws of the State of New York without regard to conflicts of law principles thereof.

     6. Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws in effect from time to time, such provision shall be fully severable; this Agreement shall be construed and enforced as if the illegal, invalid or unenforceable provision had never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom.

     7. Multiple Counterparts and Facsimile Signature. This Agreement may be executed in identical counterparts, each of which shall be deemed an original for all purposes and all of which shall constitute, collectively, one Agreement. This Agreement may be executed by facsimile signature provided that an original of this Agreement is delivered by overnight courier promptly thereafter.

     8. Authority. Each of the parties hereto represents and warrants that it is duly authorized to execute and deliver this Agreement in accordance with its organizational and governing documents, including, as applicable, its corporate charter, corporate bylaws, limited liability company agreement or articles of organization and/or partnership agreement and that this Agreement is binding upon such party in accordance with its terms.

     9. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns.

[Signatures appear on the following page.]

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     IN WITNESS WHEREOF, the parties have executed this Termination Agreement as of the date first above written.

MERISTAR HOSPITALITY CORPORATION
By:
Name:
Title:
MERISTAR HOSPITALITY OPERATING PARTNERSHIP, L.P.
By:	Meristar Hospitality Corporation, its general partner
By:
Name:
Title:
MERISTAR HOTEL LESSEE, INC.
By:
Name:
Title:
INTERSTATE HOTELS & RESORTS, INC.
By:
Name:
Title:
INTERSTATE OPERATING COMPANY, L.P.
By:	Interstate Hotels & Resorts, Inc.
	By:
	Name:
	Title:

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EX-10.1

exv10w1

EX-10.2

EXHIBIT 10.2

EXECUTIVE EMPLOYMENT AGREEMENT

EXECUTIVE EMPLOYMENT AGREEMENT, effective as of February 23, 2004 by and between INTERSTATE HOTELS & RESORTS, INC., a Delaware corporation (the “Company”), MERISTAR MANAGEMENT COMPANY, L.L.C., a Delaware limited liability company (the “LLC”) and any successor employer, and WILLIAM RICHARDSON (the “Executive”), an individual residing at 3323 Ponoka Rd Pittsburgh, PA 15241.

          The Company and the LLC desire to employ the Executive in the capacity of Chief Financial Officer, and the Executive desires to be so employed, on the terms and subject to the conditions set forth in this agreement (the “Agreement”);

          Now, therefore, in consideration of the mutual covenants set forth herein and other good and valuable consideration the parties hereto hereby agree as follows:

          1. Employment; Term. The Company and the LLC each hereby employ the Executive, and the Executive agrees to be employed by the Company and the LLC, upon the terms and subject to the conditions set forth herein, for a term of three (3) years, commencing on February 23, 2004 (the “Commencement Date”), and ending on February 23, 2007 unless terminated earlier in accordance with Section 4 of this Agreement; provided that such term shall automatically be extended from time to time for additional periods of one calendar year from the date on which it would otherwise expire unless the Executive, on the one hand, or the Company and the LLC, on the other, gives notice to the other party and parties prior to such date that it elects to permit the term of this Agreement to expire without extension on such date. (The initial term of this Agreement as the same may be extended in accordance with the terms of this Agreement is hereinafter referred to as the “Term”).

          2. Positions; Conduct.

               (a) During the Term, the Executive will hold the title and office of, and serve in the position of Chief Financial Officer of the Company and the LLC. The Executive shall undertake the responsibilities and exercise the authority customarily performed, undertaken and exercised by persons situated in a similar executive capacity, and shall perform such other specific duties and services (including service as an officer, director or equivalent position of any direct or indirect subsidiary without additional compensation) as they shall reasonably request consistent with the Executive’s position.

               (b) During the Term, the Executive agrees to devote his full business time and attention to the business and affairs of the Company and the LLC and to faithfully and diligently perform, to the best of his ability, all of his duties and responsibilities hereunder. Nothing in this Agreement shall preclude the Executive from devoting reasonable time and attention to (i) serving, with the approval of the Board, as a director, trustee or member of any committee of any organization, (ii) engaging in charitable and community activities and (iii) managing his personal investments and affairs; provided that such activities do not involve any material conflict of interest with the interests of the Company or, individually or collectively, interfere materially with the

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performance by the Executive of his duties and responsibilities under this Agreement. Notwithstanding the foregoing and except as expressly provided herein, during the Term, the Executive may not accept employment with any other individual or entity, or engage in any other venture which is directly or indirectly in conflict or competition with the business of the Company or the LLC.

               (c) The Executive’s office and place of rendering his services under this Agreement shall be in the principal executive offices of the Company which shall be in the Washington, D.C. metropolitan area. Under no circumstances shall the Executive be required to relocate from the Washington, D.C. metropolitan area or provide services under this Agreement in any other location other than in connection with reasonable and customary business travel. During the Term, the Company shall provide the Executive with executive office space, and administrative and secretarial assistance and other support services consistent with his position as Chief Financial Officer and with his duties and responsibilities hereunder.

          3. Salary; Additional Compensation; Perquisites and Benefits.

               (a) During the Term, the Company and the LLC will pay the Executive a base salary at an aggregate annual rate of not less than $350,000 per annum, subject to annual review by the Compensation Committee of the Board (the “Compensation Committee”), and in the discretion of such Committee, increased from time to time. Once increased, such base salary may not be decreased. Such salary shall be paid in periodic installments in accordance with the Company’s standard practice, but not less frequently than semi-monthly.

               (b) For each fiscal year during the Term, the Executive will be eligible to receive a bonus from the Company. The award and amount of such bonus shall be based upon the achievement of predefined operating or performance goals and other criteria established by the Compensation Committee, which goals shall give the Executive the opportunity to earn a cash bonus equal to an amount between 0% and 125% of base salary.

               (c) During the Term, the Executive will participate in all plans now existing or hereafter adopted by the Company or the LLC for their management employees or the general benefit of their employees, such as any pension, profit-sharing, deferred compensation plans, the Interstate Executive Real Estate Fund, bonuses, stock option or other incentive compensation plans, life and health insurance plans, or other insurance plans and benefits on the same basis and subject to the same qualifications as other senior executive officers. Notwithstanding the foregoing, the Company and the LLC may, in their sole discretion, discontinue or eliminate any such plans.

               (d) The Executive shall be eligible for stock option and restricted stock award grants from time to time pursuant to the Company’s Incentive Plan in accordance with the terms thereof. All such grants shall be at the discretion of the Board. Executive shall receive a separate option agreement governing any such grants.

               (e) The Company and the LLC will reimburse the Executive, in accordance with its standard policies from time to time in effect, for all out-of-pocket business expenses as may be incurred by the Executive in the performance of his duties

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under this Agreement. Executive will also be reimbursed for certain reasonable relocation expenses including house-hunting trips, real estate costs, and moving fees in connection with Executive’s move to the Washington, DC area at the beginning of his employment. Finally, the Company shall pay for the Executive’s apartment offered through BridgeStreet for one year from the hire date.

               (f) The Executive shall be entitled to vacation time to be credited and taken in accordance with the Company’s policy from time to time in effect for senior executives, which in any event shall not be less than a total of four weeks per calendar year. Such vacation time shall not be carried over year to year, and shall not be paid out upon termination of employment, or upon expiration of this Agreement.

               (g) The Company, at its sole cost, shall pay (i) up to $7,500 annually toward the premium of a life insurance policy with a death benefit of at least $1,000,000 payable to a beneficiary designated by the Executive in accordance with the terms and conditions of such life insurance policy and (ii) up to $7,500 annually toward the premium of a disability insurance policy with a disability benefit of at least $1,000,000 payable to the executive in accordance with the terms and conditions of such disability insurance policy. The Company makes no representations or warranties that the insurance benefits contained in the insurance policies supplied pursuant to this section will be paid under any particular conditions, and the Company shall not be deemed a guarantor of such benefits. Such benefits shall be payable in accordance with the terms of the respective insurance policy.

               (h) To the fullest extent permitted by applicable law, the Executive shall be indemnified and held harmless by the Company and the LLC against any and all judgments, penalties, fines, amounts paid in settlement, and other reasonable expenses (including, without limitation, reasonable attorneys’ fees and disbursements) actually incurred by the Executive in connection with any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative, investigative or other) for any action or omission in his capacity as a director, officer or employee of the Company or the LLC.

               Indemnification under this Section 3(h) shall be in addition to, and not in substitution of, any other indemnification by the Company or the LLC of its officers and directors. Expenses incurred by the Executive in defending an action, suit or proceeding for which he claims the right to be indemnified pursuant to this Section 3(h) shall be paid by the Company or the LLC, as the case may be, in advance of the final disposition of such action, suit or proceeding upon the Company’s or the LLC’s receipt of (x) a written affirmation by the Executive of his good faith belief that the standard of conduct necessary for his indemnification hereunder and under the provisions of applicable law has been met and (y) a written undertaking by or on behalf of the Executive to repay the amount advanced if it shall ultimately be determined by a court that the Executive engaged in conduct, including fraud, theft, misfeasance, or malfeasance against the Company or the LLC, which precludes indemnification under the provisions of such applicable law. Such written undertaking in clause (y) shall be accepted by the Company or the LLC, as the case may be, without security therefor and without reference to the financial ability of the Executive to make repayment thereunder.

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The Company and the LLC shall use commercially reasonable efforts to maintain in effect for the Term of this Agreement a directors’ and officers’ liability insurance policy, with a policy limit of at least $25,000,000, subject to customary exclusions, with respect to claims made against officers and directors of the Company or the LLC; provided, however, the Company or the LLC, as the case may be, shall be relieved of this obligation to maintain directors’ and officers’ liability insurance if, in the good faith judgment of the Company or the LLC, it cannot be obtained at a reasonable cost.

          4. Termination.

               (a) The Term will terminate immediately upon the Executive’s death, Disability, or, upon thirty (30) days’ prior written notice by the Company, in the case of a Determination of Disability. As used herein the term “Disability” means the Executive’s inability to perform his duties and responsibilities under this Agreement for a period of more than 120 consecutive days, or for more than 180 days, whether or not continuous, during any 365-day period, due to physical or mental incapacity or impairment. A “Determination of Disability” shall occur when a physician, reasonably satisfactory to both the Executive and the Company and paid for by the Company or the LLC, finds that the Executive will likely be unable to perform his duties and responsibilities under this Agreement for the above-specified period due to a physical or mental incapacity or impairment. Such decision shall be final and binding on the Executive and the Company; provided that if they cannot agree as to a physician, then each shall select and pay for a physician and these two together shall select a third physician whose fee shall be borne equally by the Executive and either the Company or the LLC and whose Determination of Disability shall be binding on the Executive and the Company. Should the Executive become incapacitated, his employment shall continue and all base and other compensation due the Executive hereunder shall continue to be paid through the date upon which the Executive’s employment is terminated for Disability or Determination of Disability in accordance with this section.

               (b) The Term may be terminated by the Company upon notice to the Executive and with or without “Cause” as defined herein.

               (c) The Term may be terminated by the Executive upon notice to the Company and with or without “Good Reason” as defined herein.

          5. Severance.

               (a) If the Term is terminated by the Company for Cause,

(i)	the Company and the LLC will pay to the Executive an aggregate amount equal to the Executive’s accrued and unpaid base salary through the date of such termination;
(ii)	all unvested options and restricted shares will terminate immediately; and

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(iii) any vested options issued pursuant to the Company’s Incentive Plan and held by the Executive at termination, will expire ninety (90) days after the termination date.

               (b) If the Term is terminated by the Executive other than because of death, Disability or for Good Reason,

(i)	the Company and the LLC will pay to the Executive an aggregate amount equal to the Executive’s accrued and unpaid base salary through the date of such termination;
(ii)	all unvested options and restricted shares terminate immediately; and
(iii)	any vested options issued pursuant to the Company’s Incentive Plan and held by the Executive at termination, will expire ninety (90) days after the termination date.

               (c) If the Term is terminated upon the Executive’s death or Disability,

(i)	the Company and the LLC will pay to the Executive’s estate or the Executive, as the case may be, a lump sum payment equal to the Executive’s base salary through the termination date, plus a pro rata portion of the Executive’s bonus for the fiscal year in which the termination occurred;
(ii)	the Company will make payments for one (1) year of all compensation otherwise payable to the Executive pursuant to this Agreement, including, but not limited to, base salary, bonus and welfare benefits;
(iii)	all of the Executive’s unvested stock options will immediately vest and such options, along with those previously vested and unexercised, will become exercisable for a period of one (1) year thereafter; and
(iv)	all of the Executive’s unvested restricted stock will immediately vest and all of the restricted stock of the Company held by the Executive shall become free from all contractual restrictions.

               (d) Subject to Section 5(e) hereof, if the Term is terminated by the Company without Cause or other than by reason of Executive’s death or Disability, in

6

addition to any other remedies available, or if the Executive terminates the Term for Good Reason,

(i)	the Company and the LLC shall pay the Executive a lump sum equal to two (2) times the product of (x) the sum of (A) the Executive’s then annual base salary and (B) the amount of the Executive’s bonus for the preceding calendar year; provided that, if Executive separates from employment pursuant to this Section 5(d) prior to his first anniversary with the Company, then Executive’s bonus amount for purposes of this Section 5(d)(i) will be    % of Executive’s base salary;
(ii)	all of the Executive’s unvested stock options will immediately vest and such options, along with those previously vested and unexercised, will become exercisable for a period of one (1) year thereafter;
(iii)	all of the Executive’s unvested restricted stock will immediately vest and all of the restricted stock of the Company held by the Executive shall become free from all contractual restrictions; and
(iv)	the Company shall also continue in effect the Executive’s health and dental benefits (or similar health and dental benefits paid to senior executives) noted in Section 3(c) as follows: Upon Executive’s termination of employment, Executive shall be eligible for continued health insurance benefits under the federal law known as COBRA. Executive is required to timely elect COBRA in order to receive continued health insurance coverage under this Agreement. Upon Executive’s election of COBRA coverage and timely payment of applicable monthly COBRA premiums, Executive will receive health insurance coverage under COBRA up to the maximum period provided by law. The Company will reimburse Executive of the cost of such COBRA coverage until the earlier of (x) eighteen (18) months from the termination date or (y) the date on which the Executive obtains health insurance coverage from a subsequent employer. Executive acknowledges that if he does not timely elect COBRA coverage he will not receive continued health insurance benefits from the Company. Executive also acknowledges that he is responsible for any taxes due on payments from the

7

Company in reimbursement for COBRA premium amounts.

               (e) Left intentionally blank.

               (f) If at any time the Term is not extended pursuant to the proviso to Section 1 hereof as a result of the Company giving notice thereunder that it elects to permit the term of this Agreement to expire without extension, the Company shall be deemed to have terminated the Executive’s employment without Cause.

               (g) As used herein, the term “Cause” means:

               (i) the Executive’s willful and intentional failure or refusal to perform or observe any of his material duties, responsibilities or obligations set forth in this Agreement; provided, however, that the Company shall not be deemed to have Cause pursuant to this clause (i) unless the Company gives the Executive written notice that the specified conduct has occurred and making specific reference to this Section 5(g)(i) and the Executive fails to cure the conduct within thirty (30) days after receipt of such notice;

               (ii) any willful and intentional act of the Executive involving malfeasance, fraud, theft, misappropriation of funds, or embezzlement affecting the Company or the LLC;

               (iv) the Executive’s conviction of, or a plea of guilty or nolo contendere to, an offense which is a felony;

               (v) Executive’s material breach of this Agreement; or

               (vi) Gross misconduct by Executive that is of such a serious or substantial nature that a substantial likelihood exists that such misconduct would injure the reputation of the Company if the Executive were to remain employed by the Company or LLC.

Termination of the Executive for Cause shall be communicated by a Notice of Termination. For purposes of this Agreement, a “Notice of Termination” shall mean delivery to the Executive of a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Company’s Board at a meeting of the Board called and held for the purpose (after reasonable notice to the Executive and reasonable opportunity for the Executive, together with the Executive’s counsel, to be heard before the Board prior to such vote) of finding that in the good faith opinion of the Board, the Executive was guilty of conduct constituting Cause and specifying the particulars thereof in detail, including, with respect to any termination based upon conduct described in clause (i) above that the Executive failed to cure such conduct during the thirty-day period following the date on which the Company gave written notice of the conduct referred to in such clause (i). For purposes of this Agreement, no such purported termination of the Executive’s employment shall be effective without such Notice of Termination;

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               (h) As used herein, the term “Good Reason” means the occurrence of any of the following, without the prior written consent of the Executive:

               (i) assignment to the Executive of duties materially inconsistent with the Executive’s positions as described in Section 2(a) hereof, or any significant diminution in the Executive’s duties or responsibilities, other than in connection with the termination of the Executive’s employment for Cause, Disability or as a result of the Executive’s death or by the Executive other than for Good Reason;

               (ii) the change in the location of the Company’s principal executive offices or of the Executive’s principal place of employment to a location outside the Washington, D.C. metropolitan area;

               (iii) any material breach of this Agreement by the Company or the LLC which is continuing;

               (iv) a Change in Control; provided that a Change of Control shall only constitute Good Reason if (i) the Executive terminates this Agreement within the six month period following a Change of Control; or

provided, however, that the Executive shall not be deemed to have Good Reason pursuant to clauses (h)(i) or (iii) above unless the Executive gives the Company or the LLC, as the case may be, written notice that the specified conduct or event has occurred and the Company or the LLC fails to cure such conduct or event within thirty (30) days of the receipt of such notice.

          (i) As used herein, the term “Change in Control” shall have the following meaning:

               (i) the acquisition (other than from the Company) by any “Person” (as the term is used for purposes of Sections 13(d) or 14(d) of the Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of thirty (30%) percent or more of the combined voting power of the Company’s then outstanding voting securities;

               (ii) the individuals who were members of the Board (the “Incumbent Board”) during the previous twelve (12) month period, cease for any reason to constitute at least a majority of the Board; provided, however, that if the election, or nomination for election by the Company’s stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board;

               (iii) approval by the stockholders of the Company of (a) merger or consolidation involving the Company if the stockholders of the Company, immediately before such merger or consolidation do not, as a result of such merger or consolidation, own, directly or indirectly, more than fifty (50%) percent of the combined voting power of the then outstanding voting securities of the corporation resulting from such merger or consolidation in substantially the

9

same proportion as their ownership of the combined voting power of the voting securities of the Company outstanding immediately before such merger or consolidation or (b) a complete liquidation or dissolution of the Company or an agreement for the sale or other disposition of all or substantially all of the assets of the Company; or

               (iv) approval by the stockholders of the Company of any transaction (including without limitation a “going private transaction”) involving the Company if the stockholders of the Company, immediately before such transaction, do not as a result of such transaction, own directly or indirectly, more than fifty (50%) percent of the combined voting power of the then outstanding voting securities of the corporation resulting from such transaction in substantially the same proportion as their ownership of the combined voting power of the voting securities of the Company outstanding immediately before such transaction.

          Notwithstanding the foregoing, a Change in Control shall not be deemed to occur pursuant to clause (i)(i) above solely because thirty (30%) percent or more of the combined voting power of the Company’s then outstanding securities is acquired by (a) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by the Company or any of its subsidiaries or (b) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of the Company in the same proportion as their ownership of stock in the Company immediately prior to such acquisition.

               (j) The amounts required to be paid and the benefits required to be made available to the Executive under this Section 5 are absolute. Under no circumstances shall the Executive, upon the termination of his employment hereunder, be required to seek alternative employment and, in the event that the Executive does secure other employment, no compensation or other benefits received in respect of such employment shall be set-off or in any other way limit or reduce the obligations of the Company under this Section 5.

               (k) Excise Tax Payments.

               (i) Gross-Up Payment. If it shall be determined that any payment or distribution of any type to or in respect of the Executive, by the Company, the LLC, or any other person, whether paid or payable or distributed or distributable pursuant to the terms of the Agreement or otherwise (the “Total Payments”), is or will be subject to the excise tax imposed by Section 4999 of the Internal Code of 1986, as amended (the “Code”) or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the “Excise Tax”), then the Executive shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes) imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments.

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               (ii) Determination by Accountant.

                    (A) All computations and determinations relevant to this Section 5(k) shall be made by a national accounting firm selected by the Company from among the five (5) largest accounting firms in the United States (the “Accounting Firm”) which firm may be the Company’s accountants. Such determinations shall include whether any of the Total Payments are “parachute payments” (within the meaning of Section 280G of the Code). In making the initial determination hereunder as to whether a Gross-Up Payment is required the Accounting Firm shall determine that no Gross-Up Payment is required, if the Accounting Firm is able to conclude that no “Change of Control” has occurred (within the meaning of Section 280G of the Code) on the basis of “substantial authority” (within the meaning of Section 6230 of the Code) and shall provide opinions to that effect to both the Company and the Executive. If the Accounting Firm determines that a Gross-Up Payment is required, the Accounting Firm shall provide its determination (the “Determination”), together with detailed supporting calculations regarding the amount of any Gross-Up Payment and any other relevant matter both to the Company and the Executive by no later than ten (10) days following the Termination Date, if applicable, or such earlier time as is requested by the Company or the Executive (if the Executive reasonably believes that any of the Total Payments may be subject to the Excise Tax). If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive and the Company with a written statement that such Accounting Firm has concluded that no Excise Tax is payable (including the reasons therefor) and that the Executive has substantial authority not to report any Excise Tax on his federal income tax return.

                    (B) If a Gross-Up Payment is determined to be payable, it shall be paid to the Executive within twenty (20) days after the later of (i) the Determination (and all accompanying calculations and other material supporting the Determination) is delivered to the Company by the Accounting Firm or (ii) the date of the event which leads to the Gross-up Payment. Any determination by the Accounting Firm shall be binding upon the Company and the Executive, absent manifest error.

                    (C) As a result of uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments not made by the Company should have been made (“Underpayment”), or that Gross-Up Payments will have been made by the Company which should not have been made (“Overpayments”). In either such event, the Accounting Firm shall determine the amount of the Underpayment or Overpayment that has occurred. In the case of an Underpayment, the amount of such Underpayment (together with any interest and penalties payable by the Executive as a result of such Underpayment) shall be promptly paid by the Company to or for the benefit of the Executive.

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                    (D) In the case of an Overpayment, the Executive shall, at the direction and expense of the Company, take such steps as are reasonably necessary (including the filing of returns and claims for refund), follow reasonable instructions from, and procedures established by, the Company, and otherwise reasonably cooperate with the Company to correct such Overpayment, provided, however, that (i) the Executive shall not in any event be obligated to return to the Company an amount greater than the net after-tax portion of the Overpayment that he has retained or has recovered as a refund from the applicable taxing authorities and (ii) this provision shall be interpreted in a manner consistent with the intent of Section 5(k)(i), which is to make the Executive whole, on an after-tax basis, from the application of the Excise Taxes, it being acknowledged and understood that the correction of an Overpayment may result in the Executive repaying to the Company an amount which is less than the Overpayment.

                    (E) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service relating to the possible application of the Excise Tax under Section 4999 of the Code to any of the payments and amounts referred to herein and shall afford the Company, at its expense, the opportunity to control the defense of such claim.

          6. Cooperation with Company. Following the termination of the Executive’s employment for any reason, Executive shall fully cooperate with the Company in all matters relating to the winding up of his pending work on behalf of the Company including, but not limited to, any litigation in which the Company is involved and the orderly transfer of any such pending work to other employees of the Company as may be designated by the Company. The Company agrees to reimburse the Executive for any out-of-pocket expense he incurs in performing any work on behalf of the Company following the termination of his employment.

          7. Confidential Information.

               (a) The Executive acknowledges that the Company and its subsidiaries or affiliated ventures (“Company Affiliates”) own and have developed and compiled, and will in the future own, develop and compile, certain Confidential Information and that during the course of his rendering services hereunder Confidential Information will be disclosed to the Executive by the Company Affiliates. The Executive hereby agrees that, during the Term and for a period of three years thereafter, he will not use or disclose, furnish or make accessible to anyone, directly or indirectly, any Confidential Information of the Company Affiliates. In particular, Executive covenants and agrees that Executive shall not, directly or indirectly, communicate or divulge, or use for the benefit of Executive or for any other person, or to the disadvantage of the Company, the Confidential Information or any information in any way relating to the Confidential Information, without prior written consent from the Company.

               (b) As used herein, the term “Confidential Information” means any trade secrets, confidential or proprietary information, or other knowledge, know-how,

12

information, documents, materials, owned, developed or possessed by a Company Affiliate pertaining to its businesses, including, but not limited to, records, memoranda, computer files and disks, audio and video tapes, CD’s, and property in any form containing information generally not known in the hospitality industry, including but not limited to trade secrets, techniques, know-how (including designs, plans, procedures, processes and research records), operations, market structure, formulas, data, programs, licenses, prices, costs, software, computer programs, innovations, discoveries, improvements, research, developments, test results, reports, specifications, data, formats, marketing data and business plans and strategies, customer lists, client lists and client contact lists, agreements and other forms of documents, expansion plans, budgets, projections, and salary, staffing and employment information. Notwithstanding the foregoing, Confidential Information shall not in any event include information which (i) was generally known or generally available to the public prior to its disclosure to the Executive, (ii) becomes generally known or generally available to the public subsequent to its disclosure to the Executive through no wrongful act of the Executive, (iii) is or becomes available to the Executive from sources other than the Company Affiliates which sources are not known to the Executive to be under any duty of confidentiality with respect thereto or (iv) the Executive is required to disclose by applicable law or regulation or by order of any court or federal, state or local regulatory or administrative body (provided that the Executive provides the Company with prior notice of the contemplated disclosure and reasonably cooperates with the Company, at the Company’s sole expense, in seeking a protective order or other appropriate protection of such information).

               (c) Upon demand by the Company and/or upon termination of employment with the Company for any reason, Executive shall promptly deliver to the Company all property and materials, whether written, descriptive, or maintained in some other form belonging to or relating to the Company, its business affairs and those of its Affiliates, including all Confidential Information. If Executive desires to retain copies of any forms or other materials developed by Executive during his employment with the Company, he may request permission to do so from the Chief Executive Officer, which permission shall not be unreasonably withheld.

               (d) The Executive agrees that during his employment hereunder and for a period of twelve (12) months thereafter he will not solicit or accept the business of, or assist any other person to solicit or accept the business of, any persons or entities who were customers of the Company, as of, or within one (1) year prior to, the Executive’s termination of employment, for the purposes of providing products or services competitive with the products or services of the Company or to cause such customers to reduce or end their business with the Company.

               (c) The Executive agrees that during his employment hereunder and for a period of twelve (12) months thereafter he will not solicit, raid, entice or induce any person that then is or at any time during the twelve (12) month period prior to the end of the Term was an employee in Executive’s department (other than a person whose employment with the Company has been terminated by the Company), to become employed by any person, firm or corporation.

          8. Specific Performance.

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               (a) The Executive acknowledges that the services to be rendered by him hereunder are of a special, unique, extraordinary and personal character and that the Company Affiliates would sustain irreparable harm in the event of a violation by the Executive of Section 7 hereof. Therefore, in addition to any other remedies available, the Company shall be entitled to specific enforcement and/or an injunction from any court of competent jurisdiction restraining the Executive from committing or continuing any such violation of this Agreement without proving actual damages or posting a bond or other security. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of damages.

               (b) If any of the restrictions on activities of the Executive contained in Section 7 hereof shall for any reason be held by a court of competent jurisdiction to be excessively broad, such restrictions shall be construed so as thereafter to be limited or reduced to be enforceable to the maximum extent compatible with the applicable law as it shall then appear; it being understood that by the execution of this Agreement the parties hereto regard such restrictions as reasonable and compatible with their respective rights.

               (c) Notwithstanding anything in this Agreement to the contrary, in the event that the Company fails to make any payment of any amounts or provide any of the benefits to the Executive when due as called for under Section 5 of this Agreement and such failure shall continue for twenty (20) days after written notice thereof from the Executive, all restrictions on the activities of the Executive under Section 7 hereof shall be immediately and permanently terminated.

          9. Withholding. The parties agree that all payments to be made to the Executive by the Company pursuant to the Agreement shall be subject to all applicable withholding obligations of such company.

          10. Notices. All notices required or permitted hereunder shall be in writing and shall be deemed given and received when delivered personally, four (4) days after being mailed if sent by registered or certified mail, postage pre-paid, or by one (1) day after delivery if sent by air courier (for next-day delivery) with evidence of receipt thereof or by facsimile with receipt confirmed by the addressee. Such notices shall be addressed respectively:

If to the Executive, to:

William Richardson

3323 Ponoka Rd

Pittsburgh, PA 15241

If to the Company or to the LLC, to:

Interstate Hotels & Resorts, Inc.

4501 North Fairfax Drive, Suite 800

Fairfax, VA 22203

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Attention: Legal Department

or to any other address of which such party may have given notice to the other parties in the manner specified above.

          11. Miscellaneous.

               (a) This Agreement is a personal contract calling for the provision of unique services by the Executive, and the Executive’s rights and obligations hereunder may not be sold, transferred, assigned, pledged or hypothecated by the Executive. The rights and obligations of the Company and the LLC hereunder will be binding upon and run in favor of their respective successors and assigns. The Company will not be deemed to have breached this Agreement if any obligations of the Company to make payments to the Executive are satisfied by the LLC.

               (b) This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware, without regard to conflict of laws principles.

               (c) The headings of the various sections of this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof.

               (d) The provisions of this Agreement which by their terms call for performance subsequent to the expiration or termination of the Term shall survive such expiration or termination.

               (e) The Company and the LLC shall reimburse the Executive for all costs incurred by the Executive in any proceeding for the successful enforcement of the terms of this Agreement, including without limitation all costs of investigation and reasonable attorneys’ fees and expenses incurred in the preparation of or in connection with such proceeding.

               (f) This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all other prior agreements and undertakings, both written and oral, among the parties with respect to the subject matter hereof, all of which shall be terminated on the Commencement Date. In addition, the parties hereto hereby waive all rights such party may have under all other prior agreements. In addition, the parties hereto hereby waive all rights such party may have under all other prior agreements and undertakings, both written and oral, among the parties hereto.

          IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the date first above written.

EXECUTIVE:

William Richardson

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COMPANY:
INTERSTATE HOTELS & RESORTS, INC.
By:
Name:
Title:
LLC:
INTERSTATE MANAGEMENT COMPANY, LLC
	By:	Interstate Operating Company, L.P., a member
	By:	Interstate Hotels & Resorts, Inc., its general partner
By:
Name:
Title:

EX-10.3

EXHIBIT 10.3

SEPARATION AGREEMENT

          This Separation Agreement (“Agreement”) is made and entered into as of April 1, 2004 (“Effective Date”), by and between Interstate Hotels & Resorts, Inc., a Delaware corporation (successor in interest to MeriStar Hotels & Resorts, Inc.) (“IHR”), Interstate Management Company L.L.C., a Delaware limited liability company (successor in interest to MeriStar Management Company L.L.C.) (“IMC”) (collectively, the “Company”), and Paul W. Whetsell (“Executive”).

          WHEREAS, the Company and the Executive are parties to an Executive Employment Agreement dated November 1, 2001 (the “Employment Agreement”); and

          WHEREAS, the Company and the Executive have twice amended that Employment Agreement, once on July 31, 2002 and once on December 13, 2002; and

          WHEREAS, the Company and the Executive have agreed to terminate their employment relationship and end the Term of the Employment Agreement on the basis of the terms set forth in this Agreement.

          NOW THEREFORE, AND IN CONSIDERATION of the mutual promises of the parties to this Agreement, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

     1. Termination. The Employment Agreement and Executive’s employment shall be terminated effective at midnight on March 31, 2004 (“Termination Date”). Executive’s termination is agreed by the parties to be without Cause pursuant to Section 5(b) of the Employment Agreement. The termination of Executive’s employment will not affect his role as Chairman of the Board of Directors of IHR (the “Board of Directors”). The parties shall, contemporaneously with their execution of this Agreement, execute a side letter governing certain terms and conditions of Executive’s service as Chairman of the Board of Directors.

     2. Benefits. Except as provided for in this Agreement, immediately following the Termination Date the Company shall cease providing and/or sharing the cost of all benefits that had been provided to the Executive in connection with his employment, including but not limited to health and dental insurance; life insurance; stock option and other incentive compensation plans (except as provided for in this Agreement); other insurance; pension, profit-sharing and bonus plans; expense reimbursement; and car allowances; provided however, that Executive shall continue to be eligible to participate in all benefit plans available to members of the Board of Directors for as long as Executive serves as a Director, including, but not limited to, the Company’s deferred compensation plan.

     3. Severance and Other Obligations Upon Termination. Provided the Revocation Period set forth below has expired without revocation, the Company shall provide

Executive the following severance benefits in lieu of the benefits contemplated in Executive’s employment agreement:

          (a) Executive shall be granted restricted stock with a face value equivalent to one million five hundred and sixty-two thousand five hundred dollars ($1,562,500) pursuant to the Restricted Stock Agreement attached as Exhibit A to this Agreement. The restricted stock granted pursuant to this Section 3(a) shall be valued at the average ten-day trailing closing price on the New York Stock Exchange of IHR’s publicly traded common stock (the “Valuation Price”), measured from the Effective Date of this Agreement. In the event that use of the aforementioned average ten-day trailing closing price would result in a grant in excess of 250,000 shares of restricted stock, the grant shall be limited to 250,000 shares and the difference in value between the grant of 250,000 shares and $1,562,500 shall be paid to Executive in cash (the “Cash Payment”). At the Executive’s direction, the Company will reimburse the Executive the amount the Executive owes for federal and state taxes, assuming that Mr. Whetsell is paying at the then highest marginal tax rate for federal and state income tax purposes, for the vesting of the 250,000 shares and the Cash Payment of the whether paid through withholdings or directly by the Executive in one or more payments no later than 10 days prior to such tax amount being due.

               The Company anticipates that the grant of restricted stock pursuant to this Section 3(a) will not trigger the applicable provisions of Section 280G of the Internal Revenue Code. The Company will indemnify Executive, as currently provided for in the Employment Agreement, if the Internal Revenue Service takes the position at anytime in the future that Section 280G was triggered by the payments and/or grants made pursuant to this Agreement.

          (b) All unvested stock options Executive currently holds in IHR shall vest immediately upon expiration of the Revocation Period, provided there has been no revocation. If at any time executive ceases his service as Chairman, for whatever reason and whether voluntary or involuntary, all unexercised vested stock options shall remain exercisable until the earlier of (i) one year after the last day that Executive held the position of Chairman, or (ii) the expiration date of the option.

          (c) Executive currently holds 156,542 unvested restricted shares which will vest in accordance with the Restricted Stock Agreement attached as Exhibit B to this Agreement. At the Executive’s direction, the Company will reimburse the Executive the amount the Executive owes for federal and state taxes, assuming that Mr. Whetsell is paying at the then highest marginal tax rate for federal and state income tax purposes, for the vesting of the 156,542 shares whether paid through withholdings or directly by the Executive in one or more payments no later than 10 days prior to such tax amount being due.

          (d) In all respects except as provided for expressly in this Agreement, all restricted stock granted pursuant to this Agreement or otherwise shall be governed by the applicable Restricted Stock Agreement.

          (e) All payments set forth above will be subject to applicable taxes and withholding.

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     4. At the time of the disposition of any asset held by MeriStar Investment Partners, L.P. (the “MIP Portfolio”), the Company shall pay Executive a bonus payment in an amount equal to the lesser of (i) an amount equal to any portion of Executive’s initial investment in the portfolio ($142,500) (the “Executive Investment”) that he has not yet received; or (ii) an amount equal to a pro rata portion of Executive’s initial investment in the MIP portfolio (less amounts previously received by Executive) calculated on the basis of IHR’s cumulative return of its initial investment in the MIP portfolio. By way of illustration, the parties agree that if one asset in the MIP Portfolio is sold (prior to any other assets in the MIP Portfolio being sold) and there is a return to IHR of 10% of IHR’s initial capital investment, then the Executive will receive a payment pursuant to the Section equal to 10% of the Executive Investment. If subsequently, the remainder of the MIP portfolio is disposed of for an amount equal to ninety five percent (95%) of the IHR’s initial capital investment therein, then the Executive will receive an additional payment equal to ninety percent (90%) of the amount of Executive’s Investment. In the event that IHR receives a sum greater than its initial investment upon disposition of the MIP portfolio, the Company may, in its sole discretion increase Executive’s bonus payment under this Section 4 by an amount deemed appropriate by the Company.

     5. Acknowledgments.

          (a) Executive acknowledges that the payments and other benefits set forth in this Agreement fully satisfy any and all obligations the Company has under the Employment Agreement and that the Company has no obligation to make any other payments or provide any other benefits to the Executive except (i) as set forth in this Agreement and (ii) for any unreimbursed expenses Mr. Whetsell has or will incur in connection with his activities on behalf of the Company. Executive waives any rights to any other payments or benefits from the Company not provided for in this Agreement.

          (b) Executive agrees to comply with all ongoing obligations set forth in the Employment Agreement. Without limiting the foregoing, Executive acknowledges and agrees that he shall comply with the restrictions related to the preservation of confidential information, the restrictions that prohibit Executive from soliciting Company employees for employment, as set forth in and according to the terms of Sections 7 and 8 of the Employment Agreement. The Company agrees that it shall indemnify Executive as provided for in the Employment Agreement, including but not limited to the provisions of Section 4(i) of the Employment Agreement, and shall provide Executive all excise tax payments as required by Section 5(k) of the Employment Agreement, should such indemnification or excise tax payments be required according to the terms of Sections 4(i) and 5(k), respectively. Nothing in this Section 5(b) shall be construed as imposing on Executive or Company any obligations that are not imposed by the Employment Agreement.

          (c) The Company acknowledges that it has no present knowledge of any conduct by Executive as of the Effective Date that would constitute a violation of the Employment Agreement or otherwise provide the Company grounds to terminate Executive’s employment for Cause as defined therein.

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     6. Non-Disclosure.

          (a) Executive agrees to keep the terms of this Agreement and the discussions leading to the Agreement confidential and not to disclose the terms to any person (other than his immediate family, his legal counsel, and his financial and tax advisors or as required by law or court order) without express prior written consent from the Company. Notwithstanding the foregoing, however, Executive and the Company agree that the terms of Executive’s Employment Agreement are already public knowledge and therefore are not subject to non-disclosure.

          (b) Notwithstanding any other provisions of this Agreement, any party to this Agreement (and each employee, representative, or other agent of such party) may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the transaction and all materials of any kind (including opinions and other tax analyses) that are provided to the party relating to such tax treatment and tax structure, provided that in connection with any such disclosure all references to the settlement amount paid pursuant to this Agreement, and other figures from which the settlement amount may be estimated or calculated, shall be redacted.

          (c) No provision of this Agreement shall be construed as prohibiting Executive from providing truthful and accurate information in response to a valid subpoena issued by a court of competent jurisdiction or other duly authorized entity. However, Executive agrees to notify the Company by contacting a Company officer promptly before complying with such a subpoena, so that the Company may protect its interests, including moving to quash the subpoena if necessary.

          (d) Except as provided in Paragraph 6(c) above, and as necessary to enforce the terms of this Agreement, each party agrees that no part of this Agreement is to be construed as used as, or admitted into evidence in any proceeding of any character, judicial, administrative or otherwise.

     7. Non-Disparagement. Executive shall make no statements disparaging the Company, any of its affiliates, any of its officers, directors, or employees, or any of its business practices. The Company’s directors and officers shall make no statements disparaging the Executive.

     8. Waiver and Release.

          (a) In consideration of the severance payments and other benefits outlined in this Agreement, Executive, for himself, his attorneys, heirs, executors, administrators, successors, and assigns, does hereby fully and forever release and discharge Interstate Hotels & Resorts, Inc., Interstate Management Co., LLC, their parent, subsidiary, and affiliate corporations, and all related companies, as well as all predecessors, successors, assigns, directors, officers, partners, agents, employees, former employees, heirs, executors, attorneys, and administrators (hereinafter “Releasees”) from all suits, causes of action, and/or claims, demands or entitlements of any nature whatsoever, whether known, unknown, or unforeseen,

4

which he has or may have against the Releasees arising out of or in connection with his employment by the Company (other than the obligations imposed on the Company pursuant to this Agreement), the termination of his employment, or any event, transaction, or matter occurring or existing on or before the date on which he executes this Agreement. Executive agrees, without limiting the generality of this Waiver and Release, not to file or otherwise institute any claim or lawsuit seeking damages or other relief and not to otherwise assert any claims that are lawfully released herein. Executive further hereby irrevocably and unconditionally waives any and all rights to recover any relief or damages concerning the claims that are lawfully released herein. Executive represents and warrants that he has not previously filed or joined in any such claims, demands or entitlements against the Releasees and that he will indemnify and hold harmless the Releasees from all liabilities, claims, demands, costs, expenses and/or attorneys’ fees incurred as a result of any such claims.

EXECUTIVE HEREBY ACKNOWLEDGES AND AGREES
THAT THIS RELEASE IS A GENERAL RELEASE.

          (b) This Release specifically includes, but is not limited to, all claims relating to Executive’s employment and the termination of that employment, all claims of breach of contract, employment discrimination (including, but not limited to, discrimination on the basis of race, sex, religion, national origin, age, pregnancy, disability or any other protected status, and coming within the scope of Title VII of the Civil Rights Act, the Age Discrimination in Employment Act, the Older Workers Benefit Protection Act, the Americans with Disabilities Act, and the Family & Medical Leave Act, all as amended, or any other applicable state, federal, or local law), claims under the Employee Retirement Income Security Act, as amended, claims under the Fair Labor Standards Act, as amended (or any other applicable federal, state or local statute relating to payment of wages), claims under the Uniformed Services Employment and Reemployment Rights Act of 1994, and the Veterans’ Reemployment Rights Law of 1940, as amended, and claims concerning recruitment, hiring, discharge, promotions, transfers, right to reemployment, salary rate, severance pay, stock options, wages or benefits due, sick leave, holiday pay, vacation pay, life insurance, any other leave, group medical insurance, any other fringe benefits, worker’s compensation, termination, employment status, libel, slander, defamation, intentional or negligent misrepresentation and/or infliction of emotional distress, together with any and all tort, contract, or other claims which might have been asserted by Executive or on his behalf in any suit, charge of discrimination, or claim against the Releasees.

          (c) Executive acknowledges that he has been given an opportunity of twenty-one (21) days to consider this Release and that he has been encouraged by Company to discuss fully the terms of this Release with legal counsel of his own choosing. Executive may, if he so desires, execute this Agreement prior to the expiration of the 21-day consideration period. Moreover, for a period of seven (7) days following his execution of this Release (“Revocation Period”), Executive shall have the right to revoke the waiver of claims arising under the Age Discrimination in Employment Act, a federal statute that prohibits employers from discriminating against employees who are age 40 or over. If he elects to revoke this Waiver and Release within this seven-day period, he must inform Company by delivering a written notice of revocation to Shane Brennan no later than 5:00 p.m. on the seventh calendar day following his execution of this Waiver and Release. However, if Executive elects to exercise this revocation

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right, this Agreement shall be voided in its entirety at the election of Company and Company shall be relieved of all obligations to make any payments required under this Agreement. If Executive does not revoke this Release, he understands and agrees that it will become fully enforceable immediately after the seven day revocation period has expired.

     9. General Terms.

          (a) Governing Law. This Agreement shall be governed by the laws of the State of Delaware, without regard to its conflicts of laws principles.

          (b) Non-Admissions. This Agreement does not constitute an admission of liability or wrongdoing on the part of the Company, Executive, or any of the Releasees.

          (c) Consideration. Executive affirms that the terms stated herein are the only consideration for executing this Agreement, that no other representations, promises, or agreements of any kind have been made to him, by any person or entity whatsoever to cause him to execute this Agreement.

          (d) Entire Agreement. This Agreement contains and constitutes the entire understanding and agreement by and among the parties and supersedes and cancels all previous negotiations, agreements, commitments, and writings in connection with the termination of Executive’s employment. The Employment Agreement shall continue to bind Executive and Company according to its terms and with regard to all ongoing obligations and commitments, except that to the extent any provision of this Agreement is inconsistent with any provision of the Employment Agreement, the terms of this Agreement shall control.

          (e) Release and Discharge. This Agreement may not be released, discharged, modified or supplemented except in a writing signed by the Chief Executive Officer of the Company and Executive.

          (f) Binding Agreement. This Agreement shall be binding upon and inure to the benefit of the parties and their respective representatives, successors and permitted assigns; however, this Agreement is a personal contract calling for the provision of unique services by the Executive, and the Executive’s rights and obligations hereunder may not be sold, transferred, assigned, pledged or hypothecated by the Executive.

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[SIGNATURE PAGE FOLLOWS]

     EXECUTIVE STATES THAT HE IS SIGNING THIS AGREEMENT KNOWINGLY AND VOLUNTARILY AND THAT HE HAS NOT BEEN COERCED INTO SIGNING THIS AGREEMENT.

     THE UNDERSIGNED STATE THAT THEY HAVE CAREFULLY READ THIS AGREEMENT, THAT THEY KNOW AND UNDERSTAND ITS TERMS, AND THEY SIGN IT FREELY.

     IN WITNESS WHEREOF, the parties have duly executed this Agreement:

EXECUTIVE

Paul W. Whetsell

INTERSTATE HOTELS & RESORTS, INC.

By:

Name:

Title:

INTERSTATE MANAGEMENT COMPANY, L.L.C.

By: Interstate Operating Company, L.P.,
its member

By: Interstate Hotels & Resorts, Inc.,
its general partner

By:

Name:

Title:

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EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Steven D. Jorns, Chief Executive Officer of Interstate Hotels & Resorts, Inc. certify that:

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

a.	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision 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 and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c.	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is likely to materially affect, the registrant’s internal control over financial reporting; and;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 9, 2004	/s/ Steven D. Jorns
	Steven D. Jorns Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, J. William Richardson, certify that:

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

a.	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision 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 and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c.	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is likely to materially affect, the registrant’s internal control over financial reporting; and;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 9, 2004	/s/ J. William Richardson
	J. William Richardson Chief Financial Officer

EX-32.1

Exhibit 32.1

INTERSTATE HOTELS & RESORTS, INC.
SARBANES-OXLEY ACT SECTION 906 CERTIFICATIONS

In connection with this quarterly report on Form 10-Q of Interstate Hotels & Resorts, Inc. (the “Registrant”) for the three months ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven D. Jorns, Chief Executive Officer of the Registrant, hereby certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 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 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.

Dated: August 9, 2004	/s/ Steven D. Jorns
	Steven D. Jorns Chief Executive Officer

EX-32.2

Exhibit 32.2

INTERSTATE HOTELS & RESORTS, INC.
SARBANES-OXLEY ACT SECTION 906 CERTIFICATIONS

In connection with this quarterly report on Form 10-Q of Interstate Hotels & Resorts, Inc. (the “Registrant”) for the three months ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, J. William Richardson, Chief Financial Officer of the Registrant, hereby certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 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 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.

Dated: August 9, 2004	/s/ J. William Richardson
	J. William Richardson Chief Financial Officer