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 September 30, 2005
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from           to

Commission File Number 1-14331

Interstate Hotels & Resorts, Inc.

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

www.ihrco.com

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

(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).     þ

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o          No þ

      The number of shares of Common Stock, par value $0.01 per share, outstanding at November 1, 2005 was 30,771,848.

INTERSTATE HOTELS & RESORTS, INC.

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1:	Financial Statements (Unaudited)		2
	Consolidated Balance Sheets — September 30, 2005 and December 31, 2004		2
	Consolidated Statements of Operations and Comprehensive Income (Loss) — Three and nine months ended September 30, 2005 and 2004		3
	Consolidated Statements of Cash Flows — Nine months ended September 30, 2005 and 2004		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		27
Item 4:	Controls and Procedures		28
PART II. OTHER INFORMATION
Item 1:	Legal Proceedings		29
Item 6:	Exhibits		29

1

PART I. FINANCIAL INFORMATION

Item 1:     Financial Statements

INTERSTATE HOTELS & RESORTS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

			September 30,			December 31,
			2005			2004
			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	17,806		$	16,481
	Restricted cash			3,894			690
	Accounts receivable, net of allowance for doubtful accounts of $2,758 at September 30, 2005 and $3,090 at December 31, 2004			30,365			32,765
	Due from related parties, net of allowance for doubtful accounts of $1,611 at September 30, 2005 and $836 at December 31, 2004			5,960			12,368
	Prepaid expenses and other current assets			10,111			9,012
		Total current assets		68,136			71,316
Marketable securities				1,598			2,320
Property and equipment, net				39,366			19,981
Investments in and advances to affiliates				8,090			11,541
Notes receivable				6,476			5,180
Deferred income taxes				15,909			18,312
Goodwill				96,809			96,802
Intangible assets, net				48,163			51,162
		Total assets	$	284,547		$	276,614
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	5,581		$	5,651
	Accrued expenses			66,298			61,003
	Current portion of long-term debt			5,750			5,750
		Total current liabilities		77,629			72,404
Deferred compensation				1,526			1,706
Long-term debt				80,552			83,447
		Total liabilities		159,707			157,557
Minority interest				953			930
Commitments and contingencies
Stockholders’ equity:
	Preferred stock, $.01 par value; 5,000,000 shares authorized, no shares issued			—			—
	Common stock, $.01 par value; 250,000,000 shares authorized; 30,719,072, and 30,629,519 shares issued and outstanding at September 30, 2005 and December 31, 2004, respectively			307			307
	Treasury stock			(69	)		(69	)
	Paid-in capital			189,714			188,865
	Accumulated other comprehensive income			93			892
	Accumulated deficit			(66,158	)		(71,868	)
		Total stockholders’ equity		123,887			118,127
		Total liabilities, minority interest and stockholders’ equity	$	284,547		$	276,614

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

2

INTERSTATE HOTELS & RESORTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands, except per share amounts)

			Three months ended						Nine months ended
			September 30,						September 30,
			2005			2004			2005			2004
Revenue:
	Lodging revenues		$	3,403		$	—		$	8,511		$	—
	Management fees			9,008			5,453			25,601			17,414
	Management fees-related parties			6,505			6,660			20,264			23,345
	Corporate housing			33,267			31,701			91,792			83,506
	Other revenue			3,125			4,245			9,583			10,599
				55,308			48,059			155,751			134,864
	Other revenue from managed properties			247,745			190,865			681,449			564,739
		Total revenue		303,053			238,924			837,200			699,603
Operating expenses by department:
	Lodging expenses			2,487			—			6,491			—
	Corporate housing			25,894			25,836			73,923			68,121
Undistributed operating expenses:
	Administrative and general			19,317			16,593			56,961			51,699
	Depreciation and amortization			2,474			2,127			6,830			6,640
	Restructuring and severance expenses			—			42			2,043			3,481
	Asset impairments and write-offs			1,046			1,601			2,957			7,792
				51,218			46,199			149,205			137,733
	Other expenses from managed properties			247,745			190,865			681,449			564,739
		Total operating expenses		298,963			237,064			830,654			702,472
OPERATING INCOME (LOSS)				4,090			1,860			6,546			(2,869	)
Interest income				288			111			658			801
Interest expense				(1,965	)		(2,113	)		(8,218	)		(6,093	)
Equity in earnings (loss) of affiliates				(381	)		(5	)		2,811			(946	)
Gain on sale of investments and extinguishment of debt				4,326			—			4,711			—
INCOME (LOSS) BEFORE MINORITY INTEREST AND INCOME TAXES				6,358			(147	)		6,508			(9,107	)
Income tax (expense) benefit				(2,585	)		(279	)		(2,647	)		3,264
Minority interest (expense) benefit				(38	)		(7	)		(49	)		68
INCOME (LOSS) FROM CONTINUING OPERATIONS				3,735			(433	)		3,812			(5,775	)
Income (loss) from discontinued operations, net of tax				1,656			133			1,898			(920	)
NET INCOME (LOSS)			$	5,391		$	(300	)	$	5,710		$	(6,695	)
Other comprehensive loss, net of tax:
	Foreign currency translation loss			(281	)		(104	)		(314	)		(209	)
	Unrealized loss on investments and other			(27	)		(84	)		(485	)		(28	)
	COMPREHENSIVE INCOME (LOSS)		$	5,083		$	(488	)	$	4,911		$	(6,932	)
BASIC EARNINGS (LOSS) PER SHARE:
	Continuing operations		$	0.12		$	(0.01	)	$	0.13		$	(0.19	)
	Discontinued operations			0.06			—			0.06			(0.03	)
	Basic earnings (loss) per share		$	0.18		$	(0.01	)	$	0.19		$	(0.22	)
DILUTED EARNINGS (LOSS) PER SHARE:
	Continuing operations		$	0.12		$	(0.01	)	$	0.12		$	(0.19	)
	Discontinued operations			0.05			—			0.06			(0.03	)
	Diluted earnings (loss) per share		$	0.17		$	(0.01	)	$	0.18		$	(0.22	)

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)

					Nine months ended
					September 30,
					2005			2004
OPERATING ACTIVITIES:
	Net income (loss)				$	5,710		$	(6,695	)
	Adjustments to reconcile to cash provided by operations:
		Depreciation and amortization				6,830			6,640
		Amortization and write-off of deferred financing fees				2,403			462
		Equity in (earnings) loss of affiliates				(2,811	)		946
		Asset impairments and write-offs				2,957			7,792
		Minority interest				49			(68	)
		Deferred income taxes				2,403			(3,368	)
		Gain on sale of investments and extinguishment of debt				(4,711	)		—
		Grant of stock for payment of severance				—			3,181
		Discontinued operations:
			Depreciation			155			384
			(Gain) loss on sale			(2,605	)		376
		Changes in assets and liabilities:
			Accounts receivable, net			3,296			(5,785	)
			Prepaid expenses and other current assets			(663	)		(915	)
			Accounts payable and accrued expenses			6,418			(8,383	)
			Due from related parties			6,408			6,379
			Other changes in asset and liability accounts			264			(732	)
				Cash provided by operations		26,103			214
INVESTING ACTIVITIES:
	Proceeds from the sale of investments and hotels					10,971			522
	Change in restricted cash					(3,204	)		1,364
	Purchases of property and equipment, net					(31,752	)		(2,061	)
	Purchases of intangible assets					(1,660	)		(1,109	)
	(Contributions) distributions to/from affiliates, net					4,475			(424	)
	Change in notes receivable					(531	)		2,553
				Cash provided by (used in) investing activities		(21,701	)		845
FINANCING ACTIVITIES:
	Proceeds from borrowings					106,200			34,000
	Repayment of borrowings					(105,372	)		(32,719	)
	Proceeds from issuance of common stock					40			735
	Cash paid for redemption of preferred operating partnership units					—			(1,310	)
	Financing fees paid					(3,641	)		(114	)
				Cash provided by (used in) financing activities		(2,773	)		592
Effect of exchange rate on cash						(304	)		626
Increase in cash and cash equivalents						1,325			2,277
CASH AND CASH EQUIVALENTS, beginning of period						16,481			7,450
CASH AND CASH EQUIVALENTS, end of period					$	17,806		$	9,727
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes:
				Interest	$	5,349		$	5,209
				Income taxes		1,094			1,138

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

4

INTERSTATE HOTELS & RESORTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS SUMMARY

      We are the largest independent U.S. hotel management company not affiliated with a hotel brand, measured by number of rooms under management. We have two operating divisions, hotel management and corporate housing.

      We manage a portfolio of hospitality properties and provide related services in the hotel, resort, conference center and golf markets. We also own one hotel property and hold non-controlling interests in eight joint ventures which hold ownership interests in 16 of our managed properties as of September 30, 2005. Our portfolio is diversified by franchise and brand affiliations. The related services we provide include insurance and risk management services, purchasing, project management services, information technology, telecommunications services and centralized accounting services.

      Our corporate housing division is operated through our BridgeStreet Worldwide, Inc. subsidiary. We provide apartment rentals for both individuals and corporations with a need for temporary housing as an alternative to purchasing long-term apartment rentals or prolonged hotels stays for individuals.

      As of September 30, 2005, we managed 294 properties, with 67,425 rooms in 41 states, the District of Columbia, Canada, and Russia. We had 3,138 apartments under lease or management through our BridgeStreet corporate housing division in the United States, France and the United Kingdom.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

      We have prepared these unaudited consolidated interim financial statements according to the rules and regulations of the Securities and Exchange Commission. Accordingly, 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, 2004.

      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.

      Certain reclassifications have been made to our prior year financial statements to conform to our current presentation.

5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock-Based Compensation

      We maintain stock-based employee compensation plans. Prior to 2003, we accounted for those plans in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Effective January 1, 2003, we adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” and applied those provisions prospectively to all employee awards granted, modified or settled after January 1, 2003. The following table illustrates the effect on net income (loss) and income (loss) per share if the fair value based method had been applied to all of our outstanding and unvested awards.

		Three months ended						Nine months ended
		September 30,						September 30,
		2005			2004			2005			2004
Net income (loss), as reported		$	5,391		$	(300	)	$	5,710		$	(6,695	)
Add: Stock-based employee compensation expense included in reported net income (loss), net of tax			15			50			163			182
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax			(22	)		(52	)		(185	)		(257	)
Net income (loss), pro forma		$	5,384		$	(302	)	$	5,688		$	(6,770	)
Earnings per share:
	Basic, as reported	$	0.18		$	(0.01	)	$	0.19		$	(0.22	)
	Basic, pro forma	$	0.18		$	(0.01	)	$	0.19		$	(0.22	)
	Diluted, as reported	$	0.17		$	(0.01	)	$	0.18		$	(0.22	)
	Diluted, pro forma	$	0.17		$	(0.01	)	$	0.18		$	(0.22	)

      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

      Emerging Issues Task Force (“EITF”) Issue 04-5, “Investor’s Accounting for an Investment in a Limited Partnership When the Investor Is the Sole General Partner and the Limited Partners Have Certain Rights” was ratified by the FASB in September 2005. At issue is what rights held by the limited partner(s) preclude consolidation in circumstances in which the sole general partner would consolidate the limited partnership in accordance with U.S. generally accepted accounting principles. The assessment of limited partners’ rights and their impact on the presumption of control of the limited partnership by the sole general partner should be made when an investor becomes the sole general partner and should be reassessed if (a) there is a change to the terms or in the exercisability of the rights of the limited partners, (b) the sole general partner increases or decreases its ownership of limited partnership interests, or (c) there is an increase or decrease in the number of outstanding limited partnership interests. This Issue is effective for fiscal years beginning after December 15, 2005 and as of September 29, 2005 for new or modified arrangements. We are not the sole general partner in any of our joint ventures. Accordingly, we do not expect the adoption of the EITF to have a material effect on our financial statements as we do not expect the EITF to change the manner in which we account for our existing joint ventures.

      In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, (“FAS 123R”), which requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. The statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost will be

6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). The provisions of FAS 123R are effective for the first quarter of 2006. The adoption of this standard is not expected to have a material effect on our consolidated financial position and results of operations as we currently use the fair value method prescribed in SFAS No. 123 for all employee awards granted, modified or settled after January 1, 2003, and all employee awards granted prior to our adoption of FAS 123 or January 1, 2003, will be fully vested by December 31, 2005.

3. EARNINGS PER SHARE

      We calculate our basic earnings (loss) per common share by dividing net earnings (loss) by the weighted average number of shares of common stock outstanding. Our diluted earnings (loss) per share assumes the issuance of common stock for all potentially dilutive common stock equivalents outstanding. Potentially dilutive shares include restricted stock and stock options granted under our comprehensive stock plan, and operating partnership units held by minority partners. No effect is shown for anti-dilutive securities. Basic and diluted earnings (loss) per common share are as follows:

	Quarter Ended
	September 30, 2005							September 30, 2004
	Income/				Per Share			Income/					Per Share
	(Loss)		Shares		Amount			(Loss)			Shares		Amount
	In thousands, except per share amounts
Income (loss) from continuing operations	$	3,735		30,717	$	0.12		$	(428	)		30,637	$	(0.01	)
Income from discontinued operations, net of tax		1,656		—		0.06			128			—		—
Basic net income (loss)	$	5,391		30,717	$	0.18		$	(300	)		30,637	$	(0.01	)
Assuming exercise of all outstanding employee stock options less shares repurchased at average market price		—		132		—			—			—		—
Assuming vesting of all outstanding restricted stock		—		134		(0.01	)		—			—		—
Diluted net income (loss)	$	5,391		30,983	$	0.17		$	(300	)		30,637	$	(0.01	)

	Year-to-Date Ended
	September 30, 2005							September 30, 2004
	Income/				Per Share			Income/					Per Share
	(Loss)		Shares		Amount			(Loss)			Shares		Amount
	In thousands, except per share amounts
Income (loss) from continuing operations	$	3,812		30,696	$	0.13		$	(5,760	)		30,431	$	(0.19	)
Income (loss) from discontinued operations, net of tax		1,898		—		0.06			(935	)		—		(0.03	)
Basic net income (loss)	$	5,710		30,696	$	0.19		$	(6,695	)		30,431	$	(0.22	)
Assuming exercise of all outstanding employee stock options less shares repurchased at average market price		—		130		—			—			—		—
Assuming vesting of all outstanding restricted stock		—		156		(0.01	)		—			—		—
Diluted net income (loss)	$	5,710		30,982	$	0.18		$	(6,695	)		30,431	$	(0.22	)

7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4. INVESTMENTS AND ADVANCES TO AFFILIATES

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

		September 30,		December 31,
		2005		2004
MIP Lessee, L.P.		$	2,403	$	4,856
S.D. Bridgeworks, LLC			—		253
CNL/ IHC Partners, L.P.			2,565		2,477
Interconn Ponte Vedra Company, L.L.C.			2,668		2,334
Other			454		1,621
	Total	$	8,090	$	11,541

      In January 2005, our joint venture S.D. Bridgeworks, LLC, sold the Hilton San Diego Gaslamp hotel and in June 2005 our joint venture sold the related retail space concluding our interest in the joint venture. Our portion of equity in the joint venture’s earnings related to the gain on the sale was approximately $4,200 and our proceeds were approximately $4,200.

      On April 15, 2005, we sold our 10% joint venture interest in Northridge-Interstate Hospitality Partners, LLC, which owns the Sheraton Smithtown hotel. Our gain related on the sale was approximately $39 and our proceeds related to the sale were approximately $1,130.

      On May 27, 2005 our joint venture, MIP Lessee, L.P. sold the Wyndham Milwaukee hotel. Our portion of the joint venture’s loss on sale was approximately $395.

      The recoverability of the carrying values of our investments and advances to our investees is 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. The debt of all investees is non-recourse to us, and we do not guarantee any of our investees’ obligations.

      Presented below is the combined summarized financial information of MIP Lessee, L.P., S.D. and Bridgeworks, LLC for the nine months ended September 30, 2005 and 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:

	Nine months ended,		Nine months ended,
	September 30, 2005		September 30, 2004
Revenue	$	71,469	$	94,356
Operating expenses	$	51,166	$	64,663
Net income (loss)	$	17,712	$	(7,171	)
Our share of the net income (losses)	$	2,863	$	(939	)

8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5. INTANGIBLE ASSETS

      Intangible assets consist of the following:

		September 30,			December 31,
		2005			2004
Management contracts		$	51,176		$	53,186
Franchise fees			1,221			1,945
Deferred financing fees			2,003			2,676
Management contracts in process			2,521			2,018
	Total cost		56,921			59,825
	Less accumulated amortization		(8,758	)		(8,663	)
Intangible assets, net		$	48,163		$	51,162

      We amortize the value of our intangible assets over their estimated useful lives, which generally correspond with the expected terms of the associated management, franchise, or financing agreement. We incurred aggregate amortization expense of $950 and $2,890 on these assets for the three and nine months ended September 30, 2005, and $921 and $2,823 for the three and nine months ended September 30, 2004. Amortization of deferred financing fees is included in interest expense. In connection with the repayment of our subordinated term loan in the first quarter of 2005, we recorded a loss of unamortized deferred financing fees of $1,847 included in interest expense. In addition, we recorded a loss of unamortized deferred financing fees of $34 to gain on sale of investments and extinguishment of debt in connection with the extinguishment of the $3,723 note payable with FelCor. For additional information see Note 6 in the consolidated financial statements.

      Our goodwill balance is allocated as follows:

		September 30,		December 31,
		2005		2004
Hotel management		$	87,603	$	87,596
Corporate housing			9,206		9,206
	Total goodwill	$	96,809	$	96,802

      We test goodwill for impairment during the fourth quarter of each fiscal year unless circumstances arise which would require earlier evaluation.

6. LONG-TERM DEBT

      Our long-term debt consists of the following:

		September 30,			December 31,
		2005			2004
Senior credit facility-revolving loan		$	18,526		$	27,000
Senior credit facility-term loan			46,776			16,474
Non-recourse promissory note			—			3,723
Sunstone promissory note			2,000			2,000
Subordinated term loan			—			40,000
Mortgage debt			19,000			—
	Total long-term debt		86,302			89,197
Less current portion			(5,750	)		(5,750	)
	Long-term debt, net of current portion	$	80,552		$	83,447

9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Senior Credit Facility-Revolving Loan and Term Loan — On January 14, 2005, we entered into an amended and restated senior secured credit facility (the “Credit Facility”) with various lenders. The Credit Facility replaces our existing senior secured credit facility (the “Old Credit Facility”) and provides aggregate loan commitments for a $53,000 term loan and a $55,000 revolving loan. The Credit Facility is scheduled to mature on January 14, 2008.

      The actual rates for both the revolving loan and term loan depend on the results of certain financial tests. As of September 30, 2005, based on those financial tests, borrowings under the revolving loan bore interest at a rate of LIBOR plus 350 basis points (rate of 7.4% at September 30, 2005) and borrowings under the term loan bore interest at a rate of LIBOR plus 450 basis points (rate of 8.4% at September 30, 2005). We incurred $1,523 and $4,581 of interest expense on our Credit Facility for the three and nine months ended September 30, 2005, respectively, and we incurred $610 and $1,810, of interest expense on our Old Credit Facility for the three and nine months ended September 30, 2004, respectively.

      The debt under our Credit Facility is guaranteed by certain of our existing wholly-owned subsidiaries and collateralized by pledges of ownership interests, owned hospitality properties, and other collateral that was not previously prohibited from being pledged by any of our existing contracts or agreements. Our Credit Facility contains covenants that include maintenance of financial ratios at the end of each quarter, compliance reporting requirements and other customary restrictions. We are in compliance with the amended loan covenants and expect to be in compliance for the remainder of the loan term.

      When we entered into the amended Credit Facility, we borrowed approximately $87,200, including the entire $53,000 term loan and $34,200 under the revolving loan. We used those amounts to repay our existing $40,000 subordinated term loan, $43,474 outstanding under our Old Credit Facility, and fees and expenses associated with the repayments and the amended Credit Facility. As of September 30, 2005, we had repaid $6,224 of term loans and had $18,526 outstanding under our revolving loan, leaving approximately $36,000 of availability.

      Non Recourse Promissory Note — In 2001, we entered into a $4,170 non-recourse promissory note with FelCor Lodging Trust Incorporated (“FelCor”), to fund the acquisition of a 50% equity interest in two partnerships that owned eight mid-scale hotels (“the JV”). The note bore interest at 12% per annum, with a maturity date of December 31, 2010. The note was collateralized solely by our equity interest in the JV.

      The note provided for repayments only to be made to the extent the JV made distributions to us. The operating performance of the JV’s hotels was poor over the past several years. In March 2005, the lenders, with the JV’s acquiescence, initiated foreclosure proceedings, which were completed in September 2005. We have confirmed with FelCor that they do not intend to foreclose on the collateral of this note as it is now worthless and that they do not expect payment of this note except to the extent that the JV would make any future distributions to us. The JV no longer holds title to any of the hotel assets and the JV has no other operations from which to generate cash. Accordingly, we have derecognized the liability. The derecognition of the remaining principal of $3,723 and $637 of accrued interest is recorded as an ordinary gain for the extinguishment of debt of $4,326 in our statement of operations in the third quarter of 2005.

      Sunstone Promissory Note — On October 26, 2004, we entered into a Stock Purchase Agreement to acquire Sunstone Hotel Properties, Inc. (“Sunstone”). In connection with the purchase, we entered into a non-interest bearing note with Sunstone Hotels Investors, LLC (“Sunstone REIT”), for $2,000 that is due December 31, 2005.

      Subordinated Term Loan — In January 2003, we entered into a $40,000 subordinated term loan that bore interest at a rate of LIBOR plus 850 basis points and was scheduled to mature on January 31, 2006. In January 2005, we repaid this loan with proceeds from the refinancing of our Credit Facility, as discussed above. We recorded a loss of $1,847 for unamortized deferred financing costs in connection with this repayment during the first quarter of 2005.

10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Mortgage Debt — In February 2005, we entered into a $19,000 non-recourse mortgage loan to finance the acquisition of the Hilton Concord hotel. Interest only is payable until the loan matures in March 2008. The loan bears interest at a rate of LIBOR plus 225 basis points (rate of 5.9% at September 30, 2005). Interest expense of $279 and $660 was incurred for the three and nine months ended September 30, 2005.

      Interest Rate Caps — In February 2005, we entered into a $19,000, three-year interest rate cap agreement in connection with the mortgage loan on the Hilton Concord hotel, in order to provide an economic hedge against the potential effect of future interest rate fluctuations. The interest rate agreement caps the 30-day LIBOR at 6.65% and is scheduled to mature on March 1, 2008. At September 30, 2005, the fair value of this interest rate cap agreement was approximately $8 and was recorded as an asset. In March 2005, we entered into a $55,000, three-year interest rate cap agreement related to our Credit Facility, in order to provide an economic hedge against the potential effect of future interest rate fluctuations. The interest rate agreement caps the 30-day LIBOR at 5.75% and is scheduled to mature on January 14, 2008. At September 30, 2005, the fair value of this interest rate cap agreement was approximately $59 and was recorded as an asset. The change in fair market value of our interest rate cap agreements of $19 and $67 for the three and nine months ended September 30, 2005, respectively, is recorded in the statement of operations as a reduction to interest expense.

7. SEGMENT INFORMATION

      We are organized into two operating divisions: our hotel management division, which includes our hotel and other hospitality management activities and our ownership of hotels and interests in joint ventures which own hotels, and our corporate housing division. Each division is managed separately because of its distinct products and services.

	Hotel			Corporate					Financial
	Management			Housing			Other		Statements
Three months ended September 30, 2005
Revenue	$	269,786		$	33,267		$	—	$	303,053
Net income	$	4,313		$	1,078		$	—	$	5,391
Three months ended September 30, 2004
Revenue	$	207,223		$	31,701		$	—	$	238,924
Net income (loss)	$	(42	)	$	(258	)	$	—	$	(300	)
Nine months ended September 30, 2005
Revenue	$	745,408		$	91,792		$	—	$	837,200
Net income (loss)	$	4,959		$	751		$	—	$	5,710
Total assets	$	249,619		$	17,509		$	17,419	$	284,547
Nine months ended September 30, 2004
Revenue	$	616,097		$	83,506		$	—	$	699,603
Net income (loss)	$	(5,364	)	$	(1,331	)	$	—	$	(6,695	)
Total assets	$	222,780		$	18,877		$	23,587	$	265,244

11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Revenues from foreign operations, which include reimbursable expenses from managed properties, were as follows:

	Three months				Nine months
	ended				ended
	September 30,				September 30,
	2005		2004		2005		2004
United Kingdom	$	7,764	$	6,645	$	22,322	$	17,744
France		544		539		1,599		1,333
Russia		914		616		2,682		2,104
Canada		1,197		1,172		3,362		2,503
Portugal		—		76		27		315

      Included in discontinued operations, is revenue from our Toronto operation, which was disposed of in September 2004, amounting to $2,233 for the nine months ended September 30, 2004.

8. RESTRUCTURING AND SEVERANCE EXPENSES

      We have recorded severance expense of $2,043 for the nine months ended September 30, 2005, respectively, and $42 and $3,481 for the three and nine months ended September 30, 2004, respectively.

      These charges consist of the following:

		Three months				Nine months
		ended				ended
		September 30,				September 30,
		2005		2004		2005		2004
Severance to former CEOs and other corporate personnel		$	—	$	—	$	1,952	$	3,312
Severance to former corporate housing personnel			—		42		91		169
	Total	$	—	$	42	$	2,043	$	3,481

      Severance to Former CEOs and other Corporate Personnel — We have incurred charges of $1,952 for the nine months ended September 30, 2005, related to severance payments to former personnel, including $1,800 in contractual severance costs due to our former chief executive officer, Steven D. Jorns. The severance costs incurred of $3,312 for the nine months ended September 30, 2004 related to our former chief executive officer, Paul L. Whetsell.

      Severance to Former Corporate Housing Personnel — During 2005 and 2004, we incurred charges of approximately $91 and $169, respectively, related to severance for former personnel paid to employees of our corporate housing business or connection with consolidating and restructuring of our operations.

9. ASSET IMPAIRMENTS AND OTHER WRITE-OFFS

      The charges for asset impairments and other write-offs consist of the following:

		Three Months				Nine Months
		Ended				Ended
		September 30,				September 30,
		2005		2004		2005		2004
Management contract losses		$	1,046	$	1,601	$	2,094	$	5,989
Investment in and advances to affiliates			—		—		—		1,101
Hotel real estate investment fund costs			—		—		863		—
Cost of uncompleted merger			—		—		—		606
Other			—		—		—		96
	Total	$	1,046	$	1,601	$	2,957	$	7,792

12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Management contract losses — In the first quarter of 2005, we recorded a loss of approximately $239 of unamortized management contract costs related to the Hilton San Diego Gaslamp hotel, which was sold in January 2005, by our S.D. Bridgeworks joint venture. In the second quarter of 2005, we recorded $329 of contract costs associated with four hotels disposed of by Sunstone Hotel Investors, Inc.; $383 of costs related to one hotel disposed of by MeriStar; and, an additional $97 of other terminated management contracts costs. During the third quarter of 2005, we recorded a loss of $933 associated with MeriStar’s disposition of three hotels and an additional $113 of other terminated management contracts costs. In connection with its asset disposition plan, MeriStar disposed of 20 hotels in the first nine months of 2004, five of which occurred in the third quarter of 2004.

      Investment in and advances to affiliates — During the first quarter of 2004, we recorded an impairment loss of $563 in our investment in MIP Lessee, L.P. In addition, during the first quarter of 2004, we recorded an impairment loss of $538 for the remainder of our investment in our joint venture that owns the Residence Inn Houston Astrodome Medical Center.

      Hotel real estate investment fund costs — We had been attempting to form a real estate investment fund with a group of institutional investors. We now believe that other investment vehicles may be more appropriate for the company. Accordingly, we decided not to proceed with this particular investment fund, and expensed $863 of costs related to the proposed fund.

      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 which were expensed when we determined that the merger would not be consummated.

10. GAIN AND LOSS ON SALE OF INVESTMENTS AND EXTINGUISHMENT OF DEBT

      In January 2005, we recognized a gain of $385 from the exercise of stock warrants for stock in an unaffiliated company and subsequent sale of that stock, which we had held as an investment.

      In September 2005, we recorded a gain of $4,326 in connection with the extinguishment of debt on our non-recourse promissory note with FelCor. See Note 6 for more detail on this extinguishment.

11. COMMITMENTS AND CONTINGENCIES

      Insurance Matters — As part of our management services to hotel owners, we generally obtain casualty (workers’ compensation and liability) insurance coverage for our managed and owned hotels. In December 2002, one of the carriers we used to obtain casualty insurance coverage was downgraded significantly by rating agencies. In January 2003, we negotiated a transfer of that carrier’s current policies to a new carrier. We are working with the prior carrier to facilitate a timely and efficient settlement of the claims outstanding under the prior carrier’s casualty policies. The prior carrier has primary responsibility for settling those claims from its assets. If the prior carrier’s assets are not sufficient to settle these outstanding claims, and the claims exceed amounts available under state guaranty funds, we may be required to settle those claims. We are indemnified under our management agreements for such amounts. Prior to January 2001, we leased certain hotels from owners. We are responsible for claims related to leased hotels.

      In addition, in January 2005, the prior carrier presented invoices to us and other policy holders related to dividends previously granted to us and other policy holders with respect to the prior policies. As the invoices were not specific in nature additional time and research as well as discussion with the prior carrier were necessary to determine the validity of the invoiced amount. In the third quarter of 2005 we received additional documentation from the carrier validating the nature and amount of the invoiced amount. We have now determined that the amount is probable and estimable and have therefore recorded the liability in the third quarter of 2005. In September 2005, we invoiced the prior carrier for premium refunds due to us on previous policies. The initial premiums on these policies were calculated based on estimated employee payroll expenses

13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and gross hotel revenues. Due to the September 11^th terrorist attacks, the estimated premiums billed were significantly overstated and as a result, we are owed refunds on the premiums paid. We believe that we hold the right of offset in regard to this receivable and payable with the prior insurance carrier. Accordingly, there is no effect on the statement of operations for the three and nine months ending September 30, 2005. We will aggressively pursue collection of our receivable and do not expect to pay any amounts to the prior carrier prior to reaching an agreement with the prior carrier and to the contractual amounts due to us. To the extent we do not collect sufficiently on our receivable we would vigorously attempt to recover any additional amounts from our owners.

      Leases — We lease apartments for our corporate housing division and office space for our corporate offices. In August 2005, we entered into sublease agreements related to our corporate office space. See Note 13 for further discussion. Future minimum lease payments required under these operating leases (including the recently entered subleases) as of September 30, 2005 were as follows:

2005		$	22,764
2006			33,283
2007			13,702
2008			9,714
2009			8,281
Thereafter			22,204
	Total	$	109,948

      Management Agreement Commitments — Under the provisions of management agreements with certain hotel owners, we are obligated to provide an aggregate of up to $2,032 to these hotel owners in the form of investments or loans. The specific amounts that may be provided and the timing of future investments or working capital loans to hotel owners is not currently known as these advances are at the hotel owner’s discretion.

      Termination Fees — MeriStar’s taxable subsidiaries have the right to terminate a management agreement for a hotel upon the sale of the hotel to a third party or if the hotel is destroyed and not rebuilt after a casualty. In the event of termination, MeriStar’s taxable subsidiary will be required to pay us a termination fee equal to the value of the remaining payments calculated as defined in the agreement. The termination fee will be paid in 48 equal monthly installments, without interest, commencing the month following the termination. MeriStar’s taxable subsidiaries will be able to credit against any termination payments the present value of projected fees, calculated in accordance with the amended agreement, of any new management agreements executed during the 30-month period following the termination date. MeriStar has sold four properties since January 1, 2005.

      Contingent Liabilities Related to Partnership Interests — We own interests in several partnerships and other joint ventures. To the extent that any of these partnerships or joint ventures would become unable to pay its obligations, those obligations would become obligations of the general partners. We are not the sole general partner on any of our joint ventures. While we believe we are protected from any risk of liability because our investments in these partnerships as a general partner were conducted through the use of single-purpose entities, to the extent any debtors pursue payment from us, it is possible that we could be held liable for those liabilities and those amounts could be material.

      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.

14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

12. ACQUISITION AND DISPOSITIONS

      Acquisition — On February 11, 2005, we acquired the 329-room Hilton Concord hotel located in the East Bay area of San Francisco, California. The acquisition cost was $31,779, including normal and customary closing costs and funding of required reserves for renovations. We financed the purchase through borrowings on our Credit Facility and a $19,000 mortgage. As discussed in Note 6 this acquisition increased our leverage and required us to obtain two amendments to our Credit Facility. The hotel revenues from February 11, 2005 to September 30, 2005 were $8,511 and operating income was $2,509, which are included in our statement of operations.

      The acquisition cost of the hotel was allocated as follows:

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

      The pro forma financial information set forth below presents results as if our acquisition of the Hilton Concord had occurred on January 1, 2005. This pro forma information is not necessarily indicative of the results that actually would have occurred nor does it intend to indicate future operating results.

	Nine months ended
	September 30, 2005
Pro Forma Total Lodging Revenues	$	9,637
Pro Forma Net Income	$	163
Pro Forma Diluted Income per share	$	0.01

      In March 2005, we began operating 22 upscale hotels recently acquired by a partnership consisting of a private investment fund managed by affiliates of Goldman Sachs and Highgate Holdings. At the time of the transaction, an affiliate of Highgate Holdings was affiliated with three of our directors. With the departure of one of these directors from our board in June 2005, this entity is currently affiliated with two of our directors.

      Dispositions — On September 7, 2005, we sold the Pittsburgh Airport Residence Inn by Marriott for $11,000 and we recognized a gain on sale of $2,605. SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” requires that the operations of the hotel be re-classified as discontinued operations in our Consolidated Statement of Operations for all periods presented. The following table summarizes the revenues and income before taxes of the hotel and the related gain on the sale of the hotel:

	Three months ended		Nine months ended		Three months ended		Nine months ended
	September 30, 2005		September 30, 2005		September 30, 2004		September 30, 2004
Revenues	$	656	$	2,345	$	905	$	2,476
Income before Taxes		2,805		3,217		205		488
Income from discontinued operations, net of taxes		1,656		1,898		133		317

      Included in our 2004 statement of operations is the disposal of BridgeStreet Canada, Inc., the owner of our corporate housing operations in Toronto. BridgeStreet Canada was sold in September 2004. Operations for the three and nine month period presented as discontinued operations in 2004, is comprised of the following:

	Three months ended		Nine months ended
	September 30, 2004		September 30, 2004
Revenues	$	—	$	2,233
Loss before taxes		—		(1,237	)
Loss from discontinued operations, net of taxes		—		(1237	)

15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

13. SUBSEQUENT EVENTS

      Subleases of Corporate Office Space — In August 2005, we entered into an agreement to sublease 34,700 square feet of our office space to a third party, effective November 2005. As our remaining office space after the sublease was not adequate for our existing office space needs, we have subleased an additional 16,200 square feet of office space from MeriStar, also effective November 2005. The subleases end in August 2013, which corresponds to the end of our original lease agreement. They are being accounted for as operating leases. The net annual rent related to the subleases will be $555 and shall increase by 4% per annum. The subleases also include an abatement of the first nine and twelve monthly installments of rent for the Meristar and third party subleases, respectively. We expect to save approximately $4.3 million in rent payments over the term of the respective lease and subleases as a result of this transaction.

      Hotel Acquisition — On October 31, 2005, we entered into a purchase and sale agreement for the purchase of the 195-room Durham Hilton from MeriStar for $14,050. Subject to certain closing requirements of the contract, the acquisition is expected to close on or about November 10, 2005. The purchase is expected to be financed with general corporate funds and a draw down on our Credit Facility.

16

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

Forward-Looking Statements

      The Securities and Exchange Commission (the “SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. In this report on Form 10-Q and the information incorporated by reference herein we make some “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements anticipating future growth in revenues and cash flow. Any statements in this document about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “will likely result,” “expect,” “will,” “will continue,” “anticipate,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook” and other similar terms and phrases. Accordingly, these statements involve estimates, assumptions and uncertainties that are not yet determinable and could cause actual results to differ materially from those expressed in the statements. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this report on Form 10-Q and our report on Form 10-K as amended and the documents incorporated by reference therein. In addition to the risks related to our business, the factors that could cause actual results to differ materially from those described in the forward-looking statements include, among others, the following:

•  economic conditions generally, and the real estate market specifically;

•  the impact of actual or threatened future terrorist incidents or hostilities;

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

•  international geopolitical difficulties or health concerns;

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

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

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

•  the impact of weather-related events or other calamities;

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

•  failure to renew essential management contracts or business leases;

•  competition from other hospitality companies, pricing pressures;

•  variations in lease and room rental rates;

•  litigation involving antitrust, consumer and other issues;

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

•  other factors discussed under the heading “Risk Factors” in our annual report on Form 10-K.

      These factors and the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made or incorporated by reference in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2004 or this quarterly report on Form 10-Q. 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 update any forward-looking statement or statements to reflect events or circumstances after the date on which the

17

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.

Quarterly Summary

      Overview — We are the largest independent U.S. hotel management company not affiliated with a hotel brand, measured by number of rooms under management. We have two operating divisions, (i) hotel management, which includes our hotel and other hospitality management activities and our ownership of hotels and interests in joint ventures that own hotels, and (ii) corporate housing. Each is managed separately because of its distinct products and services.

      We manage a portfolio of hospitality properties and provide related services in the hotel, in 41 states, the District of Columbia, Canada, and Russia. We are also a provider of related services in the resort, conference center and golf markets. We also own one hotel property and hold non-controlling interests in eight joint ventures which hold ownership interests in 16 of our managed properties as of September 30, 2005. Our portfolio is diversified by franchise and brand affiliations. The related services we provide include insurance and risk management services, purchasing, project management services, information technology, telecommunications services and centralized accounting services.

      Our corporate housing division is operated through our BridgeStreet Worldwide, Inc., subsidiary. We provide apartment rentals for both individuals and corporations with a need for temporary housing as an economical alternative to purchasing long-term apartment rentals or prolonged hotels stays for individuals. We had 3,138 apartments under lease or management through our BridgeStreet corporate housing division in the United States, France and the United Kingdom, as of September 30, 2005, compared to 3,354 at September 30, 2004.

      At September 30, 2005, we managed 294 properties with 67,425 guest rooms, compared to 255 properties with 57,074 guest rooms at September 30, 2004. Hotels under management increased by a net amount of 39 from September 30, 2004 to September 30, 2005, with the increase due to the following:

•  In March 2005, we began operating 22 upscale hotels owned by a partnership consisting of a private investment fund managed by affiliates of Goldman Sachs and Highgate Holdings. During the nine months ended September 30 2005, five of these properties were sold and we no longer manage the hotel.

•  In connection with our purchase of Sunstone, we acquired management contracts for 54 properties, during the fourth quarter of 2004. During the nine months ended September 30, 2005, we added one property and four properties were transitioned our of our system.

•  From September 30, 2004 to September 30, 2005, MeriStar sold seven properties, six of which we no longer manage. In addition, 33 other properties were transitioned out of our system, including the eight properties that were owned by our joint venture with FelCor, which have been foreclosed upon by the lender, and added 10 properties to our system from various owners.

      Our Outlook — We have continued to experience growing demand through the third quarter of 2005 at our managed hotels. This demand has been primarily from business, group and leisure travelers. This has allowed us to continue to drive higher average daily rates. This shift in demand along with lower hotel supply growth during the year and slightly higher occupancy has driven our revenue per available room (“RevPar”) increases for same-store hotels of 10.4% year-to-date.

      We continue to expect supply growth in the hotel industry to remain low for the remainder of the year and into 2006. We believe this low supply growth in the industry and strong demand trends for business and leisure travelers fueled by the continued steady economic growth will drive continued improvement at our hotels for at least the remainder of 2005.

18

      Our corporate housing division has also been successful in driving improved average daily rate with a year-to-date increase of 8.4%. This is again due to the strong demand by business travelers utilizing our apartments as an alternative to long-term hotel stays or corporate investments in temporary housing. In addition, our corporate housing division has continued to increase its margins by utilizing its “smart growth” strategy of maintaining higher occupancies and lower inventories of apartments. This allows the division to quickly react and manage the amount of unoccupied apartments in a more efficient manner. For these reasons we expect our corporate housing division to continue to perform well for the remainder of 2005.

      We have continued to execute on our strategy of increasing our ownership interests in hotels either by purchasing hotels or through investments in joint ventures. We have purchased one hotel in 2005 and expect to close the acquisition of another hotel in the fourth quarter of 2005. Our new business pipeline remains strong, and we believe we will have additional opportunities to increase our ownership interests for the remainder of 2005 and into 2006.

Recent events

Hotel Acquisition

      On October 31, 2005, we entered into a purchase and sale agreement for the purchase of the 195-room Durham Hilton from MeriStar for $14,050. Subject to certain closing requirements of the contracts, the acquisition is expected to close on or about November 10, 2005. The purchase is expected to be financed with general corporate funds and a draw down on our Credit Facility.

Hurricanes

      During August and September of 2004, Florida experienced several strong hurricanes that damaged or closed 10 properties we manage for MeriStar, currently three of our managed hotels remain closed. MeriStar is currently in negotiations with the insurance provider to recover amounts under business interruption insurance policies. Our management agreement with MeriStar provides that we are entitled to recover management fees for the time period the hotels were partially or completely closed and for the time period after the hotels re-opened, but were not operating at historical levels. MeriStar has recognized a portion of the amounts claimed for business interruption under the policy. However, MeriStar has informed us that insufficient hotel revenue data has been agreed to with their carrier and therefore it has not been possible to calculate the amount of management fees due to us. We will recognize revenue when the amount of management fees can be determined and all contingencies have been resolved, which we expect to occur at or near the date that our claims are settled. We believe this will occur later in 2005 or early 2006.

      In August and September 2005, Hurricane Katrina affected Louisiana, Mississippi, and briefly affected Miami. The hurricane damaged three of our managed properties in these areas, currently two of our managed hotels remain closed. The Holiday Inn Fort Lauderdale was closed for two weeks. The Hotel Mason De Ville in the French Quarter and the Holiday Inn Select New Orleans Airport were severely damaged and will be closed for an indeterminable amount of time. The insurance coverage for the two New Orleans properties entitles us to business interruption insurance. We will recognize income from these properties when all contingencies have been resolved in the determination of our losses. At this time, we can not estimate when that may be.

      In October 2005, Hurricane Wilma struck Florida. The hurricane damaged two of our managed hotels, one remains closed at this time as we are assessing the damage. Again, we are covered under the insurance policies and will recognize income from business interruption if it is determined that the losses have met the requirements under the policy and once all contingencies have been resolved.

Critical Accounting Policies and Estimates

      The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. Application of

19

these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. We evaluate our estimates and judgments, including those related to the impairment of long-lived assets, on an ongoing basis. We base our estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances.

      We have discussed those policies that we believe are critical and require judgment in their application in our Annual Report on Form 10-K, as amended, for the year ending December 31, 2004. Since the date of that report, there have been no material changes to our critical accounting policies or the methodologies or assumptions we use in applying them.

Results of Operations

Three months ended September 30, 2005 compared with three months ended September 30, 2004

Revenue

      The following table shows the operating statistics for our managed hotels on a same-store basis. Same-store basis exclude properties for which we do not have comparable data. Generally, these are properties that leave our system during the period reported, or new managed properties for which we were unable to obtain historical information. In addition, same-store basis excludes the results of 13 hotels affected by the hurricanes for the three months ended September 30 (dollars not in thousands):

	2005			2004			Change
Number of rooms at September 30		60,024			60,024			—
Number of hotels at September 30		268			268			—
Revenue per available room (RevPAR)	$	83.37		$	75.26			10.8	%
Average daily rate (ADR)	$	110.34		$	101.62			8.6	%
Occupancy		75.6	%		74.1	%		2.0	%

      The following table sets forth operating information with respect to our corporate housing division for the three months ended September 30, (dollars not in thousands):

	2005			2004			Change
Number of markets		17			18			(5.5	)%
Average number of units		3,336			3,493			(4.5	)%
Average daily rate (ADR)	$	111.71		$	107.31			4.1	%
Occupancy		94.1	%		91.1	%		3.3	%

      Our total revenue increased $64,129, or 26.8%, to $303,053 for the three months ended September 30, 2005 compared to $238,924 for the three months ended September 30, 2004. Major components of this increase were:

•  Revenue from lodging is $3,403 for the three months ended September 30, 2005, due to the acquisition of the Hilton Concord hotel in February 2005. Lodging revenue from the Residence Inn Pittsburgh, which was sold in September 2005, for the three months ended September 30, 2005 and 2004 has been reclassified as discontinued operations in both periods.

•  Revenue from management fees increased $3,400, or 28.1%, to $15,513 for the three months ended September 30, 2005, from $12,113 for the three months ended September 30, 2004. Our RevPAR, ADR and occupancy have improved year over year due to the significant improvements in market conditions, and the net increase of 39 hotels under management. Included in revenue from management fees is termination fees of

•  Revenue from our corporate housing operations has increased $1,566, or 4.9%, to $33,267 for the three months ended September 30, 2005, from $31,701 for the three months ended September 30, 2004. This increase in revenue is partially attributable to an increase in ADR by approximately 4.1%, to $111.71 from $107.31, and an increase in occupancy to 94.1% from 91.1%.

20

•  Reimbursable expenses, which we record as other revenue and other expenses from managed properties, increased by $56,880, or 29.8%, to $247,745 for the three months ended September 30, 2005, from $190,865 for the three months ended September 30, 2004. The primary reason for this increase is the increase in the number of managed hotels, directly resulting in an increase in the number of hotel employees and in related reimbursable salaries and other expenses. In addition, other revenue from managed properties has been revised and reduced for the three months ended September 30, 2004 by $9,449. Our statements of operations include an equal and offsetting amount — “Other expenses from managed properties” — which has also been revised by the same amount. These amounts represent the payroll and related costs, and certain other costs of the hotel’s operations that are contractually reimbursed to us by the hotel owners. The revisions have no impact on operating income (loss), net income (loss), or earnings (loss) per share, or our balance sheet or cash flows.

Operating Expenses by Department

      Total operating expenses by department increased $2,545, or 9.9%, to $28,381 for the three months ended September 30, 2005 compared to $25,836 for the three months ended September 30, 2004. Operating expenses by department include direct expenses that are related to lodging from our owned hotel, and to our corporate housing division.

•  Lodging expenses are $2,487 for the three months ended September 30, 2005, due to the acquisition of the Hilton Concord hotel in February 2005. Lodging expenses from the Residence Inn Pittsburgh for the three months ended September 30, 2005 and 2004 have been reclassified as discontinued operations in both periods.

•  Corporate housing expenses increased $58 to $25,894, for the three months ended September 30, 2005, compared to $25,836 for the three months ended September 30, 2004. As our revenue growth was driven by an increase in yield management (higher ADR and occupancy % with a lower unit count) rather than expansion into new markets, expenses remained consistent across periods in spite of growing revenues.

Undistributed Operating Expenses

      Total undistributed operating expenses increased $2,474, or 12.1%, to $22,837 for the three months ended September 30, 2005, compared to $20,363 for the three months ended September 30, 2004. Major factors affecting the increase were:

•  Administrative and general expenses increased $2,724, or 16.4%, to $19,317 for the three months ended September 30, 2005, from $16,593 for the three months ended September 30, 2004. The majority of this increase is due to a $1,834 increase in administrative and general costs from the Sunstone operations that we acquired in October 2004.

•  Asset impairments and other write-offs decreased $555, to $1,046 for the three months ended September 30, 2005, from $1,601 for the same period last year. These expenses relate to terminations of various management contracts. For additional information on these expenses, see Note 9 in the consolidated financial statements.

•  Reimbursable expenses, which we record as other revenue and other expenses from managed properties, increased by $56,880, or 29.8%, to $247,745 for the three months ended September 30, 2005, from $190,865 for the three months ended September 30, 2004. The primary reason for this is the increase in the number of managed hotels, directly resulting in an increased number of hotel employees and related reimbursable salaries and other expenses. In addition, other expenses from managed properties has been revised and reduced for the three months ending September 30, 2004 by $9,449. Our statements of operations include an equal and offsetting amount — “Other revenue from managed properties” — which has also been revised by the same amount. These amounts represent the payroll and related costs, and certain other costs of the hotel’s operations that are contractually reimbursed to us by the hotel owners. The revisions have no impact on operating income (loss), net income (loss), or earnings (loss) per share, or our balance sheet or cash flows.

21

Net Income (Loss)

      Net income (loss) improved by $5,691, to net income of $5,391, for the three months ended September 30, 2005, from a net loss of $300 for the three months ended September 30, 2004. This improvement in net income (loss) is a result of the items described above as well as the following:

•  Our gain on the extinguishment of debt of $4,326 related to the FelCor promissory note. As we no longer have an obligation to make payments on the note, we derecognized the liability and recorded a corresponding gain.

•  Net interest expense decreased $325, to $1,677, for the three months ended September 30, 2005, from $2,002 for the same period in 2004. In the third quarter of 2005 we had a higher average cash balance compared to the third quarter of 2004, as a result of improved operations. This along with higher interest rates on our cash accounts generated higher interest income compared to the third quarter of 2004. This was partially offset by a slightly higher average debt balance and slightly higher interest rates during the third quarter of 2005 compared to the third quarter of 2004, resulting from the debt incurred with the purchase of Sunstone and the Hilton Concord, as well as the refinancing of our line of credit.

•  Our equity in losses of affiliates increased $376, to $381, for the three months ended September 30, 2005, compared to $5 for the same period in 2004. The majority of the increase is attributable to a $350 loss on our investment in the Radisson St. Louis hotel as we do not expect to receive any distributions.

•  Income tax expense was $2,585 for the three months ended September 30, 2005, compared to $282 for the three months ended September 30, 2004.

Nine months ended September 30, 2005 compared with nine months ended September 30, 2004

Revenue

      The following table shows the operating statistics for our managed hotels on a same-store basis. Same-store basis exclude properties for which we do not have comparable data. Generally, these are properties that leave our system during the period reported, or new managed properties for which we were unable to obtain historical information. In addition, same-store basis excludes the results of 13 hotels affected by the hurricanes for the three months ended September 30 (dollars not in thousands):

	2005			2004			Change
Number of rooms at September 30		60,024			60,024			—
Number of hotels at September 30		268			268			—
Revenue per available room (RevPAR)	$	79.38		$	71.88			10.4	%
Average daily rate (ADR)	$	109.62		$	101.23			8.3	%
Occupancy		72.4	%		71.0	%		2.0	%

      The following table sets forth operating information with respect to our corporate housing division for the nine months ended September 30, (dollars not in thousands):

	2005			2004			Change
Number of markets		18			20			(10	)%
Average number of units		3,214			3,367			(4.5	)%
Average daily rate (ADR)	$	109.28		$	100.85			8.4	%
Occupancy		92.5	%		89.9	%		2.9	%

      Our total revenue increased $137,597, or 19.7%, to $837,200 for the nine months ended September 30, 2005 compared to $699,603 for the nine months ended September 30, 2004. Major components of this increase were:

•  Revenue from lodging is $8,511 for the nine months ended September 30, 2005, due to the acquisition of the Hilton Concord hotel in February 2005. Lodging revenue from the Residence Inn Pittsburgh,

22

	which was sold in September 2005, has been reclassified as discontinued operations for the nine months ended September 30, 2005 and 2004.
•	Revenue from management fees increased $5,106, or 12.5%, to $45,865 for the nine months ended September 30, 2005, from $40,759 for the nine months ended September 30, 2004. Our RevPAR, ADR and occupancy have improved year over year, due to the significant improvement in market conditions and the net increase of 39 hotels under management.
•	Revenue from our corporate housing operations increased $8,286, or 9.9%, to $91,792, for the nine months ended September 30, 2005, from $83,506 for the nine months ended September 30, 2004. This increase in revenue is attributable to an increase in ADR of approximately 8.4%, to $109.28 from $100.85, and an increase in occupancy to 92.5% from 89.9% partially offset by a decrease in average number of units. Also, revenue from BridgeStreet’s network partner business increased for the nine months ended September 30, 2005 as compared to the nine months ended September 30, 2004.
•	Reimbursable expenses, which we record as other revenue and other expenses from managed properties, increased by $116,710, or 20.7%, to $681,449 for the nine months ended September 30, 2005, from $564,739 for the nine months ended September 30, 2004. The primary reason for this increase is the increase in the number of managed hotels resulting in an increase in the number of hotel employees and in related reimbursable salaries and other expenses. In addition, other revenue from managed properties has been revised and reduced for the nine months ending September 30, 2004 by $36,556. Our statements of operations include an equal and offsetting amount — “Other expenses from managed properties” — which has also been revised by the same amount. These amounts represent the payroll and related costs, and certain other costs of the hotel’s operations that are contractually reimbursed to us by the hotel owners. The revisions have no impact on operating income (loss), net income (loss), or earnings (loss) per share, or our balance sheet or cash flows.

Operating Expenses by Department

      Total operating expenses by department increased $12,293, or 18%, to $80,414 for the nine months ended September 30, 2005 compared to $68,121 for the nine months ended September 30, 2004. Operating expenses by department include direct expenses that are related to lodging from our owned hotel, and to our corporate housing division.

•  Lodging expenses are $6,491 for the nine months ended September 30, 2005, due to the acquisition of the Hilton Concord hotel in February 2005. Lodging expenses from the Residence Inn Pittsburgh have been reclassified as discontinued operations for the nine months ended September 30, 2004 and 2005.

•  Corporate housing expenses increased $5,802, or 8.5%, to $73,923, for the nine months ended September 30, 2005, compared to $68,121 for the nine months ended September 30, 2004. The increase in corporate housing expenses is primarily due to an increase in apartment rental expenses. The mix of rental units has increased in our metropolitan regions of Chicago and London, which have higher per unit costs compared to the markets we exited in 2004, Detroit and Toronto. Finally, costs from BridgeStreet’s network partner business increased in direct relationship with the revenue increase. The unit growth for the network partner business also carries a higher cost per unit versus the standard BridgeStreet leased apartment.

Undistributed Operating Expenses

      Total undistributed operating expenses decreased $821, to $68,791, for the nine months ended September 30, 2005, compared to $69,612 for the nine months ended September 30, 2004. Major factors contributing to this decrease were:

•  Restructuring and severance charges were $2,043 and $3,481 for the nine months ended September 30, 2005, and 2004, respectively. The decrease is primarily due to the decrease in severance costs as approximately $1,800 of severance was paid for our former CEO, Steve Jorns, in 2005, while in 2004 we incurred approximately $3,312 in severance costs for our former CEO, Paul Whetsell.

23

•  Asset impairments and other write-offs decreased $4,835, from $7,792, for the nine months ended September 30, 2004, to $2,957 for the same period of this year. These expenses are detailed as follows:

		Nine Months Ended
		September 30,
		2005		2004
Management contract costs		$	2,094	$	5,989
Investment impairments			—		1,101
Hotel real estate investment fund costs			863		—
Cost of uncompleted merger			—		606
Other			—		96
	Total	$	2,957	$	7,792

      For additional information on these expenses, see Note 9 to the consolidated financial statements.

•  Administrative and general expenses increased $5,262, or 10.2%, to $56,961, for the nine months ended September 30, 2005, compared to $51,699 for the nine months ended September 30, 2004. The majority of this increase is due to $5,522 in administrative and general costs from the Sunstone operations that we acquired in October 2004.

•  Reimbursable expenses, which we record as other revenue and other expenses, increased by $116,710, or 20.7%, to $681,449 for the nine months ended September 30, 2005, from $564,739 for the nine months ended September 30, 2004. The primary reason for this is the increase in the number of managed hotels directly resulting in an increased number of hotel employees and related reimbursable salaries and other expenses. In addition, other expenses from managed properties has been revised and reduced for the nine months ending September 30, 2004 by $36,556. Our statements of operations include an equal and offsetting amount — “Other revenue from managed properties” — which has also been revised by the same amount. These amounts represent the payroll and related costs, and certain other costs of the hotel’s operations that are contractually reimbursed to us by the hotel owners. The revisions have no impact on operating income (loss), net income (loss), or earnings (loss) per share, or our balance sheet or cash flows.

Net Income (Loss)

      Net income (loss) improved by $12,405 to income of $5,710, for the nine months ended September 30, 2005, from a loss of $(6,695) for the nine months ended September 30, 2004. This improvement occurred as a result of the items described above as well as the following:

•  Our gain on the extinguishment of debt of $4,326 related to the FelCor promissory note. As we no longer have an obligation to make payments on the note, we derecognized the liability and recorded a corresponding gain. We also recognized a gain of $385 from the exercise of stock warrants for stock in an unaffiliated company and subsequent sale of that stock, which we had held as an investment.

•  Our equity in earnings (losses) of affiliates increased $3,757, or 397.2%, to $2,811 for the nine months ended September 30, 2005, compared to $(946) for the same period in 2004. The majority of this increase is attributable to the recognition of our share of the gain on sale of the Hilton San Diego Gaslamp Hotel sold by our joint venture S.D. Bridgeworks, L.L.C. which totaled approximately $4,200. This gain was partially offset by losses in our MIP joint ventures, which were $1,443 and $1,111 for the nine months ending September 30, 2005 and 2004, respectively.

•  Net interest expense increased $2,268, or 42.9%, to $7,560 for the nine months ended September 30, 2005, from $5,292 for the same period in 2004. Included in interest expense is $1,847 of unamortized deferred financing fees written off in connection with the repayment of our old subordinated term loan. In addition, we have incurred additional interest expense directly associated with the increase in our average debt balance as well as an increase in our interest rates with our Credit Facility.

24

•  Income tax expense (benefit) was $2,647 for the nine months ended September 30, 2005, compared to ($3,255) for the nine months ended September 30, 2004. Our effective tax rate is approximately 41% in the 2005 period and was approximately 36% in the 2004 period.

Liquidity and Capital Resources

      Working Capital — We had $17,806 of cash and cash equivalents at September 30, 2005, compared to $16,481 at December 31, 2004, and our deficit in working capital (current assets less current liabilities) was $9,493 at September 30, 2005 compared to $1,088 at December 31, 2004. The increase in our working capital deficiency of $8,405 resulted primarily from the use of cash to purchase the Hilton Concord hotel in excess of cash generated from operations during the nine months ended September 30, 2005.

      Operating Activities — Cash provided by operating activities was $26,103 for the nine months ended September 30, 2005 compared to cash provided by operating activities of $214 for the nine months ended September 30, 2004. The increase in cash provided is primarily from improvements in our operating results described above, and an increase in accounts payable and accrued expenses balances resulting from the additional activity in connection with our Sunstone, Goldman Sachs and Hilton Concord hotel acquisitions and a decrease in accounts receivable due to improved cash collections.

      Investing Activities — Cash used in investing activities was $21,701 for the nine months ended September 30, 2005 compared to cash provided by investing activities of $845 for the nine months ended September 30, 2004. The increase is primarily related to the purchase of Hilton Concord hotel in February 2005 and an increase in restricted cash associated with the Hilton Concord and our insurance subsidiary. This was offset by the cash provided by our equity investments in real estate, through distributions of $5,500, year to date, which included $2,859 in proceeds from the sale of the hotel owned by S.D. Bridgeworks, LLC. Additional cash was provided through the sale of our ownership in the Residence Inn Pittsburgh.

      Financing Activities — Cash provided by financing activities was $2,773 for the nine months ended September 30, 2005, compared to cash provided by financing activities of $592 for the same period of 2004. This change is mainly due to net borrowings and repayments of long-term debt. We had net borrowings of $828 in 2005, as opposed to $1,281 in 2004. On January 14, 2005, we amended our Credit Facility and immediately borrowed approximately $87,200 to repay our existing $40,000 subordinated term loan, $43,474 outstanding under our prior Credit Facility and fees and other costs related for these transactions. In addition, in February 2005, we borrowed an additional $12,760 under our Credit Facility and entered into a $19,000 mortgage loan in connection with the acquisition of the Hilton Concord hotel. We also applied the proceeds from the sale of the Residence Inn Pittsburgh to pay down the senior term loan.

DEBT

      Senior Credit Facility-Revolving Loan and Term Loan — On January 14, 2005, we entered into an amended and restated senior secured credit facility with various lenders (the “Credit Facility”). The Credit Facility replaced our existing senior credit facility (the “Old Credit Facility”) and provides aggregate loan commitments of a $53,000 term loan and a $55,000 revolving loan. The Credit Facility is scheduled to mature on January 14, 2008.

      The actual rates for both the revolving loan and term loan depend on the results of certain financial tests. As of September 30, 2005, based on those financial tests, borrowings under the revolving loan bore interest at a rate of LIBOR plus 350 basis points (rate of 7.4% at September 30, 2005) and borrowings under the term loan bore interest at a rate of LIBOR plus 450 basis points (rate of 8.4% at September 30, 2005). We incurred $1,523 and $4,581 of interest expense on our Credit Facility for the three and nine months ended September 30, 2005, respectively, and we incurred $610 and $1,810, of interest expense on our Old Credit Facility for the three and nine months ended September 30, 2004, respectively.

      The debt under our Credit Facility is guaranteed by certain of our existing wholly-owned subsidiaries and collateralized by pledges of ownership interests, owned hospitality properties, and other collateral that was not previously prohibited from being pledged by any of our existing contracts or agreements. Our Credit Facility

25

contains covenants that include maintenance of financial ratios at the end of each quarter, compliance reporting requirements and other customary restrictions. We are in compliance with the amended loan covenants and expect to be in compliance for the remainder of the loan term.

      When we entered into the amended Credit Facility, we borrowed approximately $87,200, including the entire $53,000 term loan and $34,200 under the revolving loan. We used those amounts to repay our existing $40,000 subordinated term loan, $43,474 outstanding under our prior Old Credit Facility, and fees and expenses associated with the repayments and the amended Credit Facility. As of September 30, 2005, we had repaid $6,224 of term loans and had $18,526 outstanding under our revolving loan, leaving approximately $36,000 of availability.

      Mortgage Debt — In February 2005, we entered into a $19,000 non-recourse mortgage loan to finance a portion of the acquisition of the Hilton Concord hotel. Interest only is payable until the loan matures in March 2008. The loan bears interest at a rate of LIBOR plus 225 basis points. Interest expense incurred for the three and nine months ended September 30, 2005 was $279 and $660.

      Non-Recourse Promissory Note — In 2001, we entered into a $4,170 non-recourse promissory note with FelCor Lodging Trust Incorporated (“FelCor”), to fund the acquisition of a 50% equity interest in two partnerships that owned eight mid-scale hotels (“the JV”). The note bore interest at 12% per annum, with a maturity date of December 31, 2010. The note was collateralized solely by our equity interest in the JV.

      The note provided for repayments only to be made to the extent the JV made distributions to us. The operating performance of the JV’s hotels was poor over the past several years. In March 2005, the lenders, with the JV’s acquiescence, initiated foreclosure proceedings, which were completed in September 2005. We have confirmed with FelCor that they do not intend to foreclose on the collateral of this note as it is now worthless and that they do no expect payment of this note except to the extent that the JV would make any future distributions. The JV no longer holds title to any of the hotel assets and the JV has no other operations from which to generate cash. Accordingly, we have derecognized the liability. The derecognition of the remaining principal and the accrued interest is recorded as an ordinary gain for the extinguishment of debt of $4,326 in our statement of operations in the third quarter of 2005.

      Interest Rate Caps — In February 2005, we entered into a $19,000, three-year interest rate cap agreement in connection with the mortgage loan on the Hilton Concord hotel, in order to provide an economic hedge against the potential effect of future interest rate fluctuations. The agreement caps the 30-day LIBOR at 6.65% and is scheduled to mature on March 1, 2008. At September 30, 2005, the fair value of this interest rate cap agreement was approximately $8 and was recorded as an asset. In March 2005, we entered into a $55,000, three-year interest rate cap agreement related to our Credit Facility, in order to provide an economic hedge against the potential effect of future interest rate fluctuations. The interest rate agreement caps the 30-day LIBOR at 5.75% and is scheduled to mature on January 14, 2008. At September 30, 2005, the fair value of this interest rate cap agreement was approximately $59 and was recorded as an asset. The change in fair market value of our interest rate cap agreements of $19 and $67 for the three and nine months ended September 30, 2005, respectively, is recorded in the statement of operations as a reduction to interest expense.

      Sunstone Promissory Note — On October 26, 2004, we entered in to a Stock Purchase Agreement to acquire Sunstone. In connection with the purchase we entered into a non-interest bearing note with Sunstone REIT, for $2,000 that is due December 31, 2005 and is recorded in the current portion of long-term debt.

      Liquidity — Currently we are limited in our ability to increase our borrowings due to the additional debt from the acquisition of the Hilton Concord hotel described above. However, we believe that cash generated by our operations, together with borrowing capacity under our Credit Facility, will be sufficient to fund our requirements for working capital, required capital expenditures and debt service for the next 12 months. We expect to continue to seek acquisitions of management contracts, and opportunities where we can participate in the ownership of the 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. To the extent we utilize debt to finance acquisitions, such as our recent purchase of the Raleigh Durham Hilton, we

26

may be required to seek additional amendments under our Credit Facility, which we will evaluate at the time of those acquisitions. With respect to our purchase of the Raleigh Durham Hilton, under our current forecasts, we do not believe we would need to seek an amendment under our Credit Facility. However, to the extent we would be required to get an amendment our lenders have confirmed that they would work with us to acquire any needed amendments. We believe these sources of capital will be sufficient to provide for our long-term capital needs. We will evaluate our liquidity and investment requirements as circumstances dictate.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate 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. The percentage of our debt that is floating rate was 98% at September 30, 2005 and 94% at December 31, 2004. In the first quarter of 2005, we entered into our new Credit Facility and a mortgage loan, both of which are subject to variable interest rates and we entered into two interest rate cap agreements. These items are described below. See our Annual Report on Form 10-K, as amended, for additional details.

      On January 14, 2005, we entered into our new Credit Facility with various lenders. The scheduled maturity of the Credit Facility is January 14, 2008. We pay interest on our borrowings under the revolving loan portion at a rate ranging from LIBOR plus 325 to 350 basis points and at a rate under the term loan portion ranging from LIBOR plus 450 to 550 basis points. The actual interest rates for both the revolving loan bore and the term loan depend on the result of certain financial tests. As of September 30, 2005, based on those financial tests, borrowings under the revolving loan bore interest at a rate of LIBOR plus 350 basis points (rate of 7.4% at September 30, 2005) and borrowings under the term loan bore interest at a rate of LIBOR plus 450 basis points (rate of 8.4% at September 30, 2005).

      When we entered into our new Credit Facility, we borrowed approximately $87,200, including the entire $53,000 term loan and $34,200 under the revolving loan. We used those amounts to repay our existing $40,000 subordinated term loan, $43,474 outstanding under our Old Credit Facility, and fees and expenses associated with the repayments and the new Credit Facility. As of September 30, 2005, we had repaid $6,224 of term loans and had $18,526 outstanding under our revolving loan, leaving approximately $36,000 of availability.

      In February 2005, we entered into a $19,000 mortgage loan in connection with the acquisition of the Hilton Concord hotel. The loan is scheduled to mature in March 2008. The mortgage loan carries a variable rate of interest based on LIBOR plus a spread of 225 basis points (rate of 5.9% at September 30, 2005).

      In February 2005, we entered into a $19,000, three-year interest rate cap agreement in connection with the mortgage debt we assumed with the purchase of the Hilton Concord hotel in order to hedge against the effect that future interest rate fluctuations may have on our floating rate debt. The agreement caps the 30-day LIBOR at 6.65%. This cap is scheduled to mature on March 1, 2008. At September 30, 2005, the fair value of this cap was approximately $8 and was recorded as an asset. In March 2005, we entered into a $55,000, three-year interest rate cap agreement in connection with the Credit Facility, in order to provide an economic 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 5.75%. This cap is scheduled to mature on January 14, 2008. At September 30, 2005, the fair value of this cap was approximately $59 and was recorded as an asset.

      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 $230 and $706 for the three and nine months ended September 30, 2005, respectively, and by approximately $149 and $456 for the three and nine months ended September 30, 2004, respectively.

Exchange Rate Risk

      Our international operations are subject to foreign exchange rate fluctuations. We derived approximately 16% of our total revenue, excluding reimbursed revenues from managed properties, for both the three and nine

27

month periods ended September 30, 2005, respectively, from services performed in Canada, the United Kingdom, France, and Russia. Our foreign currency translation losses were $(281) and $(314) for the three and nine months ended September 30, 2005, respectively, and are included in accumulated comprehensive income (loss) on our statements of operations and other comprehensive income (loss), net of tax. To date, since most of our foreign operations have been largely self-contained, we have not been exposed to material foreign exchange risk. Therefore, we have not entered into any 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 and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the 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 effective as of September 30, 2005.

Changes in Internal Controls

      On May 31, 2005, our Chief Accounting Officer, Kenneth Barr, terminated his employment with us. Currently, we do not expect to hire a replacement. We have evaluated our internal control procedures as they relate to the responsibilities held by the Chief Accounting Officer position. Responsibility for and performance of the internal control procedures performed by the Chief Accounting Officer position have been assumed by other members of senior management. We believe the internal control over financial reporting has not been materially affected by this change in senior management.

      There have not been any other material changes in our internal control over financial reporting that has occurred during the third quarter of 2005 that has materially affected, or is reasonably likely to materially affect, the company’s 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.

28

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 6. Exhibits

      (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 September 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)).

29

Exhibit No.		Description of Document
	4.4	Registration Rights Agreement, dated September 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 September 30, 1999).
	10.2	Second Amendment to Amended and Restated Senior Secured Credit Agreement, dated as of May 2, 2005, among Interstate Operating Company, L.P., Societe Generale, SG Americas Securities, LLC, and various other lenders.
	10.3*	Employment Agreement, dated as of February 17, 2005, by and between Thomas F. Hewitt and the Company.
	10.4*	Amended and Restated Employment Agreement, dated as of February 23, 2004, by and between J. William Richardson and the Company.
	31.1*	Sarbanes-Oxley Act Section 302 Certifications of the Chief Executive Officer.
	31.2*	Sarbanes-Oxley Act Section 302 Certifications of the Chief Financial Officer.
	32.*	Sarbanes-Oxley Act Section 906 Certifications of Chief Executive Officer and Chief Financial Officer.

*  Filed herewith

30

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

Dated: November 9, 2005

31 EX-10.3 2 w14588exv10w3.htm EXHIBIT 10.3

Exhibit 10.3

EXECUTIVE EMPLOYMENT AGREEMENT

EXECUTIVE EMPLOYMENT AGREEMENT, effective as of February 17, 2005, by and between INTERSTATE HOTELS & RESORTS, INC., a Delaware corporation (the “Company”), INTERSTATE MANAGEMENT COMPANY, L.L.C., a Delaware limited liability company (the “LLC”) and any successor employer, and THOMAS F. HEWITT (the “Executive”), an individual residing at ***********************************.

     The Company and the LLC desire to employ the Executive in the capacity of Chief Executive 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 17, 2005 (the “Commencement Date”), and ending on February 17, 2008, unless terminated earlier in accordance with Section 5 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, give notice to the other party at least 120 calendar days 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 Executive 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 positions.

          (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 performance by the Executive of his duties and responsibilities under this Agreement.

2

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. 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 Executive Officer and with his duties and responsibilities hereunder.

     3. Board of Directors. While it is understood that the right to elect directors of the Company is by law vested in the stockholders and directors of the Company, it is nevertheless mutually contemplated that, subject to such rights, during the Term the Executive will serve as a member of the Company’s Board of Directors. Executive will not receive any additional compensation or receive any stock options in the Company as a result of his position as a director of the Company.

     4. 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 $400,000 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 150% 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, 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. Except as noted below, all such grants shall be at the sole discretion of the Board. Executive shall receive a separate option agreement

3

governing any such grants. Notwithstanding the foregoing, the Executive shall be granted annually no later than March 31 of each year (beginning in 2005) at least 50,000 restricted shares in the Company, as determined by the Board, depending on the performance of the Company. The shares will vest equally on the first, second and third anniversary of the date of grant.

          (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 under this Agreement. Until April 21, 2005, the Company shall provide at the Company’s cost an apartment for the Executive in Arlington, Virginia and shall reimburse the Executive for all travel to and from Arlington, Virginia relating to his relocation to the Washington, D.C. metropolitan area.

          (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 $10,000 annually toward the premium of a life insurance policy with a death benefit payable to a beneficiary designated by the Executive and (ii) up to $15,000 annually toward the premium of a disability insurance policy with a disability benefit 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) The Executive shall be granted a car allowance of up to $1,000 per month.

          (i) The Company shall reimburse Executive for all relocation expenses incurred by Executive in moving he and his family to the Washington, D.C. metropolitan area (including but not limited to brokerage commissions on selling his current home) up to a maximum of $125,000 .

          (j) In addition to any bonus payable for calendar year 2005 pursuant to paragraph 4(b) above, the Executive shall be eligible for a one-time bonus for calendar year 2005 which shall have a maximum potential of $500,000 and shall be based on criteria, including the Company’s financial performance for the year, established by the Board. The bonus will be paid within 30 days of the Company’s filing of its Form 10-K for 2005 with the Securities and Exchange Commission.

          (k) 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)

4

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 4(i) 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 4(k) 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. 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.

     5. 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.

5

          (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.

     6. 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
(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;

6

(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 6(e) hereof, if the Term is terminated by the Company without Cause or other than by reason of Executive’s death or Disability, in 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 6(d) prior to his first anniversary with the Company, then Executive’s bonus amount for purposes of this Section 6(d)(i) will be 112.5% 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

7

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 Company in reimbursement for COBRA premium amounts.

          (e) Intentionally left 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 6(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.

8

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;

          (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) the failure of the Company to nominate the Executive to the Board, removal from the Board or the failure of the Executive to be elected to the Board;

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

          (v) a Change in Control; provided that a Change of Control shall only constitute Good Reason if (i) the Executive terminates this Agreement within the twelve month period following a Change of Control, or (ii) the Company terminates the Executive within two years following a Change of Control

provided, however,

     (x) that the Executive shall not be deemed to have Good Reason pursuant to clauses (h)(i), (ii), (iii) or (iv) 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; and

9

     (y) that if that Executive terminates for Good Reason under paragraph 6(h)(v)(i) above, notwithstanding paragraph 6(d) above, Executive will not receive any severance payment pursuant to paragraph 6(d)(i) above.

              (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 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) 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,

10

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 6 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 6.

          (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.

          (ii) Determination by Accountant.

               (A) All computations and determinations relevant to this Section 6(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

11

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.

               (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 6(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.

12

     7. 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. In addition, after the six month period following Executive’s termination of employment, Executive will be paid a per diem at a daily rate equivalent to his base salary at the time of termination for the time Executive spends on behalf of the Company pursuant to this paragraph.

     8. 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, 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

13

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 Chairman of the Board of Directors, 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.

          (e) 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 Executive’s termination was an employee of the Company (other than a person whose employment with the Company has been terminated by the Company), to become employed by any person, firm or corporation.

          (f) 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.

     9. Specific Performance.

          (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 8 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 8 hereof shall for any reason be held by a court of competent

14

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 6 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 8 hereof shall be immediately and permanently terminated.

     10. 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.

     11. 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:

Thomas F. Hewitt

********************

********************

If to the Company or to the LLC, to:

Interstate Hotels & Resorts, Inc.
4501 North Fairfax Drive
Arlington, VA 22203
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.

     12. 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

15

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 and undertakings, both written and oral, among the parties hereto. Notwithstanding the preceding two sentences, Sections 6(d)(iii), (iv), (v) and (vi) of the Second Amended and Restated Employment Agreement between Executive and Interstate Hotels Corporation (a predecessor of the Company) will remain in full force and effect through January 31, 2006.

16

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

EXECUTIVE:
	/s/ Thomas F. Hewitt
	Thomas F. Hewitt
COMPANY:
	INTERSTATE HOTELS & RESORTS, INC.
	By:	/s/ Christopher L. Bennett
	Name:	Christopher L. Bennett
	Title:	Senior Vice President, General Counsel and Secretary
	LLC:
	INTERSTATE MANAGEMENT COMPANY, LLC
		By: Interstate Operating Company, L.P., a member
		By: Interstate Hotels & Resorts, Inc.,
		its general partner
	By:	/s/ Christopher L. Bennett
	Name:	Christopher L. Bennett
	Title:	Senior Vice President General Counsel and Secretary

EX-10.3

exv10w3

EX-10.4

Exhibit 10.4

AMENDED AND RESTATED
EXECUTIVE EMPLOYMENT AGREEMENT

AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT, effective as of October ___, 2005 (the “Agreement”), by and between INTERSTATE HOTELS & RESORTS, INC., a Delaware corporation (the “Company”), INTERSTATE 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 ***********************************.

     WHEREAS, the Company and the LLC entered into an employment agreement, dated as of February 23, 2004, with the Executive employing the Executive in the capacity of Chief Financial Officer, and the Executive desired to be so employed, on the terms and subject to the conditions set forth in such agreement (the “Old Agreement”); and

     WHEREAS, the Company, the LLC and the Executive agree to amend and restate the Old Agreement in its entirety as provided in this 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

2

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 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 $375,000 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 150% 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.

3

          (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 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 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 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

4

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. 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.

          (i) The Company shall pay Executive a one-time bonus of $63,000 on or before June 1, 2005.

          (j) During the Term, the Company and the LLC shall reimburse the Executive for monthly and/or annual dues (not to include any meal, drink, golf, tennis or other activity allowances) paid by the Executive to maintain his membership in the Washington Golf and Country Club; provided however, that the total annual reimbursement provided to Executive pursuant to this Agreement (exclusive of the one-time initiation dues) shall not exceed $500 per month. Executive shall be solely responsible for any and all tax liabilities and consequences of such reimbursements, and neither the Company nor the LLC makes any representations or warranties to the Executive concerning the tax consequences of any reimbursements provided pursuant to this Section 3(i).

          (k) All of the unvested Restricted Shares granted to the Executive pursuant to the Restricted Stock Agreement, dated as of April 2, 2004, executed by the Company, the LLC and the Executive shall immediately vest as of the date of this Agreement and shall become free from all contractual restrictions.

          (l) The Executive’s unvested 66,666 options in the Company’s common stock which were part of a grant of 100,000 options granted to the Executive on April 1, 2004, will immediately vest in connection with the execution of this Agreement.

5

     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
(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,

6

(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 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

7

	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 62.5% 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 Company in reimbursement for COBRA premium amounts.

          (e) Notwithstanding any other provision to the contrary, in the event that (i) there occurs a Change in Control; and (ii) the Executive is either terminated by the Company without Cause or the Executive resigns his employment within three (3) months following such Change in Control; and (iii) the Executive satisfies any other applicable prerequisites for termination of the Employment Agreement for Good Reason, then the lump sum

8

severance payment due to the Executive pursuant to Section 5(d)(i) shall be calculated using the maximum cash bonus possible pursuant to Section 3(b), which amount is 150% of the Executive’s then current base salary, rather than the actual cash bonus previously received by the Executive as otherwise provided for in Section 5(d)(i)(x)(B). All other aspects of Executive’s severance entitlement shall remain unchanged.

          (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;

9

          (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

10

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.

11

          (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.

12

               (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,

13

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.

          (e) 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.

14

          (f) 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. Specific Performance.

          (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

******************

******************

15

If to the Company or to the LLC, to:

Interstate Hotels & Resorts, Inc.
4501 North Fairfax Drive, Suite 800
Fairfax, VA 22203
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 effective date of this Agreement (other than (i) that certain Restricted Stock Agreement, dated as of April 1, 2005, between the Company, the LLC and the Executive and (ii) the terms of the option

16

grant made to Executive on April 2, 2004). 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:
/s/ William Richardson
William Richardson
COMPANY:
INTERSTATE HOTELS & RESORTS, INC.
By:	/s/ Christopher L. Bennett
Name:	Christopher L. Bennett
Title:	Senior Vice President, General Counsel and Secretary
LLC:
INTERSTATE MANAGEMENT COMPANY, LLC
	By: Interstate Operating Company, L.P., a member
	By: Interstate Hotels & Resorts, Inc.,
	its general partner
By:	/s/ Christopher L. Bennett
Name:	Christopher L. Bennett
Title:	Senior Vice President, General Counsel and Secretary

EX-31.1

EXHIBIT 31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Thomas F. Hewitt, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Interstate Hotels & Resorts, Inc.;
2.	Based on my knowledge, this 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 report;
3.	Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and we 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 report is being prepared;
b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by the report based on such evaluation; and
d.	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 reasonably 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 the registrant’s board of directors (or persons performing the equivalent functions):

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: November 9, 2005

/s/ THOMAS F. HEWITT

   Thomas F. Hewitt

   Chief Executive Officer

EX-31.2

EXHIBIT 31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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 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 report;
3.	Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and we 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 report is being prepared;
b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by the report based on such evaluation; and
d.	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 reasonably 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 the registrant’s board of directors (or persons performing the equivalent functions):

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: November 9, 2005

/s/ J. WILLIAM RICHARDSON

J. William Richardson

 Chief Financial Officer

31

EX-32

EXHIBIT 32

Section 906 Certification

Certification of Chief Executive Officer and Chief Financial Officer

Pursuant to 18 U.S.C. ss. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officers of Interstate Hotels & Resorts, Inc. (the “Company”) hereby certify, to such officers’ knowledge, that:

(i) the accompanying quarterly report on Form 10-Q of the Company for the three months and nine months ended September 30, 2005 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the securities Exchange Act of 1934, as amended;

and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 9, 2005

/s/ THOMAS F. HEWITT  

Thomas F. Hewitt 

Chief Executive Officer 

/s/ J. WILLIAM RICHARDSON  

J. William Richardson 

Chief Financial Officer 

32