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, 2006
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 (State of Incorporation)	52-2101815 (IRS Employer Identification No.)
4501 North Fairfax Drive, Ste 500 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 that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  þ  Yes     o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o     Accelerated filer þ     Non-accelerated filer o

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,      was 31,513,468.

INTERSTATE HOTELS & RESORTS, INC.

INDEX

			Page
PART I. FINANCIAL INFORMATION
	Item 1:	Financial Statements (Unaudited):
		Consolidated Balance Sheets — September 30, 2006 and December 31, 2005		2
		Consolidated Statements of Operations and Comprehensive Income (Loss) — Three and nine months ended September 30, 2006 and 2005		3
		Consolidated Statements of Cash Flows — Nine months ended September 30, 2006 and 2005		4
		Notes to Consolidated Financial Statements		5
	Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
	Item 3:	Quantitative and Qualitative Disclosures About Market Risk		34
	Item 4:	Controls and Procedures		34
PART II. OTHER INFORMATION
	Item 1:	Legal Proceedings		35
	Item 6:	Exhibits		35

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,
	2006			2005
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	12,320		$	12,929
Restricted cash		4,181			3,209
Accounts receivable, net of allowance for doubtful accounts of $2,353 and $1,873 respectively		55,810			41,594
Due from related parties, net of allowance for doubtful accounts of $963 and $1,800 respectively		1,498			6,001
Prepaid expenses and other current assets		14,354			8,594
Total current assets		88,163			72,327
Marketable securities		1,385			1,503
Property and equipment, net		69,546			52,070
Investments in and advances to affiliates		10,630			7,686
Notes receivable		4,962			6,052
Deferred income taxes, net		14,721			11,925
Goodwill		86,185			96,809
Intangible assets, net		32,707			44,708
Total assets	$	308,299		$	293,080
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,991		$	4,508
Accrued expenses		75,879			70,347
Current portion of long-term debt		3,750			3,750
Total current liabilities		84,620			78,605
Deferred compensation		1,329			1,474
Long-term debt		67,552			81,302
Total liabilities		153,501			161,381
Minority interest		468			1,059
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; 31,513,468, and 30,609,935 shares issued and outstanding at September 30, 2006 and December 31, 2005 respectively		315			306
Treasury stock		(69	)		(69	)
Paid-in capital		193,254			189,330
Accumulated other comprehensive income		868			64
Accumulated deficit		(40,038	)		(58,991	)
Total stockholders’ equity		154,330			130,640
Total liabilities, minority interest and stockholders’ equity	$	308,299		$	293,080

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)

							Nine months ended
	Three months ended September 30,						September 30,
	2006			2005			2006			2005
Revenue:
Lodging	$	7,154		$	3,376		$	18,609		$	8,482
Management fees		12,779			9,008			34,386			25,600
Management fees-related parties		1,287			5,366			12,030			16,970
Termination fees		16,995			274			18,774			867
Termination fees-related parties		—			1,139			6,117			3,294
Corporate housing		40,014			33,267			101,066			91,792
Other		2,688			2,806			9,117			8,541
		80,917			55,236			200,099			155,546
Other revenue from managed properties		202,780			241,710			645,553			665,450
Total revenue		283,697			296,946			845,652			820,996
Operating expense by department:
Lodging		5,210			2,487			13,670			6,491
Corporate housing		30,896			25,894			80,079			73,923
Undistributed operating expenses:
Administrative and general		19,594			19,317			58,553			56,961
Depreciation and amortization		1,922			2,474			5,908			6,830
Restructuring and severance		—			—			—			2,043
Asset impairments and write-offs		2,024			1,046			10,666			2,957
		59,646			51,218			168,876			149,205
Other expenses from managed properties		202,780			241,710			645,553			665,450
Total operating expenses		262,426			292,928			814,429			814,655
OPERATING INCOME		21,271			4,018			31,223			6,341
Interest income		514			360			1,445			863
Interest expense		(2,199	)		(1,965	)		(6,240	)		(8,218	)
Equity in earnings (losses) of affiliates		4,745			(381	)		4,311			2,811
Gain on sale of investment and extinguishment of debt		—			4,326			—			4,711
INCOME BEFORE MINORITY INTEREST AND INCOME TAXES		24,331			6,358			30,739			6,508
Income tax expense		(9,011	)		(2,585	)		(11,615	)		(2,647	)
Minority interest expense		(122	)		(38	)		(171	)		(49	)
INCOME FROM CONTINUING OPERATIONS		15,198			3,735			18,953			3,812
Income from discontinued operations, net of tax		—			1,656			—			1,898
NET INCOME	$	15,198		$	5,391		$	18,953		$	5,710
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss)		66			(281	)		737			(314	)
Unrealized gain (loss) on investments		55			27			67			(485	)
COMPREHENSIVE INCOME	$	15,319		$	5,137		$	19,757		$	4,911
BASIC EARNINGS PER SHARE:
Continuing operations	$	0.48		$	0.12		$	0.61		$	0.13
Discontinued operations		—			0.06			—			0.06
Basic earnings per share	$	0.48		$	0.18		$	0.61		$	0.19
DILUTIVE EARNING PER SHARE:
Continuing operations	$	0.48		$	0.12		$	0.60		$	0.12
Discontinued operations		—			0.05			—			0.06
Dilutive Earning per share	$	0.48		$	0.17		$	0.60		$	0.18

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,
	2006			2005
OPERATING ACTIVITIES:
Net income	$	18,953		$	5,710
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		5,908			6,830
Amortization of deferred financing fees		573			2,530
Stock compensation expense		788			942
Bad debt expense		865			1,161
Asset impairments and write-offs		10,666			2,957
Equity in earnings of affiliates		(4,311	)		(2,811	)
Gain on sale of investments and extinguishment of debt		—			(4,711	)
Operating distributions from unconsolidated affiliates		285			375
Minority interest		171			49
Deferred income taxes		7,828			2,403
Discontinued operations:
Depreciation and amortization		—			155
Gain on sale		—			(2,605	)
Changes in assets and liabilities:
Accounts receivable, net		(14,994	)		421
Due from related parties, net		4,503			6,408
Prepaid expenses and other current assets		(3,679	)		(1,189	)
Accounts payable and accrued expenses		2,527			6,305
Other changes in asset and liability accounts		594			(325	)
Cash provided by operations		30,677			24,605
INVESTING ACTIVITIES:
Proceeds from the sale of investments		—			483
Proceeds from the sale of discontinued operations		—			10,488
Change in restricted cash		(972	)		(1,465	)
Acquisition of subsidiary		(497	)		—
Acquisition of hotels		(14,538	)		(31,779	)
Purchases of property and equipment		(6,261	)		(1,817	)
Additions to intangible assets		(1,417	)		(1,700	)
Contributions to unconsolidated affiliates		(13,192	)		(492	)
Distributions from unconsolidated affiliates		15,754			6,610
Changes in notes receivable		596			(531	)
Cash used in investing activities		(20,527	)		(20,203	)
FINANCING ACTIVITIES:
Proceeds from borrowings		9,000			110,200
Repayment of borrowings		(22,750	)		(109,372	)
Proceeds from issuance of common stock		2,810			40
Financing fees paid		—			(3,641	)
Cash used in financing activities		(10,940	)		(2,773	)
Effect of exchange rate on cash		181			(304	)
Net (decrease) increase in cash and cash equivalents		(609	)		1,325
CASH AND CASH EQUIVALENTS, beginning of period		12,929			16,481
CASH AND CASH EQUIVALENTS, end of period	$	12,320		$	17,806
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes:
Interest	$	5,564		$	5,349
Income taxes		2,185			1,094

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

4

INTERSTATE HOTELS & RESORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

1.   BUSINESS SUMMARY

We are one of the largest independent U.S. hotel management companies, measured by number of rooms under management. We have three operating divisions: hotel management, corporate housing and hotel ownership, each of which are reportable operating segments. We manage a portfolio of hospitality properties and provide related services in the hotel, resort and conference center markets. Our portfolio is diversified by franchise and brand affiliations. The related services provided include insurance and risk management, purchasing and capital project management, information technology and telecommunications and centralized accounting. As of September 30, 2006, we managed 233 hotel properties and five ancillary service centers (i.e. conference centers and laundry facilities), with 52,617 rooms in 40 states, the District of Columbia, Canada, and Russia.

Our corporate housing division is operated through our subsidiary BridgeStreet Worldwide, Inc. This division provides apartment rentals for both individuals and corporations with a need for temporary housing as an alternative to long-term apartment rentals or prolonged hotel stays. As of September 30, 2006, we had 3,371 apartments under lease and 298 units under management in the United States, France and the United Kingdom.

We also wholly own three hotel properties and hold non-controlling joint venture equity interests in ten joint ventures, which hold ownership interests in 24 of our managed properties as of September 30, 2006.

Our subsidiary operating partnership, Interstate Operating Company, L.P, indirectly holds substantially all of our assets. We are the sole general partner of that operating partnership. Certain independent third parties and we are limited partners of the partnership. The interests of those third parties are reflected in minority interests on our consolidated balance sheet. The partnership agreement gives the general partner full control over the business and affairs of the partnership. We own more than 99% of the subsidiary operating partnership.

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 U.S. generally accepted accounting principles (“GAAP”). 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, for the year ended December 31, 2005.

In our opinion, the accompanying unaudited consolidated interim financial statements reflect all normal and recurring adjustments 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 U.S. generally accepted accounting principles 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 our results for the entire year.

These consolidated financial statements include our accounts and the accounts of all of our majority owned subsidiaries. We eliminate all significant intercompany balances and transactions. Certain reclassifications have been made to our prior year financial statements to conform to our current presentation.

Related Parties — In May 2006, The Blackstone Group, which we refer to as “Blackstone,” acquired MeriStar Hospitality Corporation, which we refer to as “MeriStar.” MeriStar had previously been considered a related party, as our Chairman of the Board, Paul Whetsell, was also the CEO of MeriStar. Mr. Whetsell did not become part of the Blackstone management team, and we do not consider Blackstone to be a related party. As such, the line items “due from related parties” on our consolidated balance sheet and “management fees — related parties” on our consolidated statement of operations do not include any amounts associated with Blackstone at September 30, 2006 and for the period from May 2, 2006 through September 30, 2006, although fees received from Meristar prior to May 2,

5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2006 continue to be included in “management fees- related parties.” Our managed properties for which we also hold a joint venture ownership interest continue to be presented as related parties. See Note 4 “Investments and Advances to Affiliates” for further information on these related party amounts.

Stock-Based Compensation — We adopted the fair-value based method of accounting for stock-based compensation effective January 1, 2003, using the prospective method described in SFAS No. 148, “Accounting for Stock Based Compensation — Transition and Disclosure.” All stock-based awards granted prior to January 1, 2003 were fully vested as of December 31, 2005. On January 1, 2006, we adopted SFAS No. 123 (revised 2004), “Share Based Payment” (“SFAS No. 123R”) using the modified prospective method. We have previously and will continue to use the Black-Scholes pricing model to estimate the value of stock options granted to employees. The adoption of SFAS No. 123R did not have a material impact on our results of operations or financial position as all of our unvested stock-based awards as of December 31, 2005 have previously been accounted for under the fair-value method of accounting. See Note 15, “Stock-Based Compensation,” for additional information.

Accounting for Income Taxes — In July 2006, FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109,” was issued. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109 (“SFAS No. 109”), “Accounting for Income Taxes.” FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new FASB standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The provisions of FIN 48 are to be applied to all tax positions upon initial adoption of this standard. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. The cumulative effect of applying the provisions of FIN 48 should be reported as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that fiscal year. We are currently evaluating the financial statement impact, if any, of the interpretation and will adopt the provisions of FIN 48 on January 1, 2007.

Control of a Limited Partnership — Emerging Issues Task Force 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights,” (“EITF 04-05”) 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 otherwise consolidate the limited partnership in accordance with GAAP. 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 was effective for fiscal years beginning after December 15, 2005 and as of June 29, 2005 for new or modified arrangements. We are not the sole general partner in any of our joint ventures, nor are we the controlling general partner for the one joint venture which involves multiple general partners. Accordingly, this EITF does not change the manner in which we account for our existing joint ventures.

Effects of Prior Year Misstatements — In September 2006, Staff Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” was issued. SAB 108 expresses the staff’s view regarding the process of quantifying financial statement misstatements. The interpretation provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The cumulative effects of the initial application should be reported in the carrying amounts of assets and liabilities as of the beginning of that fiscal year, and the offsetting adjustment should be made to the opening balance of the retained earnings for that year. The disclosures should include the nature and amount of each individual error being corrected in the cumulative adjustment, when and how each error being corrected arose and the fact that the errors

6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

had previously been considered immaterial. The guidance of SAB 108 is effective for fiscal years ending after November 15, 2006. We will assess the impact, if any, to the extent we have prior year misstatements in the future and will adopt the provisions of SAB 108 as of December 31, 2006.

3.   EARNINGS PER SHARE

We calculate our basic earnings per common share by dividing net income by the weighted average number of shares of common stock outstanding. Our diluted earnings per common share assumes the issuance of common stock for all potentially dilutive stock equivalents outstanding. Potentially dilutive shares include restricted stock and stock options granted under our various stock compensation plans and operating partnership units held by minority partners. In periods in which there is a loss, diluted shares outstanding will equal basic shares outstanding to prevent anti-dilution. Basic and diluted earnings per common share are as follows (in thousands, except per share amounts):

	Three months ended
	September 30, 2006						September 30, 2005
	Income/				Per Share		Income/				Per Share
	(Loss)		Shares		Amount		(Loss)		Shares		Amount
Income from continuing operations	$	15,198		31,368	$	0.48	$	3,735		30,539	$	0.12
Income from discontinued operations, net of tax		—		—		—		1,656		—		0.06
Basic net income	$	15,198		31,368	$	0.48	$	5,391		30,539	$	0.18
Assuming exercise of outstanding employee stock options less shares repurchased at average market price		—		190		—		—		132		—
Assuming vesting of outstanding restricted stock		—		195		—		—		134		(0.01	)
Diluted net income	$	15,198		31,753	$	0.48	$	5,391		30,805	$	0.17

	Nine months ended
	September 30, 2006							September 30, 2005
	Income/				Per Share			Income/				Per Share
	(Loss)		Shares		Amount			(Loss)		Shares		Amount
Income from continuing operations	$	18,953		30,983	$	0.61		$	3,812		30,503	$	0.13
Income from discontinued operations, net of tax		—		—		—			1,898		—		0.06
Basic net income	$	18,953		30,983	$	0.61		$	5,710		30,503	$	0.19
Assuming exercise of outstanding employee stock options less shares repurchased at average market price		—		282		—			—		130		—
Assuming vesting of outstanding restricted stock		—		159		(0.01	)		—		156		(0.01	)
Diluted net income	$	18,953		31,424	$	0.60		$	5,710		30,789	$	0.18

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 (in thousands, except number of hotels):

			Our Equity	September 30,		December 31,
Joint Venture	Number of Hotels		Participation	2006		2005
MIP Lessee, L.P.		8	10.0%	$	1,567	$	2,022
CNL/IHC Partners, L.P.		3	15.0%		2,609		2,566
RQB Resort/Development Investors, LLC(1)		1	10.0%		215		2,670
True North Tesoro Property Partners, L.P.		1	15.9%		1,414		—
Amitel Holdings, LLC		6	15.0%		3,967		—
Cameron S-Sixteen Hospitality, LLC		1	10.9%		507		—
Other		4	5.0%-50.0%		351		428
Total		24		$	10,630	$	7,686

(1) The December 31, 2005 balance relates to our joint venture with Interconn Ponte Vedra Company, L.P., which held the Sawgrass Marriott Resort & Spa until July 2006.

We held an interest in Interconn Ponte Vedra Company, L.P. (“Interconn”), which owned the Sawgrass Marriott Resort & Spa (“Sawgrass”). In July 2006, Interconn sold Sawgrass to RQB Resort Investors, LLC and RQB Resort Development, LLC (together, the RQB Joint Venture). We invested a total of $9.3 million in the RQB Joint Venture. Of this amount, $7.0 million was invested on the date of sale and the remaining $2.3 million was invested in October 2006. We are not required to contribute any additional capital or other funding to the RQB Joint Venture and will receive a preferred return of 10% per annum on our unrecovered capital. We will not otherwise participate in the profits and losses of the RQB Joint Venture. We will receive total proceeds from Interconn for our 10% interest from the disposition of Sawgrass totaling $16.5 million. As of September 30, 2006, we have received distributions of $15.3 million. We expect to receive the remaining distribution of $1.2 million by the end of 2006. We have recognized a gain of $4.5 million on the sale, which is equal to the excess of our proceeds over the carrying value of our investment in Interconn of $2.7 million and the $9.3 million investment in the RQB Joint Venture. This gain is presented in equity in earnings (losses) of affiliates on our statement of operations. The initial carrying value of our investment in the RQB Joint Venture was zero. We will employ the equity method to account for this investment. Our preferred return will be recognized as income when earned. Future operating distributions of unrecovered capital will be recorded as income when received.

In June 2006, we entered into three separate joint ventures with a total investment of $6.4 million, for interests in eight hotels with more than 1,200 rooms. These investments included a $2.0 million investment to acquire a 21% interest in the Doral Tesoro Hotel & Golf Club near Dallas/Ft. Worth, Texas, a $0.5 million investment to acquire a 10.9% interest in The Statehouse Inn in Boise, Idaho, and a $3.9 million investment to acquire a 15.0% interest in a portfolio of six Residence Inn by Marriott properties in and around Cleveland, Ohio. In September 2006, we received a return of our investment in True North Tesoro Property Partners, L.P. of $0.5 million as part of the planned syndication of joint venture interests. This reduced our equity investment in the joint venture to $1.4 million or 15.9%.

In September 2006, the majority owners and we entered into a definitive agreement to sell MIP Lessee L.P. The sale is expected to close during the fourth quarter of 2006.

We had related party accounts receivable from our joint venture ownership interests of $1.5 million as of September 30, 2006 and December 31, 2005. We had related party management fees from these joint ventures of $1.3 million and $3.5 million for the three and nine months ended September 30, 2006, respectively, and $0.9 million and $2.8 million for the three and nine months ended September 30, 2005, respectively.

8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The recoverability of the carrying values of our investments and advances to our investees is dependent upon the 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 impairment 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.

The summarized financial information of MIP Lessee, L.P. for the three and nine months ended September 30, 2006 and 2005 is presented below. Summarized profit and loss information for this investment 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:

	Three months ended					Nine months ended
	September 30,					September 30,
	2006		2005			2006			2005
Revenue	$	31,148	$	25,635		$	78,631		$	71,206
Operating expenses		25,874		22,715			68,680			71,794
Net income (loss)		47		(1,156	)		(4,547	)		(14,430	)
Our share of the above earnings (losses)		5		(116	)		(455	)		(1,443	)

5.   PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

	September 30,			December 31,
	2006			2005
Land	$	6,985		$	5,610
Furniture and fixtures		11,707			7,866
Building and improvements		46,080			32,297
Leasehold improvements		6,139			5,198
Computer equipment		9,855			9,038
Software		12,244			12,298
Other		1,696			865
Total	$	94,706		$	73,172
Less accumulated depreciation		(25,160	)		(21,102	)
Property and equipment, net	$	69,546		$	52,070

The “Other” line item above represents vehicles and operating stock primarily relating to our BridgeStreet corporate housing division.

6.   INTANGIBLE ASSETS

Intangible assets consist of the following (in thousands):

	September 30,			December 31,
	2006			2005
Management contracts	$	38,738		$	49,902
Franchise fees		1,600			1,226
Deferred financing fees		2,223			2,339
Total cost		42,561			53,467
Less accumulated amortization		(9,854	)		(8,759	)
Intangible assets, net	$	32,707		$	44,708

9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We amortize the value of our intangible assets, except goodwill, which all have definite useful lives, over their estimated useful lives, which generally correspond with the expected terms of the associated management, franchise, or financing agreements. In the first nine months of 2006, we recognized impairment losses of $8.3 million related to management contract costs for 18 properties sold by MeriStar during the first quarter, $1.4 million for three Blackstone properties terminated in September 2006, $0.7 million for 14 Sunstone properties sold during the nine months ended September 30, 2006 and $0.3 million for various other properties. During February 2006, we paid $0.5 million to acquire a corporate housing business in Chicago, IL. In connection with this acquisition, we recorded an intangible asset of $0.5 million related to customer rental contracts which we assumed as part of the purchase. We will amortize this intangible asset over the remaining term of the contracts, all of which expire in 2006.

We incurred scheduled amortization expense on our remaining management contracts and franchise fees of $0.5 million and $2.0 million for the three and nine months ended September 30, 2006 and $0.8 million and $2.3 million for the three and nine months ended September 30, 2005. We also incurred amortization expense related to deferred financing fees of $0.2 and $0.6 million for the three and nine months ended September 30, 2006, respectively, and $0.2 million and $2.5 million for the three and nine months ended September 30, 2005, respectively. In the first quarter of 2005, $1.8 million of deferred financing fees was amortized in connection with the refinancing of our senior credit facility and repayment of our subordinated term loan. Amortization of deferred financing fees is included in interest expense.

We evaluate our capitalized management contracts for impairment when circumstances warrant. When we receive notification that a management contract will be terminated early, we evaluate when or if amortization should be accelerated or if any remaining management contract costs should be impaired. In May 2006, Blackstone acquired MeriStar. As of September 30, 2006, we do not believe the carrying value of $21.6 million associated with the remaining MeriStar management contracts is impaired as the obligations and duties under those contracts, including the payment of termination fees, were assumed by Blackstone. We will continue to assess the recorded value of those management contracts and their related amortization periods as circumstances warrant.

We evaluate goodwill annually for impairment during the fourth quarter; however, when circumstances warrant, we will assess the valuation of our goodwill more frequently. We evaluated goodwill, for impairment in the first quarter due to the loss of 21 management contracts. We also evaluated goodwill in the third quarter due to the loss of a significant number of management contracts. Our analysis in both periods concluded that goodwill was not impaired.

As a result of the relief of $10.6 million of the valuation allowance on our deferred tax assets in June 2006, our goodwill decreased by a like amount. The relief of the valuation was charged against goodwill in accordance with SFAS No. 109, “Accounting for Income Taxes.”’ See Note 16 for a full discussion of our income taxes.

7.   ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

	September 30,		December 31,
	2006		2005
Salaries and employee related benefits	$	28,992	$	34,234
Other		46,887		36,113
Total	$	75,879	$	70,347

No individual amounts in “Other” represent more than 5% of current liabilities.

10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

8.   LONG-TERM DEBT

Our long-term debt consists of the following (in thousands):

	September 30,			December 31,
	2006			2005
Senior credit facility — revolving loan	$	10,526		$	20,526
Senior credit facility — term loan		41,776			45,526
Mortgage debt		19,000			19,000
Total long-term debt		71,302			85,052
Less current portion		(3,750	)		(3,750	)
Long-term debt, net of current portion	$	67,552		$	81,302

Senior Credit Facility — In January 2005, we entered into an amended and restated senior secured credit facility, which we refer to as the “Credit Facility,” with various lenders. The Credit Facility replaced our previous senior secured credit facility and provides aggregate loan commitments for a $53.0 million term loan and a $55.0 million revolving loan. The Credit Facility is scheduled to mature on January 14, 2008. When we entered into the Credit Facility, we borrowed approximately $87.2 million, including the entire $53.0 million term loan and $34.2 million under the revolving loan. We are required to make quarterly payments of $1.3 million on the term loan until its maturity date.

The actual interest rates on both the revolving loan and term loan depend on the results of certain financial tests. As of September 30, 2006, based on those financial tests, borrowings under the revolving loan bore interest at the 30-day LIBOR rate plus 325 basis points (a rate of 8.63% per annum) and borrowings under the term loan bore interest at the 30-day LIBOR plus 450 basis points (a rate of 9.88% per annum). We incurred interest expense of $1.6 million and $4.5 million on the senior credit facilities for the three and nine months ended September 30, 2006, respectively, and $1.5 million and $4.6 million for the three and nine months ended September 30, 2005, respectively.

The debt under the Credit Facility is guaranteed by certain of our 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. The Credit Facility contains covenants that include maintenance of certain financial ratios at the end of each quarter, compliance reporting requirements and other customary restrictions. In connection with the purchase of the Hilton Concord hotel, we entered into amendments to the Credit Facility in February 2005 and May 2005 in order to modify certain liquidity covenants that we would have otherwise failed pursuant to the purchase of the hotel. At September 30, 2006, we were in compliance with the loan covenants of the Credit Facility. The acquisition of the Hilton Arlington in October 2006, did not impact our compliance with these loan covenants.

Mortgage Debt — In February 2005, we entered into a $19.0 million non-recourse mortgage loan to finance the acquisition of the Hilton Concord hotel. We are required to make interest-only payments until the loan matures in March 2008, with the option for two one-year extensions. The loan bore interest at the 30-day LIBOR rate plus 225 basis points (rate of 7.63% per annum at September 30, 2006). We incurred interest expense on the loan of $0.4 million and $1.0 million for the three and nine months ended September 30, 2006, respectively, and $0.3 million and $0.7 million for the three and nine months ended September 30, 2005, respectively.

Interest Rate Caps — In February 2005, we entered into a $19.0 million, three-year interest rate cap agreement in connection with the mortgage loan on the Hilton Concord hotel, to protect against the potential effect of future interest rate fluctuations. The interest rate agreement caps the 30-day LIBOR at 6.65% per annum and is scheduled to mature on March 1, 2008. In March 2005, we entered into a $55.0 million, 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% per annum and is scheduled to mature on

11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

January 14, 2008. At September 30, 2006, the total fair value of these interest rate cap agreements was approximately $20,000, with changes in fair value recorded in our statement of operations.

9.   SEGMENT INFORMATION

We are organized into three reportable segments: hotel management, hotel ownership and corporate housing. Following our acquisition of two hotels in 2005, hotel ownership was required to be classified as a separate reportable segment due to its material significance and management’s internal process established to oversee hotels and joint venture investments. Each segment is managed separately because of its distinctive products and services. Reimbursable expenses, classified as “other revenue and expenses from managed properties” on the statement of operations, are not included as part of this segment analysis because they are offset, dollar-for-dollar between revenue and expense. These reimbursable expenses are all part of the hotel management segment.

Hotel management includes the operations related to our managed properties, our purchasing, construction and design subsidiary and our insurance subsidiary. Revenue for this segment consists of “management fees” (which includes $3.2 million of business interruption proceeds for the nine months ended September 30, 2006), “termination fees” and “other” from our statement of operations. Our insurance subsidiary, as part of the hotel management segment, provides a layer of reinsurance for property, casualty, auto and employment practices liability coverage to our hotel owners.

Corporate housing includes the related revenue and expense from our statement of operations as well as general and administrative costs, depreciation and interest expense related to that segment. Hotel ownership includes our wholly-owned hotels and joint venture investments. Corporate is not actually an operating segment but rather includes costs that do not specifically relate to any other single segment of our business. Corporate includes expenses related to our public company structure, certain restructuring charges, Board of Directors costs, audit fees, unallocated corporate debt and an allocation for rent and legal expenses. Corporate assets include deferred tax assets, deferred financing fees and various other corporate assets.

Capital expenditures includes the “acquisition of subsidiary”, “acquisition of hotels” and “purchases of property and equipment” line items from our cash flow statement. We have revised amounts previously reported to reflect the addition of hotel ownership as a reportable segment in 2005. All amounts presented are in thousands.

	Hotel		Corporate			Hotel
	Management		Housing			Ownership			Corporate			Consolidated
Three months ended September 30, 2006
Revenue	$	33,749	$	40,014		$	7,154		$	—		$	80,917
Depreciation and amortization		929		296			582			115			1,922
Operating expense		14,824		36,485			5,210			1,205			57,724
Operating income (loss)		17,996		3,233			1,362			(1,320	)		21,271
Interest expense, net		—		(2	)		(461	)		(1,222	)		(1,685	)
Equity in earnings of affiliates		—		—			4,745			—			4,745
Income (loss) before minority interests and income taxes	$	17,996	$	3,231		$	5,646		$	(2,542	)	$	24,331
Capital expenditures	$	315	$	250		$	1,662		$	78		$	2,305

12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Hotel		Corporate		Hotel
	Management		Housing		Ownership			Corporate			Consolidated
Three months ended September 30, 2005
Revenue	$	18,593	$	33,267	$	3,376		$	—		$	55,236
Depreciation and amortization		1,592		272		403			207			2,474
Operating expense		13,425		31,322		2,485			1,512			48,744
Operating income (loss)		3,576		1,673		488			(1,719	)		4,018
Interest expense, net		—		—		(298	)		(1,307	)		(1,605	)
Equity in earnings of affiliates		—		—		(381	)		—			(381	)
Other gains		—		—		4,326			—			4,326
Income (loss) before minority interests and income taxes	$	3,576	$	1,673	$	4,135		$	(3,026	)	$	6,358
Capital expenditures	$	160	$	106	$	162		$	39		$	467

	Hotel		Corporate			Hotel
	Management		Housing			Ownership			Corporate			Consolidated
Nine months ended September 30, 2006
Revenue	$	80,424	$	101,066		$	18,609		$	—		$	200,099
Depreciation and amortization		2,896		1,193			1,481			338			5,908
Operating expense		49,189		96,148			13,670			3,961			162,968
Operating income (loss)		28,339		3,725			3,458			(4,299	)		31,223
Interest expense, net		—		(18	)		(1,131	)		(3,646	)		(4,795	)
Equity in earnings of affiliates		—		—			4,311			—			4,311
Income (loss) before minority interests and income taxes	$	28,339	$	3,707		$	6,638		$	(7,945	)	$	30,739
Total assets	$	172,445	$	40,351		$	76,735		$	18,768		$	308,299
Capital expenditures	$	1,709	$	1,814		$	17,346		$	427		$	21,296
Nine months ended September 30, 2005
Revenue	$	55,272	$	91,792		$	8,482		$	—		$	155,546
Depreciation and amortization		4,618		851			791			570			6,830
Operating expense		38,925		89,555			6,491			7,404			142,375
Operating income (loss)		11,729		1,386			1,200			(7,974	)		6,341
Interest expense, net		—		—			(900	)		(6,455	)		(7,355	)
Equity in earnings of affiliates		—		—			2,811			—			2,811
Other gains		—		—			4,326			385			4,711
Income (loss) before minority interests and income taxes	$	11,729	$	1,386		$	7,437		$	(14,044	)	$	6,508
Total assets	$	183,660	$	35,522		$	44,667		$	20,698		$	284,547
Capital expenditures	$	746	$	257		$	32,407		$	186		$	33,596

13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Revenues from foreign operations, excluding reimbursable expenses, were as follows (in thousands):

	Three months				Nine months
	ended September 30,				ended September 30,
	2006		2005		2006		2005
Canada	$	59	$	127	$	256	$	461
United Kingdom	$	11,146	$	7,764	$	26,647	$	22,322
France	$	752	$	544	$	1,898	$	1,599
Russia	$	375	$	375	$	1,125	$	1,125

10.   RESTRUCTURING AND SEVERANCE EXPENSES

We incurred $2.0 million in restructuring and severance expenses for the nine months ended September 30, 2005. These expenses primarily consist of severance payments to former personnel, including $1.8 million related to Steve Jorns, our former CEO.

11.   ASSET IMPAIRMENTS AND WRITE-OFFS

The charges for asset impairment and write-offs consist of the following (in thousands):

	Three months				Nine months
	ended September 30,				ended September 30,
	2006		2005		2006		2005
Management contract costs	$	2,024	$	1,046	$	10,666	$	2,094
Hotel real estate investment fund costs		—		—		—		863
Total	$	2,024	$	1,046	$	10,666	$	2,957

Management contract costs are amortized on a straight-line basis over the life of the management contract. In the event that the management contract is terminated early, the unamortized management contract costs are impaired. For the nine months ended September 30, 2006, the management contract impairment losses primarily consist of $8.3 million for the termination of management contracts of 18 MeriStar properties that were sold during the first quarter and $2.0 million associated with the loss of 17 management contracts during the third quarter of 2006. For the nine months ended September 30, 2005, the impairment of management contract costs related to the loss of 13 management contracts, four of which were lost in the third quarter. The remaining impairment related to a real estate investment fund which we were attempting to form with a group of institutional investors. We concluded that other investment vehicles were more appropriate for the company and accordingly, decided not to proceed with this particular investment fund.

12.   OTHER TRANSACTIONS

We managed eight MeriStar properties that were damaged or closed due to hurricanes in 2004. In March 2006, we settled our claim for lost management fees and we received approximately $3.2 million in business interruption proceeds. This recovery is recorded in management fees on our statements of operations.

During August 2006, we entered into an amendment to our master fee agreement with Blackstone. The amendment allows them to transition three properties from management by us without the sale of the property. In exchange, we received the right to preclude them from substituting any future management agreements they give us to reduce or offset their currently payable termination fees for hotels they have sold. The amendment removed all contingencies related to the receipt of the agreed upon termination fee payments due from Blackstone. As a result, we recognized, on a present value basis, the $15.1 million of termination fees due to us as of the date of the amendment. Of the $15.1 million, $14.5 million is recorded as accounts receivable at September 30, 2006, of which $0.7 million was subsequently paid in October and $13.8 million was used as a credit towards the purchase of the Hilton Arlington.

14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In January 2005, we recognized a gain of $0.4 million from the exchange 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 recognized a gain of $4.3 million in connection with the extinguishment of debt on our non-recourse promissory note with FelCor Lodging Trust Incorporated (“FelCor”).

13.   COMMITMENTS AND CONTINGENCIES

Insurance Matters — As part of our management services to hotel owners, we generally obtain casualty (workers’ compensation and general liability) insurance coverage for our managed 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 have been working with the prior carrier to facilitate a timely and efficient settlement of the original 1,213 claims outstanding under the prior carrier’s casualty policies. The prior carrier has primary responsibility for settling those claims from its assets. As of September 2006, only 74 claims remained outstanding. 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, except for periods prior to January 2001, when we leased certain hotels from owners. Based on the information, we believe the ultimate resolution of this situation will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

During 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. Based on this information we have determined that the amount is probable and estimable and have therefore recorded the liability. 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 and gross hotel revenues. Due to the September 11th terrorist attacks and the resulting substantial decline in business and leisure travel in the months that followed we reduced hotel level headcount and payroll. The estimated premiums billed were significantly overstated and as a result, we are owed refunds on the premiums paid. The amount of our receivable exceeds the dividend amounts claimed by the prior carrier. We have reserved the amount of the excess given the financial condition of the carrier. We believe that we hold the legal right of offset in regard to this receivable and payable with the prior insurance carrier. Accordingly, there was no effect on the statement of operations in 2005 or in the first nine months of 2006. 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 them regarding the contractual amounts due to us. To the extent we do not collect sufficiently on our receivable and pay amounts that we have been invoiced, we will 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. Future minimum lease payments required under these operating leases as of September 30, 2006 were as follows (in thousands):

September 30, 2006-2007	$	21,913
September 30, 2007-2008		36,002
September 30, 2008-2009		21,306
September 30, 2009-2010		17,325
September 30, 2010-2011		12,099
Thereafter		20,969
Total	$	129,614

The operating lease obligations shown in the table above have not been reduced by a non-cancelable sublease related to our former corporate office space. We remain secondarily liable under this lease in the event that the sub-lessee defaults under the sublease terms. We do not believe that material payments will be required as a result of the

15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

secondary liability provisions of the primary lease agreements. We expect to receive minimum payments under this sublease as follows (in thousands):

September 30, 2006-2007	$	902
September 30, 2007-2008		1,122
September 30, 2008-2009		1,167
September 30, 2009-2010		1,214
September 30, 2010-2011		1,262
Thereafter		2,565
Total	$	8,232

Commitments Related to Management Agreements and Hotel Ownership — Under the provisions of management agreements with certain hotel owners, we are obligated to provide an aggregate of $4.0 million to these hotel owners in the form of investments or loans. 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. We are also required to fund up to $0.6 million in the event of cost overruns in excess of 110% of the projected budgeted costs, as defined in the relevant management agreement, for the development of certain hotels related to one of our joint venture interests.

Guarantees — In January 2005, BridgeStreet signed a 15-year operating and management agreement to operate 116 apartments in London. As part of the agreement, we have guaranteed the building owner minimum monthly rental revenues of approximately $0.1 million from July 2005 through June 2008. We recorded a liability for the minimum revenue guarantee and an offsetting entry to prepaid rent. The liability is reduced as the minimum monthly revenue guarantee is met each month and the prepaid rent is amortized to corporate housing expense as an offset to the reduction of the liability. We have not been required to fund any shortfalls to date. At September 30, 2006, we have a remaining asset and corresponding liability of $2.0 million related to this guarantees.

Letters of Credit — As of September 30, 2006, we had a $1.5 million letter of credit outstanding from Northridge Insurance Company in favor of our property insurance carrier. The letter of credit expires on April 4, 2007. We are required by the property insurance carrier to deliver the letter of credit to cover its losses in the event we default on payments to the carrier. Accordingly, Butterfield Bank has required us to restrict a portion of our cash equal to the amount of the letter of credit, which we present as restricted cash on the consolidated balance sheet. We also have a $0.8 million letter of credit outstanding from Societe Generale in favor of the insurance carrier that issues surety bonds on behalf of the properties we manage. The letter of credit expires on June 2, 2007. We are required by the insurance carrier to deliver the letter of credit to cover its risk in the event the properties default on their required payments related to the surety bonds.

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 become unable to pay its obligations, those obligations would become obligations of the general partners. We are not the sole general partner of 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.

16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

14.   ACQUISITIONS & DISPOSITIONS

Acquisitions:

On June 27, 2006, we acquired the 131-room Hilton Garden Inn Baton Rouge Airport in Louisiana. The acquisition cost was $14.5 million, including normal and customary closings costs. We financed the purchase through borrowings on our Credit Facility and available cash. From June 27, 2006 to September 30, 2006, hotel revenues and operating income of $1.3 million and $0.3 million respectively, have been included in our statement of operations. The acquisition cost of the hotel was allocated as follows (in thousands):

Accounts receivable and other assets	$	44
Land		1,375
Buildings and improvements		12,087
Furniture and fixtures		1,022
Total	$	14,528

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 $31.8 million, including normal and customary closing costs. We financed the purchase through borrowings on our credit facility and a $19.0 million non-recourse mortgage loan, which increased our leverage and required us to obtain two amendments under our credit facility in the first and second quarter of 2005. The acquisition cost of the hotel was allocated as follows (in thousands):

Cash and restricted cash	$	1,739
Accounts receivable and other assets		105
Land		4,700
Buildings and improvements		23,235
Furniture and fixtures		2,000
Total	$	31,779

The purchase of the Hilton Concord was a material acquisition. If the acquisition had occurred on January 1, 2005, the pro forma financial information for the nine months ended September 30, 2005 would have included additional lodging revenue of $1.1 million and a net loss of $0.1 million related to the operating results of the Hilton Concord from January 1, 2005 though February 10, 2005. There would have been no change to the earnings per share reported in our consolidated statement of operations. 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.

Dispositions:

On September 7, 2005, we sold the Pittsburgh Airport Residence Inn by Marriott for $11.0 million and we recognized a gain on sale of $2.6 million. 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 (in thousands):

	Three months ended		Nine months ended
	September 30, 2005		September 30, 2005
Revenues	$	656	$	2,345
Income before Taxes	$	2,805	$	3,217
Income from discontinued operations, net of taxes	$	1,656	$	1,898

17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

15.   STOCK-BASED COMPENSATION

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123R supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB No. 25”) and amends SFAS No. 95, “Statement of Cash Flows.” We adopted SFAS No. 123R on January 1, 2006 using the modified prospective transition method. Under the modified prospective transition method, compensation cost recognized in fiscal 2006 includes: (a) compensation cost for all equity-based payments granted prior to but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and (b) compensation cost for all equity-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. Results for prior periods have not been restated. We do not consider the accounting for our stock-based awards to be a critical accounting policy as the related amounts are not significant to our consolidated balance sheet and statement of operations.

We maintain two stock-based compensation plans, under which, we may award to participating employees options to purchase our common stock and restricted shares of our common stock. Effective January 1, 2003, we adopted the fair value recognition provisions of SFAS No. 123 for employee stock-based awards granted, modified or settled on or after January 1, 2003 and recorded compensation expense based on the fair value of the stock-based awards at the date of grant. All stock-based awards granted in fiscal years prior to 2003 were fully vested as of December 31, 2005. As a result, the adoption of SFAS No. 123R had no effect on the compensation cost which we have recorded related to stock-based awards, net income and basic and dilutive earnings per share for the nine months ended September 30, 2006.

The following table (in thousands, except per share amounts) illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123 to all equity-based compensation for the nine months ended September 30, 2005. The reported and pro forma net income and earnings per share for the nine months ended September 30, 2006 are the same because all equity-based compensation is calculated under the provisions of SFAS No. 123R. The amounts for the nine months ended September 30, 2006 are included in the following table only to provide net income and earnings per share for a comparative presentation to the same period of the previous year. The pro forma disclosure for the nine months ended September 30, 2005 utilized the Black-Scholes pricing model to estimate the value of the respective options with such value amortized to expense over the options’ vesting periods.

	Three months ended						Nine months ended
	September 30,						September 30,
	2006			2005			2006			2005
Net income, as reported	$	15,198		$	5,391		$	18,953		$	5,710
Add: Stock-based employee compensation expense included in net income, net of tax		107			58			465			163
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of tax		(107	)		(64	)		(465	)		(185	)
Net income, pro forma	$	15,198		$	5,385		$	18,953		$	5,688
Earnings per share:
Basic, as reported	$	0.48		$	0.18		$	0.61			0.19
Diluted, as reported	$	0.48		$	0.17		$	0.60			0.18
Basic, pro forma	$	0.48		$	0.18		$	0.61			0.19
Diluted, pro forma	$	0.48		$	0.17		$	0.60			0.18

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We have continued to utilize the Black-Scholes pricing model to estimate the fair value of all stock options granted subsequent to January 1, 2006. The fair value of stock options granted in 2006 have been calculated based on the stock price on the date of the option grant, the exercise price of the option and the following assumptions:

	Nine months ended
	September 30, 2006
Expected volatility		31.1%
Risk-free interest rate		5.1%
Expected life of options		6.0 years
Expected dividend yield		0%
Forfeiture rate		2%

Expected Volatility — Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. We use the historical volatility over the preceding six-year period to estimate expected volatility.

Risk-Free Interest Rate — This is the average U.S. Treasury rate (having a term that most closely resembles the expected life of the option) for the quarter in which the option was granted.

Expected Life of Options — This is the period of time that the options granted are expected to remain outstanding. This estimate is based primarily on historical exercise data. Options granted during the three and nine months ended September 30, 2006 vest over three years and have a maximum term of ten years.

Expected Dividend Yield — We have never declared or paid dividends on our common stock and do not anticipate paying any dividends in the foreseeable future.

Forfeiture Rate — This is the estimated percentage of options granted that are expected to be forfeited or cancelled on an annual basis before becoming fully vested. We estimate the forfeiture rate based on past turnover data with further consideration given to the level of the employees to whom the options were granted.

At September 30, 2006, approximately 1.8 million shares of common stock were available for future grants under our stock-based compensation plans. The stock-based awards granted under these plans, which include stock options and restricted stock, are typically awarded at the fair market value of our common stock at the date of grant. They vest over a period of three years and have a maximum term of ten years from the date of grant. For stock subject to graded vesting, we have utilized the “straight-line” method for allocating compensation cost by period. The compensation cost that has been charged against income for these plans for the nine months ended September 30, 2006 was approximately $0.8 million.

As of September 30, 2006, there was $1.6 million of unrecognized compensation cost related to unvested stock awards granted under the compensation plans noted above. The cost is expected to be recognized through the second quarter of 2009 with a weighted-average recognition period of 2.2 years.

A summary of option activity under the equity-based compensation plans as of September 30, 2006, and changes during the nine months then ended is as follows:

						Aggregate
	Number of			Weighted Average		Intrinsic
	Shares			Exercise Price/Share		Value
Options outstanding at December 31, 2005		1,614,421		$	6.75
Granted		62,500		$	6.22
Exercised		(683,458	)	$	4.11
Forfeited		(473,150	)	$	11.25
Options outstanding at September 30, 2006		520,313		$	6.67	$	2,863,000
Options exercisable at September 30, 2006		367,818		$	7.16	$	1,957,000

19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The weighted average remaining contractual life for all options outstanding and all options exercisable under these plans at September 30, 2006 was 5.5 years. The total intrinsic value of stock options exercised during the nine months ended September 30, 2006 was approximately $2.2 million.

A summary of the restricted stock activity under the equity-based compensation plans as of September 30, 2006, and changes during the nine months then ended is as follows:

				Weighted
				Average
	Number of			Grant-
	Restricted			Date Fair
	Shares			Value
Unvested at December 31, 2005		228,657		$	4.65
Granted		273,000		$	5.60
Vested		(156,856	)	$	4.72
Forfeited		(18,224	)	$	4.37
Unvested at September 30, 2006		326,577		$	5.40

The total intrinsic value of restricted stock which vested during the nine months ended September 30, 2006 was approximately $0.7 million.

16.   INCOME TAXES

Our deferred tax assets primarily consist of net operating loss carryforwards, asset basis differences between GAAP and tax, principally intangible assets, and employment related tax credits. As of December 31, 2005, we had approximately $56 million of deferred tax assets, $3 million of deferred tax liabilities and a valuation allowance of $41 million, which equaled the net deferred tax asset of approximately $12 million reported in our consolidated balance sheet. Approximately $29 million of the valuation allowance was recorded in July 2002 at the time of the Interstate-MeriStar merger, as management did not believe based on the facts and circumstances at that time that the combined company would realize certain of the deferred tax assets.

Management evaluates the expected future utilization of the deferred tax assets based on the nature and expected reversal of the timing difference; future taxable income considering actual results and current and future industry and economic conditions and their impact on projected taxable income; and, current regulations. Based on management’s current evaluation, we believe certain of the assets that were offset by a valuation allowance in purchase accounting will now be realized in the current and future years. During the second quarter of 2006, the Company reduced the valuation allowance by $10.6 million and recorded a corresponding reduction in goodwill in accordance with SFAS No. 109, “Accounting for Income Taxes.”

During the third quarter of 2006, the following events caused adjustments to our projected taxable income for the year: (1) the recognition of $14.5 million in termination fees which was not projected as income until future periods and (2) a material gain expected to be recorded in the fourth quarter of 2006 related to the sale of our interest in the MIP Lessee, L.P. joint venture. In addition, the sale of our stock by significant shareholders resulted in an ownership change in the third quarter, as set forth in the Internal Revenue Code. Due to this ownership change, there are limits as to the amount of net operating loss carryforwards that can be utilized to reduce our taxable income in periods after the ownership change. This will require us to utilize employment related tax credits which were generated subsequent to the merger in 2002. The credits earned prior to our merger in 2002 have similar limitations to those imposed on our net operating loss carryforwards. We expect to utilize $1.6 million of the credits earned after the merger and up to the date of our ownership change. These credits previously had a partial valuation allowance recorded against them. The partial relief of $0.9 million of this valuation allowance has been recorded as a reduction to income tax expense and resulted in a change in our effective tax rate from 41% to 38%.

20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company will continue to evaluate the valuation of the deferred tax assets, which may result in a further reduction of goodwill, the recognition of a benefit in a future period, or both, depending on whether the timing differences and the related allowance were created in the pre-merger periods or the post-merger periods.

17.   SUBSEQUENT EVENT

In October 2006, we acquired the 308-room Hilton Arlington located in Texas, from affiliates of Blackstone. The purchase price was $36.3 million, including normal and customary closing costs. On the date of the acquisition, Blackstone owed us $13.8 million, on a present value basis, for unpaid termination fees. We received credit for these unpaid termination fees at closing. We financed the remainder of the purchase through a non-recourse mortgage loan of $24.7 million. The variable rate loan has an interest rate equal to the 30-day LIBOR plus 135 basis points. We are required to make monthly interest-only payments until the loan matures in November 2009, with the option for two one-year extensions. We entered into a $24.7 million, three-year interest rate cap agreement in connection with the mortgage loan which caps the 30-day LIBOR at 7.25% per annum and is schedule to mature in November 2009.

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Item 2:   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations, which we refer to as MD&A, is intended to help the reader understand Interstate, our operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated interim financial statements and the accompanying notes, which we refer to as Notes.

Forward-Looking Statements

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 Quarterly 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. These statements are often, but not always, made through the use of words or phrases such as “will likely result,” “expect,” “will continue,” “anticipate,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook” and other similar terms and phrases. 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. Forward-looking statements are based on management’s current expectations and assumptions and are not guarantees of future performance that involve known and unknown risks, uncertainties and other factors which may cause our actual results to differ materially from those anticipated at the time the forward-looking statements are made. These risks and uncertainties include those risk factors discussed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2005.

Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this Quarterly Report on Form 10-Q and our most recent Annual Report on Form 10-K and the documents incorporated by reference herein. 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 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.

Overview and Outlook

Our Business — We are one of the largest independent U.S. hotel management companies, measured by number of rooms under management. We have three reportable operating segments: hotel management, hotel ownership (through whole-ownership and joint ventures) and corporate housing. Our portfolio of managed properties is diversified by brand, franchise and ownership group. As of September 30, 2006, we managed hotels representing more than 30 franchise and brand affiliations and operated 16 independent hotels. Our managed hotels are owned by more than 60 different ownership groups. We managed 233 hotel properties and five ancillary service centers (i.e. conference centers and laundry facilities), with 52,617 rooms in 40 states, the District of Columbia, Canada and Russia. We also owned three hotels with 655 rooms and had 3,669 apartments under lease or management in the United States, France and the United Kingdom through BridgeStreet, our corporate housing subsidiary.

Financial Highlights and Significant Events

Financial Highlights

Our operating results for the third quarter of 2006 continued the strong overall performance that we have experienced throughout 2006 in all operating segments of our business. Although the number of hotel properties we manage has decreased 18% in the nine months ended September 30, 2006, our base management fees (excluding the effects of termination fees and business interruption proceeds) have only decreased 2.1% compared to the comparable three month period of 2005 and have increased 1.5% compared to the comparable nine month period of 2005. This was primarily due to our focus on increasing revenue per available room (RevPAR) and continually improving operating efficiencies at our managed properties. In addition, for the nine months ended September 30, 2006, we received

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business interruption proceeds of $3.2 million and accelerated management termination fees on a present value basis of $15.1 million for all hotels terminated by Blackstone on or before October 1, 2006. In 2006, our corporate housing operations achieved an increase in revenues of $6.7 million, or 20.3%, in the third quarter compared to the same period in 2005, and $9.3 million, or 10.1% over the comparable nine month period of 2005. The improvement was driven by the continued strategic management of our apartment inventory cycle, which focuses on obtaining more flexible lease terms and allows us to quickly add or remove units in particular markets based on demand, as well as continued improvement in our managed apartments in the United Kingdom, increases in our average daily rate (ADR) and our acquisition of Twelve Oaks Corporate Residences, Inc., which we refer to as “Twelve Oaks,” a Chicago-based entity with leases for approximately 300 furnished apartment units, in February 2006. Finally, our three wholly-owned hotels, one of which we acquired on June 27, 2006, contributed $1.4 million and $3.5 million to our operating income for the three and nine month periods ended September 30, 2006, respectively, compared to $0.5 million and $1.2 million for the three and nine months period ended September 30, 2005.

Significant Events

Investments and Acquisitions in Real Estate — Throughout 2006, we have been able to execute on our growth strategy of selectively investing in joint ventures and acquiring properties in growing markets that we believe have favorable economic, demographic and supply dynamics. In October 2006, we acquired the 308-room Hilton Arlington located in Texas, from affiliates of Blackstone. The purchase price was $36.3 million, including normal and customary closing costs. On the date of the acquisition, Blackstone owed us $13.8 million, on a present value basis, for unpaid termination fees. We received credit for these unpaid termination fees at closing. We financed the remainder of the purchase through a non-recourse mortgage loan of $24.7 million. The variable rate loan has an interest rate equal to the 30-day LIBOR plus 135 basis points. We are required to make monthly interest-only payments until the loan matures in November 2009, with options for two, one-year extensions. We entered into a $24.7 million, three-year interest rate cap agreement in connection with the mortgage loan which caps the 30-day LIBOR at 7.25% per annum and is schedule to mature in November 2009.

In July 2006, we, along with our joint venture partners, sold the Sawgrass Marriott Resort & Spa. Our portion of the proceeds from the sale was approximately $16.5 million. We immediately reinvested $7.0 million in the new joint venture, RQB Development/Resort Investors, LLC, which purchased the hotel. We contributed an additional $2.3 million in the fourth quarter for our share of equity for renovations and working capital, bringing our total investment to $9.3 million in the new joint venture as a 10% preferred equity interest. As our cost basis in the original joint venture was $2.7 million, we recognized a gain of $4.5 million based on the amount of proceeds received which were not re-invested in the new joint venture.

In June 2006, we acquired the 131-room Hilton Garden Inn Baton Rouge Airport for $14.5 million. The acquisition was funded with approximately $5.0 million borrowed under our Credit Facility, with the remaining amount paid from available cash on hand. We also entered into three separate joint ventures with a total investment of $6.4 million for interests in eight hotels with more than 1,200 rooms. These investments include a $3.9 million investment to acquire a 15% interest in a portfolio of six Residence Inn by Marriott properties in and around Cleveland, Ohio, a $0.5 million investment to acquire a 10.9% interest in the Statehouse Inn in Boise, Idaho, and a $2.0 million investment to acquire a 21.0% interest in the Doral Tesoro Hotel & Golf Club near Dallas/Ft. Worth, Texas. In September 2006, we received a $0.5 million return of our initial investment in the Doral Tesoro Hotel & Golf Club which reduced our investment in the joint venture to $1.5 million, or 15.9%. These investments were all funded with available cash on hand.

Turnover of Management Contracts — Due to the current hotel real estate market, there have been a significant number of hotel purchase and sale transactions throughout 2006. Although we realize that these transactions, which lead to turnover in management contracts, are an inherent part of our business, the number of properties we manage has been reduced.

In September 2006, Sunstone Hotel Investors sold 13 hotels to Trinity Hotel Investors, terminating our management contracts for these properties. These hotels accounted for $1.0 million in management fees during the nine months ended September 30, 2006. We recognized $0.6 million of impairment loss on the intangible assets related to the management contracts from these properties and approximately $0.3 million in termination fees.

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In May 2006, Blackstone acquired MeriStar. Our management agreements for the 44 hotels that Blackstone acquired as a result of the transaction were not affected by the transaction, as the rights, responsibilities and duties (including with respect to budget setting, asset management and termination) under those contracts were assumed by Blackstone. To date, Blackstone has sold four properties, one of which was the Hilton Arlington. We are in discussions with Blackstone as to its plans for the 40 remaining hotels and underlying management contracts, which accounted for 12,698 rooms and $3.4 million and $10.6 million in management fees for the three and nine month periods ended September 30, 2006, respectively.

Prior to its sale to Blackstone, MeriStar sold 17 hotels and a golf and tennis club in the first quarter of 2006 in connection with its previously announced asset disposition program. At the end of July, we no longer managed any of these properties. In connection with these dispositions, we recorded termination fees of approximately $4.7 million and $9.5 million during the three and nine month periods ended September 30, 2006, respectively. Approximately $4.4 million of these termination fees were recorded upon the amendment to our master fee agreement with Blackstone in August 2006. In addition, we recognized $8.3 million of impairment losses for the intangible assets related to the management contracts from these 18 properties.

We were also notified that the private investment fund managed by affiliates of Goldman Sachs and Highgate Holdings, for which we managed 14 properties at the end of 2005, was terminating all but one of our management contracts and turning the management of these properties over to Highgate Holdings. The 13 properties which we have ceased to manage accounted for approximately $0.8 million in management fees during the nine months ended September 30, 2006. There are no impairments of management contract intangible assets or termination fees associated with these 13 properties.

In summary, the impact on our financial results for the 68 properties where management agreements have been terminated in 2006 is as follows:

					Termination Fees			Management Fees		Management Fees
	Number of		Number of		Nine Months			Nine Months		Nine Months
Owner Group	Properties		Rooms		Ended 9/30/2006			Ended 9/30/2006		Ended 9/30/2005
MeriStar/Blackstone		21		4,438	$	23.5 million	**	$	2.3 million	$	2.7 million
Sunstone		13		2,567	$	0.3 million		$	1.0 million	$	0.8 million
Goldman Sachs		13		3,381		N/A		$	0.8 million	$	1.4 million
Others		21		4,405	$	1.1 million		$	1.2 million	$	2.4 million
Total		68		14,791	$	24.9 million		$	5.3 million	$	7.3 million

** These are the termination fees recorded related to all MeriStar/Blackstone properties for the nine months ended September 30, 2006, including the 37 properties terminated prior to 2006. The termination fees recorded for the nine months ended September 30, 2006 for the 21 properties terminated in 2006 was $12.7 million.

We have partially offset the loss of these management contracts by obtaining the management contracts to 15 additional properties during the first nine months of 2006. These properties, which include the Hilton Times Square in New York City (began management in March 2006) and a portfolio of six Residence Inn properties in the Cleveland, Ohio area (also began management in March 2006), added approximately 2,115 rooms to our portfolio. We have recorded management fees of $0.9 million through September 30, 2006 related to these 15 properties.

Other Events — In February 2006, we and MeriStar agreed to a settlement with the insurance carrier for business interruption proceeds related to eight properties which were damaged or closed by hurricanes in 2004. In accordance with the settlement, we received business interruption proceeds of $3.2 million during the first quarter, which have been recorded as management fees in our statement of operations.

In February 2006, BridgeStreet acquired Twelve Oaks, a Chicago-based entity with leases for approximately 300 furnished apartment units for $0.5 million. The acquisition included the assumption of all leases related to Twelve Oaks, 13 furnished apartment complexes in and around the Chicago area, as well as the purchase or assumption of the leases on all of Twelve Oaks’ furniture and equipment. The acquisition nearly doubled our presence in the Chicago market.

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Industry Overview

Overall, the lodging industry has continued to build upon the strong growth it has seen since 2004 and continues to set new industry records. During the first and second quarters of 2006, the U.S. economy saw real gross domestic product grow by 5.6% and 2.9%, respectively. During this same period, industry RevPAR has increased 9.0% on strong industry ADR growth of 6.8%. Through the first three quarters of 2006, we have seen strong advances in our ADR while our occupancy continues to grow at a balanced pace. This growth continues to support industry forecasts, which expect robust ADR gains to continue to support RevPAR growth for the remainder of 2006 and into 2007. For the remainder of 2006, industry forecasts project occupancy to reach 64.2%, with ADR growth at 6.9%, contributing to an expected RevPAR growth of 8.7% for the year. Looking forward to 2007 and into 2008, RevPAR growth will continue to be achieved more from ADR gains than from occupancy; however, these gains are forecast to slow to between 6% and 8% due to projected below trend economic growth of 3.0% as a result of various economic factors, including higher energy costs, rising interest rates and a volatile stock market.

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 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, for the year ending December 31, 2005. 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

Operating Statistics

Statistics related to our managed hotel properties (including wholly-owned hotels) and corporate housing units:

	As of September 30,				Percent Change
	2006		2005		’06 vs. ’05
Hotel Management
Properties managed		233		294		(20.7	)%
Number of rooms		52,617		67,425		(22.0	)%
Hotel Ownership
Number of properties		3		1		200.0	%
Number of rooms		655		329		99.1	%
Corporate Housing
Number of markets		17		17		—
Average number of leased apartments for the nine months ended		3,222		3,214		0.2	%

Hotels under management decreased by a net of 61 properties as of September 30, 2006 compared to September 30, 2005, due to the following:

•  We acquired 18 additional management contracts from various owners.

•  Blackstone/MeriStar transitioned 24 properties out of our system.

•  We transitioned 27 properties out of our system from various other owners.

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•  Sunstone sold 14 properties which we no longer manage.

•  14 of the hotels we managed for Goldman Sachs and Highgate Holdings have been sold, or transitioned to Highgate Holdings, for management.

The operating statistics related to our managed hotels, including wholly-owned hotels, on a same-store basis¹and our corporate housing division, were as follows:

	Three months
	ended September 30,						Percent Change
	2006			2005			’06 vs. ’05
Hotel Management
RevPar	$	90.07		$	83.95			7.3	%
ADR	$	118.92		$	111.22			6.9	%
Occupancy		75.7	%		75.5	%		0.3	%
Corporate Housing
ADR	$	125.78		$	111.72			12.6	%
Occupancy		93.8	%		94.1	%		(0.3)	%

	Nine months
	ended September 30,						Percent Change
	2006			2005			’06 vs. ’05
Hotel Management
RevPar	$	88.12		$	80.23			9.8	%
ADR	$	118.96		$	110.78			7.4	%
Occupancy		74.1	%		72.4	%		2.3	%
Corporate Housing
ADR	$	119.92		$	109.24			9.8	%
Occupancy		92.7	%		92.5	%		0.2	%

Three months ended September 30, 2006 compared to the three months ended September 30, 2005

  Revenue

The significant components of revenue were as follows (in thousands):

	Three months
	ended September 30,				Percent Change
	2006		2005		’06 vs. ’05
Lodging	$	7,154	$	3,376		>100	%
Management fees		14,066		14,374		(2.1	)%
Termination fees		16,995		1,413		>100	%
Corporate housing		40,014		33,267		20.3	%
Other		2,688		2,806		(4.2	)%
Other revenue from managed properties		202,780		241,710		(16.1	)%
Total revenue	$	283,697	$	296,946		(4.5	)%

¹ We present these operating statistics for the periods included in this report on a same-store basis. We define our same-store hotels as those which (i) are managed or owned by us for the entirety of the reporting periods being compared or have been managed by us for part of the reporting periods compared and we have been able to obtain operating statistics for the period of time in which we did not manage the hotel and (ii) have not sustained substantial property damage, business interruption or undergone large-scale capital projects during the periods being reported. In addition, the operating results of hotels for which we no longer manage as of September 30, 2006 are not included in same-store hotel results for the periods presented herein. Of the 233 properties that we managed as of September 30, 2006, 217 hotels have been classified as same-store hotels.

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Lodging — The increase in lodging revenue is primarily due to the inclusion of revenues of $1.6 million for the Hilton Durham hotel, which was purchased in November 2005, and $1.1 million for the Hilton Garden Inn Baton Rouge, which was purchased in June 2006. Revenues from the Hilton Concord hotel, which was purchased in February 2005 and recently completed property physical improvement programs, increased by 30.7% for the three months ended September 30, 2006 compared to the three months ended September 30, 2005, due to an increase in occupancy of 23.4% resulting from continued additional group sales and an increase in RevPAR of 24.1%.

Management & termination fees — The increase is primarily due to the recognition of $15.1 million of termination fees due from Blackstone for management contracts terminated on or before October 1, 2006. Excluding the management termination fees due from Blackstone, management and termination fees increased $0.2 million to $16.0 million for the three months ended September 30, 2006 compared to September 30, 2005. Overall, we managed fewer properties for the three months ended September 30, 2006 compared to September 30, 2005. However, due to the strength of the economy and our improved operating efficiencies at our properties, we were nearly able to offset the loss of management contracts by significantly increasing RevPAR by 7.3% and ADR by 6.9% during the quarter, which kept base management fees steady, only marginally decreasing by $0.3 million or 2.1% for the three months ended September 30, 2006 compared to September 30, 2005.

Corporate housing — The increase in corporate housing revenue is primarily attributable to additional revenue of $2.6 million in the Chicago market, resulting from the acquisition of Twelve Oaks, which supplied an additional 300 furnished units. Revenue in the London market increased $3.4 million. The continued strategic management of our apartment inventory cycle allowed us to increase ADR by 12.6% while keeping occupancy near 94%.

Other — Other revenues decreased $0.1 million due to a decrease in our purchasing and capital project management subsidiary and our accounting fees as a result of managing fewer properties. These decreases were offset by a slight increase in revenue from our insurance subsidiary.

Other revenue from managed properties — 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 and are also recorded as “other expenses from managed properties.” The decrease of $38.9 million in other revenue from managed properties is primarily due to the decrease in the number of managed hotels directly and a corresponding decrease in the number of hotel employees and related reimbursable salaries, benefits and other expenses.

Operating Expenses by Department

Lodging expenses increased $2.7 million or 109.5%, to $5.2 million for the three months ended September 30, 2006, compared to $2.5 million for the three months ended September 30, 2005. The increase is primarily due to the inclusion of lodging expenses of $1.3 million for the Hilton Durham hotel, which was acquired in November 2005, and $0.8 for the Hilton Baton Rouge hotel, which was acquired in June 2006. Lodging expenses at the Hilton Concord increased $0.6 million, which was primarily driven by an increase in occupancy. Gross margin related to these hotels remained consistent between periods.

Corporate housing expenses increased $5.0 million or 19.3%, to $30.9 million, for the three months ended September 30, 2006, from $25.9 million for the three months ended September 30, 2005. The increase was primarily driven from leasing additional units in markets with higher rental costs per unit, such as London, Chicago and New York.

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Undistributed Operating Expenses

The significant components of undistributed operating expenses were as follows (in thousands):

	Three Months
	Ended September 30,				Percent Change
	2006		2005		’06 vs. ’05
Administrative and general	$	19,594	$	19,317		1.4	%
Depreciation and amortization		1,922		2,474		(22.3	)%
Asset impairments and write-offs		2,024		1,046		93.5	%
Total undistributed operating expenses	$	23,540	$	22,837		3.1	%

Administrative and general — Administrative and general expenses showed a slight increase between periods. These expenses consist of payroll and related benefits for employees in operations management, sales and marketing, finance, legal, human resources and other support services, as well as general corporate and public company expenses.

Depreciation and amortization — Although we had a significant increase in depreciable assets for the three months ended September 30, 2006 compared to the three months ended September 30, 2005 due to the presence of three wholly owned hotels as of September 30, 2006, our depreciation and amortization expense decreased. This occurred as various software assets became fully depreciated in December 2005, resulting in a $0.5 million reduction in depreciation expense. In addition, the significant impairment of management contract costs related to sale of MeriStar properties reduced amortization expense by approximately $0.3 million. These changes were offset by additional depreciation expense of $0.2 million, which is primarily due to the inclusion of the Hilton Durham and Hilton Garden Inn Baton Rouge in the second quarter of 2006.

Asset impairments and write-offs — When we receive notification that a management contract will be terminated early, we evaluate when or if amortization should be accelerated or if any remaining management contract costs should be impaired. For the three months ending September 2006, $1.4 million of asset impairments were recorded as a result of three terminated management contracts from Blackstone. In September 2006, Sunstone sold 13 properties, terminating our management contracts; accordingly, we recorded an additional $0.6 million in asset impairments million related to these contracts. For the three months ended September 30, 2005, $1.0 million of asset impairments were recorded as a result of the termination of four management contracts.

Other Income and Expense

The significant components of other income and expenses were as follows (in thousands):

	Three Months
	Ended September 30,					Percent Change
	2006		2005			’06 vs. ’05
Interest expense	$	2,199	$	1,965			11.9	%
Equity in earnings (losses) of affiliates		4,745		(381	)		>100	%
Gain on sale of investments & extinguishment of debt		—		4,326			(100	)%
Income tax expense		9,011		2,585			>100	%
Minority interest expense		122		38			>100	%
Income from discontinued operations, net of tax		—		1,656			(100	)%

Interest expense — Interest expense increased quarter over quarter by $0.2 million due to an increase in the average interest rate on our outstanding debt combined with the loss related to our interest rate cap agreements associated with our outstanding debt. These increases were only partially offset by a lower average outstanding debt balance during the quarter.

Equity in earnings of affiliates — The increase is due primarily to a gain of approximately $4.5 million recognized from the sale of our 10.0% interest in the joint venture that owned the Sawgrass Marriott Resort & Spa.

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We also recorded net earnings of approximately $0.2 million from our other joint ventures throughout the third quarter of 2006.

Income tax expense — The change in income tax expense is driven by the increase in income from continuing operations offset by the change in our effective tax rate from 41% as of September 30, 2005 to 38% as of September 30, 2006.

Income from discontinued operations, net of tax — Income from discontinued operations represents the operations of the Pittsburgh Airport Residence Inn by Marriott, which was sold in September 2005.

Nine months ended September 30, 2006 compared to nine months ended September 30, 2005

  Revenue

The significant components of revenue were as follows (in thousands):

	Nine Months
	Ended September 30,				Percent Change
	2006		2005		’06 vs. ’05
Lodging	$	18,609	$	8,482		>100	%
Management fees		46,416		42,570		9.0	%
Termination fees		24,891		4,161		>100	%
Corporate housing		101,066		91,792		10.1	%
Other		9,117		8,541		6.7	%
Other revenue from managed properties		645,553		665,450		(3.0	)%
Total revenue	$	845,652	$	820,996		3.0	%

Lodging — The increase in lodging revenue is due to the inclusion of the operations of the Hilton Concord and Hilton Durham hotels for the entire period in 2006 as well as stronger than expected operations year to date. The Hilton Concord hotel, which was purchased in February 2005 and recently completed property physical improvement programs, has increased year to date occupancy, RevPAR and ADR over prior year by 23.3%, 24.7% and 1.2%, respectively. The increase in occupancy was primarily due to additional group reservations, which contributed to the increase of revenue over the corresponding period of $3.8 million. The Hilton Durham, which was purchased in November 2005, had revenues of $5.1 million in 2006 led by strong ADR levels for the nine months ending September 30, 2006. In June 2006, we purchased the Hilton Garden Inn Baton Rouge; which contributed an additional $1.2 million in revenues. The operations of the Residence Inn Pittsburgh, which was sold in 2005, have been included in discontinued operations. Revenues from the Residence Inn Pittsburgh were $2.3 million for the nine months ended September 30, 2005.

Management & termination fees — The increase is primarily due to $15.1 million in termination fees due from Blackstone for management contracts terminated on or before October 1, 2006. In addition, we received one-time termination fees of $4.1 million from MeriStar due to the sale of ten properties during the first quarter of 2006. Termination fees received throughout the period from various other properties increased $1.5 million for the nine months ending September 30, 2006 compared to September 30, 2005. In addition, in the first quarter of 2006, we received approximately $3.2 million in business interruption proceeds associated with eight properties that were damaged or closed due to the hurricanes in 2004. Overall, we managed fewer properties in 2006 compared to 2005. However, due to the strength of the economy and our continued improvement in our operating efficiencies at our managed properties, we have been able to significantly increase RevPAR (9.8%), ADR (7.4%) and occupancy (2.3%) during the year. Excluding the one-time items noted above, this led to an increase in our base management fees of $0.6 million or 1.5%, which more than offset the decrease in management fees due to the decreased number of properties.

Corporate housing — The increase in corporate housing revenue is primarily attributable to additions in the Chicago market, which realized an increase in revenue of $6.0 million due to an additional 300 units available resulting from the acquisition of Twelve Oaks in February 2006. Revenue in the London market increased

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$4.3 million in the nine months ended September 30, 2006. The continued strategic management of our apartment inventory allowed us to increase ADR by 9.8% while keeping occupancy near 93%.

Other — Other revenues increased $0.6 million primarily due to the timing of revenue recognition for our purchasing and capital project management services completing projects earlier in the year than expected. In addition, we realized an increase in revenues from our insurance subsidiary.

Other revenue from managed properties — 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 and are also recorded as “other expenses from managed properties.” The decrease of approximately $20 million in other revenue from managed properties is primarily due to the decline in the number of managed hotels and a corresponding reduction in the number of hotel employees and related reimbursable salaries, benefits and other expenses. The decreases were offset by the increase in payroll and insurance costs from 2005 to 2006.

Operating Expenses by Department

Lodging expenses increased $7.2 million or 110.6%, to $13.7 million for the nine months ended September 30, 2006, compared to $6.5 million for the nine months ended September 30, 2005. The increase is primarily due to the inclusion of the operations of the Hilton Concord and Hilton Durham hotels for the entire period in 2006. The Hilton Concord hotel was purchased in February 2005, while the Hilton Durham was purchased in November 2005. Gross margins related to the hotels increased from 23.5% to 26.5% for the nine months ended September 30, 2006. In addition, in June 2006, we acquired the Hilton Garden Inn Baton Rouge, which incurred approximately $0.8 million in lodging expenses.

Corporate housing expenses increased $6.2 million or 8.3%, to $80.1 million, for the nine months ended September 30, 2006, from $73.9 million for the nine months ended September 30, 2005. The increase was primarily driven from leasing additional units in markets with higher rental costs per unit, such as London where the demand has remained strong and Chicago where we acquired 300 additional units.

Undistributed Operating Expenses

The significant components of undistributed operating expenses were as follows (in thousands):

	Nine Months
	Ended September 30,				Percent Change
	2006		2005		’06 vs. ’05
Administrative and general	$	58,553	$	56,961		2.8	%
Depreciation and amortization		5,908		6,830		(13.5	)%
Restructuring and severance		—		2,043		(100	)%
Asset impairments and write-offs		10,666		2,957		>100	%
Total undistributed operating expenses	$	75,127	$	68,791		9.2	%

Administrative and general — Administrative and general expenses showed a slight increase between periods. These expenses consist of payroll and related benefits for employees in operations management, sales and marketing, finance, legal, human resources and other support services, as well as general corporate and public company expenses. The primary reason for the increase was due to an increase in the incentive compensation for the nine month period ended September 30, 2006 compared to comparative period 2005.

Depreciation and amortization — Although we had a significant increase in depreciable assets for 2006 compared to 2005 due to the presence of three wholly-owned hotels as of September 30, 2006, our depreciation and amortization expense decreased. Various software assets and furniture and equipment became fully depreciated in December 2005 and throughout 2006, resulting in a $1.2 million reduction in depreciation expense. In addition, the significant impairment of management contract costs related to sale of MeriStar properties reduced scheduled amortization expense by approximately $0.8 million. These changes were offset by additional depreciation expense of $0.7 million related to the three owned hotels and additional amortization expense of $0.5 million related to customer contracts acquired in the Twelve Oaks acquisition.

30

Restructuring and severance — The restructuring expenses incurred in 2005 primarily relate to severance costs of approximately $1.8 million for our former CEO in connection with the terms of his separation agreement.

Asset impairments and write-offs — When we receive notification that a management contract will be terminated early, we evaluate when or if amortization should be accelerated or if any remaining management contract costs should be impaired. For the nine months ended September 30, 2006, $8.3 million of asset impairments were recorded related to the sale of 18 MeriStar properties, $1.4 million in connection with three Blackstone terminated management contracts and $0.7 million associated with 14 properties sold by Sunstone. During the nine months ended September 30, 2005, $0.3 million of asset impairments were recorded due to the sale of the Hilton San Diego Gaslamp hotel, $0.3 million related to four Sunstone properties sold and $1.3 million related to four MeriStar hotel dispositions. The remaining expense for the nine months ended September 30, 2005 was $0.9 million of costs related to a real estate investment fund which we decided not to proceed with.

Other Income and Expenses

The significant components of other income and expenses were as follows (in thousands):

	Nine Months
	Ended September 30,				Percent Change
	2006		2005		’05 vs. ’04
Interest expense	$	6,240	$	8,218		(24.1	)%
Equity in earnings (losses) of affiliates		4,311		2,811		53.4	%
Gain on sale of investments and extinguishment of debt		—		4,711		(100	)%
Income tax expense		11,615		2,647		>100	%
Minority interest expense		171		49		>100	%
Income from discontinued operations, net of tax		—		1,898		(100	)%

Interest expense — Interest expense decreased primarily due to $1.8 million of unamortized deferred financing fees which were expensed in January 2005 in connection with the refinancing of our credit facility. The remainder of the decrease was due to our average debt balance decreasing between periods only partially offset by rising interest rates as well as gains realized on our interest rate caps that are held in connection with our debt.

Equity in earnings (losses) of affiliates — The increase is due to a gain of $4.5 million recorded on the sale of Sawgrass Marriott Resort & Spa. We incurred a reduction of losses in our CapStar Hallmark joint venture of $0.2 million and $1.0 million in our MIP joint venture due to improved operating performance of the hotels in the portfolios. This was offset by the gain of approximately $4.3 million recorded on the sale of the Hilton San Diego Gaslamp hotel in January 2005 and the related retail space in June 2005.

Gain on sale of investments and extinguishment of debt — In 2005, we recognized $4.3 million of gain on extinguishment of debt related to our FelCor promissory note and we recognized a gain of $0.4 million from the exchange of stock warrants in an unaffiliated company and subsequent sale of that stock, which we had held as an investment.

Income tax expense — The change in income tax expense is driven by the increase in our income from continuing operations. This is partially offset by a reduction in the effective tax rate from 41% in 2005 to 38% in 2006.

Income from discontinued operations, net of tax — Income from discontinued operations represents the operations of the Pittsburgh Airport Residence Inn by Marriott, which was sold in September 2005.

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Liquidity, Capital Resources and Financial Position

Key metrics related to our liquidity, capital resources and financial position were as follows (in thousands):

	Nine Months
	Ended September 30,						Percent Change
	2006			2005			’05 vs. ’04
Cash provided by operating activities	$	30,677		$	24,605			24.7	%
Cash used in investing activities		(20,527	)		(20,203	)		1.6	%
Cash used in financing activities		(10,940	)		(2,773	)		>100	%
Working capital (deficit)		3,543			(9,493	)		>100	%
Cash interest expense		5,564			5,349			4.0	%
Debt balance		71,302			86,302			(17.4	)%

Operating Activities — The increase in cash provided by operating activities is primarily due to the change in net income, which increased by $26.3 million after removing all non-cash income and expense items, including asset impairment and write-offs of $10.7 million and $3.0 million incurred during the nine months ended September 30, 2006 and 2005, respectively. Significant one-time cash items included in net income for the nine months ended September 30, 2006 are a one-time cash payment of $3.2 million resulting from the settlement of our business interruption claim and one-time termination fees of $4.1 million related to the sale of l0 MeriStar properties in February 2006. The positive cash flow was offset by an increase in our receivables of $17.3 million, primarily related to the recognition of the net present value of management termination fees due from Blackstone hotels terminated with us on or before October 1, 2006. In addition, the change in accounts payable and accrued expenses decreased by $3.8 million in 2006 compared to 2005.

Investing Activities — The major components of the slight increase in cash used in investing activities in 2006 compared to 2005 were:

•  In 2006, we purchased the Hilton Garden Inn Baton Rouge Airport for $14.5 million while in 2005, we used a net of $21.3 million on two transactions related to owned hotels ($31.8 million related to purchase of the Hilton Concord offset by $10.5 million received from the sale of the Residence Inn Pittsburgh).

•  We received additional net distributions from our joint venture investments in 2005 compared to 2006. In 2005, we received distributions of $4.5 million from the sale of the San Diego Gaslamp hotel, $1.1 million from the sale of the Sheraton Smithtown hotel and $1.0 million from the return of our preferred equity interest in MIP Lessee, L.P. In 2006, we contributed a total of $13.0 million for investments in four joint ventures and received a distribution of $15.3 million from the sale of the Sawgrass Marriott Resort & Spa and $0.5 million from our Doral Tesoro joint venture. Distributions which are a return of our investment in the joint venture are recorded as investing cash flows while distributions which are a return on our investment are recorded as operating cash flows.

•  We spent an additional $4.4 million on property and equipment in 2006, which is primarily related to improvements at our owned hotels and general corporate additions. We also spent $0.5 million in 2006 for the Twelve Oaks acquisition.

Financing Activities — The increase in cash used by financing activities is primarily due to net repayments on long-term debt of $13.8 million in the first nine months of 2006, compared to net borrowings on long-term debt of $0.8 million in the first nine months of 2005. Our additional borrowings in 2005 related to the purchase of the Hilton Concord hotel, while the repayments in 2006 were made from the cash provided by operating activities. We also drew down an additional $5.0 million from our Credit Facility in 2006 related to the purchase of the Hilton Garden Inn Baton Rouge Airport. In 2005, we also paid financing fees of $3.6 million in connection with the refinancing of our Credit Facility, while in 2006, we received proceeds of $2.8 million from the issuance of approximately 683,000 common shares from the exercise of stock options.

Liquidity — Our known short-term liquidity requirements consist primarily of funds necessary to pay for operating expenses and other expenditures. Our long-term liquidity requirements consist primarily of funds necessary to pay for scheduled debt maturities and costs associated with potential acquisitions and continuing our

32

growth strategy. We continually monitor our operating and cash flow models in order to forecast our compliance with the financial covenants. As of September 30, 2006, we were in compliance with all financial covenants under our Credit Facility.

We will continue to implement our growth strategy by seeking acquisitions of wholly-owned and joint venture interests in hotel properties, such as our three joint venture investments and acquisition of the Hilton Garden Inn Baton Rouge Airport during the second quarter of 2006. The joint venture investments were funded with cash on hand, while the Hilton Garden Inn Baton Rouge Airport was financed with cash on hand and a $5.0 million draw on our Credit Facility. In October 2006, we acquired our fourth wholly-owned property, the Hilton Arlington. We financed the purchase through borrowings of $24.7 million, in a non-recourse mortgage loan. The remaining purchase price was funded through the use of a credit for termination fees due to us from Blackstone for hotels sold up through October 1, 2006. After this acquisition, we continued to be in compliance with all financial covenants under our Credit Facility.

Our ability to incur additional debt is dependent upon a number of factors, including our degree of leverage, the value of our unencumbered assets (if any), our public debt ratings and borrowing restrictions imposed by existing lenders. In addition, we have certain limitations under our senior credit facility that could limit our ability to make future investments without the consent of our lenders. We expect to use additional cash flows from operations and amounts available under the Credit Facility to pay required debt service, income taxes and make planned capital purchases for our wholly-owned hotels and corporate housing. We may also seek to raise additional funding for future investments and growth opportunities by raising additional debt or equity from time to time based on the specific needs of those future investments.

Senior Credit Facility — In January 2005, we entered into an amended and restated senior secured credit facility, with various lenders. The Credit Facility replaced our previous senior secured credit facility and provides aggregate loan commitments for a $53.0 million term loan and a $55.0 million revolving loan. The Credit Facility is scheduled to mature on January 14, 2008. When we entered into the Credit Facility, we borrowed approximately $87.2 million, comprising the entire $53.0 million term loan and $34.2 million under the revolving loan. We are required to make quarterly payments of $1.3 million on the term loan until its maturity date.

The actual interest rates on both the revolving loan and term loan depend on the results of certain financial tests. As of September 30, 2006, based on those financial tests, borrowings under the revolving Credit Facility bore interest at the 30-day LIBOR rate plus 325 basis points (a rate of 8.63% per annum) and borrowings under the term loan bore interest at the 30-day LIBOR plus 450 basis points (a rate of 9.88% per annum). We incurred interest expense of $1.6 million and $4.5 million on the Credit Facility for the three and nine months ended September 30, 2006, respectively, and $1.5 million and $4.5 million for the three and nine months ended September 30, 2005, respectively. We have repaid $3.8 million of the term loan in 2006 leaving $41.8 million outstanding as of September 30, 2006. We have $10.5 million outstanding under our revolving loan, leaving approximately $44.5 million of availability.

The debt under the Credit Facility is guaranteed by certain of our 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. The Credit Facility contains covenants that include maintenance of financial ratios at the end of each quarter, compliance reporting requirements and other customary restrictions. In connection with the purchase of the Hilton Concord hotel, we entered into amendments to the Credit Facility in February 2005 and May 2005 in order to modify certain liquidity covenants that we would have otherwise failed as a result of purchasing the hotel.

Mortgage Debt — In October 2006, we entered into a $24.7 million non-recourse mortgage loan to finance the acquisition of the Hilton Arlington hotel. We are required to make interest-only payments until the loan matures in November 2009, with the option for two one-year extensions. The loan bore interest at the 30-day of LIBOR rate plus 135 basis points (rate of 6.73% per annum at September 30, 2006).

In February 2005, we entered into a $19.0 million non-recourse mortgage loan to finance the acquisition of the Hilton Concord hotel. We are required to make interest-only payments until the loan matures in March 2008, with the option for two one-year extensions. The loan bore interest at the 30-day of LIBOR rate plus 225 basis points

33

(rate of 7.63% per annum at September 30, 2006). We incurred interest expense on the loan of $0.4 million and $1.0 million for the three and nine months ended September 30, 2006, respectively.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

There were no material changes to the information provided in Item 7A in our Annual Report on Form 10-K regarding our market risk except for an interest rate cap agreement that was entered into in conjunction with our mortgage loan associated with the purchase of the Hilton Arlington in October 2006. The $24.7 million, three-year interest rate cap agreement is designed to protect against the potential effect of future interest rate fluctuations. The interest rate agreement caps the 30-day LIBOR at 7.25% and is scheduled to mature on November 19, 2009. The 30-day LIBOR rate, upon which our debt and interest rate cap agreements are based on, increased from 4.44% per annum as of December 31, 2005 to 5.38% per annum as of September 30, 2006.

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 $0.2 million and $0.6 million for the three and nine months ended September 30, 2006 respectively, and by $0.2 million and $0.7 million for the three and nine months ended September 30, 2005, respectively.

Item 4.   Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information that is required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that the information is accumulated and communicated to our management, including our chief executive officer, chief financial officer, and chief accounting officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)).

We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness of 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, 2006.

Changes in Internal Controls

There has not been any change in our internal control over financial reporting during the third quarter of 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving their stated goals under all potential future conditions. Also, we have investments in certain unconsolidated entities. As we do not control or manage these entities, our disclosure controls and procedures with respect to these entities are substantially more limited than those we maintain with respect to our consolidated subsidiaries.

34

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-l/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-l/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-l/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-l/A filed with the Securities and Exchange Commission on July 23, 1998 (Registration No. 333-49881)).
	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 June 30, 1999).
	10	.6*	Purchase and Sale Agreement between Alcor Holdings, LLC, an affiliate of The Blackstone Group, and Interstate Arlington, LP, dated September 11, 2006, for the purchase of the Hilton Arlington.
	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

35

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.

By:  /s/  Bruce A. Riggins

Bruce A. Riggins

Chief Financial Officer

Dated: November 9, 2006

36

EX-10.6

Exhibit 10.6

AGREEMENT OF PURCHASE AND SALE

between

EQUISTAR ARLINGTON PARTNERS, L.P., the SELLER

and

INTERSTATE ARLINGTON, LP, the BUYER

Dated as of September 11, 2006

Table of Contents

	Page
ARTICLE I DEFINITIONS		1
SECTION 1.1. Defined Terms		1
ARTICLE II SALE, PURCHASE PRICE AND CLOSING		8
SECTION 2.1. Sale of Asset		8
SECTION 2.2. Purchase Price		10
SECTION 2.3. Earnest Money		11
SECTION 2.4. The Closing		11
ARTICLE III REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLER		12
SECTION 3.1. General Seller Representations and Warranties		12
SECTION 3.2. Representations and Warranties of the Seller as to the Asset		14
SECTION 3.3. Limitations on Representations and Warranties of the Seller		16
SECTION 3.4. Covenants of the Seller Prior to Closing		16
SECTION 3.5. Amendment to Schedules		17
ARTICLE IV REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BUYER		17
SECTION 4.1. Representations and Warranties of the Buyer		17
SECTION 4.2. Covenants of the Buyer Prior to Closing		19
SECTION 4.3. Employee Matters		20
SECTION 4.4. Bookings		21
SECTION 4.5. Franchise Agreement		21
SECTION 4.6. Manager Defaults		22
ARTICLE V CONDITIONS PRECEDENT TO CLOSING		24
SECTION 5.1. Conditions Precedent to the Seller’s Obligations		24
SECTION 5.2. Conditions to the Buyer’s Obligations		24
SECTION 5.3. Waiver of Conditions Precedent		25
ARTICLE VI CLOSING DELIVERIES		25
SECTION 6.1. The Buyer Closing Deliveries		25
SECTION 6.2. The Seller Closing Deliveries		26
ARTICLE VII INSPECTIONS; RELEASE		28
SECTION 7.1. Right of Inspection		28
SECTION 7.2. Examination; No Contingencies		28
SECTION 7.3. Release		31

-i-

	Page
ARTICLE VIII TITLE AND PERMITTED EXCEPTIONS		32
SECTION 8.1. Title Insurance and Survey		32
SECTION 8.2. Title Commitment; Survey		32
SECTION 8.3. Delivery of Title		32
SECTION 8.4. Cooperation		33
ARTICLE IX TRANSACTION COSTS; RISK OF LOSS		33
SECTION 9.1. Transaction Costs		33
SECTION 9.2. Risk of Loss		34
ARTICLE X ADJUSTMENTS		35
SECTION 10.1. Adjustments		35
SECTION 10.2. Re-Adjustment		38
SECTION 10.3. Accounts Receivable		39
SECTION 10.4. Interstate Letter Agreement		40
ARTICLE XI INDEMNIFICATION		40
SECTION 11.1. Indemnification by the Seller		40
SECTION 11.2. Indemnification by the Buyer		40
SECTION 11.3. Limitations on Indemnification		41
SECTION 11.4. Survival		41
SECTION 11.5. Indemnification as Sole Remedy		41
ARTICLE XII DEFAULT AND TERMINATION		42
SECTION 12.1. The Seller’s Termination		42
SECTION 12.2. The Buyer’s Termination		43
ARTICLE XIII TAX CERTIORARI PROCEEDINGS		43
SECTION 13.1. Prosecution and Settlement of Proceedings		43
SECTION 13.2. Application of Refunds or Savings		44
SECTION 13.3. Survival		44
ARTICLE XIV MISCELLANEOUS		44
SECTION 14.1. Use of Blackstone Name and Address		44
SECTION 14.2. Exculpation of the Seller		44
SECTION 14.3. Brokers		44
SECTION 14.4. Confidentiality; Press Release; IRS Reporting Requirements		45
SECTION 14.5. Escrow Provisions		46
SECTION 14.6. Successors and Assigns; No Third-Party Beneficiaries		46
SECTION 14.7. Assignment		47
SECTION 14.8. Further Assurances		47
SECTION 14.9. Notices		47
SECTION 14.10. Entire Agreement		49
SECTION 14.11. Amendments		49

-ii-

	Page
SECTION 14.12. No Waiver		49
SECTION 14.13. Governing Law		49
SECTION 14.14. Intentionally Omitted		49
SECTION 14.15. Severability		49
SECTION 14.16. Section Headings		49
SECTION 14.17. Counterparts		49
SECTION 14.18. Acceptance of Deed		49
SECTION 14.19. Construction		49
SECTION 14.20. Recordation		49
SECTION 14.21. Waiver of Jury Trial		50
SECTION 14.22. Time is of the Essence		50

Schedules

Schedule A	—	Land
Schedule 1.1	—	Title Commitment
Schedule 3.l(c)	—	Consents
Schedule 3.2(a)	—	Operating Agreements
Schedule 3.2(c)	—	Tenant Leases
Schedule 3.2(d)	—	Brokerage Commissions
Schedule 3.2(f)	—	Litigation
Schedule 3.2(g)	—	Bookings
Schedule 10.4	—	Interstate Payment

Exhibits

Exhibit A	—	Form of Assignment of Leases
Exhibit B	—	Form of Assignment of Contracts
Exhibit C	—	Form of Special Warranty Deed
Exhibit D	—	Form of Bill of Sale
Exhibit E	—	Form of Assignment of Intangibles
Exhibit F	—	Form of FIRPTA Certificate
Exhibit G	—	Form of Title Affidavit
Exhibit H	—	Form of Memorandum of Sale

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AGREEMENT OF PURCHASE AND SALE

          AGREEMENT OF PURCHASE AND SALE (this “Agreement”), made as of the 11^th day of September, 2006 between EQUISTAR ARLINGTON PARTNERS, L.P., a Delaware limited partnership (the “Seller”), and INTERSTATE ARLINGTON, LP, a Delaware limited partnership (the “Buyer”).

Background

          A. The Seller is the owner of the land more particularly described in Schedule A attached hereto (the “Land”). The Seller is also the owner of the hotel facility located on the Land having an address at 2401 E. Lamar Boulevard, Arlington, Texas and commonly known as the “Hilton Arlington” (the “Hotel”). The Land and the Hotel shall be referred to herein, collectively, as the “Property”; the Property and the Asset-Related Property (as defined below) shall be referred to herein as the “Asset”.

          B. The Seller desires to sell to the Buyer, and the Buyer desires to purchase from the Seller, the Asset on the terms and conditions hereinafter set forth.

AGREEMENT

          NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

ARTICLE I

DEFINITIONS

          SECTION 1.1. Defined Terms. The capitalized terms used herein will have the following meanings.

          “Accounts Receivable” means all amounts which the Seller is entitled to receive from the operation of the Hotel, but are not paid as of the Closing, including, without limitation, charges for the use or occupancy of any guest, conference, meeting or banquet rooms or other facilities at the Hotel, or any other goods or services provided by or on behalf of the Seller at the Hotel, but expressly excluding any credit card charges and checks which the Seller has submitted for payment as of the Closing.

          “Agreement” shall mean this Agreement of Purchase and Sale, together with the exhibits and schedules attached hereto, as the same may be amended, restated, supplemented or otherwise modified.

          “Allocation” shall have the meaning assigned thereto in subsection 2.2(c).

          “Anti-Money Laundering and Anti-Terrorism Laws” shall have the meaning assigned thereto in subsection 3.1(f)(i).

          “Asset” shall have the meaning assigned thereto in “Background” paragraph A.

          “Asset File” shall mean the materials with respect to the Asset previously delivered to the Buyer or its representatives by or on behalf of the Seller or made available to the Buyer at the Property or in Manager’s possession.

          “Asset-Related Property” shall have the meaning assigned thereto in subsection 2.1(b).

          “Assigned Accounts Receivable” shall have the meaning assigned thereto in subsection 10.3(b)(i).

          “Assignment of Contracts” shall have the meaning assigned thereto in subsection 6.1(a)(ii).

          “Assignment of Intangibles” shall have the meaning assigned thereto in subsection 6.2(a)(v).

          “Assignment of Leases” shall have the meaning assigned thereto in subsection 6.1(a)(i).

          “Basket Limitation” shall mean an amount equal to $100,000.

          “Bill of Sale” shall have the meaning assigned thereto in subsection 6.2(a)(ii).

          “Bookings” shall have the meaning assigned thereto in subsection 2.1(b)(viii).

          “Books and Records” shall have the meaning assigned thereto in subsection 2.1(b)(xvi).

          “Brookhollow Estoppel” shall have the meaning assigned thereto in section 4.7(b).

          “Business Day” shall mean any day other than a Saturday, Sunday or other day on which banks are authorized or required by law to be closed in New York City, New York.

          “Buyer” shall have the meaning assigned thereto in the Preamble to this Agreement.

          “Buyer-Related Entities” shall have the meaning assigned thereto in Section 11.1.

          “Buyer’s Knowledge” shall mean the actual knowledge of the Buyer based upon the actual knowledge of Leslie Ng, David Lee and Christopher Bennett without any duty on the part of such Person to conduct any independent investigation or make any inquiry of any Person.

          “Buyer Waived Breach” shall have the meaning assigned thereto in 11.3.

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          “Cap Limitation” shall mean an amount equal to $1,500,000.

          “Claims” shall have the meaning assigned thereto in Section 7.3.

          “Closing” shall have the meaning assigned thereto in subsection 2.4(a).

          “Closing Date” shall have the meaning assigned thereto in subsection 2.4(a).

          “Closing Documents” shall mean any certificate, assignment, instrument or other document delivered pursuant to this Agreement.

          “Code” means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute. Any reference herein to a particular provision of the Code shall mean, where appropriate, the corresponding provision in any successor statute.

          “Condition of the Asset” shall have the meaning assigned thereto in subsection 7.2(b).

          “Cut-Off Time” shall have the meaning assigned thereto in subsection 10.1.

          “Deed” shall have the meaning assigned thereto in subsection 6.2(a)(i).

          “Earnest Money” shall have the meaning assigned thereto in subsection 2.3(a).

          “Employees” shall mean, at any time, all persons who are employed by the Seller or Manager (whether on a full-time or part-time basis) at the Hotel at such time to operate the Hotel.

          “Environmental Laws” shall have the meaning assigned thereto in subsection 3.2(h).

          “Equipment Leases” shall have the meaning assigned thereto in subsection 2.1(b)(vii).

          “Escrow Account” shall have the meaning assigned thereto in subsection 14.5(a).

          “Escrow Agent” shall have the meaning assigned thereto in subsection 2.3(a).

          “Executive Order” shall have the meaning assigned thereto in subsection 3.1(f)(i).

          “Existing Survey” shall mean that certain survey of the Property prepared by Andrew J. Schafer, RDLS #5017, Halff Associates, Inc. and dated June 24, 1998.

          “Extension Option” shall have the meaning assigned thereto in subsection 2.4(b).

          “FIRPTA” shall have the meaning assigned thereto in subsection 6.2(a)(vii).

          “Financing Liens” shall have the meaning assigned thereto in subsection 8.3(a).

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          “FF&E” shall have the meaning assigned thereto in subsection 2.1(b)(ii).

          “Franchise Agreement” shall mean that certain Amended and Restated Franchise Agreement dated May 2, 2006 by and between Franchisor and the Seller.

          “Franchisor” shall mean Hilton Inns, Inc., a Delaware corporation.

          “Governmental Authority” shall mean any federal, state or local government or other political subdivision thereof, including, without limitation, any agency or entity exercising executive, legislative, judicial, regulatory or administrative governmental powers or functions, in each case to the extent the same has jurisdiction over the Person or property in question.

          “Government List” shall mean any of (i) the two lists maintained by the United States Department of Commerce (Denied Persons and Entities), (ii) the list maintained by the United States Department of Treasury (Specially Designated Nationals and Blocked Persons), and (iii) the two lists maintained by the United States Department of State (Terrorist Organizations and Debarred Parties).

          “Guest Ledger” means any and all charges accrued to the open accounts of any guests or customers at the Hotel as of the Cut-Off Time for the use and occupancy of any guest, conference, meeting or banquet rooms or other facilities at the Hotel, any restaurant, bar or banquet services, or any other goods or services provided by or on behalf of the Seller.

          “Hazardous Materials” shall have the meaning assigned thereto in subsection 7.2(b)(i).

          “Hotel” shall have the meaning assigned thereto in “Background” paragraph A.

          “Intangible Property” shall have the meaning assigned thereto in subsection 2.1(b)(xiii).

          “Interstate Letter” shall have the meaning assigned thereto in Section 10.4.

          “Interstate Payment” shall have the meaning assigned thereto in Section 10.4.

          “Inventories” shall have the meaning assigned thereto in subsection 2.1(b)(xi).

          “IRS” shall mean the Internal Revenue Service.

          “Inventories” shall have the meaning assigned thereto in subsection 2.1(b)(xi).

          “IRS” shall mean the Internal Revenue Service.

          “IRS Reporting Requirements” shall have the meaning assigned thereto in subsection 14.4(c).

          “Land” shall have the meaning assigned thereto in “Background” paragraph A.

          “Licenses and Permits” shall have the meaning assigned thereto in subsection 2.1(b)(iii).

          “Liquor Holder” shall have the meaning assigned thereto in subsection 4.2(a)(ii).

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          “Liquor Authorities” shall have the meaning assigned thereto in subsection 4.2(a)(iii).

          “Memorandum of Sale” shall have the meaning assigned thereto in subsection 4.2(a)(ii).

          “Losses” shall have the meaning assigned thereto in Section 11.1.

          “Management Agreement” shall mean that certain Hotel Management Agreement, which is dated as of January 1, 2001 between MeriStar SPE Leasing Corp. and Manager, as assigned to the Seller pursuant to that certain Assignment and Assumption Agreement dated as of May 2, 2006 among MerStar CMBS 2005 Lessee, LLC, the Seller and MeriStar Hospitality Operating Partnership, L.P., pursuant to which Manager is to provide management and other services with respect to the Property.

          “Manager” shall mean Interstate Management Company L.L.C., successor in interest to MeriStar Management Company, L.L.C.

          “Material Casualty” shall have the meaning assigned thereto in subsection 9.2(b).

          “Material Condemnation” shall have the meaning assigned thereto in subsection 9.2(b).

          “Miscellaneous Personal Property” shall have the meaning assigned thereto in subsection 2.1(b)(xv).

          “Natural Hazard Expert” shall have the meaning assigned thereto in subsection 7.4(b).

          “Operating Agreements” shall mean all maintenance, service and supply contracts, management agreements, credit card service agreements, booking and reservation agreements, and all other contracts and agreements which are held by the Seller in connection with the operation of the Hotel, other than the Franchise Agreement, the Management Agreement, Tenant Leases, Equipment Leases, the Bookings and Licenses and Permits.

          “Outside Closing Date” shall have the meaning assigned thereto in subsection 4.5(b).

          “Permitted Exceptions” shall mean (i) the items set forth in exceptions 1, 2, 3,4, 5 (subject to the Seller’s and the Buyer’s proration obligations under subsection 10.1(a)) and 6 (but as to 6(f), limited to only those Tenant Leases as contemplated under clause (iii) below) in the Title Commitment, (ii) the matters shown on the Existing Survey, (iii) the Tenant Leases set forth in Schedule 3.2(c) attached hereto and the Operating Agreements and any Tenant Leases, Operating Agreements or other contracts entered into after the date hereof, and in accordance with the terms of this Agreement, (iv) liens for current real estate taxes which are not yet due and payable, (v) discrepancies, conflicts in boundary lines, shortages in area, encroachments and any other state of facts as disclosed on a new survey of the property that were not shown on the Existing Survey and that do not have a material adverse effect on the use or value of the

          

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Property, (vi) subject to the adjustments provided for herein, any service, installation, connection or maintenance charge, and charges for sewer, water, electricity, telephone, cable television or gas first due from and after the Cut-Off Time, (vii) rights of tenants to remove trade fixtures at the expiration of the term of the Tenant Leases of such tenants to the extent set forth in the applicable Tenant Lease, (viii) right of tenants as tenants only under the Tenant Leases permitted in clause (iii) above, (ix) laws, regulations, resolutions or ordinances, including, without limitation, building, zoning and environmental protection, as to the use, occupancy, subdivision, development, conversion or redevelopment of the Property currently or hereinafter imposed by any governmental or quasi governmental body or authority, and (x) any title exception which is waived by the Buyer pursuant to subsection 8.3(b).

          “Person” shall mean a natural person, partnership, limited partnership, limited liability company, corporation, trust, estate, association, unincorporated association or other entity.

          “Post Effective Date Monetary Encumbrance” shall have the meaning assigned thereto in subsection 8.3(c).

          “Post Effective Date Seller Encumbrance” shall have the meaning assigned thereto in subsection 8.3(a).

          “Property” shall have the meaning assigned thereto in “Background” paragraph A.

          “Property and Equipment” shall have the meaning assigned thereto in subsection 2.1(b)(x).

          “Purchase Price” shall have the meaning assigned thereto in subsection 2.2(a).

          “Releasees” shall have the meaning assigned thereto in Section 7.3.

          “Reporting Person” shall have the meaning assigned thereto in subsection 14.4(c).

          “Retail Merchandise” shall have the meaning assigned thereto in subsection 2.1(b)(xii).

          “Retained Accounts Receivable” shall have the meaning assigned thereto in subsection 10.3(b)(ii)

          “Seller” shall have the meaning assigned thereto in the Preamble to this Agreement.

          “Seller-Related Entities” shall have the meaning assigned thereto in Section 11.2.

          “Seller’s Knowledge” shall mean the actual knowledge of the Seller based upon the actual knowledge of Robert Harper, Kenneth Caplan and Bruce Wiles without any duty on the part of such Person to conduct any independent investigation or make any inquiry of any Person.

          

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          “Survival Period” shall have the meaning assigned thereto in Section 11.4.

          “Tax Clearance Certificates” shall have the meaning assigned thereto in Section 4.7(a).

          “Tax Liens” shall have the meaning assigned thereto in subsection 8.3(a).

           “Tenant Leases” shall have the meaning assigned thereto in subsection 2.1(b)(vi).

          “Termination Option” shall have the meaning assigned thereto in subsection 4.5(b).

          “Title Company” shall mean First American Title Insurance Company.

          “Title Commitment” shall mean that certain Owner Pro Forma issued by the Title Company, and referred to as GF No. or File No. 06R32664 ND6 and attached hereto as Schedule 1.1.

          “Title Policy” shall mean a standard form TLTA T-l Owner’s Policy of Title Insurance without endorsements issued by the Title Company pursuant to the Title Commitment insuring the Buyer’s title to the Property subject only to the Permitted Exceptions in an amount equal to the Purchase Price.

          “Trade Payables” shall have the meaning assigned thereto in subsection 10.1(k).

          “Transferred Employees” shall have the meaning assigned thereto in subsection 4.3(b).

          “UCC” shall mean the Uniform Commercial Code.

          “Uniform System of Accounts” shall have the meaning assigned thereto in subsection 2.1(b)(x).

          “WARN Act” means the Worker’s Adjustment and Retraining Notification Act of 1988, 29 U.S.C. § 2101, et seq., and any similar state and local applicable law, as amended from time to time, and any regulations, rules and guidance issued pursuant thereto.

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ARTICLE II

SALE, PURCHASE PRICE AND CLOSING

          SECTION 2.1. Sale of Asset.

          (a) On the Closing Date and pursuant to the terms and subject to the conditions set forth in this Agreement, the Seller shall sell to the Buyer, and the Buyer shall purchase from the Seller, the Asset.

          (b) The transfer of the Asset to the Buyer shall include the transfer of all Asset-Related Property. For purposes of this Agreement, “Asset-Related Property” shall mean the following:

     (i) all of the Seller’s right, title and interest in and to all easements, covenants and other rights appurtenant to the Land and all right, title and interest of the Seller, if any, in and to any (A) land lying in the bed of any street, road, avenue or alley, open or closed, in front of or adjoining the Land and to the center line thereof, and (B) unpaid award or payment which may hereafter be payable with respect to any taking by condemnation;

     (ii) all furniture, furnishings, fixtures, vehicles, rugs, mats, carpeting, appliances, devices, engines, telephone and other communications equipment, televisions and other video equipment, plumbing fixtures and other equipment, and all other equipment and other personal property which are now, or may hereafter prior to the Closing Date be, placed in or on or attached to the Property and are used in connection with the operation of the Property (but not including items owned or leased by tenants or which are leased under the Equipment Leases by the Seller or Manager) (the “FF&E”);

     (iii) all of the Seller’s right, title and interest in and to and to the extent transferable under applicable law, all licenses, permits and authorizations presently issued in connection with the operation of all or any part of the Property as it is presently being operated, other than the existing Liquor License (the “Licenses and Permits”);

     (iv) all of the Seller’s right, title and interest in and to and to the extent assignable, all warranties, if any, issued to the Seller by any manufacturer or contractor in connection with construction or installation of equipment or any component of the improvements included as part of the Property or FF&E;

     (v) all of the Seller’s right, title and interest in and to and to the extent assignable all Operating Agreements;

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     (vi) all of the Seller’s right, title and interest in and to all leases, subleases, licenses, contracts and other agreements, granting a real property interest to any other Person for the use and occupancy of all or any part of the Property, other than the Bookings (the “Tenant Leases”) and all security and escrow deposits or other security held by or for the benefit of, or granted to the Seller in connection with, such Tenant Leases;

     (vii) all of the Seller’s right, title and interest in and to all leases and purchase money security agreements for any equipment, machinery, vehicles, furniture or other personal property located at the Hotel and used in the operation of the Hotel which are held by or on behalf of the Seller (the “Equipment Leases”), together with all deposits made thereunder;

     (viii) all of the Seller’s right, title and interest in and to all bookings and reservations for guest, conference, meeting and banquet rooms or other facilities at the Hotel for dates from and after the Closing Date (the “Bookings”), together with all deposits held by the Seller with respect thereto;

     (ix) all of the Seller’s right, title and interest in and to all Assigned Accounts Receivable as set forth in Section 10.3;

     (x) all items included within the definition of “Property and Equipment” under the Uniform System of Accounts for the Lodging Industry, Ninth Revised Edition, as published by the Hotel Association of New York City, Inc. (the “Uniform System of Accounts”) and used in the operation of the Hotel, including, without limitation, linen, china, glassware, tableware, uniforms and similar items (“Property and Equipment”);

     (xi) all “Inventories” as defined in the Uniform System of Accounts and used in the operation of the Hotel, such as provisions in storerooms, refrigerators, pantries, and kitchens, beverages in wine cellars and bars, other merchandise intended for sale or resale, fuel, mechanical supplies, stationery, guest supplies, maintenance and housekeeping supplies and other expensed supplies and similar items and including all food and beverages which are located at the Hotel, or ordered for future use at the Hotel as of the Closing, but expressly excluding any alcoholic beverages to the extent the sale or transfer of the same is not permitted under applicable law (the “Inventories”);

     (xii) all merchandise located at the Hotel and held for sale to guests and customers of the Hotel, or ordered for future sale at the Hotel as of the Cut-Off Time, but not including any such merchandise owned by any tenant at the Property or by Manager (“Retail Merchandise”);

     (xiii) all of the Seller’s right, title and interest in and to and to the extent the Seller’s rights and interests therein are assignable, all names, tradenames, trademarks, service marks, logos, and other similar proprietary rights

9

and all registrations or applications for registration of such rights to the used by the Seller in the operation of the Hotel (the “Intangible Property”);

     (xiv) Intentionally Omitted;

     (xv) all of the Seller’s right, title and interest in and to and to the extent not included in subsection 2.1(b)(ii) above and to the extent owned by the Seller, the Hotel’s telephone numbers, printed marketing materials and any slides, proofs or drawings used by the Seller to produce such materials, to the extent such slides, proofs or drawings are in the Seller’s possession (“Miscellaneous Personal Property”; and

     (xvi) to the extent in the Seller’s possession or control, all surveys, architectural, consulting and engineering blueprints, plans and specifications and reports, if any, related to the Hotel, all books and records, if any, related to the Hotel (collectively, “Books and Records”), and any goodwill of the Seller related to the Hotel; provided, however, that the Seller may retain a copy of all such books and records.

          (c) Excluded Property. Notwithstanding anything to the contrary in Section 2.1(a) and (b), the property, assets, rights and interests set forth in this subsection 2.1(c) are expressly excluded from the Asset:

     (i) Cash. Except for deposits expressly included in subsections 2.1(a) and (b) and except for any cash on hand or in house banks for which the Seller receives a credit under subsection 10.1(1), all cash on hand or on deposit in any house bank, operating account or other account maintained in connection with the ownership of the Hotel, including, without limitation, any reserves maintained by the Seller or Manager required by the Management Agreement (subject to subsection 10.1(1)); and

     (ii) Third Party Property. Any fixtures, personal property or equipment owned by (A) the lessor under any Equipment Leases, (B) the supplier or vendor under any other Operating Agreements, (C) the tenant under any Tenant Lease, (D) any Employees, (E) Manager or (F) any guests or customers of the Hotel, including, without limitation, those items set forth on Schedule 2.1(c) attached hereto.

          SECTION 2.2. Purchase Price.

          (a) The consideration for the purchase of the Asset shall be $36,300,000 (the “Purchase Price”), which shall be paid by the Buyer to the Seller at the Closing in immediately available funds by wire transfer to such accounts or accounts that the Seller shall designate to the Buyer; provided that such amount shall be reduced by the Earnest Money and adjusted for Closing adjustments and credits provided for in Article X and elsewhere in the Agreement and the Interstate Payment as described in Article X below.

10

          (b) No adjustment shall be made to the Purchase Price except as explicitly set forth in this Agreement.

          (c) The Seller and the Buyer agree that the Purchase Price shall be allocated among the Assets as determined by agreement of the parties prior to the Closing for federal, state and local tax purposes in accordance with Section 1060 of the Code. The Buyer shall, within 10 days after the date of this Agreement, prepare and deliver to the Seller for its review a schedule allocating the Purchase Price (and any other items that are required for federal income tax purposes to be treated as part of the purchase price) among the Assets (such schedule, the “Allocation”). The Seller shall review such Allocation and provide any objections to the Buyer within 10 days after the receipt thereof. If the Seller raises any objection to the Allocation, the parties hereto will negotiate in good faith to resolve such objection(s). Upon reaching an agreement on the Allocation, the Buyer and the Seller shall (i) cooperate in the filing of any forms (including Form 8594 under Section 1060 of the Code) with respect to the Allocation as finally resolved, including any amendments to such forms required pursuant to this Agreement with respect to any adjustment to the Purchase Price and (ii) shall file all federal, state and local tax returns and related tax documents consistent with such allocation, as the same may be adjusted pursuant to Section 9.1 or any other provisions of this Agreement. Notwithstanding the foregoing, if, after negotiating in good faith, the parties hereto are unable to agree on a mutually satisfactory Allocation, each of the Buyer and the Seller shall use its own allocation for purposes of this Section 2.4.

          SECTION 2.3. Earnest Money.

          (a) On the date hereof, the Buyer shall deposit with the Title Company, as escrow agent (in such capacity, “Escrow Agent”), cash in an amount equal to $2,000,000 (together with all accrued interest thereon, the “Earnest Money”) in immediately available funds by wire to such account as Escrow Agent shall designate to the Buyer. The Earnest Money shall be nonrefundable to the Buyer except as otherwise expressly provided in this Agreement. If the Earnest Money is not deposited by the Buyer by 5:00 p.m. (New York Time) on the date of this Agreement, the Seller shall have the right, in the Seller’s sole and absolute discretion, upon written notice to the Buyer delivered prior to the Buyer’s deposit of the Earnest Money with the Title Company, to terminate this Agreement whereupon neither party hereto shall have any further rights or obligations hereunder except for those that expressly survive the termination of this Agreement.

          (b) Upon delivery by the Buyer to Escrow Agent and upon receipt of an executed form W-9, the Earnest Money will be deposited by Escrow Agent in an interest-bearing account acceptable to the Buyer and the Seller and shall be held in escrow in accordance with the provisions of Section 14.5. All interest earned on the Earnest Money while held by Escrow Agent shall be paid to the party to whom the Earnest Money is paid, except that if the Closing occurs, the Buyer shall receive a credit for such interest in accordance with subsection 2.2(a).

          SECTION 2.4. The Closing.

          (a) The closing of the sale and purchase of the Asset (the “Closing”) shall take place on September 26, 2006 (such date, the “Closing Date”), Time Being Of The Essence

11

with respect to the Buyer’s and the Seller’s obligations hereunder on the Closing Date, subject only to the rights to extend and/or adjourn the Closing Date as are expressly permitted in this Agreement.

          (b) The Buyer shall have the right to extend the Closing Date (as it may have otherwise been extended in accordance with Section 4.5) for up to 15 days (the “Extension Option”) in accordance with the terms of this subsection 2.4(b). In order to exercise the Extension Option, the Buyer must deliver written notice to the Seller and Escrow Agent of such extension no later than two Business Days prior to the then scheduled Closing Date. Notwithstanding the provisions of subsection 2.4(b), the parties agree and acknowledge that in no event shall the Buyer have the right to extend the Closing Date under subsection 2.4(b) beyond the Outside Closing Date. If the Closing Date is extended under any other provision of this Agreement, the length of the Extension Option shall be reduced accordingly so that the Closing Date shall not be extended under subsection 2.4(b) beyond the Outside Closing Date.

          (c) The Closing shall be held on the Closing Date at 10:00 A.M. at the offices of Simpson Thacher & Bartlett LLP, 425 Lexington Avenue, New York, New York, or at such other location agreed upon by the parties hereto.

          (d) Notwithstanding the provisions of subsection 2.4(b), there shall be no requirement that the Seller and the Buyer physically attend the Closing, and all funds and documents to be delivered at the Closing may be delivered to Escrow Agent unless the parties hereto mutually agree otherwise. The Buyer and the Seller hereby authorize their respective attorneys to execute and deliver to Escrow Agent any additional or supplementary instructions as may be necessary or convenient to implement the terms of this Agreement and facilitate the closing of the transactions contemplated hereby, provided that such instructions are consistent with and merely supplement this Agreement and shall not in any way modify, amend or supersede this Agreement.

ARTICLE III

REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLER

          SECTION 3.1. General Seller Representations and Warranties. The Seller hereby represents and warrants to the Buyer as follows:

          (a) Formation; Existence. It is a limited partnership, duly formed, validly existing and in good standing under the laws of the State of Delaware and the State of Texas.

          (b) Power and Authority. It has all requisite power and authority to enter into this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement, the sale of the Assets and the consummation of the transactions provided for in this Agreement have been duly authorized by all necessary action on its part. This Agreement has been duly executed and

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delivered by it and constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights and by general principles of equity (whether applied in a proceeding at law or in equity).

          (c) No Consents. Except as set forth in Schedule 3.1(c). no consent, license, approval, order, permit or authorization of, or registration, filing or declaration with, any court, administrative agency or commission or other Governmental Authority or instrumentality, domestic or foreign, is required to be obtained or made in connection with the execution, delivery and performance of this Agreement or any of the transactions required or contemplated hereby.

          (d) No Conflicts. The execution, delivery and compliance with, and performance of the terms and provisions of, this Agreement, and the sale of the Asset, will not (i) conflict with or result in any violation of its organizational documents, (ii) conflict with or result in any violation of any provision of any bond, note or other instrument of indebtedness, contract, indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which it is a party in its individual capacity, or (iii) violate any existing term or provision of any order, writ, judgment, injunction, decree, statute, law, rule or regulation applicable to it or its assets or properties.

          (e) Foreign Person. It is not a “foreign person” as defined in Internal Revenue Code Section 1445 and the regulations issued thereunder.

          (f) Anti-Terrorism Laws.

     (i) None of the Seller or, to Seller’s Knowledge, its affiliates, is in violation of any laws relating to terrorism, money laundering or the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Action of 2001, Public Law 107-56 and Executive Order No. 13224 (Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism) (the “Executive Order”) (collectively, the “Anti-Money Laundering and Anti-Terrorism Laws”).

     (ii) None of the Seller or, to Seller’s Knowledge, its affiliates, is acting, directly or indirectly, on behalf of terrorists, terrorist organizations or narcotics traffickers, including those persons or entities that appear on the Annex to the Executive Order, or are included on any relevant lists maintained by the Office of Foreign Assets Control of U.S. Department of Treasury, U.S. Department of State, or other U.S. government agencies, all as may be amended from time to time.

     (iii) None of the Seller or, to Seller’s Knowledge, its affiliates or, without inquiry, any of its brokers or other agents, in any capacity in connection with the purchase of the Property (A) conducts any business or engages in making or receiving any contribution of funds, goods or services to or for the benefit of any person included in the lists set forth in the preceding paragraph; (B) deals in,

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or otherwise engages in any transaction relating to, any property or interests in property blocked pursuant to the Executive Order; or (C) engages in or conspires to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in any Anti-Money Laundering and Anti-Terrorism Laws.

     (iv) The Seller understands and acknowledges that the Buyer may become subject to further anti-money laundering regulations, and agrees to execute instruments, provide information, or perform any other acts as may reasonably be requested by the Buyer, for the purpose of: (A) carrying out due diligence as may be required by applicable law to establish the Seller’s identity and source of funds; (B) maintaining records of such identities and sources of funds, or verifications or certifications as to the same; and (C) taking any other actions as may be required to comply with and remain in compliance with anti-money laundering regulations applicable to the Seller.

     (v) Neither the Seller, nor any person controlling or controlled by the Seller, is a country, territory, individual or entity named on a Government List, and the monies used in connection with this Agreement and amounts committed with respect thereto, were not and are not derived from any activities that contravene any applicable anti-money laundering or anti-bribery laws and regulations (including funds being derived from any person, entity, country or territory on a Government List or engaged in any unlawful activity defined under Title 18 of the United States Code, Section 1956(c)(7)).

          SECTION 3.2. Representations and Warranties of the Seller as to the Asset. The Seller hereby represents and warrants to the Buyer as follows:

          (a) Operating Agreements. To Seller’s Knowledge, (i) all material Operating Agreements (and any amendments or modification thereof) affecting the Property as of the date hereof are set forth on Schedule 3.2(a) attached hereto, (ii) the same have not been modified or amended, except as shown in such documents, (iii) all material Operating Agreements are in full force and effect, (iv) the Seller has delivered to the Buyer true and complete copies of each material Operating Agreement to the extent in the Seller’s possession and (v) there are no material defaults by any party under any material Operating Agreement.

          (b) Employees. The Seller does not have any employees. The Seller is not a party to any collective bargaining agreement or other contract or agreement with any labor organization. The Seller has not entered into any agreements with any Employees except through Manager.

          (c) Tenant Leases and Equipment Leases. To Seller’s Knowledge, Schedule 3.2(c) sets forth a correct and complete list of the Tenant Leases and all material Equipment Leases for the Hotel as of the date hereof. Except as set forth in Schedule 3.2(c), as of the date hereof, (i) to Seller’s Knowledge, all material Equipment Leases and Tenant Leases are in full force and effect and the Seller has delivered to the Buyer true and complete copies of all material Equipment Leases and Tenant Leases to the extent in the Seller’s possession, and (ii) the Seller

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has not given or, to Seller’s Knowledge, received any written notice of any breach or default under any of the Tenant Leases or Equipment Leases that has not been cured.

          (d) Brokerage Commissions. To Seller’s Knowledge, there are no unpaid brokerage commissions or finders’ fees payable by the landlord with respect to the current or any renewal term of any of the Tenant Leases other than those set forth on Schedule 3.2(d) attached hereto and the Seller has no agreement with any broker with respect to any renewal term of any Tenant Lease except as set forth in Schedule 3.2(d).

          (e) Condemnation. As of the date hereof, there is no pending condemnation or similar proceedings affecting the Property, and to Seller’s Knowledge, no such action is threatened or contemplated.

          (f) Litigation. To Seller’s Knowledge and except as disclosed in Schedule 3.2(f) attached hereto, as of the date hereof, there are no actions, suits or proceedings pending against or affecting the Asset or the Seller in any court or before or by an arbitration tribunal or regulatory commission, department or agency and to Seller’s Knowledge, no such actions, suits or proceedings has been threatened or contemplated.

          (g) Bookings. To Seller’s Knowledge, Schedule 3.2(g) sets forth a correct list of all Bookings for the Hotel as of the date hereof.

          (h) Environmental Matters. The Seller has not received any written notice from any governmental or regulatory authority of a violation of any applicable Environmental Laws, which have not been corrected. For the purposes of this subsection 3.2(h), “Environmental Laws” means any and all federal, state, county and local statutes, laws, regulations and rules in effect on the date of this Agreement relating to the protection of the environment or to the use, transportation and disposal of Hazardous Materials.

          (i) Title to Personal Property. Other than FF&E, Property and Equipment, Retail Merchandise and Inventories covered by an Equipment Lease or as it relates to the rights, if any, of Franchisor under the Franchise Agreement therein, the Seller shall own the FF&E, Property and Equipment, Retail Merchandise and Inventories free and clear of all liens and encumbrances as of the Closing Date.

          (j) Franchise Agreement. The Seller has delivered to the Buyer a true and complete copy of the Franchise Agreement. To Seller’s Knowledge, (i) the Franchise Agreement is in full force and effect and (ii) there are no material defaults by any party thereunder as of the date hereof.

          (k) Violation of Law. The Seller has not received any written notice from any governmental or regulatory authority of a violation of any applicable material law within the past two years, which have not been remedied.

          (l) Liquor Holder. All of the issued and outstanding shares of Liquor Holder is held by MeriStar SPE Leasing LLC (f/k/a MeriStar SPE Leasing Corp.) and such interest will not be encumbered as of the Closing.

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          SECTION 3.3. Limitations on Representations and Warranties of the Seller. If the representations and warranties relating to the Operating Agreements set forth in Section 3.2 and the status of the contract parties thereunder (other than the Seller or its affiliates) contained herein were true and correct as of the date of this Agreement, no change in circumstances or status of such contract party (e.g., defaults, bankruptcies or other adverse matters relating to such contract party) occurring after the date hereof shall permit the Buyer to terminate this Agreement or constitute grounds for the Buyer’s failure to close.

          SECTION 3.4. Covenants of the Seller Prior to Closing. From the date hereof until Closing or earlier termination of this Agreement, the Seller or the Seller’s agents shall:

          (a) Insurance. Keep the Property insured against fire and other hazards in coverage, amounts and deductibles not materially less than those in effect as of the date of this Agreement and otherwise under such terms as the Seller deems advisable consistent with past practices.

          (b) New Operating Agreements. Without the prior written consent of the Buyer, which consent shall not be unreasonably withheld or delayed, not enter into any Operating Agreements or Equipment Leases, or renew, amend or supplement any such contracts; provided that the Seller may enter into or renew such contracts, or amend or supplement such contracts, without the Buyer’s consent if such contract is entered into (or renewed, amended, or supplemented, as the case may be) in the course of customary maintenance and repairs at the Property, or is necessary as a result of an emergency at the Property and in either case is terminable on 30 days or less notice, without penalty. If the Seller enters into or renews any such contracts, or amends or supplements any such contracts, after the date of this Agreement, then the Seller shall promptly provide written notice and a copy thereof to the Buyer and unless the same required the Buyer’s approval pursuant to this paragraph and such approval was not obtained, the Buyer shall assume such contract at Closing and the schedule of contracts attached to the Assignment of Contracts shall be so modified, and such contract shall be deemed added to Schedule 3.2(a) attached hereto and Schedule 3.2(a) shall be deemed amended at the Closing to include such contracts. If a new contract, or a renewal, amendment or supplement to an existing contract, requires the Buyer’s approval and the Buyer does not object within seven days after receipt of a copy of such contract, then the Buyer shall be deemed to have approved such contract. The Seller shall observe and perform all of its material obligations under the material Operating Agreements and Equipment Leases excluding any such agreements which may be terminated in the ordinary course of the operation of the Hotel or as a result of a default by the other party.

          (c) New Tenant Leases. Without the prior consent of the Buyer, not execute any new lease, or renew, amend or supplement any existing lease (unless required by the terms thereof), for space at the Property. If the Buyer’s approval was obtained on a new lease or the renewal, amendment or supplement of an existing lease, the Buyer shall assume such lease at Closing and the schedule of leases attached to the Assignment of Leases shall be so modified, and such lease shall be deemed added to Schedule 3.2(c) attached hereto and Schedule 3.2(c) shall be deemed amended at the Closing to include such leases. If the Buyer does not object within seven days after receipt of a copy of a request for approval of a new lease, or to the renewal, amendment or supplement of an existing lease (unless required by the terms thereof),

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then the Buyer shall be deemed to have approved such new lease, renewal, amendment or supplement, as the case may be.

          (d) Franchise Agreement. Observe and perform all of its material obligations under the Franchise Agreement. Without the prior consent of the Buyer, the Seller shall not amend, supplement or terminate the Franchise Agreement.

          (e) Assets. Shall not sell, exchange, assign, transfer, convey or otherwise dispose of all or any of the Asset or any interest therein except for any FF&E, Inventories, Retail Merchandise, Miscellaneous Personal Property or Property and Equipment that are sold, replaced or consumed in the ordinary course of business and shall, to the extent within the Seller’s control under the Management Agreement, maintain levels of Inventory and Property and Equipment in a manner substantially consistent with the Seller’s customary operating practices and historical practice at the Property.

          (f) Operation. Shall, to the extent within the Seller’s control under the Management Agreement, continue to operate and maintain the Hotel in substantially the same manner in which it is being operated and maintained as of the date hereof, provided that, except for emergency repairs, the Seller shall not perform any capital improvements at the Hotel including, without limitation, any capital improvements or expenditures as may be contemplated by the existing capital expenditure budget for the Hotel.

          (g) Management Agreement. At or prior to the Closing, the Seller shall terminate the Management Agreement effective as of or prior to the Closing Date.

          SECTION 3.5. Amendment to Schedules. Notwithstanding anything to the contrary in this Agreement, the Seller shall have the right to amend and supplement the schedules to this Agreement from time to time prior to the Closing to reflect changes since the date of this Agreement by providing a written copy of such amendment or supplement to the Buyer; provided, however, that any amendment or supplement to the schedules to this Agreement shall have no effect for the purposes of determining whether subsection 5.2(a) has been satisfied if the matter raised in such supplement has a material adverse effect on the Asset, but shall have effect only for the purposes of limiting the defense and indemnification obligations of the Seller for the inaccuracy or untruth of the representation or warranty qualified by such amendment or supplement.

ARTICLE IV

REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BUYER

          SECTION 4.1. Representations and Warranties of the Buyer. The Buyer hereby represents and warrants to the Seller as follows:

          (a) Formation: Existence. It is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Delaware.

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          (b) Power; Authority. It has all requisite power and authority to enter into this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement, the purchase of the Asset and the consummation of the transactions provided for herein have been duly authorized by all necessary action on the part of the Buyer. This Agreement has been duly executed and delivered by the Buyer and constitutes the legal, valid and binding obligation of the Buyer enforceable against the Buyer in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights and by general principles of equity (whether applied in a proceeding at law or in equity).

          (c) No Consents. No consent, license, approval, order, permit or authorization of, or registration, filing or declaration with, any court, administrative agency or commission or other Governmental Authority or instrumentality, domestic or foreign, is required to be obtained or made in connection with the execution, delivery and performance of this Agreement or any of the transactions required or contemplated hereby.

          (d) No Conflicts. The execution, delivery and compliance with, and performance of the terms and provisions of, this Agreement, and the purchase of the Asset, will not (i) conflict with or result in any violation of its organizational documents, (ii) conflict with or result in any violation of any provision of any bond, note or other instrument of indebtedness, contract, indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which it is a party in its individual capacity, or (iii) violate any existing term or provision of any order, writ, judgment, injunction, decree, statute, law, rule or regulation applicable to it or its assets or properties.

          (e) Anti-Terrorism Laws.

     (i) None of the Buyer or, to the Buyer’s Knowledge, its affiliates, is in violation of the Executive Order or any Anti-Money Laundering and Anti-Terrorism Law.

     (ii) None of the Buyer or, to the Buyer’s Knowledge, its affiliates, is acting, directly or indirectly, on behalf of terrorists, terrorist organizations or narcotics traffickers, including those persons or entities that appear on the Annex to the Executive Order, or are included on any relevant lists maintained by the Office of Foreign Assets Control of U.S. Department of Treasury, U.S. Department of State, or other U.S. government agencies, all as may be amended from time to time.

     (iii) None of the Buyer or, to the Buyer’s Knowledge, its affiliates or, without inquiry, any of its brokers or other agents, in any capacity in connection with the purchase of the Property (A) conducts any business or engages in making or receiving any contribution of funds, goods or services to or for the benefit of any person included in the lists set forth in the preceding paragraph; (B) deals in, or otherwise engages in any transaction relating to, any property or interests in property blocked pursuant to the Executive Order; or

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(C) Engages in or conspires to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in any Anti-Money Laundering and Anti-Terrorism Laws.

     (iv) The Buyer understands and acknowledges that the Seller may become subject to further anti-money laundering regulations, and agrees to execute instruments, provide information, or perform any other acts as may reasonably be requested by the Seller, for the purpose of: (A ) carrying out due diligence as may be required by applicable law to establish the Buyer’s identity and source of funds; (B) maintaining records of such identities and sources of funds, or verifications or certifications as to the same; and (C) taking any other actions as may be required to comply with and remain in compliance with anti-money laundering regulations applicable to the Buyer.

     (v) Neither the Buyer, nor any person controlling or controlled by the Buyer, is a country, territory, individual or entity named on a Government List, and the monies used in connection with this Agreement and amounts committed with respect thereto, were not and are not derived from any activities that contravene any applicable anti-money laundering or anti -bribery laws and regulations (including funds being derived from any person, entity, country or territory on a Government List or engaged in any unlawful activity defined under Title 18 of the United States Code, Section 1956(c)(7)).

          SECTION 4.2. Covenants of the Buyer Prior to Closing.

          (a) Licenses and Permits.

     (i) The Buyer shall use all commercially reasonable and good faith efforts to obtain the transfer of all Licenses and Permits (to the extent transferable) or the issuance of new licenses and permits. The Buyer, at its cost and expense, shall submit all necessary applications and other materials to the appropriate Governmental Authority and take such other actions to effect the transfer of Licenses and Permits or issuance of new licenses and permits, as of the Closing, and the Seller shall use commercially reasonable efforts (at no cost or expense to the Seller) to cooperate with the Buyer to cause the Licenses and Permits to be transferred or new licenses and permits to be issued to the Buyer. It shall not be a condition to the Closing hereunder that the Buyer has obtained any transfer of Licenses or Permits or issuance of any new licenses or permits.

     (ii) The Seller agrees to reasonably cooperate with the Buyer in connection with the transfer of the interest in the entity (the “Liquor Holder”) currently holding the license for the sale and service of alcoholic beverages at the Hotel to the Buyer or its designee without any representations or warranties except as specifically set forth herein or in the Memorandum of Sale in substantially the form of Exhibit H attached hereto (the “Memorandum of Sale”).

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     (iii) Promptly after the date hereof, the Buyer shall (and to the extent required by law, the Seller shall cause Liquor Holder to) execute and file with the Texas Alcoholic Beverage Commission and any other Governmental Authority that maintains jurisdiction over liquor-related matters at the Hotel (the “Liquor Authorities”) and publish any notices as may be required in connection with the acquisition of the Liquor Holder by the Buyer or its designee as of the Closing. Notwithstanding anything to the contrary contained herein, the Seller shall not incur any material cost or expense or any liability in connection with the transfer of the Liquor Holder to the Buyer and no representations or warranties shall be made by the Seller or its affiliates as to such conveyance other than that 100% of the issued and outstanding shares of Liquor Holder is held by MeriStar SPE Leasing LLC (f/k/a MeriStar SPE Leasing Corp.) and that such interest will not be encumbered as of the Closing. Without limitation on the foregoing, in no event shall the transfer or assignment of the Liquor Holder be deemed or construed to be a condition to the obligations of either the Seller or the Buyer hereunder.

          (b) Operating Agreements and Equipment Leases. To the extent any Operating Agreement or Equipment Lease requires the consent of the vendor party for the assignment of such agreements from the Seller to the Buyer, the Buyer shall use commercially reasonable good faith efforts to obtain such consent as of the Closing, provided, in any event the Buyer shall assume all Operating Agreements and Equipment Leases as of the Closing even if such consent has not been obtained.

          SECTION 4.3. Employee Matters.

          (a) Employees. The Buyer acknowledges that the Employees are currently employed by an affiliate of the Buyer. At the Closing, the Buyer shall (or shall cause its manager to) offer employment at the Hotel to all of the Employees in accordance with the terms of
subsection 4.3(b).

          (b) Continuity of Employees. The parties intend that there will be continuity of employment with respect to all of the Employees. It is agreed that prior to, or in connection with, the Closing, the Buyer shall take no action to cause the Seller or Manager to terminate the employment of any Employee, and neither the Seller nor the Manager shall be under any obligation to terminate any Employee prior to or on the Closing Date. It is further agreed that on or prior to the Closing Date, the Buyer shall offer employment at the Hotel (or cause its manager to continue employment of), commencing on the Closing Date to all Employees, including those on vacation, leave of absence, disability or layoff, on the same terms and conditions (including, without limitation, compensation, salary, employee benefits, job responsibility and descriptions, location, seniority and deemed length of service) as those provided to such employees by Manager on the day immediately preceding the Closing Date. Those Employees who accept the Buyer’s (or its manager’s) offer of employment and commence (or continue) employment with the Buyer (or its manager) on the Closing Date shall hereafter be referred to as “Transferred Employees.”

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          (c) Indemnity. The Seller shall pay all wages, payroll taxes and fringe benefits (including accrued vacation pay to the extent actually earned) as well as social security, unemployment compensation, health, life and disability insurance and pension fund contributions, if any, of the Employees through the Closing Date, provided, that, the Seller shall have no liability or obligation to pay for any sick pay or accrued but unearned vacation pay. The Seller shall indemnify, defend and hold the Buyer harmless from and against any and all claims, actions, suits, demands, proceedings, losses, expenses, damages, obligations and liabilities (including costs of collection, attorney’s fees and other costs of defense) made by an Employee to the extent relating to an event occurring prior to or an obligation relating to a period prior to the Closing Date, provided that such indemnity shall not apply with respect to any losses incurred by the Buyer with respect to the amount of employee expenses that have been prorated under subsection 10.1(m) or such matters for which Manager would be liable to the Seller under the Management Agreement. The Buyer shall indemnify, defend and hold the Seller harmless from and against any and all claims, actions, suits, demands, proceedings, losses, expenses, damages, obligations and liabilities (including costs of collection, attorney’s fees and other costs of defense) arising out of or otherwise in respect of (i) the termination of any Employees in connection with the transactions contemplated by this Agreement; (ii) failure of the Buyer (or its manager) to continue the employment of any Transferred Employee on the same terms and conditions as said employee enjoys on the day immediately preceding the Closing Date; (iii) a breach by the Buyer of the covenants set forth in subsection 4.3(b); (iv) failure of the Buyer to comply with its obligations including, but not limited to, any statutory obligations with respect to the Transferred Employees; (v) any claim made by any Employee for severance pay; or (vi) any claim made by any Employee arising with respect to acts or omissions at the Property which acts or omissions occurred on or after the Closing Date.

          (d) WARN Act. The Buyer (or its manager) shall not, at any time prior to 90 days after the Closing Date, effectuate a “plant closing” or “mass layoff,” as those terms are defined in the WARN Act, affecting in whole or in part any site of employment, facility, operating unit or Employee, without notifying the Seller in advance and without complying with the notice requirements and other provisions of the WARN Act. In addition, the Buyer shall provide a full defense to, and indemnify the Seller for any Losses which the Seller may incur in connection with any suit or claim of violation brought against or affecting the Seller under the WARN Act for any actions taken by the Buyer (or its manager or any of its and Manager’s affiliates) with regard to the Hotel or any Employee affected by this Agreement subsequent to the Closing Date.

          (e) Survival. The provisions of this Section 4.3 shall survive the Closing.

          SECTION 4.4. Bookings. The Buyer shall honor all existing Bookings and all other Bookings made in accordance with this Agreement for any period on or after the Closing Date. The provisions of this Section 4.4 shall survive the Closing.

          SECTION 4.5. Franchise Agreement.

          (a) The parties acknowledge that the transfer of the franchise rights granted under the Franchise Agreement to the Buyer is subject to the prior written consent of Franchisor under the Franchise Agreement. Immediately following the date of this Agreement, (i) the Seller

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shall proceed promptly and in good faith to give the notices required under the Franchise Agreement with respect to the transactions contemplated hereby and (ii) the Buyer shall proceed promptly and in good faith to effect the consent of Franchisor to the transfer of such franchise rights to the Buyer, which may require the transfer of the Franchise Agreement or execution of a new franchise agreement with Franchisor. Accordingly, the Buyer shall promptly submit to Franchisor a complete application to become a franchisee of Franchisor’s franchise system accompanied by payment of the applicable application fee. As part of the application process, the Buyer shall provide any and all information and documentation that Franchisor requires (including, without limitation, financial statements, organizational documents, background information regarding the owners of the Buyer and other documentation supporting its application). Without limiting the foregoing, the Buyer shall use commercially reasonable efforts to obtain a new franchise agreement in place of the Franchise Agreement, which may entail promptly responding to requests from Franchisor and otherwise promptly complying with all obligations of a transferee under the Franchise Agreement. The Seller agrees to reasonably cooperate, at no cost, in good faith with the Buyer and Franchisor in such process. The Buyer shall agree with Franchisor to accept and be bound by any property improvement plan required by Franchisor in connection with obtaining such consent (which may consist of the property improvement plan currently incorporated into the Franchise Agreement), and to complete such property improvement plan within the time periods set forth in such property improvement plan. In connection with the transfer of the franchise rights, the Buyer shall be required to pay any and all fees and charges associated therewith (including, without limitation, any transfer fee mandated under the Franchise Agreement).

          (b) If Franchisor has not agreed to terminate the Franchise Agreement and enter into a new franchise agreement with the Buyer by the originally scheduled Closing Date, the Closing Date shall be extended to a date that is the earlier of (i) ten Business Days after receipt of such consent and (ii) November 2, 2006 (the “Outside Closing Date”). In the event Franchisor has not delivered such new franchise agreement by the Outside Closing Date, the Buyer and the Seller shall each have the option to terminate this Agreement by written notice to the other party (the “Termination Option”). In the event the Termination Option is elected by either the Seller or the Buyer, this Agreement shall terminate and provided the Buyer is not in default of any of its obligations pursuant to subsection 4.5(a) or otherwise, the Earnest Money shall be refunded to the Buyer and neither party shall have any further rights or obligations hereunder except for those that expressly survive the termination of this Agreement.

          SECTION 4.6. Manager Defaults. The Buyer acknowledges that an affiliate of the Buyer is Manager and that the Buyer is knowledgeable about the Asset. Notwithstanding anything to the contrary contained herein, (a) the Buyer agrees that the Seller shall have no liability under this Agreement for a breach hereof, including without limitation, any breach under Sections 3.2 and 3.4, to the extent such breach was caused by an act or omission of Manager (other than such acts taken by Manager at the specific direction of the Seller) and any such act or omission shall not serve as a basis for the Buyer failing to close on the purchase of the Assets in accordance with the terms of this Agreement or any recourse against the Seller and (b) to the extent Manager has actual knowledge of any inaccuracy or breach of any representation or warranty of the Seller contained in this Agreement, such knowledge shall be imputed to the Buyer and the Buyer shall be precluded from asserting a failure of the condition set forth in subsection 5.2(a) related thereto as it relates to the representations and warranties made by the

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Seller in this Agreement as of the date hereof (but not as the same are re-made as of the Closing pursuant to this Agreement). The provisions of this Section 4.6 shall survive the Closing.

     SECTION 4.7. Tax Clearance Certificates; Etc.

     (a) The Seller shall promptly after the execution of this Agreement apply for and thereafter use commercially reasonable efforts to obtain and deliver to the Buyer and the Title Company on or prior to the Closing such municipal, state and county tax clearance certificates demonstrating the payment of all tax liabilities which, if unpaid, could impose successor liability on the Buyer (“Tax Clearance Certificates”). To the extent the Seller is unable to deliver such Tax Certificates on or prior to the Closing, the Seller shall use commercially reasonable efforts to obtain such certificates as soon as practicable following the Closing. The Seller shall be liable for the payment of all amounts which may be required to be paid to obtain all Tax Clearance Certificates. The Seller shall indemnify, defend and hold the Buyer harmless from and against (x) any and all amounts which may be required to be paid to obtain all Tax Clearance Certificates and (y) any claims or other liabilities arising out of the Seller’s failure to obtain all such Tax Clearance Certificates, each to the extent due with respect to the operation of the Hotel prior to the Closing. Notwithstanding anything to the contrary contained herein, the Seller shall have no liability to the Buyer or obligations hereunder as it relates to any Tax Clearance Certificates with respect to unemployment taxes or mixed beverages taxes. The provisions of this subsection 4.7(a) shall survive the Closing.

     (b) The Seller shall use commercially reasonable efforts to obtain and deliver to the Buyer and the Title Company on or prior to the Closing an estoppel certificate from Brookhollow/Arlington Inc. or its successors or assign (the “Brookhollow Estoppel”) with respect to that certain instrument entitled “Section 3 Brookhollow/Arlington Protective Covenants” dated June 2, 1981 and recorded in Volume 7130, Page 132 of the Deed Records of Tarrant County, Texas, as supplemented and modified by that certain Restrictive Covenant recorded in Volume 7130, Page 147 of the Deed Records of Tarrant County, Texas, and as modified and supplemented from time to time.

     (c) The Buyer acknowledges and agrees that the neither the delivery of the Tax Clearance Certificates or the Brookhollow Estoppel by the Seller pursuant to this Section 4.7 or any matters disclosed therein shall be a condition precedent to the obligation of the Buyer to purchase and pay for the Asset in accordance with the terms of this Agreement. Notwithstanding the foregoing, to the extent such matters are raised as exceptions to the Title Policy, the Seller shall deliver such affidavits or indemnities as reasonably required by the Title Company to omit such matters from the Title Policy.

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ARTICLE V

CONDITIONS PRECEDENT TO CLOSING

     SECTION 5.1. Conditions Precedent to the Seller’s Obligations. The obligation of the Seller to consummate the transfer of the Asset to the Buyer on the Closing Date is subject to the satisfaction (or waiver by the Seller) as of the Closing of the following conditions:

     (a) Each of the representations and warranties made by the Buyer in this Agreement shall be true and correct in all material respects when made and on and as of the Closing Date as though such representations and warranties were made on and as of the Closing Date, subject to any changes permitted pursuant to this Agreement.

     (b) The Buyer shall have performed or complied in all material respects with each obligation and covenant required by this Agreement to be performed or complied with by the Buyer on or before the Closing.

     (c) No order or injunction of any court or administrative agency of competent jurisdiction nor any statute, rule, regulation or executive order promulgated by any Governmental Authority of competent jurisdiction shall be in effect as of the Closing which restrains or prohibits the transfer of the Asset or the consummation of any other transaction contemplated hereby.

     (d) The Seller shall have received all of the documents required to be delivered by the Buyer under subsection 6.1(a).

     (e) The Seller shall have received the Purchase Price in accordance with subsection 2.2(a) and all other amounts due to the Seller from the Buyer hereunder.

     (f) The Seller shall have received evidence that (i) Franchisor has consented to the transfer of the franchise rights associated with the Franchise Agreement in accordance with subsection 4.5(a), and (ii) the Seller and any affiliates thereof have been released by Franchisor pursuant to such release as contemplated by the Franchise Agreement.

     (g) Manager shall have performed or complied in all material respects with each obligation and covenant required by the Interstate Letter (as defined below) to be performed or complied with by Manager.

     SECTION 5.2. Conditions to the Buyer’s Obligations. The obligation of the Buyer to purchase and pay for the Asset is subject to the satisfaction (or waiver by the Buyer) as of the Closing of the following conditions:

     (a) Each of the representations and warranties made by the Seller in this Agreement shall be true and correct in all material respects when made and on and as of the Closing Date as though such representations and warranties were made on and as of Closing

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Date subject to (i) the Seller’s right to cure the same prior to the Closing as expressly provided in this Agreement, (ii) any changes permitted pursuant to this Agreement, and (iii) any changes relating to matters arising after the date hereof in connection with the representations and warranties as set forth in subsections 3.2(e) and 3.2(g).

     (b) The Seller shall have performed or complied in all material respects with each obligation and covenant required by this Agreement to be performed or complied with by the Seller on or before the Closing.

     (c) No order or injunction of any court or administrative agency of competent jurisdiction nor any statute, rule, regulation or executive order promulgated by any Governmental Authority of competent jurisdiction shall be in effect as of the Closing which restrains or prohibits the transfer of the Asset or the consummation of any other transaction contemplated hereby.

     (d) Title to the Property shall be delivered to the Buyer in the manner required under Section 8.1.

     (e) The Buyer shall have received all of the documents required to be delivered by the Seller under Section 6.2, and all of the consents set forth on Schedule 3.1(c) shall have been obtained.

     (f) Franchisor shall have issued a new franchise agreement to the Buyer in accordance with Section 4.5(a).

     (g) Affiliates of the Seller shall have performed or complied in all material respects with each obligation and covenant required by the Interstate Letter to be performed or complied with by such affiliates.

     SECTION 5.3. Waiver of Conditions Precedent. The Closing shall constitute conclusive evidence that the Seller and the Buyer have respectively waived any conditions which are not satisfied as of the Closing.

ARTICLE VI

CLOSING DELIVERIES

     SECTION 6.1. The Buyer Closing Deliveries.

     The Buyer shall deliver the following documents at Closing:

     (a) with respect to the Asset:

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     (i) an assignment and assumption of the Seller’s interest in the Tenant Leases (an “Assignment of Leases”) duly executed by the Buyer in substantially the form of Exhibit A attached hereto; and

     (ii) an assignment and assumption of the Operating Agreements, Equipment Leases and Bookings (an “Assignment of Contracts”) duly executed by the Buyer in substantially the form of Exhibit attached hereto.

(b) with respect to the transactions contemplated hereunder:

     (i) a duly executed and sworn officer’s certificate from the Buyer (or the general partner or managing member of the Buyer, where appropriate) certifying that the Buyer has taken all necessary action to authorize the execution of all documents being delivered hereunder and the consummation of all of the transactions contemplated hereby and that such authorization has not been revoked, modified or amended;

     (ii) an executed and acknowledged incumbency certificate from the Buyer (or the general partner or managing member of the Buyer, where appropriate) certifying the authority of the officers of the Buyer (or the general partner or managing member of the Buyer, where appropriate) to execute this Agreement and the other documents delivered by the Buyer to the Seller at the Closing;

     (iii) all transfer tax returns which are required by law and the regulations issued pursuant thereto in connection with the payment of all state or local real property transfer taxes that are payable or arise as a result of the consummation of the transactions contemplated by this Agreement, in each case, as prepared and approved by the Seller and the Buyer and duly executed by the Buyer;

     (iv) the Memorandum of Sale duly executed by the Buyer or its designee; and

     (v) a closing statement prepared and approved by the Seller and the Buyer, consistent with the terms of this Agreement.

SECTION 6.2. The Seller Closing Deliveries.

The Seller shall deliver the following documents at Closing:

(a) with respect to the Asset:

     (i) a special warranty deed (a “Deed”) in substantially the form of Exhibit C attached hereto and in recordable form in Texas, duly executed and acknowledged by the Seller;

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     (ii) a bill of sale (a “Bill of Sale”) duly executed by the Seller in substantially the form of Exhibit D attached hereto, transferring the FF&E, Property and Equipment, Inventories, Retail Merchandise, Books and Records, Miscellaneous Personal Property and Accounts Receivable to the Buyer;

     (iii) the Assignment of Leases duly executed by the Seller, together with a copies, and if available, originals of the Tenant Leases referred to in such assignment;

     (iv) the Assignment of Contracts duly executed by the Seller, together with copies, and if available, originals of all contracts and agreements assigned thereby;

     (v) a general assignment of the Licenses and Permits and Intangible Property (the “Assignment of Intangibles”) duly executed by the Seller in substantially the form of Exhibit E attached hereto;

     (vi) all keys and keycards in the Seller’s possession and security and access codes to the Property;

     (vii) an affidavit that the Seller is not a “foreign person” within the meaning of the Foreign Investment in Real Property Tax Act of 1980, as amended, in substantially the form of Exhibit F attached hereto (the “FIRPTA”);

     (viii) a closing statement prepared and approved by the Seller and the Buyer, consistent with the terms of this Agreement;

     (ix) all Books and Records and receipts in the Seller’s possession relating to the ownership, operating and management of the Hotel;

     (x) the title affidavits and documents referred to in Section 8.4; and

     (xi) evidence reasonably acceptable to the Title Company, to the extent required, of the termination of the Management Agreement.

(b) with respect to the transactions contemplated hereunder:

     (i) a duly executed and sworn officer’s certificate from the general partner of the Seller certifying that the Seller has taken all necessary action to authorize the execution of all documents being delivered hereunder and the consummation of all of the transactions contemplated hereby and that such authorization has not been revoked, modified or amended;

     (ii) an executed and acknowledged incumbency certificate from the general partner of the Seller certifying the authority of the officers of the general partner of the Seller to execute this Agreement and the other documents delivered by the Seller to the Buyer at the Closing;

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     (iii) the Memorandum of Sale duly executed by MeriStar SPE Leasing LLC; and

     (iv) all transfer tax returns which are required by law and the regulations issued pursuant thereto that are required as a result of the consummation of the transactions contemplated by this Agreement, in each case, as prepared and approved by the Seller and the Buyer and duly executed by the Seller.

ARTICLE VII

INSPECTIONS; RELEASE

     SECTION 7.1. Right of Inspection. Prior to the Closing, the Buyer and its agents shall have the right, upon reasonable prior written notice to the Seller (which shall in any event be at least 24 hours in advance) and at the Buyer’s sole cost, risk and expense, to inspect the Property during business hours, provided that any such inspection shall not unreasonably impede the normal day-to-day business operation of the Property, and provided further that the Seller shall be entitled to accompany the Buyer and its agents on such inspection. Notwithstanding the foregoing, the Buyer shall not have the right to do any invasive testing of the Property without the prior written consent of the Seller which may be granted or denied in the Seller’s sole and absolute discretion. The Seller shall be entitled to accompany the Buyer and its agents on any such permitted interviews and testing. The Buyer’s right of inspection of the Property shall be subject to the rights of the tenants and Hotel guests and the rights of Manager under the Management Agreement. Prior to any such inspection, the Buyer shall deliver to the Seller certificates reasonably satisfactory to the Seller evidencing that the Buyer’s consultants and agents carry and maintain such general liability insurance policies with such companies and in such scope and amounts as are acceptable to the Seller in its reasonable discretion, in all cases naming the Seller as an additional insured and loss payee thereunder. The Buyer hereby indemnifies and agrees to defend and hold the Seller harmless from and against all loss, cost (including, without limitation, reasonable attorneys’ fees), claim or damage arising out of, resulting from relating to or in connection with or from any such inspection by the Buyer or its agents, except to the extent such claim or damage was caused solely by the Seller or the Seller’s agents. The provisions of this Section 7.1 shall survive the Closing and any termination of this Agreement. Notwithstanding the foregoing rights to inspect, the Buyer acknowledges that there is no “due diligence period” or “due diligence termination right” in this Agreement and the Buyer does not have the right to terminate this Agreement based on the results of such inspections other than pursuant to an express termination right set forth in this Agreement.

     SECTION 7.2. Examination; No Contingencies.

     (a) Before entering into this Agreement, the Buyer has made such examination of the Asset and all other matters affecting or relating to the transactions contemplated hereunder as the Buyer has deemed necessary. In entering into this Agreement, the

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Buyer has not been induced by and has not relied upon any written or oral representations, warranties or statements, whether express or implied, made by the Seller or any partner of the Seller, or any affiliate, agent, employee, or other representative of any of the foregoing or by any broker or any other person representing or purporting to represent the Seller with respect to the Asset, the Condition of the Asset or any other matter affecting or relating to the transactions contemplated hereby, other than those expressly set forth in this Agreement or in the Closing Documents. The Buyer’s obligations under this Agreement shall not be subject to any contingencies, diligence or conditions except as expressly set forth in this Agreement or in the Closing Documents. The Buyer acknowledges and agrees that, except as expressly set forth herein or in the Closing Documents, the Seller makes no representations or warranties whatsoever, whether express or implied or arising by operation of law, with respect to the Asset or the Condition of the Asset. THE BUYER AGREES THAT THE ASSET WILL BE SOLD AND CONVEYED TO (AND ACCEPTED BY) THE BUYER AT THE CLOSING IN THE THEN EXISTING CONDITION OF THE ASSET, AS IS, WHERE IS, WITH ALL FAULTS, AND WITHOUT ANY WRITTEN OR VERBAL REPRESENTATIONS OR WARRANTIES WHATSOEVER, WHETHER EXPRESS OR IMPLIED OR ARISING BY OPERATION OF LAW, OTHER THAN AS EXPRESSLY SET FORTH IN THIS AGREEMENT OR IN THE CLOSING DOCUMENTS. Without limiting the generality of the foregoing, except as set forth in this Agreement or in the Closing Documents, the transactions contemplated by this Agreement are without statutory, express or implied warranty, representation, agreement, statement or expression of opinion of or with respect to the Condition of the Asset or any aspect thereof, including, without limitation, (i) any and all statutory, express or implied representations or warranties related to the suitability for habitation, merchantability, or fitness for a particular purpose, (ii) any statutory, express or implied representations or warranties created by any affirmation of fact or promise, by any description of the Asset or by operation of law and (iii) all other statutory, express or implied representations or warranties by the Seller whatsoever. The Buyer acknowledges that the Buyer has knowledge and expertise in financial and business matters that enable the Buyer to evaluate the merits and risks of the transactions contemplated by this Agreement.

     (b) For purposes of this Agreement, the term “Condition of the Asset” means the following matters:

     (i) Physical Condition of the Property. The quality, nature and adequacy of the physical condition of the Property, including, without limitation, the quality of the design, labor and materials used to construct the improvements included in the Property; the condition of structural elements, foundations, roofs, glass, mechanical, plumbing, electrical, HVAC, sewage, and utility components and systems; the capacity or availability of sewer, water, or other utilities; the geology, flora, fauna, soils, subsurface conditions, groundwater, landscaping, and irrigation of or with respect to the Property, the location of the Property in or near any special taxing district, flood hazard zone, wetlands area, protected habitat, geological fault or subsidence zone, hazardous waste disposal or clean-up site, or other special area, the existence, location, or condition of ingress, egress, access, and parking; the condition of the personal property and any fixtures; and the presence of any asbestos or other Hazardous Materials, dangerous, or toxic substance, material or waste in, on, under or about the Property and the

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improvements located thereon. “Hazardous Materials” means (A) those substances included within the definitions of any one or more of the terms “hazardous substances,” “toxic pollutants”, “hazardous materials”, “toxic substances”, and “hazardous waste” in the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601 et seq. (as amended), the Hazardous Materials Transportation Act, as amended, 49 U.S.C. Sections 1801 et seq., the Resource Conservation and Recovery Act of 1976 as amended, 42 U.S.C. Section 6901 et seq., Section 311 of the Clean Water Act, 15 U.S.C. § 2601 et seq., 33 U.S.C. § 1251 et seq., 42 U.S.C. 7401 et seq. and the regulations and publications issued under any such laws, (B) petroleum, radon gas, lead based paint, asbestos or asbestos containing material and polychlorinated biphenyls and (C) mold or water conditions which may exist at the Property or other matters governed by any applicable federal, state or local law or statue.

     (ii) Adequacy of the Asset. The economic feasibility, cash flow and expenses of the Asset, and habitability, merchantability, fitness, suitability and adequacy of the Property for any particular use or purpose.

     (iii) Legal Compliance of the Asset. The compliance or non-compliance of the Seller or the operation of the Property or any part thereof in accordance with, and the contents of, (A) all codes, laws, ordinances, regulations, agreements, licenses, permits, approvals and applications of or with any governmental authorities asserting jurisdiction over the Property, including, without limitation, those relating to zoning, building, public works, parking, fire and police access, handicap access, life safety, subdivision and subdivision sales, and Hazardous Materials, dangerous, and toxic substances, materials, conditions or waste, including, without limitation, the presence of Hazardous Materials in, on, under or about the Property that would cause state or federal agencies to order a clean up of the Property under any applicable legal requirements and (B) all agreements, covenants, conditions, restrictions (public or private), condominium plans, development agreements, site plans, building permits, building rules, and other instruments and documents governing or affecting the use, management, and operation of the Property.

     (iv) Matters Disclosed in the Schedules and the Asset File. Those matters referred to in this Agreement and the documents listed on the Schedules attached hereto and the matters disclosed in the Asset File.

     (v) Insurance. The availability, cost, terms and coverage of liability, hazard, comprehensive and any other insurance of or with respect to the Property.

     (vi) Condition of Title. The condition of title to the Property, including, without limitation, vesting, legal description, matters affecting title, title defects, liens, encumbrances, boundaries, encroachments, mineral rights, options, easements, and access; violations of restrictive covenants, zoning ordinances, setback lines, or development agreements; the availability, cost, and

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coverage of title insurance; leases, rental agreements, occupancy agreements, rights of parties in possession of, using, or occupying the Property; and standby fees, taxes, bonds and assessments.

     SECTION 7.3. RELEASE. THE BUYER HEREBY AGREES THAT THE SELLER, AND EACH OF THEIR PARTNERS, MEMBERS, TRUSTEES, DIRECTORS, OFFICERS, EMPLOYEES, REPRESENTATIVES, PROPERTY MANAGERS, ASSET MANAGERS, AGENTS, ATTORNEYS, AFFILIATES AND RELATED ENTITIES, HEIRS, SUCCESSORS, AND ASSIGNS (COLLECTIVELY, THE “RELEASEES”) SHALL BE, AND ARE HEREBY, FULLY AND FOREVER RELEASED AND DISCHARGED FROM ANY AND ALL LIABILITIES, LOSSES, CLAIMS (INCLUDING THIRD PARTY CLAIMS), DEMANDS, DAMAGES (OF ANY NATURE WHATSOEVER), CAUSES OF ACTION, COSTS, PENALTIES, FINES, JUDGMENTS, REASONABLE ATTORNEYS’ FEES, CONSULTANTS’ FEES AND COSTS AND EXPERTS’ FEES (COLLECTIVELY, THE “CLAIMS”) WITH RESPECT TO ANY AND ALL CLAIMS, WHETHER DIRECT OR INDIRECT, KNOWN OR UNKNOWN, FORESEEN OR UNFORESEEN, THAT MAY ARISE ON ACCOUNT OF OR IN ANY WAY BE CONNECTED WITH THE ASSET OR THE PROPERTY INCLUDING, WITHOUT LIMITATION, THE PHYSICAL, ENVIRONMENTAL AND STRUCTURAL CONDITION OF THE PROPERTY OR ANY LAW OR REGULATION APPLICABLE THERETO, INCLUDING, WITHOUT LIMITATION, ANY CLAIM OR MATTER (REGARDLESS OF WHEN IT FIRST APPEARED) RELATING TO OR ARISING FROM (A) THE PRESENCE OF ANY ENVIRONMENTAL PROBLEMS, OR THE USE, PRESENCE, STORAGE, RELEASE, DISCHARGE, OR MIGRATION OF HAZARDOUS MATERIALS ON, IN, UNDER OR AROUND THE PROPERTY REGARDLESS OF WHEN SUCH HAZARDOUS MATERIALS WERE FIRST INTRODUCED IN, ON OR ABOUT THE PROPERTY, (B) ANY PATENT OR LATENT DEFECTS OR DEFICIENCIES WITH RESPECT TO THE PROPERTY, (C) ANY AND ALL MATTERS RELATED TO THE PROPERTY OR ANY PORTION THEREOF, INCLUDING WITHOUT LIMITATION, THE CONDITION AND/OR OPERATION OF THE PROPERTY AND EACH PART THEREOF, AND (D) THE PRESENCE, RELEASE AND/OR REMEDIATION OF ASBESTOS AND ASBESTOS CONTAINING MATERIALS IN, ON OR ABOUT THE PROPERTY REGARDLESS OF WHEN SUCH ASBESTOS AND ASBESTOS CONTAINING MATERIALS WERE FIRST INTRODUCED IN, ON OR ABOUT THE PROPERTY; PROVIDED, HOWEVER, THAT IN NO EVENT SHALL RELEASEES BE RELEASED FROM (X) ANY CLAIMS ARISING PURSUANT TO THE PROVISIONS OF THIS AGREEMENT OR THE SELLER’S OBLIGATIONS, IF ANY, UNDER THE CLOSING DOCUMENTS OR (Y) ANY CLAIMS ARISING FROM ANY FRAUDULENT ACTS COMMITTED BY THE SELLER TO THE BUYER IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. THE BUYER FURTHER AGREES THAT THE WAIVERS AND RELEASES HEREIN HAVE BEEN NEGOTIATED AND AGREED UPON IN LIGHT OF THAT REALIZATION AND THAT THE BUYER NEVERTHELESS HEREBY INTENDS TO RELEASE, DISCHARGE AND ACQUIT THE SELLER FROM ANY SUCH UNKNOWN CLAIMS, DEBTS, AND CONTROVERSIES WHICH MIGHT IN ANY WAY BE INCLUDED AS A MATERIAL PORTION OF THE CONSIDERATION GIVEN TO THE SELLER BY THE BUYER IN EX CHANGE FOR THE SELLER’S PERFORMANCE HEREUNDER. THE SELLER HAS GIVEN THE BUYER MATERIAL CONCESSIONS REGARDING THIS TRANSACTION IN EXCHANGE FOR

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THE BUYER AGREEING TO THE PROVISIONS OF THIS SECTION 7.3. THE SELLER AND THE BUYER HAVE EACH INITIALED THIS SECTION 7.3 TO FURTHER INDICATE THEIR AWARENESS AND ACCEPTANCE OF EACH AND EVERY PROVISION HEREOF. THE PROVISIONS OF THIS SECTION 7.3 SHALL SURVIVE THE CLOSING AND SHALL NOT BE DEEMED MERGED INTO ANY INSTRUMENT OR CONVEYANCE DELIVERED AT THE CLOSING.

SELLER’S INITIALS: BUYER’S INITIALS:

ARTICLE VIII

TITLE AND PERMITTED EXCEPTIONS

     SECTION 8.1. Title Insurance and Survey.

     The Property shall be sold and is to be conveyed, and the Buyer agrees to purchase the Property, subject only to the Permitted Exceptions.

     SECTION 8.2. Title Commitment; Survey.

     The Buyer has received and reviewed a copy of the Title Commitment and the Existing Survey.

     SECTION 8.3. Delivery of Title.

     (a) At or prior the Closing, the Seller shall obtain releases of (i) all mortgages and/or deed of trust liens and other financing items encumbering the Asset (“Financing Liens”), (ii) tax liens (other than liens for taxes not yet due and payable) encumbering the Property (“Tax Liens”) and (iii) any liens encumbering the Property affirmatively placed on the Property by the Seller on or after August 8, 2006 (“Post Effective Date Seller Encumbrance”). Other than as set forth in this Agreement (including without limitation the first sentence of this subsection 8.3(a), and subsection 8.3(c)), the Seller shall not be required to take or bring any action or proceeding or any other steps to remove any title exception or to expend any moneys therefor, nor shall the Buyer have any right of action against the Seller, at law or in equity, for the Seller’s inability to convey title subject only to the Permitted Exceptions.

     (b) Subject to the Seller’s obligations under subsecti ons 8.3(a) and 8.3(c), in the event that the Seller is unable to convey title subject only to the Permitted Exceptions, and the Buyer has not, prior to the Closing Date, given notice to the Seller that the Buyer is willing to waive objection to each title exception which is not a Permitted Exception, the Seller shall have the right, in the Seller’s sole and absolute discretion, to (i) take such action as the Seller shall deem advisable to attempt to discharge each such title exception which is not a Permitted Exception or (ii) terminate this Agreement. In the event that the Seller shall elect to attempt to

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discharge such title exceptions which are not Permitted Exceptions, the Seller shall proceed to attempt to discharge such title exceptions diligently and in good faith and for so long as it is so attempting to discharge such title objections shall be entitled to one or more adjournments of the Closing Date for a period not to exceed 60 days in the aggregate. If, for any reason whatsoever, the Seller has not discharged such title exceptions which are not Permitted Exceptions prior to the expiration of the last of such adjournments, and if the Buyer is not willing to waive objection to such title exceptions, this Agreement shall be terminated as of the expiration of the last of such adjournments. In the event of a termination of this Agreement pursuant to this subsection 8.3(b), the Earnest Money shall be refunded to the Buyer and neither party shall have any further rights or obligations hereunder except for those that expressly survive the termination of this Agreement. Nothing in this clause (b) shall require the Seller, despite any election by the Seller to attempt to discharge any title exceptions, to take or bring any action or proceeding or any other steps to remove any title exception or to expend any moneys therefor, other than with respect to the Post Effective Date Seller Encumbrance, the Post Effective Date Monetary Encumbrance, Financing Liens and Tax Liens.

     (c) Notwithstanding the foregoing, at the Closing, in addition to releasing all Financing Liens, Tax Liens and Post Effective Date Seller Encumbrances which the Buyer does not waive its objection to pursuant to Section 8.3(b), the Seller shall obtain a release of any lien encumbering the Property on or after August 8, 2006 which may be removed by the payment of a sum of money (a “Post Effective Date Monetary Encumbrances”); provided that Seller shall not be obligated to spend more than $250,000 in the aggregate to remove any Post-Effective Date Monetary Encumbrances.

     SECTION 8.4. Cooperation. In connection with obtaining the Title Policy, the Buyer and the Seller, as applicable, and to the extent requested by the Title Company, will deliver to the Title Company (a) evidence sufficient to establish (i) the legal existence of the Buyer and the Seller and (ii) the authority of the respective signatories of the Seller and the Buyer to bind the Seller and the Buyer, as the case may be, (b) certificates of good standing of the Seller in Delaware and Texas; and (c) an affidavit of the Seller in the form attached hereto as Exhibit G.

ARTICLE IX

TRANSACTION COSTS; RISK OF LOSS

     SECTION 9.1. Transaction Costs.

     (a) The Buyer and the Seller agree to comply with all real estate transfer tax laws applicable to the sale of the Asset. The Seller agrees to pay for the “basic” title insurance premium for a standard form TLTA T-1 Owner’s Policy of Title Insurance issued by Title Company in the State of Texas with coverage in the amount of the Purchase Price. In addition to their respective apportionment obligations hereunder, (i) the Seller and the Buyer shall each be responsible for the payment of the costs of their respective legal counsel, advisors and other

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professionals employed thereby in connection with the sale of the Asset, and (ii) the Buyer shall be responsible for all costs and expenses associated with (A) the Buyer’s due diligence, (B) the amount by which the title insurance premium for the Owner’s Policy and all endorsements (including limiting the survey exception to shortages in area) exceeds the basic title insurance premium for a standard form TLTA T-1 Owner’s Policy of Title Insurance with coverage in the amount of the Purchase Price, (C) the policy premiums in respect of any mortgage title insurance obtained by the Buyer, (D) all costs for any new survey and search costs with respect to the Property and updates related thereto, (E) payment, at the Closing, of the recording charges and fees (other than deed recordation taxes) for the documents necessary to transfer the Asset, (F) obtaining any financing the Buyer may elect to obtain (including any fees, financing costs, transfer taxes, mortgage and recordation taxes and intangible taxes in connection therewith) and (G) all other costs which are the responsibility under applicable law for the Buyer to pay (including, without limitation, all sales and use taxes due as a result of the sale of the Asset). The fees, if any, of the Escrow Agent shall be equally divided between the Seller and the Buyer.

     (b) Each party to this Agreement shall indemnify the other parties and their respective successors and assigns from and against any and all loss, damage, cost, charge, liability or expense (including court costs and reasonable attorneys’ fees) which such other party may sustain or incur as a result of the failure of either party to timely pay any of the aforementioned taxes, fees or other charges for which it has assumed responsibility under this Section. The provisions of this Article IX shall survive the Closing or the termination of this Agreement.

     SECTION 9.2. Risk of Loss.

     (a) If, on or before the Closing Date, (i) the Property or any portion thereof shall be damaged or destroyed by fire or other casualty or (ii) any Governmental Authority or other entity having condemnation authority shall take the property or any portion thereof or institute an eminent domain proceeding by delivering written notice thereof to the Seller and the same is not dismissed prior to the Closing, then the Seller shall promptly notify the Buyer and at Closing, the Seller will credit against the Purchase Price payable by the Buyer at the Closing an amount equal to the net proceeds (other than on account of business or rental interruption relating to the period prior to Closing), if any, received by the Seller on or prior to the Closing as a result of such casualty or condemnation, plus the amount of any deductible, less any amounts spent to restore the Property. If as of the Closing Date, the Seller has not received all or any portion of such insurance or condemnation proceeds, then the parties shall nevertheless consummate on the Closing Date the conveyance of the Asset (without any credit for such as yet unpaid insurance or condemnation proceeds except for a credit for any deductible under such insurance) and the Seller will at Closing assign to the Buyer all rights of the Seller, if any, to the insurance or condemnation proceeds (other than on account of business or rental interruption relating to the period prior to Closing but including all business or rental interruption relating to the period on or after Closing) and to all other rights or claims arising out of or in connection with such casualty or condemnation and the Buyer may notify all appropriate insurance companies of its interest in the insurance proceeds.

     (b) Notwithstanding the provisions of subsection 9.2(a), if, on or before the Closing Date, the Property or any portion thereof shall be (i) damaged or destroyed by a Material

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Casualty or (ii) taken as a result of a Material Condemnation, the Buyer shall have the right, exercised by notice to the Seller no more than ten Business Days after the Buyer has received notice of such Material Casualty or Material Condemnation, to terminate this Agreement, in which event the Earnest Money shall be refunded to the Buyer and neither party shall have any further rights or obligations hereunder other than those which expressly survive the termination of this Agreement. If the Buyer fails to timely terminate this Agreement in accordance with this subsection 9.2(b), the provisions of subsection 9.2(a) shall apply. As used in this subsection 9.2(b), a “Material Casualty” shall mean any damage to the Property or any portion thereof by fire or other casualty that, in the Seller’s reasonable judgment, may be expected to cost in excess of $2,000,000 to repair. As used in this subsection 9.2(b), a “Material Condemnation ” shall mean a taking of the Property or any material portion thereof as a result of a condemnation or eminent domain proceeding or the institution of such proceeding pursuant to a written notice thereof to the Seller that, permanently impairs the use and value of th e Property, and which can not be restored to substantially the same use and value as before the taking.

     (c) Subject to the provisions of this Section 9.2, the risk of loss or damage to the Property shall remain with the Seller until delivery of the Deed.

ARTICLE X

ADJUSTMENTS

     SECTION 10.1. Adjustments. Except as otherwise specifically provided in subsection 10.1(m), the Seller shall be responsible for and shall pay (or credit the Buyer for) all liabilities, including, without limitation, all real property, personal property and sales and use taxes, which accrue with respect to the Asset with respect to all periods prior to the Closing and the Buyer shall be responsible for and shall pay all liabilities, including without limitation all real property, personal property and sales and use taxes, which accrue with respect to the Asset with respect to all periods from and after the Closing. Unless otherwise provided below, the following are to be adjusted and prorated between the Seller and the Buyer as of 11:59 P.M. on the day preceding the Closing (the “Cut-Off Time”), based upon a 365 day year, and the net amount thereof under Section 10.1 shall be added to (if such net amount is in the Seller’s favor) or deducted from (if such net amount is in the Buyer’s favor) the Purchase Price payable at Closing:

     (a) Taxes and Assessments. All real estate and personal property taxes and assessments (including, without limitation, special assessments and improvement assessments) levied against the Asset shall be prorated as of the Cut-Off Time between the Buyer and the Seller. If the amount of any such taxes is not ascertainable on the Closing Date, the proration for such taxes shall be estimated based on the most recent available bill; provided , however , that after the Closing, the Seller and the Buyer shall reprorate the taxes and pay any deficiency in the original proration to the other party promptly upon receipt of the actual bill for the relevant taxable period. In the event that the Asset or any part thereof shall be or shall have been affected by an assessment or assessments which are payable in installments, the Seller shall, at the

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Closing, be responsible for any installments due prior to the Closing and the Buyer shall be responsible for any installments due on or after the Closing, provided that such assessments shall in any event be prorated between the Buyer and the Seller as of the Cut-Off Time. The reproration obligation under this subsection 10.1 (a) shall survive the Closing.

     (b) Water and Sewer Charges, Utilities. All utility services shall be prorated as of the Cut-Off Time between the Buyer and the Seller. To the extent possible, readings shall be obtained for all utilities as of the Cut-Off Time. If not possible, the cost of such utilities shall be prorated between the Seller and the Buyer by estimating such cost on the basis of the most recent bill for such service; provided, however, that after the Closing, the Seller and the Buyer shall reprorate the amount for such utilities and pay any deficiency in the original proration to the other party promptly upon receipt of the actual bill for the relevant billing period. The Seller shall receive a credit for all deposits transferred to the Buyer or which remain on deposit for the benefit of the Buyer with respect to such utility contracts, otherwise such deposits shall be refunded to the Seller. The reproration obligation in this subsection 10.1(b) shall survive the Closing.

     (c) Operating Agreements and Equipment Leases. Charges and payments (including the reimbursement of expenses) under all Operating Agreements and Equipment Leases.

     (d) Miscellaneous Revenues. Revenues, if any, arising out of telephone booths, vending machines, parking, or other income-producing agreements, on an if, as and when collected basis.

     (e) Inventory. The Seller shall receive a credit for all Inventory and Retail Merchandise in unopened cases as of the Closing in an amount equal to the Seller’s actual cost (including sales and/or use tax) for such items.

     (f) Tenant Leases. Any rents and other amounts prepaid, accrued or due and payable under the Tenant Leases shall be prorated as of the Cut-Off Time between the Buyer and the Seller. The Buyer shall receive a credit for all cash security deposits held by the Seller under the Tenant Leases and the Buyer thereafter shall be obligated to refund or apply such deposits in accordance with the terms of such Tenant Leases.

     (g) Licenses and Permits. All amounts prepaid, accrued or due and payable under any Permits (other than utilities which are separately prorated under subsection 10.1(b)) transferred to the Buyer shall be prorated as of the Cut-Off Time between the Seller and the Buyer. The Seller shall receive a credit for all deposits made by the Seller under the Licenses and Permits which are transferred to the Buyer or which remain on deposit for the benefit of the Buyer.

     (h) Deposits for Bookings. The Buyer shall receive a credit for all prepaid deposits for Bookings scheduled for accommodations or events on or after the Closing Date, except to the extent such deposits are transferred to the Buyer and for all other amounts prepaid by guests or other customers for accommodations or events on or after the Closing Date.

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     (i) Restaurants and Bars, Etc. The Seller shall close out the transactions in the restaurants and bars in the Hotel as of the Cut-Off Time and all revenues with respect thereto and with respect to other services to guests of the Hotel, including without limitation, health club revenues, room service revenues and banquet revenues, if any, shall be prorated between the Seller and the Buyer as of the Cut-Off Time.

     (j) Vending Machines. The Seller shall remove all monies from all vending machines, laundry machines, pay telephones and other coin-operated equipment as of the Cut-Off Time and shall retain all monies collected therefrom as of the Cut-Off Time, and the Buyer shall be entitled to any monies collected therefrom after the Cut-Off Time.

     (k) Trade Payables. Except to the extent an adjustment or proration is made under another subsection of this Section 10.1, (i) the Seller shall pay in full prior to the Closing all amounts payable to vendors or other suppliers of goods or services to the Hotel (the “Trade Payables”) which are due and payable as of the Closing Date for which goods or services have been delivered to the Hotel prior to Closing, and (ii) the Buyer shall receive a credit for the amount of such Trade Payables which have accrued, but are not yet due and payable as of the Closing Date, and the Buyer shall pay all such Trade Payables accrued as of the Closing Date when such Trade Payables become due and payable up to the amount of such credit; provided, however, the Seller and the Buyer shall reprorate the amount of credit for any Trade Payables and pay any deficiency in the original proration to the other party promptly upon receipt of the actual bill for such goods or services. The Seller shall receive a credit for all advance payments or deposits made with respect to FF&E, Retail Merchandise, Property and Equipment and Inventories ordered, but not delivered to the Hotel prior to the Closing Date, and the Buyer shall pay the amounts which become due and payable for such FF&E, Retail Merchandise, Property and Equipment and Inventories which were ordered but not delivered prior to Closing. The reproration obligation in this subsection 10.1(k) shall survive the Closing.

     (1) Cash. The Seller shall receive a credit for all cash on hand at the Hotel and all cash on deposit in any house bank at the Hotel as of the Closing and all such cash on hand and cash on deposit in any house bank at the Hotel shall be transferred to and belong to the Buyer from and after the Closing. The Seller shall retain all amounts in any operating accounts of the Hotel in any bank, and there shall be no credit or adjustment hereunder with respect to such cash; provided, however, the Seller shall receive a credit for any reserve fund or account established pursuant to the terms of the Management Agreement which the Seller transfers to the Buyer at Closing, if any.

     (m) Employee Compensation. The Seller shall pay all wages, payroll taxes and fringe benefits (including accrued vacation pay to the extent actually earned) as well as social security, unemployment compensation, health, life and disability insurance and pension fund contributions, if any, of the Employees through the Closing Date, provided, that, the Seller shall have no liability or obligation to pay for any sick pay or accrued but unearned vacation pay. Notwithstanding the foregoing, with respect to accrued bonuses for 2006, the Seller’s pro-rated share shall be based upon the bonus program in place as of the beginning of 2006 in the 2006 approved budget for the Hotel prepared by Manager. The Buyer shall be responsible for all other liabilities relating to or in connection with Employees for the period on or after the Cut-Off Time and any liabilities relating to or in connection with sick pay and accrued but unearned vacation

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pay whether having accrued prior to, on or after the Cut-Off Time. The Buyer shall be responsible for all severance payments for Transferred Employees arising on or after the Closing and for all Employees not offered employment by the Buyer (or its manager) as of the Closing, or who do not accept employment by the Buyer (or its manager) on the same terms as those provided to such employees by Manager on the day immediately preceding the Closing Date.

     (n) The Buyer and the Seller each acknowledge that certain taxes and assessments accrue and are payable to the various local governments by any business entity operating a hotel and its related facilities. Included in those taxes and assessments may be business and occupation taxes, retail sales taxes, gross receipts taxes, and other special lodging or hotel taxes and assessments. For purposes of this Agreement, all of such taxes and assessments (expressly excluding (x) taxes and assessments covered in Section 10.1(a) of this Agreement, which shall be governed by the provisions of Section 10.1 (a), and (y) corporate franchise taxes, and federal, state and local income taxes) shall be allocated between the Seller and the Buyer such that those attributable to the period prior to the Cut-Off Time shall be allocable to the Seller and those attributable to the period after the Cut-Off Time shall be allocable to the Buyer (with the attribution of such taxes and assessments hereunder to be done in a manner consistent with the attribution under this Agreement of the applicable revenues on which such taxes and assessments may be based). The Seller shall be obligated to pay all such taxes and assessments which accrue with respect to the period prior to the Cut-Off Time, and the Buyer shall be obligated to pay all such taxes and assessments which accrue with respect to the period after the Cut-Off Time.

     (o) Other. If applicable, the Purchase Price shall be adjusted at Closing to reflect the adjustment of any other item which, (i) under the explicit terms of this Agreement, is to be apportioned at Closing, or (ii) is customarily prorated at the closing of similar transactions.

     (p) The provisions of Section 10.1 and the obligations of the Seller and the Buyer hereunder shall survive the Closing.

     SECTION 10.2. Re-Adjustment.

     (a) If any items to be adjusted pursuant to this Article X are not determinable at the Closing, the adjustment shall be made subsequent to the Closing when the charge is determined. The Buyer shall deliver to the Seller no later than 120 days following the Closing Date a schedule of prorations setting forth the Buyer’s determination of all adjustments to the prorations made at Closing that it believes are necessary to complete the prorations as set forth in this Article X. Any errors or omissions in computing adjustments or readjustments at the Closing or thereafter shall be promptly corrected or made, provided that the party seeking to correct such error or omission or to make such readjustment shall have notified the other party of such error or omission or readjustment on or prior to the date that is 180 days following the Closing.

     (b) The provisions of Section 10.2 and the obligations of the Seller and the Buyer hereunder shall survive the Closing.

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     SECTION 10.3. Accounts Receivable.

     (a) Guest Ledger. All revenues received or to be received from transient guests on account of room rents for the period prior to and including the Cut-Off Time shall belong to the Seller. At Closing, the Seller shall receive a credit in an amount equal to: (i) all amounts unpaid as of the Cut-Off Time charged to the Guest Ledger for all room nights up to (but not including) the night during which the Cut-Off Time occurs, and (ii) one-half of all amounts unpaid as of the Cut-Off Time charged to the Guest Ledger for the room night which includes the Cut-Off Time and the Guest Ledger and all amounts charged thereto and unpaid as of the Cut-Off Time shall become the property of the Buyer. For the period beginning on the day immediately following the Cut-Off Time, such revenues collected from the Guest Ledger shall belong to the Buyer. In the event that an amount less than the total amount due from a guest is collected and guest continued in occupancy after the Cut-Off Time, such amount shall be applied first to any amount owing by such person to the Seller and thereafter to such person’s amounts accruing to the Buyer.

     (b) Accounts Receivable (Other than Guest Ledger).

     (i) On the Closing Date, the Seller shall assign to the Buyer all Accounts Receivable that are 90 days or less past due as of the Closing (the “Assigned Accounts Receivable”), the Buyer shall pay to the Seller an amount equal to 100% of all Accounts Receivable that are 90 days or less past due as of the Closing Date and shall not credit to the Seller any amounts for Accounts Receivable more than 90 days past due as of the Closing Date. The Buyer shall have the sole right to collect and retain all such Assigned Accounts Receivable. If any Assigned Accounts Receivable are paid to the Seller after the Closing, the Seller shall pay to the Buyer the amounts received by the Seller within 10 days after receipt of such amounts without any commission or deduction for the Seller.

     (ii) After the Closing, the Seller shall retain the right to collect all Accounts Receivable other than the Guest Ledger which is addressed in subsection 10.3(a), and the Assigned Accounts Receivable, which is addressed in subsection 10.3(b)(i) (such retained Accounts Receivable, the “Retained Accounts Receivable”). The Seller shall not receive a credit for the Retained Accounts Receivable. The Seller shall have the sole right to collect the Retained Accounts Receivable. If any Retained Accounts Receivable are paid to the Buyer after the Closing, the Buyer shall pay to the Seller the amounts received by the Buyer within 10 days after receipt of such amounts without any commission or deduction for the Buyer.

     (iii) The Accounts Receivable addressed in this subsection 10.3(b) shall not include the Guest Ledger, which is addressed in subsection 10.3(a).

     (iv) The parties’ obligations under this subsection 10.3(b) shall survive the Closing.

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     (c) The provisions of Section 10.3 and the obligations of the Seller and the Buyer hereunder shall survive the Closing.

     SECTION 10.4. Interstate Letter Agreement. The Seller and the Buyeracknowledge that contemporaneously with the execution of this Agreement, Manager and certain affiliates of the Seller are executing a letter agreement (the “Interstate Agreement”). The Interstate Agreement provides, in part, that in exchange for a full release of certain amounts due to Manager, such affiliates of the Seller shall make a payment to Manager at the Closing in such amount as set forth on Schedule 10.4 based on the Closing Date (the “Interstate Payment”). The Seller and the Buyer acknowledge that in lieu of a making the Interstate Payment directly to Manager, the Buyer shall receive a credit to the Purchase Price at the Closing in an amount equal to the Interstate Payment.

ARTICLE XI

INDEMNIFICATION

     SECTION 11.1. Indemnification by the Seller. From and after the Closing and subject to Sections 11.3 and 11.4, the Seller shall indemnify and hold the Buyer, its affiliates, members and partners, and the partners, shareholders, officers, directors, employees, representatives and agents of each of the foregoing (collectively, “Buyer-Related Entities”) harmless from and against any and all costs, fees, expenses, damages, deficiencies, interest and penalties (including, without limitation, reasonable attorneys’ fees and disbursements) suffered or incurred by any such indemnified party in connection with any and all losses, liabilities, claims, damages and expenses (“Losses”), arising out of, or in any way relating to (a) any breach of any representation or warranty of the Seller contained in this Agreement or in any Closing Document and (b) any breach of any covenant of the Seller which survives the Closing contained in this Agreement or in any Closing Document, including, without limitation, any amounts due and owing to the Buyer following the Closing pursuant to Article X. Notwithstanding anything to the contrary contained herein, the Seller shall have no liability or obligation to indemnify and hold the Buyer Related Entities harmless from any Losses to the extent such Losses results from or is related to any acts or omissions of Manager which would otherwise result in an indemnification obligation of Manager in favor of the Seller pursuant to the terms of the Management Agreement or constitute a default by Manager under the Management Agreement.

     SECTION 11.2. Indemnification by the Buyer. From and after the Closing and subject to Sections 11.3 and 11.4, the Buyer shall indemnify and hold the Seller, its affiliates, members and partners, and the partners, shareholders, officers, directors, employees, representatives and agents of each of the foregoing (collectively, “Seller-Related Entities”) harmless from any and all Losses arising out of, or in any way relating to, (a) any breach of any representation or warranty by the Buyer contained in this Agreement or in any Closing Document including, without limitation, any amounts due and owing to the Seller pursuant to Article X and (b) any breach of any covenant of the Buyer which survives the Closing contained

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in this Agreement or in any Closing Document including, without limitation, any amounts due and owing to the Seller following the Closing pursuant to Article X.

     SECTION 11.3. Limitations on Indemnification. Notwithstanding the foregoing provisions of Section 11.1, (a) the Seller shall not be required to indemnify the Buyer or any Buyer-Related Entities under subsection 11.1 (a) unless the aggregate of all amounts for which an indemnity would otherwise be payable by the Seller under subsection 11.1 (a) exceeds the Basket Limitation and, in such event, the Seller shall be responsible only for such amount in excess of the Basket Limitation, (b) in no event shall the liability of the Seller with respect to the indemnification provided for in subsection 11.1 (a) exceed in the aggregate the Cap Limitation, and (c) if prior to the Closing, the Buyer or Manager obtains or has actual knowledge of any inaccuracy or breach of any representation, warranty or pre-closing covenant of the Seller contained in this Agreement (a “Buyer Waived Breach”) and nonetheless proceeds with and consummates the Closing, then the Buyer and any Buyer-Related Entities shall be deemed to have waived and forever renounced any right to assert a claim for indemnification under this Article XI for, or any other claim or cause of action under this Agreement at law or in equity on account of any such Buyer Waived Breach.

     SECTION 11.4. Survival. The (a) representations and warranties contained in this Agreement and the Closing Documents (other than the Deed or FIRPTA) shall survive for a period of six months after the Closing and (b) the covenants contained in the Agreement and the Closing Documents (other than the Deed or FIRPTA) shall survive for a period of one year after the Closing (the period beginning on the date hereof and ending on such applicable date in clause (a) or (b) being herein called the “Survival Period”) unless otherwise provided for in this Agreement. Each party shall have the right to bring an action against the other for the breach of the representations and warranties, covenants, obligations, provisions and liabilities hereunder or under the Closing Documents (other than the Deed or FIRPTA), but only on the following conditions: the party bringing the action for breach (i) gives a reasonably detailed written notice of such breach to the other party within 91 days after the expiration of the applicable Survival Period, and (ii) files an action for such breach on or before the first day following the second anniversary of the Closing Date, after which time all representations and warranties, covenants, obligations and liabilities (and any cause of action resulting from a breach thereof not then in litigation) herein or the Closing Documents (other than the Deed or FIRPTA) shall terminate. The provisions of this Section 11.4 shall not be applicable to the Deed or FIRPTA, which shall survive the Closing without limitation.

     SECTION 11.5. Indemnification as Sole Remedy. If the Closing has occurred, the sole and exclusive remedy (other than the right to seek specific performance of a covenant to be performed by the Seller or the Buyer after the Closing) available to a party in the event of a breach by the other party to this Agreement of any representation, warranty, covenant or other provision of this Agreement which survives the Closing shall be the indemnifications provided for under this Article XI or elsewhere in this Agreement, which indemnifications shall survive the Closing as provided in Article XI.

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ARTICLE XII

DEFAULT AND TERMINATION

     SECTION 12.1. The Seller’s Termination.

     (a) This Agreement may be terminated by the Seller prior to the Closing if (i) any of the conditions precedent to the Seller’s obligations set forth in Section 5.1 or elsewhere in this Agreement have not been satisfied or waived by the Seller on or prior to the Closing Date or (ii) there is a material breach or default by the Buyer in the performance of any of its obligations under this Agreement.

     (b) In the event this Agreement is terminated by the Seller pursuant to subsection 12.1(a), this Agreement shall be null and void and of no further force or effect and neither party shall have any rights or obligations against or to the other except (i) for those provisions hereof which by their terms expressly survive the termination of this Agreement and (ii) as set forth in subsection 12.1(c). Notwithstanding the foregoing, if this Agreement is terminated by the Seller prior to the Close for a failure of (i) the condition precedent set forth in subsection 5.1(f) and provided the Buyer is not in default of its obligation as set forth in Section 4.5 or (ii) the condition set forth in subsection 5.1(c) and provided any matters arising under such subsection 5.1(c) is not based upon any act or omission by the Buyer or any of its affiliates, the Escrow Agent shall disburse the Earnest Money to the Buyer as the Buyer’s sole and exclusive remedy, and upon such disbursement the Seller and the Buyer shall have no further obligations under this Agreement, except those which expressly survive such termination.

     (c) In the event the Seller terminates this Agreement as a result of a breach or default by the Buyer in any of its obligations under this Agreement, the Escrow Agent shall immediately disburse the Earnest Money to the Seller, and upon such disbursement the Seller and the Buyer shall have no further obligations under this Agreement, except those which expressly survive such termination. The Buyer and the Seller hereby acknowledge and agree that it would be impractical and/or extremely difficult to fix or establish the actual damage sustained by the Seller as a result of such default by the Buyer, and agree that the Earnest Money is a reasonable approximation thereof. Accordingly, in the event that the Buyer breaches this Agreement by defaulting in the completion of the purchase of the Asset, the Earnest Money shall constitute and be deemed to be the agreed and liquidated damages of the Seller, and shall be paid by the Escrow Agent to the Seller as the Seller’s sole and exclusive remedy hereunder; provided, however, the foregoing shall not limit the Buyer’s obligation to pay to the Seller all reasonable attorneys’ fees and costs of the Seller to enforce the provisions of this Section 12.1 or limit the Buyer’s indemnification obligations owed to the Seller pursuant to this Agreement which survive a termination of this Agreement. The payment of the Earnest Money as liquidated damages is not intended to be a forfeiture or penalty, but is intended to constitute liquidated damages to the Seller.

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     SECTION 12.2. The Buyer’s Termination.

     (a) This Agreement may be terminated by the Buyer prior to the Closing if (i) any of the conditions precedent to the Buyer’s obligations set forth in Section 5.2 or specifically set forth elsewhere in this Agreement have not been satisfied or waived by the Buyer on or prior to the Closing Date or (ii) there is a material breach or default by the Seller in the performance of its obligations under this Agreement.

     (b) In the event this Agreement is terminated by the Buyer pursuant to subsection 12.1(a), the Escrow Agent shall disburse the Earnest Money to the Buyer as the Buyer’s sole and exclusive remedy, and upon such disbursement the Seller and the Buyer shall have no further obligations under this Agreement, except those which expressly survive such termination.

     (c) If there is a material breach or default by the Seller in the performance of its obligations under this Agreement, the Buyer, at its option and as its sole and exclusive remedy, may either (i) terminate this Agreement, direct the Escrow Agent to deliver the Earnest Money to the Buyer and retain the Earnest Money, at which time this Agreement shall be terminated and of no further force and effect except for the provisions which explicitly survive such termination, or (ii) specifically enforce the terms and conditions of this Agreement provided such action seeking specific performance is initiated within 90 days of the Closing Date. The Buyer and the Seller hereby acknowledge and agree that it would be impractical and/or extremely difficult to fix or establish the actual damage sustained by the Buyer as a result of such default by the Seller, and agree that the remedy set forth in clause (i) above is a reasonable approximation thereof. Accordingly, in the event that the Seller breaches this Agreement by defaulting in the completion of the sale, and the Buyer elects not to exercise the remedy set forth in clause (ii) above but instead elects the remedy set forth in clause (i) above, the delivery of the Earnest Money to the Buyer shall be the Buyer’s sole and exclusive remedy. The Buyer agrees to, and does hereby, waive all other remedies against the Seller which the Buyer might otherwise have at law or in equity by reason of such default by the Seller.

ARTICLE XIII

TAX CERTIORARI PROCEEDINGS

     SECTION 13.1. Prosecution and Settlement of Proceedings. If any tax reduction proceedings in respect of the Property, relating to any fiscal years ending prior to the fiscal year in which the Closing occurs are pending at the time of the Closing, the Seller reserves and shall have the right to continue to prosecute and/or settle the same. If any tax reduction proceedings in respect of the Property, relating to the fiscal year in which the Closing occurs, are pending at the time of Closing, then the Seller reserves and shall have the right to continue to prosecute and/or settle the same; provided, however, that the Seller shall not settle any such proceeding without the Buyer’s prior written consent, which consent shall not be unreasonably

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withheld or delayed. The Buyer shall reasonably cooperate with the Seller in connection with the prosecution of any such tax reduction proceedings.

     SECTION 13.2. Application of Refunds or Savings. Any refunds or savings in the payment of taxes resulting from such tax reduction proceedings applicable to taxes payable during the period prior to the date of the Closing shall belong to and be the property of the Seller, and any refunds or savings in the payment of taxes applicable to taxes payable from and after the date of the Closing shall belong to and be the property of the Buyer. All attorneys’ fees and other expenses incurred in obtaining such refunds or savings shall be apportioned between the Seller and the Buyer in proportion to the gross amount of such refunds or savings payable to the Seller and the Buyer, respectively (without regard to any amounts reimbursable to tenants); provided, however, that neither the Seller nor the Buyer shall have any liability for any such fees or expenses in excess of the refund or savings paid to such party unless such party initiated such proceeding.

     SECTION 13.3. Survival. The provisions of this Article XIII shall survive the Closing.

ARTICLE XIV

MISCELLANEOUS

     SECTION 14.1. Use of Blackstone Name and Address. The Buyer hereby acknowledges and agrees that neither the Buyer nor any affiliate, successor, assignee or designee of the Buyer shall be entitled to use the name “Blackstone”, “MeriStar” or “Equistar” in connection with the operation, ownership and use of the Property. The provisions of this Section 14.1 shall survive the Closing and any termination of this Agreement.

     SECTION 14.2. Exculpation of the Seller. Notwithstanding anything to the contrary contained herein, the Seller’s shareholders, limited partners, members, the partners or members of such partners, the shareholders of such partners, members, and the trustees, officers, directors, employees, agents and security holders of the Seller and the partners or members of the Seller assume no personal liability for any obligations entered into in connection with or relating to this Agreement on behalf of the Seller and their respective individual assets shall not be subject to any claims of any person relating to such obligations. The foregoing shall govern any direct and indirect obligations of the Seller under this Agreement. The provisions of this Section 14.2 shall survive the Closing and any termination of this Agreement.

     SECTION 14.3. Brokers.

     (a) The Seller represents and warrants to the Buyer that it has dealt with no broker, finder or similar person with respect to this Agreement or the transactions contemplated hereby. The Seller agrees to indemnify, protect, defend and hold the Buyer harmless from and against all claims, losses, damages, liabilities, costs, expenses (including reasonable attorneys’

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fees and disbursements) and charges resulting from the Seller’s breach of the foregoing representation in this subsection (a). The provisions of this subsection 14.3(a) shall survive the Closing and any termination of this Agreement.

     (b) The Buyer represents and warrants to the Seller that it has dealt with no broker, finder or similar person with respect to this Agreement or the transactions contemplated hereby. The Buyer agrees to indemnify, protect, defend and hold the Seller harmless from and against all claims, losses, damages, liabilities, costs, expenses (including reasonable attorneys’ fees and disbursements) and charges resulting from the Buyer’s breach of the foregoing representations in this subsection (b). The provisions of this subsection 14.3(b) shall survive the Closing and any termination of this Agreement.

     SECTION 14.4. Confidentiality; Press Release: IRS Reporting Requirements.

     (a) The Buyer and the Seller, and each of their respective affiliates shall hold as confidential all information disclosed in connection with the transaction contemplated hereby and concerning each other, the Asset, this Agreement and the transactions contemplated hereby and shall not release any such information to third parties without the prior written consent of the other parties hereto, except (i) any information which was previously or is hereafter publicly disclosed or was available on a non-confidential basis prior to its disclosure (other than in violation of this Agreement or other confidentiality agreements to which affiliates of the Buyer are parties), (ii) to their partners, advisers, underwriters, analysts, employees, affiliates, officers, directors, consultants, lenders, accountants, legal counsel, title companies or other advisors of any of the foregoing, provided that they are advised as to the confidential nature of such information and are instructed to maintain such confidentiality and (iii) to comply with any law, rule or regulation (including without limitation those of the United States Securities and Exchange Commission) or the requirements of any securities exchange on which such party or its parent company is listed. The foregoing shall constitute a modification of any prior confidentiality agreement that may have been entered into by the parties. The provisions of this Section shall survive the termination of this Agreement for a period of one year.

     (b) The Seller or the Buyer may issue a press release with respect to this Agreement and the transactions contemplated hereby, provided that the content of any such press release shall be subject to the prior written consent of the other party hereto, not to be unreasonably withheld, conditioned or delayed.

     (c) For the purpose of complying with any information reporting requirements or other rules and regulations of the IRS that are or may become applicable as a result of or in connection with the transaction contemplated by this Agreement, including, but not limited to, any requirements set forth in proposed Income Tax Regulation Section 1.6045-4 and any final or successor version thereof (collectively, the “IRS Reporting Requirements”), the Seller and the Buyer hereby designate and appoint the Escrow Agent to act as the “Reporting Person” (as that term is defined in the IRS Reporting Requirements) to be responsible for complying with any IRS Reporting Requirements. The Escrow Agent hereby acknowledges and accepts such designation and appointment and agrees to fully comply with any IRS Reporting Requirements that are or may become applicable as a result of or in connection with the transaction contemplated by this Agreement. Without limiting the responsibility and obligations of the

45

Escrow Agent as the Reporting Person, the Seller and the Buyer hereby agree to comply with any provisions of the IRS Reporting Requirements that are not identified therein as the responsibility of the Reporting Person, including, but not limited to, the requirement that the Seller and the Buyer each retain an original counterpart of this Agreement for at least four years following the calendar year of the Closing.

     SECTION 14.5. Escrow Provisions.

     (a) The Escrow Agent shall hold the Earnest Money in escrow in an interest-bearing bank account at a federally insured banking institution (the “Escrow Account”).

     (b) The Escrow Agent shall hold the Earnest Money in escrow in the Escrow Account until the Closing or sooner termination of this Agreement and shall hold or apply such proceeds in accordance with the terms of this subsection (b). The Seller and the Buyer understand that no interest is earned on the Earnest Money during the time it takes to transfer into and out of the Escrow Account. At the Closing, the Earnest Money shall be paid by the Escrow Agent to, or at the direction of, the Seller. If for any reason the Closing does not occur and either party makes a written demand upon the Escrow Agent for payment of such amount, the Escrow Agent shall, within 24 hours give written notice to the other party of such demand. If the Escrow Agent does not receive a written objection within five Business Days after the giving of such notice, the Escrow Agent is hereby authorized to make such payment. If the Escrow Agent does receive such written objection within such five Business Day period or if for any other reason the Escrow Agent in good faith shall elect not to make such payment, the Escrow Agent shall continue to hold such amount until otherwise directed by joint written instructions from the parties to this Agreement or a final judgment of a court of competent jurisdiction. However, the Escrow Agent shall have the right at any time to deposit the Earnest Money with the clerk of the court of New York County. The Escrow Agent shall give written notice of such deposit to the Seller and the Buyer. Upon such deposit the Escrow Agent shall be relieved and discharged of all further obligations and responsibilities hereunder.

     (c) The parties acknowledge that the Escrow Agent is acting solely as a stakeholder at their request and for their convenience, that the Escrow Agent shall not be deemed to be the agent of either of the parties, and the Escrow Agent shall not be liable to either of the parties for any act or omission on its part, other than for its gross negligence or willful misconduct. The Seller and the Buyer shall jointly and severally indemnify and hold the Escrow Agent harmless from and against all costs, claims and expenses, including attorneys’ fees and disbursements, incurred in connection with the performance of the Escrow Agent’s duties hereunder.

     (d) The Escrow Agent has acknowledged its agreement to these provisions by signing this Agreement in the place indicated following the signatures of the Seller and the Buyer.

     SECTION 14.6. Successors and Assigns; No Third-Party Beneficiaries. The stipulations, terms, covenants and agreements contained in this Agreement shall inure to the benefit of, and shall be binding upon, the parties hereto and their respective permitted successors and assigns (including any successor entity after a public offering of stock, merger,

46

consolidation, purchase or other similar transaction involving a party hereto) and nothing herein expressed or implied shall give or be construed to give to any person or entity, other than the parties hereto and such assigns, any legal or equitable rights hereunder.

     SECTION 14.7. Assignment. This Agreement may not be assigned by the Buyer without the prior written consent of the Seller. The Buyer may designate an affiliate to which the Asset will be assigned at the Closing, provided that the Buyer provides the Seller written notice of such designation at least five days prior to the Closing and the Buyer will continue to remain primarily liable under this Agreement notwithstanding any such designation. Notwithstanding anything to the contrary contained herein, the Buyer may assign its rights and obligations under this Agreement to an affiliate of the Buyer provided that the Buyer provides the Seller with a fully executed assignment of contract at least five days prior to the Closing and the Buyer will continue to remain primarily liable under this Agreement notwithstanding any such assignment.

     SECTION 14.8. Further Assurances.

     (a) From time to time, as and when requested by any party hereto, the other party shall execute and deliver, or cause to be executed and delivered, all such documents and instruments and shall take, or cause to be taken, all such further or other actions as such other party may reasonably deem necessary or desirable to consummate the transactions contemplated by this Agreement.

     (b) The Seller shall after the Closing and if requested by the Buyer, based on the Buyer’s obligations under regulatory requirements, reasonably cooperate with the Buyer in the Buyer’s preparation of audited financial statements of the Property for the calendar year in which the Closing occurs and the three preceding calendar years, by providing such information as may be in the possession of the Seller as shall be required to enable an accounting firm of the Buyer’s choosing to prepare such audited financial statements, the cost of which shall be borne by the Buyer. Any information provided by the Seller to the Buyer pursuant to this subsection 14.8(b) shall be without any representations or warranties. The Buyer agrees to reimburse the Seller for the Seller’s actual and reasonable costs in connection with the Seller’s cooperation pursuant to this subsection 14.8(b).

     (c) The provisions of this Section 14.8 shall survive the Closing.

     SECTION 14.9. Notices. All notices, demands or requests made pursuant to, under or by virtue of this Agreement must be in writing and shall be (a) personally delivered, (b) delivered by express mail, Federal Express or other comparable overnight courier service, (c) telecopied, with telephone or written confirmation within one Business Day, or (d) mailed to the party to which the notice, demand or request is being made by certified or registered mail, postage prepaid, return receipt requested, as follows:

     To the Seller:

c/o Blackstone Real Estate Acquisitions V L.L.C.

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Attention:  _____________________
Facsimile: _____________________
Telephone: _____________________

     with copies thereof to:

Simpson Thacher & Bartlett LLP
______________________________
______________________________
Attention:  _____________________
Facsimile: _____________________
Telephone: _____________________

     To the Buyer:

Interstate Hotel & Resorts, Inc.
______________________________
______________________________
Attention:  _____________________
Facsimile: _____________________
Telephone: _____________________

     with copies thereof to:

DeCampo, Diamond & Ash
______________________________
______________________________
Attention:  _____________________
Facsimile: _____________________
Telephone: _____________________

     To the Escrow Agent/Title Company:

First American Title Insurance Company
______________________________
______________________________
Attention:  _____________________
Facsimile: _____________________
Telephone: _____________________

All notices (i) shall be deemed to have been given on the date that the same shall have been delivered in accordance with the provisions of this Section and (ii) may be given either by a party or by such party’s attorneys. Any party may, from time to time, specify as its address for purposes of this Agreement any other address upon the giving of 10 days’ prior notice thereof to the other parties.

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     SECTION 14.10. Entire Agreement. This Agreement, along with the Exhibits and Schedules hereto contains all of the terms agreed upon between the parties hereto with respect to the subject matter hereof, and all understandings and agreements heretofore had or made among the parties hereto are merged in this Agreement which alone fully and completely expresses the agreement of the parties hereto.

     SECTION 14.11. Amendments. This Agreement may not be amended, modified, supplemented or terminated, nor may any of the obligations of the Seller or the Buyer hereunder be waived, except by written agreement executed by the party or parties to be charged.

     SECTION 14.12. No Waiver. No waiver by either party of any failure or refusal by the other party to comply with its obligations hereunder shall be deemed a waiver of any other or subsequent failure or refusal to so comply.

     SECTION 14.13. Governing Law. This Agreement shall be governed by, interpreted under, and construed and enforced in accordance with, the laws of the State of Texas.

     SECTION 14.14. Intentionally Omitted.

     SECTION 14.15. Severability. If any term or provision of this Agreement or the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the remainder of this Agreement or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law.

     SECTION 14.16. Section Headings. The headings of the various Sections of this Agreement have been inserted only for purposes of convenience, are not part of this Agreement and shall not be deemed in any manner to modify, explain, expand or restrict any of the provisions of this Agreement.

     SECTION 14.17. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart.

     SECTION 14.18. Acceptance of Deed. The acceptance of the Deed by the Buyer shall be deemed full compliance by the Seller of all of the Seller’s obligations under this Agreement except for those obligations of the Seller which are specifically stated to survive the Closing.

     SECTION 14.19. Construction. The parties acknowledge that the parties and their counsel have reviewed and revised this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any exhibits or amendments hereto.

     SECTION 14.20. Recordation. Neither this Agreement nor any memorandum or notice of this Agreement may be recorded by any party hereto without the prior written consent of the other party hereto. The provisions of this Section shall survive the Closing or any

49

termination of this Agreement. The Buyer also agrees not to file any lis pendens or other instrument against the Asset in connection herewith in bad faith. In furtherance of the foregoing, the Buyer (i) acknowledges that the filing of a lis pendens in bad faith against or encumbering the Asset or the recording of any memorandum or notice of this Agreement could cause significant monetary and other damages to the Seller, and (ii) hereby indemnifies the Seller from and against any and all liabilities, damages, losses, costs or expenses (including without limitation attorneys fees and expenses) arising out of a breach of this Section 14.20. The provisions of this Section 14.20 shall survive the Closing or any termination of this Agreement.

     SECTION 14.21. Waiver of Jury Trial. The Seller and the Buyer hereby waive trial by jury in any action, proceeding or counterclaim brought by any party against another party on any matter arising out of or in any way connected with this Agreement. The provisions of this Section 14.21 shall survive the Closing and any termination of this Agreement.

     SECTION 14.22. Time is of the Essence. The Seller and the Buyer agree that time is of the essence with respect to the obligations of the Buyer and the Seller under this Agreement.

     SECTION 14.23. Bulk Sale; Occasional Sale. The Seller and the Buyer specifically waive compliance with the Uniform Commercial Code of the State of Texas with respect to bulk transfers, with any similar provision under any applicable law of the County of Tarrant and City of Arlington. The Buyer and the Seller acknowledge that the Seller is selling the entire operating assets of a business pursuant to this Agreement, which is intended to qualify as an occasional sale as defined in the Tax Code Section 151.304.

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     IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of the day and year first above written.

SELLER:
EQUISTAR ARLINGTON PARTNERS, L.P., a Delaware limited partnership
By:	MERISTAR SPE LLC, a Delaware limited partnership, its general partner
	By:	/s/ Robert Harper
		Name:	Robert Harper
		Title:	Vice President and Assistant Secretary
BUYER:
INTERSTATE ARLINGTON, LP, a Delaware limited liability company
By:	Interstate Arlington GP, LLC, a Delaware limited liability company, its general partner
	By:	Interstate Operating Company, LP, a Delaware limited partnership, its managing member
		By:	Interstate Hotels & Resorts, Inc., a Delaware corporation, its general partner
			By:	/s/ Christopher L. Bennett
				Name:	Christopher L. Bennett
				Title:	Executive Vice President and General Counsel

September 11, 2006

Alcor Holdings LLC

c/o Blackstone Real Estate Acquisitions V L.L.C.
345 Park Avenue — 32^nd Floor
New York, New York 11045
Attention: Kenneth A. Caplan

Re: The Management Agreements, dated as of January 1, 2001 (as amended, supplemented and/or modified from time to time, the “Management Agreements”), by and among MeriStar Hotel Lessee LLC, a Delaware limited liability company (f/k/a MeriStar Hotel Lessee Corp.), MeriStar SPE Leasing LLC, a Delaware limited liability company (f/k/a MeriStar SPE Leasing Corp.), MeriStar SPE California LLC, a Delaware limited liability company (f/k/a MeriStar SPE California Corp.), MeriStar SPE Colorado LLC, a Delaware limited liability company (f/k/a MeriStar SPE Colorado Corp.), MeriStar SPE North Carolina LLC, a Delaware limited liability company (f/k/a MeriStar SPE North Carolina LLC Corp.), MeriStar SPE Wisconsin LLC, a Delaware limited liability company (f/k/a MeriStar SPE Wisconsin Corp.) (collectively, “Owners”) and Interstate Management Company, L.L.C., a Delaware limited liability company (f/k/a Meristar Management Company, L.L.C.) (“Operator”)

Dear Mr. Caplan:

     This letter (this “Letter”) memorializes our agreement relating to certain termination fees currently payable by Owners to Operator under those certain Management Agreements for the properties set forth on Schedule A attached hereto that have been terminated by the applicable Owner prior to the date hereof (the “Terminated Contracts”) and certain termination fees that may be payable by Owners to Operator following the termination of those certain existing Management Agreements for the properties set forth on Schedule B attached hereto (the “Future Terminated Contracts”). Owners and Operator agree as follows:

1.

As of the date hereof, the aggregate amount of Termination Fees owed by Owners under the Terminated Contracts equals $13,899,760 (the “Current Aggregate Termination Fee”). Schedule C attached hereto sets forth the Termination Fee payment schedule relating to the Terminated Contracts.

2.

Simultaneously with the execution of this Letter, Equistar Arlington Partners, L.P., an affiliate of Owners (“Arlington Owner”), and Interstate Arlington L.P., an affiliate of Operator (“Arlington Buyer”) are entering into that certain Agreement of Purchase and Sale dated as of the date hereof (the “Arlington Agreement”) relating to the property located at 2401 E. Lamar Boulevard, Arlington, Texas and commonly known as the “Hilton Arlington” (the “Arlington Hotel”).

2

3.	Owners and Operator hereby agree that in lieu of Owners making the Current Aggregate Termination Fee in accordance with the terms of the applicable Management Agreements and the Master Fee Agreement dated as of January 1, 2001 (as amended, supplemented and/or modified from time to time, the “Master Fee Agreement”) between Owners and Operator and as otherwise described on Schedule C attached hereto, Owners shall, in full satisfaction of all such amounts, pay to Operator upon the closing under the Arlington Agreement (the “Arlington Closing”) a lump sum payment in the amount of $12,271,601, provided, if the applicable Termination Fee payment in October 2006 has been made by Owners prior to the Arlington Closing relating to the Terminated Contracts, such payment amount shall equal $11,667,069, and provided, further, if the applicable Termination Fee payment in October 2006 and November 2006 has been made by Owners prior to the Arlington Closing relating to the Terminated Contracts, such payment amount shall equal $11,215,989 (such applicable payment being referred to as the “Final Termination Fee”).
4.	On August 23, 2006, Owners issued a notice of their intent to terminate the Management Agreements for the properties set forth on Schedule B attached hereto on September 30, 2006 (the “Anticipated Terminated Contracts”). Upon such termination, certain Termination Fees may be payable in accordance with the terms of the applicable Management Agreements and the Master Fee Agreement currently estimated to equal $2,540,349 (the “Anticipated Aggregate Termination Fee”). Schedule D attached hereto sets forth the Anticipated Aggregate Termination Fee payment schedule relating to the Anticipated Terminated Contracts. Owners and Operator hereby agree that in lieu of Owners making the Anticipated Aggregate Termination Fee in accordance with the terms of the applicable Management Agreements and the Master Fee Agreement and as otherwise described on Schedule D attached hereto, Owners shall, in full satisfaction of all such amounts, pay to Operator upon the Arlington Closing (in addition to such amounts as contemplated in paragraph 3 above) a lump sum payment in the amount of $2,086,693, provided, if the applicable Termination Fee payment in October 2006 has been made by Owners prior to the Arlington Closing relating to the Anticipated Terminated Contracts, such payment amount shall equal $2,051,159, and provided, further, if the applicable Termination Fee payment in October 2006 and November 2006 has been made by Owners prior to the Arlington Closing relating to the Anticipated Terminated Contracts, such payment amount shall equal $2,015,328 (such applicable payment being referred to as the “Additional Final Termination Fee”).
5.	Owners and Operator agree that the Anticipated Aggregate Termination Fee and the Additional Final Termination Fee are preliminary amounts based on the parties best faith estimate. Owners and Operator shall cooperate in good faith to agree upon a final amount relating to the Anticipated Aggregate Termination Fee and the Additional Final Termination Fee upon the availability of the information necessary to determine such final amounts. To the extent the Additional Final

3

	Termination Fee is (i) in excess of the amount as finally determined by the parties to be payable under paragraph 4 above, Operator shall promptly refund to Owners any such excess amount or (ii) less than the amount as finally determined by the parties to be payable under paragraph 4 above, Owners shall promptly pay to Operator such deficiency.
6.	The obligation of the parties hereto is subject to the closing of the purchase and sale of the Arlington Hotel pursuant to the Arlington Agreement. In the event the Arlington Agreement is terminated pursuant to its terms, this Letter shall be null and void and the parties hereto shall have no further rights or obligations under this Letter.
7.	Operator and Owners agree that in lieu of a direct payment by Owners to Operator of the applicable Final Termination Fee and the Additional Final Termination Fee, Arlington Buyer shall receive a credit to the purchase price under the Arlington Agreement upon the Arlington Closing equal to such amounts.
8.	The Final Termination Fee and the Additional Final Termination Fee upon such credit shall be in full satisfaction of any and all termination fees or other similar amounts owed by Owners or any affiliates thereof under the Terminated Contracts and the Anticipated Terminated Contracts; provided, however, that payment of the Final Termination Fee and the Additional Final Termination Fee shall not be in satisfaction of amounts, if any, that may due and payable under the Terminated Contracts and the Anticipated Terminated Contracts other than such termination or similar fees.

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

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

     This Letter shall be governed by, and construed under, the laws of the State of New York without regard to conflicts of principles thereof.

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

     This Letter may be executed in identical counterparts, each of which shall be

4

deemed an original for all purposes and all of which shall constitute, collectively, one Letter. This Letter may be executed by facsimile signature, which signature shall be deemed an original for all purposes.

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

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

5

     All capitalized terms used in this Letter and not otherwise defined herein shall have the respective meanings given to such terms in the Management Agreements.

Sincerely,

INTERSTATE MANAGEMENT COMPANY, LLC
By:	/s/ Christopher L. Bennett Name: Christopher L. Bennett
	Title: EVP and General Counsel
ACKNOWLEDGED AND AGREED:
OWNERS:
MERISTAR HOTEL LESSEE, LLC
MERISTAR SPE LEASING LLC
MERISTAR SPE CALIFORNIA LLC
MERISTAR SPE COLORADO LLC
MERISTAR SPE NORTH CAROLINA LLC
MERISTAR SPE WISCONSIN LLC
By:	/s/ Robert Harper Name: Robert Harper
	Title: Vice President and Assistant 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 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 this 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.

/s/  Thomas F. Hewitt

Thomas F. Hewitt

Chief Executive Officer

Dated: November 9, 2006

EX-31.2

EXHIBIT 31.2

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

I, Bruce A. Riggins, 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 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 this 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.

/s/  Bruce A. Riggins

Bruce A. Riggins

Chief Financial Officer

Dated: November 9, 2006

EX-32

EXHIBIT 32

Section 906 Certification

Certification of Chief Executive Officer and Chief Financial Officer

Pursuant to 18 U.S.C. § 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 that:

(i) the accompanying quarterly report on Form 10-Q of the Company for the three months and nine months ended September 30, 2006 (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.

/s/  Thomas F. Hewitt

Thomas F. Hewitt

Chief Executive Officer

/s/  Bruce A. Riggins

Bruce A. Riggins

Chief Financial Officer

Dated: November 9, 2006