10-Q

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

Form 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2007
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 August 1, 2007 was 31,678,569.

INTERSTATE HOTELS & RESORTS, INC.

INDEX

			Page
PART I. FINANCIAL INFORMATION
	Item 1:	Financial Statements (Unaudited):		2
		Consolidated Balance Sheets — June 30, 2007 and December 31, 2006		2
		Consolidated Statements of Operations and Comprehensive Income — Three and six months ended June 30, 2007 and 2006		3
		Consolidated Statements of Cash Flows — Six months ended June 30, 2007 and 2006		4
		Notes to Consolidated Financial Statements		5
	Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
	Item 3:	Quantitative and Qualitative Disclosures About Market Risk		35
	Item 4:	Controls and Procedures		35
PART II. OTHER INFORMATION
	Item 1:	Legal Proceedings		37
	Item 4:	Submission of Matters to a Vote of Security Holders		37
	Item 6:	Exhibits		38

1

PART I. FINANCIAL INFORMATION

Item 1:   Financial Statements

INTERSTATE HOTELS & RESORTS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

	June 30,			December 31,
	2007			2006
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	27,380		$	25,308
Restricted cash		8,086			6,485
Accounts receivable, net of allowance for doubtful accounts of $373 and $253, respectively		27,398			31,511
Due from related parties, net of allowance for doubtful accounts of $1,110 and $1,110, respectively		944			1,469
Prepaid expenses and other current assets		4,056			2,592
Assets held for sale		—			28,383
Total current assets		67,864			95,748
Marketable securities		1,919			1,610
Property and equipment, net		230,522			103,895
Investments in affiliates		11,220			11,144
Notes receivable		4,289			4,962
Deferred income taxes		12,067			12,451
Goodwill		73,672			73,672
Intangible assets, net		29,886			30,208
Total assets	$	431,439		$	333,690
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,958		$	2,053
Accrued expenses		70,506			68,395
Liabilities related to assets held for sale		—			10,263
Current portion of long-term debt		862			3,750
Total current liabilities		73,326			84,461
Deferred compensation		1,914			1,541
Long-term debt		171,375			80,476
Total liabilities		246,615			166,478
Minority interest		519			516
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; 31,678,569, and 31,540,926 shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively		317			316
Treasury stock		(69	)		(69	)
Paid-in capital		194,929			194,460
Accumulated other comprehensive (loss) income		(464	)		1,201
Accumulated deficit		(10,408	)		(29,212	)
Total stockholders’ equity		184,305			166,696
Total liabilities, minority interest and stockholders’ equity	$	431,439		$	333,690

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

2

INTERSTATE HOTELS & RESORTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited, in thousands, except per share amounts)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
Revenue:
Lodging	$	18,621		$	6,418		$	31,697		$	11,455
Management fees		10,728			12,422			21,350			21,625
Management fees-related parties		852			2,765			1,699			10,725
Termination fees		2,418			1,494			3,993			1,779
Termination fees-related parties		—			702			—			6,117
Other		2,763			2,718			5,032			6,429
		35,382			26,519			63,771			58,130
Other revenue from managed properties		164,793			217,824			341,163			442,773
Total revenue		200,175			244,343			404,934			500,903
Expenses:
Lodging		12,667			4,572			22,039			8,460
Administrative and general		14,575			15,385			27,890			29,030
Depreciation and amortization		3,684			1,546			6,977			3,089
Asset impairments and write-offs		1,047			92			1,155			8,642
		31,973			21,595			58,061			49,221
Other expenses from managed properties		164,793			217,824			341,163			442,773
Total operating expenses		196,766			239,419			399,224			491,994
OPERATING INCOME		3,409			4,924			5,710			8,909
Interest income		721			545			1,157			931
Interest expense		(3,276	)		(1,970	)		(6,009	)		(4,025	)
Equity in earnings (losses) of affiliates		854			123			1,255			(434	)
INCOME BEFORE MINORITY INTEREST AND INCOME TAXES		1,708			3,622			2,113			5,381
Income tax expense		(708	)		(1,611	)		(855	)		(2,280	)
Minority interest expense		(9	)		(31	)		(62	)		(49	)
INCOME FROM CONTINUING OPERATIONS		991			1,980			1,196			3,052
Income from discontinued operations, net of tax		607			1,029			17,608			703
NET INCOME	$	1,598		$	3,009		$	18,804		$	3,755
Other comprehensive income, net of tax:
Foreign currency translation (loss) gain		(18	)		418			(23	)		671
Unrealized gain on investments		1			24			18			12
COMPREHENSIVE INCOME	$	1,581		$	3,451		$	18,799		$	4,438
BASIC EARNINGS PER SHARE:
Continuing operations	$	0.03		$	0.07		$	0.04		$	0.10
Discontinued operations		0.02			0.03			0.56			0.02
Basic earnings per share	$	0.05		$	0.10		$	0.60		$	0.12
DILUTIVE EARNINGS PER SHARE:
Continuing operations	$	0.03		$	0.07		$	0.04		$	0.10
Discontinued operations		0.02			0.03			0.55			0.02
Dilutive earnings per share	$	0.05		$	0.10		$	0.59		$	0.12

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

3

INTERSTATE HOTELS & RESORTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

	Six Months Ended
	June 30,
	2007			2006
OPERATING ACTIVITIES:
Net income	$	18,804		$	3,755
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		6,977			3,089
Amortization of deferred financing fees		1,113			387
Stock compensation expense		553			598
Bad debt expense		46			759
Asset impairments and write-offs		1,155			8,642
Equity in (earnings) losses of affiliates		(1,255	)		434
Operating distributions from unconsolidated affiliates		221			186
Minority interest		62			49
Deferred income taxes		384			1,033
Excess tax benefits from share-based payment arrangements		(87	)		(558	)
Discontinued operations:
Depreciation and amortization		—			897
Gain on sale		(18,131	)		—
Changes in assets and liabilities:
Accounts receivable		4,640			(1,453	)
Due from related parties		525			4,563
Prepaid expenses and other current assets		(1,088	)		(3,024	)
Accounts payable and accrued expenses		1,227			(2,787	)
Changes in asset and liability accounts held for sale		93			—
Other changes in asset and liability accounts		180			357
Cash provided by operations		15,419			16,927
INVESTING ACTIVITIES:
Proceeds from the sale of discontinued operations		34,966			—
Change in restricted cash		(1,601	)		4
Acquisition of hotels		(127,958	)		(14,528	)
Purchases related to discontinued operations		(68	)		(1,516	)
Purchases of property and equipment		(4,027	)		(2,947	)
Additions to intangible assets		(1,740	)		(804	)
Contributions to unconsolidated affiliates		(1,377	)		(6,248	)
Distributions from unconsolidated affiliates		2,759			—
Changes in notes receivable		746			60
Cash used in investing activities		(98,300	)		(25,979	)
FINANCING ACTIVITIES:
Proceeds from borrowings		147,825			9,000
Repayment of borrowings		(59,814	)		(12,500	)
Excess tax benefits from share-based payments		87			558
Proceeds from issuance of common stock		190			2,201
Financing fees paid		(3,317	)		—
Cash provided by (used in) financing activities		84,971			(741	)
Effect of exchange rate on cash		(18	)		187
Net increase (decrease) in cash and cash equivalents		2,072			(9,606	)
CASH AND CASH EQUIVALENTS, beginning of period		25,308			12,929
CASH AND CASH EQUIVALENTS, end of period	$	27,380		$	3,323
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes:
Interest	$	4,577		$	3,676
Income taxes		1,894			1,364

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

4

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

1.   BUSINESS SUMMARY

We are one of the largest independent U.S. hotel management companies not affiliated with a hotel brand, measured by number of rooms under management. We derive our earnings from a diversified portfolio of hotel management agreements and ownership of select hotel properties. While we continue to focus on our core business as a leading provider of hospitality management services, we continue to expand our portfolio of owned hotels in an effort to diversify and enhance our earnings. In 2007, a significant portion of our operating income will be related to owned hotels. We have two reportable operating segments: hotel management and hotel ownership (through whole-ownership and joint ventures). A third reportable segment, corporate housing, was disposed of on January 26, 2007 with the sale of BridgeStreet, our corporate housing division.

Our management portfolio is diversified by brand, franchise and ownership group to which we provide related services in the hotel, resort and conference center markets. These services include insurance and risk management, purchasing and capital project management, information technology and telecommunications, and centralized accounting services. As of June 30, 2007, we managed 187 hotel properties and five ancillary service centers (which consist of two laundry centers, two conference centers, and a spa facility), with 42,760 rooms in 36 states, the District of Columbia, Canada, Russia, Belgium and Ireland. We also owned six hotel properties, with 1,755 rooms, and held non-controlling joint venture equity interests in 11 joint ventures, which own or hold ownership interests in 17 of our managed properties.

Our corporate housing division provided 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. The assets and liabilities of our corporate housing division are presented as held for sale in our consolidated balance sheets as of December 31, 2006 and as discontinued operations in our consolidated statement of operations and cash flows for all periods presented in this report.

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 as minority interest 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, 2006.

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 GAAP 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.

5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

These consolidated financial statements include our accounts and the accounts for 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.

Revenue Recognition Related to Termination Fees

As we have existing management agreements with Blackstone, the owner of multiple hotels which we have purchased, we evaluate the impact of EITF Issue No. 04-1, “Accounting for Preexisting Relationships between the Parties to a Business Combination” (“EITF 04-1”) on the purchase accounting for these acquisitions. Our agreements with Blackstone have provisions which require the payment of termination fees if Blackstone elects to terminate the management contract or sells the hotel to any buyer, including us. We determine the amount by which the pricing of these contracts is favorable when compared to the pricing we have negotiated with owners for recently executed management contracts for comparable hotel properties and compare this amount to the amount of the required termination fee due from Blackstone. EITF 04-1 requires that we recognize the lesser of the amounts as a gain on the settlement of the executory contract and as part of the acquisition cost of the hotel. For the Hilton Houston Westchase and Westin Atlanta Airport acquisitions, the amount by which the pricing of the Blackstone contracts are favorable to us exceeded the stated termination fees due to us from Blackstone. Accordingly, we recorded the stated termination fees for the Hilton Houston Westchase and the Westin Atlanta Airport of $1.0 million and $1.4 million, respectively, at the time of acquisition.

Related Parties

In January 2007, we were retained as manager for two properties owned by Capstar Hotel Company, LLC (“New Capstar”), a newly formed real estate investment company founded by Paul Whetsell, our current Chairman of the Board. As of June 30, 2007, balances related to New Capstar have been included within “due from related parties” on our consolidated balance sheet and “management fees — related parties” on our consolidated statement of operations.

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 Mr. Whetsell was also the CEO of MeriStar. Mr. Whetsell did not become part of the Blackstone management team and accordingly, we no longer 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 December 31, 2006 and for the period from May 2, 2006 through December 31, 2006, although fees received from Meristar prior to May 2, 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 included in “management fees — related parties.” See Note 4, “Investments in Affiliates” for further information on these related party amounts.

Stock-Based Compensation

On January 1, 2006, we adopted SFAS No. 123 (revised 2004), “Share Based Payment” (“SFAS 123R”) using the modified prospective method. Beginning January 1, 2003, we have used the Black-Scholes pricing model to estimate the value of stock options granted to employees. The adoption of SFAS 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 had previously been accounted for under the fair value method of accounting. See Note 13, “Stock-Based Compensation,” for additional information.

Accounting for Uncertainty in Income Taxes

On January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income

6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

taxes recognized in an enterprise’s financial statements in accordance with SFAS 109. 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. See Note 14, “FIN 48 — Recognition and Measurement of Tax Positions and Benefits,” for additional information.

Recently Issued Accounting Pronouncements

In June 2006, EITF Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement, That Is, Gross versus Net Presentation” (“EITF 06-3”) was ratified. EITF 06-3, which is effective for periods beginning after December 15, 2006, requires the disclosure of the accounting policy for any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction on a gross (included in revenues and costs) or net (excluded from revenues) basis. We have reported revenues from our owned-hotels, which are subject to various taxes assessed by government authorities, including sales and use taxes, on a net basis.

In September 2006, FASB Statement No. 157, “Fair Value Measurements” (“SFAS 157”) was issued. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of the adoption of this statement.

In February 2007, FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities (as amended)” (“SFAS 159”) was issued. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates. It provides entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of the adoption of this statement.

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 assume the issuance of common stock for all potentially dilutive stock equivalents outstanding. Potentially dilutive shares include restricted stock, 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
	June 30, 2007						June 30, 2006
	Income/				Per Share		Income/				Per Share
	(Loss)		Shares		Amount		(Loss)		Shares		Amount
Income from continuing operations	$	991		31,642	$	0.03	$	1,980		30,890	$	0.07
Income from discontinued operations, net of tax		607		—		0.02		1,029		—		0.03
Basic net income	$	1,598		31,642	$	0.05	$	3,009		30,890	$	0.10
Assuming exercise of outstanding employee stock options less shares repurchased at average market price		—		41		—		—		212		—
Assuming vesting of outstanding restricted stock		—		306		—		—		174		—
Diluted net income	$	1,598		31,989	$	0.05	$	3,009		31,276	$	0.10

7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Six Months Ended
	June 30, 2007							June 30, 2006
	Income/				Per Share			Income/				Per Share
	(Loss)		Shares		Amount			(Loss)		Shares		Amount
Income from continuing operations	$	1,196		31,602	$	0.04		$	3,052		30,788	$	0.10
Income from discontinued operations, net of tax		17,608		—		0.56			703		—		0.02
Basic net income	$	18,804		31,602	$	0.60		$	3,755		30,788	$	0.12
Assuming exercise of outstanding employee stock options less shares repurchased at average market price		—		65		—			—		157		—
Assuming vesting of outstanding restricted stock		—		227		(0.01	)		—		144		—
Diluted net income	$	18,804		31,894	$	0.59		$	3,755		31,089	$	0.12

4.   INVESTMENTS IN AFFILIATES

Our investments and advances to our joint ventures and affiliated companies consist of the following (in thousands, except number of hotels):

			Our Equity	June 30,		December 31,
Joint Venture	Number of Hotels		Participation	2007		2006
CNL/IHC Partners, L.P.		3	15.0%	$	2,698	$	2,625
RQB Resort/Development Investors, LLC		1	10.0%		913		447
True North Tesoro Property Partners, L.P.		1	15.9%		29		1,381
Amitel Holdings, LLC		6	15.0%		3,909		3,903
Cameron S-Sixteen Hospitality, LLC		1	10.9%		451		487
Cameron S-Sixteen Broadway, LLC		1	15.7%		1,085		1,136
IHR Greenbuck Hotel Venture, LLC(1)		—	15.0%		1,074		362
Interstate Cross Keys, LLC		1	15.0%		572		—
Other		3	12.5%-50.0%		489		803
Total		17		$	11,220	$	11,144

(1) Hotel number is not listed since this joint venture is in the process of developing hotels.

In March 2007, we invested $0.5 million to acquire a 15% interest in the 147-room Radisson Cross Keys hotel in Baltimore, Maryland. We plan to invest an additional $0.3 million for future capital improvements.

In April 2007, the joint venture which owns the Doral Tesoro Hotel and Golf Club made a distribution to us of $1.8 million, which included the return of our initial investment of $1.5 million and a return on investment. As the distribution received was greater than our investment balance at the time of the distribution, the investment balance was reduced to zero with the remainder recorded as a deferred gain in our consolidated balance sheets. The distribution in excess of our investment will be deferred until such time as the assets in the venture are sold or another such event has occurred, resulting in the culmination of the earnings process. The distribution did not impact our percentage investment ownership interest in the joint venture. Also in April 2007, our joint venture Orchard Park Associates, L.P., in which we hold a 5% ownership interest, sold the Comfort Suites Norwich. We received a $0.1 million distribution as a result of the sale.

8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During 2007, we invested an additional $0.7 million in our joint venture, IHR Greenbuck Hotel Venture, LLC, to build as many as five to ten aloft^® hotels over the next several years.

We had related party accounts receivable from our joint venture ownership interests of $0.9 million and $1.4 million as of June 30, 2007 and December 31, 2006. We had related party management fees from these joint ventures of $0.9 million and $1.7 million for the three and six months ended June 30, 2007, respectively and $0.8 million and $2.2 million for the three and six months ended June 30, 2006, respectively.

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. We are not the primary beneficiary or controlling investor in any of these joint ventures however, do exert significant influence as the manager of the underlying assets, and therefore account for our interests under the equity method.

5.   PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):

	June 30,			December 31,
	2007			2006
Land	$	19,547		$	10,269
Furniture and fixtures		25,964			17,437
Building and improvements		187,234			75,566
Leasehold improvements		5,695			5,889
Computer equipment		6,414			4,978
Software		11,883			12,244
Total		256,737			126,383
Less accumulated depreciation		(26,215	)		(22,488	)
Property and equipment, net	$	230,522		$	103,895

6.   INTANGIBLE ASSETS

Intangible assets consist of the following (in thousands):

	June 30,			December 31,
	2007			2006
Management contracts	$	35,382		$	35,940
Franchise fees		1,814			1,620
Deferred financing fees		3,635			2,538
Total cost		40,831			40,098
Less accumulated amortization		(10,945	)		(9,890	)
Intangible assets, net	$	29,886		$	30,208

We amortize the value of our intangible assets, 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. For the six months ended June 30, 2007, we recognized management contract impairment charges of $1.2 million, including $0.7 million for the Westin Atlanta Airport which we purchased from Blackstone in May 2007, $0.4 million associated with seven properties sold by Sunstone Hotels Investors, Inc. (“Sunstone REIT”) and $0.1 million related to other terminated or lost management contracts. For the six months ended June 30, 2006, the

9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

management contract impairment losses of $8.6 million primarily consisted of $8.3 million for the termination of management contracts related to 18 MeriStar/Blackstone properties.

We incurred scheduled amortization expense on our remaining management contracts and franchise fees of $1.4 million and $2.7 million for the three and six months ended June 30, 2007, respectively, and $0.6 million and $1.5 million for the three and six months ended June 30, 2006, respectively. We also incurred amortization expense related to deferred financing fees of $0.4 million and $1.1 million for the three and six months ended June 30, 2007, respectively, and $0.2 million and $0.4 million for the three and six months ended June 30, 2006, respectively. During the first quarter of 2007, $0.5 million of deferred financing fees related to our old senior credit facility was amortized in connection with our entrance into a new $125.0 million senior secured credit facility (the “Credit Facility”) and the related payoff of our old senior credit facility and subordinated term loan. Amortization of deferred financing fees are included in interest expense.

In connection with the new Credit Facility, we recorded $2.2 million of financing fees which will be amortized over the term of the Credit Facility. During the second quarter of 2007, we recorded an additional $0.8 million of financing fees in connection to the amendment of our Credit Facility. See Note 8, “Long-Term Debt,” for additional information related to the Credit Facility.

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. We have revised the estimated economic lives of the underlying management contracts for the remaining Blackstone properties from 25 years to approximately four years as Blackstone has initiated plans to sell most of the portfolio of hotels within four years and had taken over management or executed sales of seven hotels as of December 31, 2006. The change in estimate occurred in December 2006 and was applied as of January 1, 2007. As of June 30, 2007, we do not believe the carrying value of $25.6 million associated with the remaining management contracts is impaired. We will continue to assess the recorded value of our 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. During the six months ended June 30, 2007, no material transactions occurred which were not already considered in our analysis during the fourth quarter of 2006. As such, we did not re-evaluate our goodwill in the second quarter of 2007.

7.   ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

	June 30,		December 31,
	2007		2006
Salaries and employee related benefits	$	22,831	$	24,895
Deferred revenue		4,862		561
Other		42,813		42,939
Total	$	70,506	$	68,395

“Other” consists of legal expenses, sales and use tax accruals, property tax accruals, owners insurance for our managed hotels, general and administrative costs of managing our business and various other items. 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):

	June 30,			December 31,
	2007			2006
Senior credit facility — term loan	$	114,712		$	40,526
Mortgage debt		57,525			43,700
Total long-term debt		172,237			84,226
Less current portion		(862	)		(3,750	)
Long-term debt, net of current portion	$	171,375		$	80,476

Senior Credit Facility

In March 2007, we entered into a new senior secured Credit Facility with various lenders. The Credit Facility consisted of a $65.0 million term loan and a $60.0 million revolving loan. Upon entering into the Credit Facility, we borrowed $65.0 million under the term loan, using a portion of it to pay off the remaining obligations under our previous credit facility. In May 2007, we amended the Credit Facility to increase the borrowings under our term loan by $50.0 million, resulting in a total of $115.0 million outstanding under the term loan, and increased the availability under our revolving loan to $85.0 million. In addition, we have the ability to increase the revolving credit facility and/or term loan by up to $75.0 million, in the aggregate, by seeking additional commitments from lenders. Simultaneously with the amendment, we used the additional $50.0 million under the term loan, along with cash on hand, to purchase the 495-room Westin Atlanta Airport. See Note 12, “Acquisitions and Dispositions,” for additional information.

The actual interest rates on both the revolving loan and term loan depend on the results of certain financial tests. As of June 30, 2007, based on those financial tests, borrowings under the term and revolving loan bore interest at the 30-day LIBOR rate plus 275 basis points (a rate of 8.07% per annum). We incurred interest expense of $1.9 million and $2.7 million on the senior credit facilities for the three and six months ended June 30, 2007, respectively, and $1.4 million and $3.0 million for the three and six months ended June 30, 2006, 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. At June 30, 2007, we were in compliance with the loan covenants of the Credit Facility.

Mortgage Debt

The following table summarizes our mortgage debt as of June 30, 2007:

	Principal		Maturity		Spread Over		Interest Rate as of
	Amount		Date(1)		30-Day LIBOR		June 30, 2007
Hilton Arlington	$	24.7 million		November 2009		135 bps		6.7	%
Hilton Houston Westchase	$	32.8 million		February 2010		135 bps		6.7	%

(1) We are required to make interest-only payments until these loans mature, with two optional one-year extensions.

In April 2007, we repaid in full, $19.0 million of mortgage debt relating to the Hilton Concord. We incurred no prepayment penalties in connection with the early repayment.

We incurred interest expense on these mortgage loans of $1.0 million and $2.1 million for the three and six months ended June 30, 2007, respectively, and $0.3 million and $0.7 million for the three and six months ended June 30, 2006, respectively. Based on the terms of these mortgage loans, a prepayment cannot be made during the

11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

first year after it has been entered. After one year, a penalty of 1% is assessed on any prepayments. The penalty is reduced ratably over the course of the second year. There is no penalty for prepayments made in the third year.

Interest Rate Caps

We have entered into three interest rate cap agreements in order to provide an economic hedge against the potential effect of future interest rate fluctuations. The following table summarizes our interest rate cap agreements as of June 30, 2007:

			Maturity		30-Day LIBOR
	Amount		Date		Cap Rate
March 2005 (Credit Facility)	$	55.0 million		January 2008		5.75	%
October 2006 (Hilton Arlington mortgage loan)	$	24.7 million		November 2009		7.25	%
February 2007 (Hilton Westchase mortgage loan)	$	32.8 million		February 2010		7.25	%

At June 30, 2007, the total fair value of these interest rate cap agreements was approximately $19,000. The change in fair value for these interest rate cap agreements was de minimus and was recognized in the consolidated statement of operations.

9.   SEGMENT INFORMATION

We are organized into two reportable segments: hotel management and hotel ownership (through whole-ownership and joint ventures). A third reportable segment, corporate housing, was disposed of on January 26, 2007 with the sale of BridgeStreet and its affiliated subsidiaries. Each segment is managed separately because of its distinctive economic characteristics. 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. 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 received during the first quarter of 2006), “termination fees” and “other” from our consolidated statement of operations. Our insurance subsidiary, as part of the hotel management segment, provides a layer of reinsurance for property, casualty, and auto and employment practices liability coverage to our hotel owners.

Hotel ownership includes our wholly-owned hotels and joint venture investments. For the hotel ownership segment presentation, we have allocated internal management fee expense of $0.4 million and $0.8 million for the three and six months ended June 30, 2007, respectively, and $0.2 million and $0.4 million for the three and six months ended June 30, 2006, respectively. These fees are eliminated in consolidation but are presented as part of the segment to present their operations on a stand-alone basis. Interest expense related to hotel mortgages and other debt drawn specifically to finance the hotels is included in the hotel ownership segment. As of January 1, 2007, our entire debt balance relates to our hotel ownership segment.

Corporate is not actually a reportable 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 interest expense and an allocation for rent and legal expenses. Corporate assets include the Company’s cash accounts, deferred tax assets, deferred financing fees and various other corporate assets.

Due to the sale of our third reportable segment, corporate housing, in January 2007, the operations of this segment are included as part of discontinued operations on the consolidated statement of operations for all periods presented. The assets related to this segment have been presented as assets held for sale on the consolidated balance sheet as of December 31, 2006. The assets of our corporate housing segment of $35.3 million as of June 30, 2006 are separately included within the corporate assets in the segment presentation below. As the corporate housing

12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

segment was sold, we have not presented its operations within the following segment presentation. See Note 12, “Acquisitions and Dispositions” for more information on the disposition of the segment.

Capital expenditures includes the “acquisition of hotels” and “purchases of property and equipment” line items from our cash flow statement. All amounts presented are in thousands.

	Hotel		Hotel
	Management		Ownership			Corporate			Consolidated
Three months ended June 30, 2007
Revenue	$	16,761	$	18,621		$	—		$	35,382
Depreciation and amortization		1,782		1,790			112			3,684
Operating expense		13,079		13,129			2,081			28,289
Operating income (loss)		1,900		3,702			(2,193	)		3,409
Interest expense, net		—		(2,915	)		360			(2,555	)
Equity in earnings of affiliates		—		854			—			854
Income (loss) before minority interests and income taxes	$	1,900	$	1,641		$	(1,833	)	$	1,708
Capital expenditures	$	46	$	78,256		$	11		$	78,313
Three months ended June 30, 2006
Revenue	$	20,101	$	6,418		$	—		$	26,519
Depreciation and amortization		973		457			116			1,546
Operating expense		13,926		4,783			1,340			20,049
Operating income (loss)		5,202		1,178			(1,456	)		4,924
Interest expense, net		—		(514	)		(911	)		(1,425	)
Equity in earnings of affiliates		—		123			—			123
Income (loss) before minority interests and income taxes	$	5,202	$	787		$	(2,367	)	$	3,622
Capital expenditures	$	792	$	15,387		$	247		$	16,426

13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Hotel		Hotel
	Management		Ownership			Corporate			Consolidated
Six months ended June 30, 2007
Revenue	$	32,074	$	31,697		$	—		$	63,771
Depreciation and amortization		3,545		3,216			216			6,977
Operating expense		25,189		22,865			3,030			51,084
Operating income (loss)		3,340		5,616			(3,246	)		5,710
Interest expense, net		—		(4,871	)		19			(4,852	)
Equity in earnings of affiliates		—		1,255			—			1,255
Income (loss) before minority interests and income taxes	$	3,340	$	2,000		$	(3,227	)	$	2,113
Total assets	$	138,951	$	246,914		$	45,574		$	431,439
Capital expenditures	$	633	$	131,194		$	158		$	131,985
Six months ended June 30, 2006
Revenue	$	46,675	$	11,455		$	—		$	58,130
Depreciation and amortization		1,967		899			223			3,089
Operating expense		34,560		8,816			2,756			46,132
Operating income (loss)		10,148		1,740			(2,979	)		8,909
Interest expense, net		—		(1,002	)		(2,092	)		(3,094	)
Equity in earnings of affiliates		—		(434	)		—			(434	)
Income (loss) before minority interests and income taxes	$	10,148	$	304		$	(5,071	)	$	5,381
Total assets	$	156,255	$	76,229		$	64,370		$	296,824
Capital expenditures	$	1,394	$	15,684		$	397		$	17,475

Revenues from foreign operations, excluding reimbursable expenses, were as follows (in thousands)(1):

	Three Months				Six Months
	Ended June 30,				Ended June 30,
	2007		2006		2007		2006
Canada	$	69	$	124	$	130	$	197
Russia	$	180	$	375	$	360	$	750
Belgium	$	28	$	—	$	28	$	—
Ireland	$	60	$	—	$	60	$	—

(1) BridgeStreet revenues from the United Kingdom and France were $2.8 million and $0.2 million, respectively, for the six month period ended June 30, 2007. Revenues from the United Kingdom and France were $8.5 million and $0.7 million for the three months ended June 30, 2006, respectively, and $15.5 million and $1.1 million for the six month period ended June 30, 2006, respectively. These revenues have been classified as discontinued operations on the consolidated statement of operations for the related periods.

A significant portion of our management fees for the three and six month periods ended June 30, 2007 were derived from Blackstone and Sunstone REIT. These owners represented 31% of our managed properties through the six months ended June 30, 2007 which contributed 44% and 43% of our base and incentive management fees for the three and six months ended June 30, 2007, respectively. As of June 30, 2007, we managed 19 hotels for Blackstone and 30 hotels and two ancillary service centers for Sunstone REIT. The total management fees for all Blackstone properties accounted for $2.2 million, or 19%, of management fees for the three months ended June 30, 2007, and $5.3 million, or 23%, of management fees for the six month period ended June 30, 2007. The

14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Sunstone REIT properties accounted for $2.6 million, or 23%, of management fees for the three months ended June 30, 2007 and $4.9 million, or 21%, of management fees for the six month period ended June 30, 2007.

10.   OTHER TRANSACTIONS

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

11.   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 these claims from its assets. As of June 30, 2007, 48 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 currently available information, we believe the ultimate resolution of these claims 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 hold the legal right of offset in regard to this receivable and payable with the prior insurance carrier. We will continue to pursue collection of our receivable and do not expect to pay any amounts to the prior carrier prior to reaching an agreement with it 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

With the sale of BridgeStreet, we no longer lease apartments for our corporate housing division. As of June 30, 2007, our lease obligations consist of only office space for our corporate offices. Future minimum lease payments required under these operating leases as of June 30, 2007 were as follows (in thousands):

June 30, 2007-2008	$	3,563
June 30, 2008-2009		2,928
June 30, 2009-2010		3,262
June 30, 2010-2011		2,841
June 30, 2011-2012		3,179
Thereafter		3,817
Total	$	19,590

15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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. Given the size and financial stability of the sub-lessee, we do not believe that any payments will be required as a result of the secondary liability provisions of the primary lease agreements. We expect to receive minimum payments under this sublease as follows (in thousands):

June 30, 2007-2008	$	1,112
June 30, 2008-2009		1,156
June 30, 2009-2010		1,202
June 30, 2010-2011		1,250
June 30, 2011-2012		1,300
Thereafter		1,581
Total	$	7,601

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 $3.0 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.

In connection with our owned hotels, we have committed to provide certain funds for property improvements as required by the respective brand franchise agreements. As of June 30, 2007, we had ongoing improvement projects in effect with remaining expected costs to complete of approximately $8.6 million for five of our owned hotels and $18.0 million for Westin Atlanta Airport.

Letters of Credit

As of June 30, 2007, 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, 2008. 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, the lender 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 Bank of America in favor of the insurance carrier that issues surety bonds on behalf of the properties we manage. The letter of credit expires on March 31, 2008. 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.

16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

12.   ACQUISITIONS AND DISPOSITIONS

Acquisitions

In May 2007, we acquired the 495-room Westin Atlanta Airport in Georgia, from an affiliate of Blackstone, for a total acquisition cost of $76.1 million, including normal and customary closing costs. We funded the acquisition through a combination of borrowings on our Credit Facility and cash on hand. From May 24, 2007 to June 30, 2007, hotel revenues and operating income of $2.4 million and $0.6 million, respectively, have been included in our consolidated statement of operations. The acquisition cost of the hotel was allocated as follows (in thousands):

Land	$	4,419
Buildings and improvements		66,243
Furniture and fixtures		4,945
Working capital		474
Total	$	76,081

As the purchase of the Westin Atlanta Airport was a material acquisition, we are providing the pro forma financial information set forth below (dollars in thousands), which represents the combined results as if the acquisition had occurred on January 1, 2006. 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.

	Six Months
	Ended June 30,
	2007		2006
Pro forma lodging revenues	$	42,016	$	24,264
Pro forma net income	$	20,354	$	5,690
Pro forma diluted earnings per share	$	0.64	$	0.18

In February 2007, we acquired the 297-room Hilton Houston Westchase in Texas, from an affiliate of Blackstone, for a total acquisition cost of $51.9 million, including normal and customary closing costs. We financed the acquisition through a non-recourse mortgage loan of $32.8 million and the remainder with a combination of cash on hand and borrowings on our previous credit facility. From February 8, 2007 to June 30, 2007, hotel revenues and operating income of $7.8 million and $2.0 million, respectively, have been included in our consolidated statement of operations. The acquisition cost of the hotel was allocated as follows (in thousands):

Land	$	4,860
Buildings and improvements		43,422
Furniture and fixtures		3,411
Working capital		184
Total	$	51,877

17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 previous credit facility and available cash. The acquisition cost of the hotel was allocated as follows (in thousands):

Land	$	1,375
Buildings and improvements		12,087
Furniture and fixtures		1,022
Working Capital		44
Total	$	14,528

Dispositions — On January 26, 2007, we sold our BridgeStreet corporate housing subsidiary for total proceeds of approximately $40.5 million in cash, resulting in a gain on sale of approximately $18.1 million. This gain has been recorded as part of discontinued operations for the six months ended June 30, 2007. Our corporate housing business had been classified as its own reportable segment. We classified the assets and liabilities relating to this subsidiary as held for sale in our consolidated balance sheet at December 31, 2006 as detailed in the following table (in thousands):

	December 31,
	2006
Accounts receivable, net	$	8,064
Prepaid expenses and other current assets		8,247
Property and equipment, net		2,214
Goodwill		9,858
Total assets held for sale	$	28,383
Accounts payable	$	2,498
Accrued expenses		7,765
Total liabilities held for sale	$	10,263

The operations of the corporate housing subsidiary have been classified as discontinued operations in our consolidated statement of operations for all periods presented. The following table summarizes operating results, the gain on the sale, and our segment reporting of our corporate housing subsidiary (in thousands):

	Six Months
	Ended June 30,
	2007			2006
Revenue	$	8,500		$	61,052
Depreciation and amortization		—			897
Operating expense		8,969			59,112
Operating (loss) income	$	(469	)	$	1,043
Gain on sale		18,131			—
Interest expense		—			16
Income before minority interest and taxes	$	17,662		$	1,027
Income tax expense		(175	)		(324	)
Income from discontinued operations, net of taxes	$	17,487		$	703

18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The disposition of our corporate housing subsidiary triggered the recognition of significant differences in the carrying values between tax basis and GAAP basis. As the tax basis was significantly higher, the gain realized for tax purposes was significantly lower than the $18.1 million gain recognized in our statement of operations for the six month period ended June 30, 2006, resulting in an effective tax rate of 1%.

In September 2005, we sold the Pittsburgh Airport Residence Inn by Marriott for $11.0 million and recognized a gain on sale of $2.5 million. We received an additional distribution of $0.2 million during the second quarter of 2007 that had been held in escrow for any contingent liabilities. The resulting adjustment to our gain on sale of $0.1 million (net of tax) has been recorded as part of discontinued operations.

13.   STOCK-BASED COMPENSATION

On January 1, 2006, we adopted SFAS No. 123 (revised 2004), “Share Based Payment” (“SFAS No. 123R”) using the modified prospective method. Since January 1, 2003, we have used 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 had previously been accounted for under the fair value method of accounting.

A summary of option activity under the equity-based compensation plans as of June 30, 2007, and changes during the six months then ended is as follows:

						Aggregate
	Number of			Weighted Average		Intrinsic
	Shares			Exercise Price/Share		Value
Options outstanding at December 31, 2006		495,413		$	6.81
Granted		40,000		$	5.99
Exercised		(48,141	)	$	3.94
Forfeited		(33,700	)	$	10.92
Options outstanding at June 30, 2007		453,572		$	6.47	$	240,462
Options exercisable at June 30, 2007		340,246		$	6.59	$	224,514

A summary of the restricted stock activity under the equity-based compensation plans as of June 30, 2007, and changes during the six months then ended is as follows:

				Weighted
				Average
	Number of			Grant-
	Restricted			Date Fair
	Shares			Value
Unvested at December 31, 2006		326,577		$	5.40
Granted		279,200		$	6.04
Vested		(134,579	)	$	5.31
Forfeited		—			—
Unvested at June 30, 2007		471,198		$	5.78

The total intrinsic value of restricted stock which vested during the six months ended June 30, 2007 was approximately $0.8 million.

The restricted stock awards granted in 2007 vest ratably over four years, except for one employee whose awards vest over three years based on his employment agreement. All restricted stock awards granted in prior years vest ratably over three years.

The compensation expense related to stock options and restricted stock awards was $0.3 million and $0.6 million for each of the three and six month periods ended June 30, 2007 and 2006, respectively. As of

19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

June 30, 2007, there was $2.5 million and $0.2 million of total unrecognized compensation cost related to unvested restricted stock and unvested stock options, respectively.

14.   FIN 48 — RECOGNITION AND MEASUREMENT OF TAX POSITIONS AND BENEFITS

We adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, we made a comprehensive review of our tax positions in accordance with the more-likely-than-not standard established by FIN 48. The result of the implementation of FIN 48 did not have a material effect on our consolidated financial position or results of operations.

The Company does not believe there will be any material changes in our unrecognized tax positions over the next 12 months.

We will recognize interest and penalties accrued related to any unrecognized tax benefits in income tax expense. For the six months ended June 30, 2007, we did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense or penalties recognized during the quarter.

We file income tax returns in the U.S. federal jurisdiction, various state and local jurisdictions, and several foreign jurisdictions in which we operate. As of January 1 and June 30, 2007, our open tax years for U.S., state and local jurisdictions that remain subject to examination range from 2001 through 2006.

15.   SUBSEQUENT EVENT

In July 2007, we formed a strategic partnership with Steadfast Resorts International (“SRI”) to own and operate hotels in Mexico. We invested $5.7 million through a convertible debt instrument in a three-property portfolio of Tesoro Resorts in Mexico, currently owned by affiliates of SRI. Our investment is expected to convert to a 15% equity interest in a joint venture with SRI in the near future. A $10 million capital plan will be initiated to make improvements at all three resorts, with the primary concentration on redeveloping the Cabo San Lucas property. The three properties included in this joint venture are:

Hotel	Rooms		Location
Tesoro Los Cabos		286	Cabo San Lucas, Mexico
Tesoro Manzanillo		331	Manzanillo, Mexico
Tesoro Ixtapa		203	Ixtapa, Mexico
Total rooms:		820

We also invested $0.5 million for a 50% interest in a separate joint venture with SRI, named Interstate de Mexico, to manage hotels. We are the managing member of this joint venture. The joint venture, which is a platform for further growth in Mexico, took over management of the three-property portfolio immediately upon its formation.

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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 Hotels & Resorts Inc., 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.

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”, “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, 2006.

Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this Quarterly Report on Form 10-Q, 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 not affiliated with a hotel brand, measured by number of rooms under management. We derive our earnings from a diversified portfolio of hotel management agreements and ownership of a group of select hotel properties. While we continue to focus on our core business as a premier provider of hospitality management services, we are also expanding our portfolio of owned hotels in an effort to diversify and enhance our earnings. In 2007, a significant portion of our operating income will be related to owned hotels. We have two reportable operating segments: hotel management and hotel ownership (through whole-ownership and joint ventures). A third reportable segment, corporate housing, was disposed of on January 26, 2007 with the sale of BridgeStreet, our corporate housing subsidiary, and the results of this segment are reported as discontinued operations in our consolidated financial statements for all periods presented.

Our portfolio of managed properties is diversified by brand, franchise and ownership group. We manage hotels representing more than 30 franchise and brand affiliations and also operate 15 independent hotels. Our managed hotels are owned by more than 60 different ownership groups. As of June 30, 2007, we managed 187 properties, with 42,760 rooms in 36 states, the District of Columbia, Canada, Russia, Belgium, and Ireland. We also owned six hotels with 1,755 rooms and held non-controlling joint venture equity interests in 11 joint ventures, which hold ownership interests in 17 of our managed properties.

Financial Highlights — Our operating results for the first half of 2007 reflect tangible results of our strategy to diversify and stabilize our income streams through the increase of hotel ownership, through wholly-owned

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acquisitions and joint venture investments. In January 2007, we were able to capitalize on the earnings growth of our corporate housing subsidiary with the sale of BridgeStreet for $40.5 million, resulting in a gain on sale of $18.1 million. This additional capital was beneficial as we purchased our fifth wholly-owned property, the Hilton Houston Westchase, in February 2007 for a total acquisition cost of $51.9 million. In May 2007, we purchased the Westin Atlanta Airport, our largest wholly-owned acquisition to date, for a total acquisition cost of $76.1 million. For the six months ended June 30, 2007, revenues from our owned-hotels were $31.7 million, an increase of $20.2 million compared to the same period in 2006. In addition, operating income from owned-hotels increased by $6.7 million, while gross margins increased from 26% in the first half of 2006, to 30% in the first half of 2007.

While our operations have benefited from the acquisitions of wholly-owned real estate, we also continue to experience the effects of the significant number of management contracts lost during 2006 and the first half of 2007. Total management fees were $23.0 million in the first half of 2007, a decrease of $6.1 million from the first half of 2006 (after removing the effect of $3.2 million of business interruption proceeds received in the first quarter of 2006). Although our management contract losses have been significant, we have effectively managed to replace the majority of the earnings from these contracts by executing our ownership growth strategy.

Investments in, and Acquisitions of Real Estate — In February 2007, we acquired the 297-room Hilton Houston Westchase from affiliates of Blackstone, for a total acquisition price of $52.2 million. We financed part of the acquisition through a non-recourse mortgage loan of $32.8 million and the remainder with a combination of cash on hand and borrowings on our old credit facility. The hotel is currently undergoing the final phase of an $11 million comprehensive renovation program, of which $8.5 million was completed by the previous owner.

In May 2007, we acquired the 495-room Westin Atlanta Airport for a total purchase price of $76.1 million, representing our largest hotel acquisition to date. Simultaneous to amending the new Credit Facility (“Credit Facility”), we borrowed a further $50.0 million of term loans to finance part of the purchase price, with the remainder paid from cash on hand. The hotel is set to begin a comprehensive $18.0 million renovation program designed to provide all of the full-service features and amenities that travelers have come to expect at a Westin property.

We have also been actively seeking joint venture investment opportunities during the first half of 2007. In March 2007, we continued to grow our portfolio of joint ventures by investing $0.5 million to acquire a 15% interest in the Radisson Hotel Cross Keys in Baltimore, Maryland. We also contributed an additional $0.7 million in an existing joint venture which will build five to ten aloft^® hotels over the next several years. Intended to be similar to the W Hotel^® brand, aloft^® is the new premium select-service hotel brand being introduced by Starwood Hotels & Resorts Worldwide, Inc. Our joint venture partner is responsible for site selection, construction and development management, while we will operate the hotels. The joint venture has signed long-term franchise agreements for the first two properties. Construction commenced on the first property located in Rancho Cucamonga, CA in January 2007, with the second location in Cool Springs, TN expected to begin construction later in 2007.

In April 2007, the joint venture which owns the Doral Tesoro Hotel and Golf Club made a distribution to us of $1.8 million, which included the return of our initial investment of $1.5 million and a return on investment. As the distribution received was greater than our investment balance at the time of the distribution, the investment balance was reduced to zero with the remainder recorded as a deferred gain in our consolidated balance sheets. The distribution in excess of our investment will be deferred until such time as the assets in the venture are sold or another such event has occurred, resulting in the culmination of the earnings process. The distribution did not impact our percentage investment ownership interest in the joint venture.

In July 2007, we formed a strategic partnership with Steadfast Resorts International (“SRI”) to own and operate hotels in Mexico. We invested $5.7 million through a convertible debt instrument in a three-property portfolio of Tesoro Resorts in Mexico, currently owned by affiliates of SRI. Our investment is expected to convert to a 15% equity interest in a joint venture with SRI in the near future. A $10 million capital plan will be initiated to make improvements at all three resorts. We also invested $0.5 million for a 50% interest in a separate joint venture with SRI to manage hotels. The joint venture, which is a platform for further growth in Mexico, took over management of the three-property portfolio immediately upon its formation.

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Increase in our Borrowing Capacity — In March 2007, we closed on our Credit Facility. The Credit Facility consisted of a $65.0 million term loan and a $60.0 million revolving loan. Upon entering into the Credit Facility, we borrowed $65.0 million under the term loan using a portion of it to pay off the remaining obligation under the old credit facility. In May 2007, we amended the Credit Facility to borrow a further $50.0 million of term loans, resulting in a total of $115.0 million of term loans outstanding under the facility, and increased the availability under our revolving loan to $85.0 million. The proceeds from the additional $50.0 million of term loans was used to purchase the 495-room Westin Atlanta Airport. The Credit Facility provides for $200.0 million of total borrowing capacity, compared to $108.0 million under the previous credit facility. In addition, we have the ability to increase the revolving credit facility and/or term loan by up to $75.0 million, in the aggregate, by seeking additional commitments from lenders.

Turnover of Management Contracts — We continued to realize the effects of the significant number of hotel purchase and sale transactions in the real estate market, which reduced the number of properties we manage. We ceased managing 49 hotels during the first half of 2007, including the loss of 17 properties owned by CNL Hotels & Resorts, Inc. which were sold as a portfolio of hotels. As a result, we were terminated as the manager of those properties. In addition, Sunstone REIT sold seven hotels, which resulted in the termination of our management contracts for those properties.

During the first six months of 2007, Blackstone sold 18 hotels, including the Hilton Houston Westchase and Westin Atlanta Airport, which we purchased in February 2007 and May 2007, respectively, and three hotels which we continued to manage as of June 30, 2007 for the new owner. The 19 Blackstone properties which we continued to manage at June 30, 2007 accounted for $3.7 million in management fees for the six months ended June 30, 2007. Termination fees due to us as of June 30, 2007 for hotels previously sold by Blackstone are $15.1 million (assuming Blackstone does not replace the lost management contracts).

In summary, the impact on our financial results for the 49 management contracts terminated in the first half of 2007 is as follows:

	Number of			Number of		Six Months		Six Months
Owner Group	Properties			Rooms		Ended 6/30/2007		Ended 6/30/2006
Blackstone		15	(1)		4,314	$	1.6 million	$	2.5 million
Sunstone REIT		7			1,492		0.4 million		0.5 million
CNL		17			2,999		0.6 million		1.5 million
Others		12			2,322		0.5 million		0.9 million
Total		51			11,127	$	3.1 million	$	5.4 million

(1) As we will no longer be recording management fees for the 297-room Hilton Houston Westchase and the 495-room Westin Atlanta Airport, we have included them in this analysis. In 2007, there were 13 Blackstone properties sold which we no longer manage.

We partially offset the loss of 10,335 rooms related to the 49 management contracts with the addition of 13 management contracts, totaling nearly 2,900 rooms.

In June 2007, Equity Inns announced that it was being acquired in a transaction that is expected to close in the fourth quarter of 2007. At June 30, 2007, we managed 39 properties for Equity Inns, consisting of 4,917 rooms. We anticipate entering into discussions with the new owner as to its future plans for those 39 properties. The management contracts for the Equity Inns properties have minimal termination fee provisions. For the six months ended June 30, 2007, we received approximately $1.3 million in management fees from the Equity Inns properties.

Industry Overview — The lodging industry, of which we are a part, is subject to international and national events. We have been impacted by several events over the previous several years, including the ongoing threat of terrorism and other hostilities, the potential outbreak of infectious disease and natural disasters. As we conduct our business on a national and international level, our activities are also affected by changes in the performance of regional and global economies.

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In the second half of 2006 and the first half of 2007, the lodging industry experienced a substantial slowdown in room demand growth as compared to prior periods. This slowdown is partially due to the impact of Hurricane Katrina in the previous periods and also a slowdown in disposable income and consumption expenditures. However, the growth in the industry is forecasted to continue in future years, albeit at a slower pace than recently experienced. Overall, industry RevPAR is projected to grow an additional 5.3% in 2007. The entire RevPAR increase is projected to be a result of growth in ADR, as occupancy is forecasted to decrease by 0.6% in 2007. The decrease in occupancy is driven by room supply growth outpacing room demand growth in 2007 by 1.1%.

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, 2006. We also believe that the following are critical accounting policies:

Accounting for Uncertainty in Income Taxes

We adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”) on January 1, 2007. FIN 48 is an interpretation of FASB Statement No. 109, “Accounting for Income Taxes,” and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. FIN 48 prescribes a recognition threshold and measurement requirement for the financial statement recognition of a tax position that we have taken or expect to take on a tax return. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Under FIN 48, we may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. See Note 14, “FIN 48 — Recognition and Measurement of Tax Positions and Benefits” for additional information.

Revenue Recognition Related to Termination Fees

As we have existing management agreements with Blackstone, the owner of multiple hotels which we have purchased, we evaluate the impact of EITF Issue No. 04-1, “Accounting for Preexisting Relationships between the Parties to a Business Combination” (“EITF 04-1”) on the purchase accounting for these acquisitions. Our agreements with Blackstone have provisions which require the payment of termination fees if Blackstone elects to terminate the management contract or sells the hotel to any buyer, including us. We determine the amount by which the pricing of these contracts is favorable when compared to the pricing we have negotiated with owners for recently executed management contracts for comparable hotel properties and compare this amount to the amount of required termination fee due from Blackstone. EITF 04-1 requires that we recognize the lesser of these amounts as a gain on the settlement of the executory contract and as part of the acquisition cost of the hotel.

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Results of Operations

Operating Statistics

Statistics related to our managed hotel properties (including wholly-owned hotels) are set forth below:

	As of June 30,				Percent Change
	2007		2006		’07 vs.’06
Hotel Management
Properties managed		187		262		(28.6	)%
Number of rooms		42,760		59,020		(27.5	)%
Hotel Ownership
Number of properties		6		3		100.0	%
Number of rooms		1,755		655		167.9	%

Hotels under management decreased by a net of 75 properties as of June 30, 2007 compared to June 30, 2006, due to the following:

•  We acquired 16 additional management contracts from various owners.

•  28 properties owned by Meristar/Blackstone were transitioned out of our system.

•  Sunstone REIT sold 22 properties which we no longer manage.

•  CNL sold 17 properties which we no longer manage.

•  24 properties owned by other owners were transitioned out of our system.

The operating statistics related to our managed hotels, including wholly-owned hotels, on a same-store basis(1) were as follows:

	Three Months
	Ended June 30,						Percent Change
	2007			2006			’07 vs. ’06
Hotel Management
RevPAR	$	104.61		$	96.85			8.0	%
ADR	$	135.43		$	126.00			7.5	%
Occupancy		77.2	%		76.9	%		0.4	%

	Six Months
	Ended June 30,						Percent Change
	2007			2006			’07 vs. ’06
Hotel Management
RevPAR	$	98.75		$	90.98			8.5	%
ADR	$	132.80		$	123.46			7.6	%
Occupancy		74.4	%		73.7	%		0.9	%

(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 June 30, 2007 are not included in same-store hotel results for the periods presented herein. Of the 187 properties that we managed as of June 30, 2007, 165 properties have been classified as same-store hotels.

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Three months ended June 30, 2007 compared to three months ended June 30, 2006

Revenue

Revenue consisted of the following (in thousands):

	Three Months
	Ended June 30,				Percent Change
	2007		2006		’07 vs. ’06
Lodging	$	18,621	$	6,418		>100	%
Management fees		11,580		15,187		(23.8	)%
Termination fees		2,418		2,196		10.1	%
Other		2,763		2,718		1.7	%
Other revenue from managed properties		164,793		217,824		(24.3	)%
Total revenue	$	200,175	$	244,343		(18.1	)%

Lodging

The increase in lodging revenue is primarily due to the inclusion of $12.0 million of revenues in the three months ended June 30, 2007 from the Westin Atlanta Airport (acquired in May 2007), the Hilton Houston Westchase (acquired in February 2007), the Hilton Arlington (acquired in October 2006) and the Hilton Garden Inn Baton Rouge Airport (acquired in June 2006). RevPAR at the two hotels we owned during both three month periods increased by 5.6%.

Management fees and termination fees

The decrease in management fee revenue is a result of a decrease in the average number of managed properties of approximately 28%. However, due to the strength of the lodging industry and improved operating efficiencies at our managed properties, we were able to partially offset the loss of management contracts by increasing RevPAR by 8.0% during the quarter.

Termination fees for the three months ended June 30, 2007 were due to the recognition of $1.4 million of termination fees from Blackstone on the sale of the Westin Atlanta Airport, $0.5 million from sales of other Blackstone properties and $0.5 million from termination by various other owners. For the three months ended June 30, 2006, we recognized $1.9 million in termination fees from MeriStar/Blackstone, and $0.3 million from various other owners.

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The composition of our management and termination fees by significant owner groups was as follows:

	Number of
	Properties @		Three Months		Three Months
Owner Group	6/30/2007		Ended 6/30/2007		Ended 6/30/2006
MANAGEMENT FEES:
Blackstone		19	$	1.9 million	$	1.9 million
Sunstone REIT		30		2.2 million		2.1 million
Equity Inns REIT		39		0.7 million		0.5 million
CNL/Ashford		5		0.2 million		0.1 million
International(1)		8		0.3 million		0.4 million
Other		86		5.3 million		4.8 million
Hotels terminated during 2007				1.0 million		2.9 million
Hotels terminated during 2006				—		2.5 million
Total management fees		187	$	11.6 million	$	15.2 million
TERMINATION FEES:
Blackstone			$	1.9 million	$	1.9 million
Sunstone REIT				0.2 million		—
Other				0.3 million		0.3 million
Total termination fees			$	2.4 million	$	2.2 million

(1) We also expect to earn incentive fees related to the international properties. We record incentive management fees in the period that it is certain these fees will be earned, which for annual incentive fee measurements is typically in the last month of the annual contract period. At June 30, 2007, we recorded deferred revenue of $4.1 related to the international properties. We expect to recognize this deferred revenue in the fourth quarter.

Other

Other revenues increased as a result of miscellaneous incentives from vendor contracts. The increase was completely offset by a decrease in operating activity in our purchasing and capital project management subsidiary and a decrease in accounting fees of $0.6 million as a result of managing fewer properties.

Other revenue from managed properties

These amounts represent the reimbursement of payroll and related costs, and certain other costs of the hotel’s operations that are contractually reimbursed to us by the hotel owners, the payments of which are recorded as “other expenses from managed properties.” The decrease of $53.0 million in other revenue from managed properties is primarily due to the decrease in the number of managed hotels and a corresponding decrease in the number of hotel employees and related reimbursable salaries, benefits and other expenses.

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Operating Expenses

Operating expenses consisted of the following (in thousands):

	Three Months
	Ended June 30,				Percent Change
	2007		2006		’07 vs. ’06
Lodging	$	12,667	$	4,572		>100	%
Administrative and general		14,575		15,385		(5.3	)%
Depreciation and amortization		3,684		1,546		>100	%
Asset impairments and write-offs		1,047		92		>100	%
Other expenses from managed properties		164,793		217,824		(24.3	)%
Total operating expenses	$	196,766	$	239,419		(17.8	)%

Lodging

The increase in lodging expense is primarily due to the inclusion of $8.1 million of expenses in the three months ended June 30, 2007 from the Westin Atlanta Airport (acquired in May 2007), the Hilton Houston Westchase (acquired in February 2007), the Hilton Arlington (acquired in October 2006) and the Hilton Garden Inn Baton Rouge Airport (acquired in June 2006). Operating margins for our owned hotels increased to 32% from 29%.

Administrative and general

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. Administrative and general expenses showed a decrease between periods, primarily due to a reduction in employee compensation of $1.2 million and expenses in our insurance subsidiary of $0.6 million. These savings have been partially offset by general and administrative expenses of $0.9 million relating to our new international office in Moscow, Russia.

Depreciation and amortization

We had a significant increase in depreciable assets due to the presence of six wholly-owned hotels during the three months ended June 30, 2007. The Westin Atlanta Airport, Hilton Houston Westchase, Hilton Arlington and Hilton Garden Inn Baton Rouge Airport, all of which were acquired in or subsequent to the second quarter of 2006, resulted in additional depreciation expense of $1.3 million. In addition, scheduled amortization expense for our management contracts increased by approximately $0.8 million as a result of revising the estimated economic lives of the management contracts for the remaining Blackstone properties from 25 years to approximately four years, due to Blackstone’s plans to sell most of the portfolio within four years.

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 ended June 30, 2007, we recognized impairment losses of $1.1 million, related to seven properties that were sold in the second quarter.

Other expenses from managed properties

These expenses 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 $53.0 million in other revenue from managed properties is primarily due to the decrease in the number of managed hotels and a corresponding decrease in the number of hotel employees and related reimbursable salaries, benefits and other expenses.

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Other income and expense

Other income and expenses consisted of the following (in thousands):

	Three Months
	Ended June 30,				Percent Change
	2007		2006		’07 vs. ’06
Interest expense, net	$	2,555	$	1,425		79.3	%
Equity in earnings of affiliates		854		123		>100	%
Income tax expense		708		1,611		(56.1	)%
Minority interest expense		9		31		(71.0	)%
Income from discontinued operations, net of tax		607		1,029		(41.0	)%

Interest expense

The majority of the increase in interest expense of $1.1 million was due to interest expense of $1.0 million incurred associated with our mortgage debt from the purchase of the Hilton Arlington and the Hilton Houston Westchase. In addition, we recorded additional interest expense of $0.4 million associated with our credit facility due to the higher average outstanding debt balance as a result of borrowing $50.0 million for the purchase of the Westin Atlanta Airport in May 2007. These increases were offset by $0.3 million in lower interest expense related to the $19.0 million of mortgage debt on the Hilton Concord, which was repaid in April 2007.

Equity in earnings of affiliates

Equity in earnings of affiliates increased $0.7 million, primarily related to $0.6 million in additional gain related to the settlement of working capital and purchase price true-ups from the sale of the Sawgrass Marriott Resort & Spa, which our joint venture sold in July 2006.

Income tax expense

The change in income tax expense is driven by the decrease in income from continuing operations.

Income from discontinued operations, net of tax

Income from discontinued operations for the three months ended June 30, 2007 was primarily due to an additional gain recognized on the sale of BridgeStreet of $0.5 million as well as an additional $0.1 million net gain related to true-ups on the September 2005 sale of the Pittsburgh Airport Residence Inn by Marriott. The 2006 discontinued operations relate to the operations of BridgeStreet.

Six months ended June 30, 2007 compared to six months ended June 30, 2006

Revenue

Revenue consisted of the following (in thousands):

	Six Months
	Ended June 30,				Percent Change
	2007		2006		’07 vs. ’06
Lodging	$	31,697	$	11,455		>100	%
Management fees		23,049		32,350		(28.8	)%
Termination fees		3,993		7,896		(49.4	)%
Other		5,032		6,429		(21.7	)%
Other revenue from managed properties		341,163		442,773		(22.9	)%
Total revenue	$	404,934	$	500,903		(19.2	)%

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Lodging

The increase in lodging revenue is primarily due to the inclusion of $19.2 million of revenues in the six months ended June 30, 2007 from the Westin Atlanta Airport (acquired in May 2007), the Hilton Houston Westchase (acquired in February 2007), the Hilton Arlington (acquired in October 2006) and the Hilton Garden Inn Baton Rouge Airport (acquired in June 2006). RevPAR at hotels we owned during both six month periods increased by 9.1%.

Management fees and termination fees

The decrease in management fee revenue is partially due to the non-recurrence in 2007 of business interruption proceeds of $3.2 million that we received in the first quarter of 2006 associated with eight properties that were damaged or closed due to hurricanes in 2004. The remaining change is a result of a decrease in the average number of managed properties of approximately 25%. However, due to the strength of the lodging industry and improved operating efficiencies at our managed properties, we were able to partially offset the loss of management contracts by increasing RevPAR by 8.5% for the six month period ended June 30, 2007 compared to prior year.

Termination fees for the six months ended June 30, 2007 were due to the recognition of $1.4 million of termination fees from Blackstone on the sale of the Westin Atlanta Airport, $1.0 million from the sale of Hilton Houston Westchase, $0.5 million from sales of other Blackstone properties and $1.1 million related to the loss of management contracts from other owners. For the six months ended June 30, 2006, we recognized $7.3 million in termination fees from MeriStar/Blackstone, including one-time termination fees of $4.1 million due to the sale of ten properties and subsequent loss of these management contracts. The remaining $0.6 million in termination fees were from various other owners.

The composition of our management and termination fees by significant owner groups was as follows:

	Number of
	Properties @		Six Months		Six Months
Owner Group	6/30/2007		Ended 6/30/2007		Ended 6/30/2006
MANAGEMENT FEES:
Blackstone		19	$	3.7 million	$	3.6 million
Sunstone REIT		30		4.3 million		3.8 million
Equity Inns		39		1.3 million		0.9 million
CNL/Ashford		5		0.3 million		0.3 million
International(1)		8		0.6 million		0.9 million
Other		86		9.7 million		9.0 million
Hotels terminated during 2007				3.1 million		5.4 million
Hotels terminated during 2006				—		5.3 million
Business interruption proceeds				—		3.2 million
Total management fees		187	$	23.0 million	$	32.4 million
TERMINATION FEES:
Blackstone			$	3.0 million	$	7.3 million
Sunstone REIT				0.2 million		—
Other				0.8 million		0.6 million
Total termination fees			$	4.0 million	$	7.9 million

(1) We also expect to earn incentive fees related to the international properties. We record incentive management fees in the period that it is certain these fees will be earned, which for annual incentive fee measurements is typically in the last month of the annual contract period. At June 30, 2007, we recorded deferred revenue of $4.1 related to the international properties. We expect to recognize this deferred revenue in the fourth quarter.

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Other

Other revenues decreased $1.4 million due to a decrease in operating activity generated by our purchasing and capital project management subsidiary and our accounting fees as a result of managing fewer properties.

Other revenue from managed properties

These amounts represent the reimbursement of payroll and related costs, and certain other costs of the hotel’s operations that are contractually reimbursed to us by the hotel owners, the payment of which are recorded as “other expenses from managed properties.” The decrease of $101.6 million in other revenue from managed properties is primarily due to the decrease in the number of managed hotels and a corresponding decrease in the number of hotel employees and related reimbursable salaries, benefits and other expenses.

Operating expenses

Operating expenses consisted of the following (in thousands):

	Six Months
	Ended June 30,				Percent Change
	2007		2006		’07 vs. ’06
Lodging	$	22,039	$	8,460		>100	%
Administrative and general		27,890		29,030		(3.9	)%
Depreciation and amortization		6,977		3,089		>100	%
Asset impairments and write-offs		1,155		8,642		(86.6	)%
Other expenses from managed properties		341,163		442,773		(22.9	)%
Total operating expenses	$	399,224	$	491,994		(18.9	)%

Lodging

The increase in lodging expense is primarily due to the inclusion of $13.1 million of expenses in the six months ended June 30, 2007 from the Westin Atlanta Airport (acquired in May 2007), the Hilton Houston Westchase (acquired in February 2007), the Hilton Arlington (acquired in October 2006) and the Hilton Garden Inn Baton Rouge Airport (acquired in June 2006). Operating margins for our owned hotels increased from 26% to 30%.

Administrative and general

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. Administrative and general expenses decreased between periods primarily due to a reduction in employee compensation of $2.8 million as overall headcount was lower. These savings have been partially offset by various general and administrative expenses totaling $1.6 million during the six month period ended June 30, 2007 relating to our new international office in Moscow, Russia and costs related to executing our growth strategy.

Depreciation and amortization

We had a significant increase in depreciable assets due to the presence of six wholly-owned hotels during the six months ended June 30, 2007. The Westin Atlanta Airport, Hilton Houston Westchase, Hilton Arlington and Hilton Garden Inn Baton Rouge Airport, all of which were acquired in or subsequent to the second quarter of 2006, resulted in additional depreciation expense of $2.2 million. In addition, scheduled amortization expense for our management contracts increased by approximately $1.6 million as a result of revising the estimated economic lives of the management contracts for the remaining Blackstone properties from 25 years to approximately four years, due to their plans to sell most of the portfolio within four years.

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 six months ended June 30, 2007, we recognized impairment losses of $1.2 million, related to properties that

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were sold in 2007. For the six months ended June 30, 2006, $8.3 million of asset impairments were recorded as a result of the termination of management contracts related to the sale of 18 MeriStar/Blackstone properties.

Other expenses from managed properties

These expenses 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 $101.6 million in other revenue from managed properties is primarily due to the decrease in the number of managed hotels and a corresponding decrease in the number of hotel employees and related reimbursable salaries, benefits and other expenses.

Other income and expense

Other income and expenses consisted of the following (in thousands):

	Six Months
	Ended June 30,					Percent Change
	2007		2006			’07 vs. ’06
Interest expense, net	$	4,852	$	3,094			56.8	%
Equity in earnings (losses) of affiliates		1,255		(434	)		>100	%
Income tax expense		855		2,280			(62.5	)%
Minority interest expense		62		49			26.5	%
Income from discontinued operations, net of tax		17,608		703			>100	%

Interest expense

The majority of the increase in interest expense of $1.8 million was due to interest expense incurred associated with our mortgage debt from the purchase of the Hilton Arlington and the Hilton Houston Westchase. In addition, we recorded additional amortization expense of $0.6 million for deferred financing fees related to the extinguishment of our old credit facility in March 2007. The increase was offset by $0.5 million in lower interest expense on our old credit facility due to a lower average outstanding debt balance during 2007 and the early repayment of the $19.0 million of mortgage debt on the Hilton Concord in April 2007.

Equity in earnings of affiliates

Equity in earnings of affiliates increased $1.7 million, primarily related to $0.6 million in additional gain related to the settlement of working capital and other purchase price true-ups from the sale of the Sawgrass Marriott Resort & Spa in July 2006 by a joint venture in which we previously had an ownership interest, which our joint venture sold in July 2006. In addition, we recorded $0.5 million in earnings in 2007 from our interest in the new joint venture which owns the Sawgrass Marriott Resort & Spa. In 2006, one of our joint ventures, which was sold in December 2006, contributed losses of $0.5 million.

Income tax expense

The change in income tax expense is driven by the decrease in income from continuing operations.

Income from discontinued operations, net of tax

Discontinued operations represents the operations of our corporate housing subsidiary (disposed in January 2007) and the gain on sale of this subsidiary of $18.1 million. The disposition of our corporate housing subsidiary triggered the recognition of significant differences in the carrying values between tax basis and GAAP basis. As the tax basis was significantly higher, the gain realized for tax purposes was significantly lower than the $18.1 million gain recognized in our statement of operations for the six month period ended June 30, 2006, resulting in an effective tax rate of 1%.

In September 2005, we sold Pittsburgh Airport Residence Inn by Marriott. We recognized an additional net gain on sale of $0.1 million in 2007 related to true-ups finalizing the sale.

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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):

	Six Months
	Ended June 30,						Percent Change
	2007			2006			’07 vs. ’06
Cash provided by operating activities	$	15,419		$	16,927			(8.9	)%
Cash used in investing activities		(98,300	)		(25,979	)		>100	%
Cash provided by (used in) financing activities		84,971			(741	)		>100	%
Working capital		(5,462	)		(14,324	)		61.9	%
Cash interest expense		4,577			3,676			24.5	%
Debt balance		172,237			81,552			>100	%

Operating Activities

The decrease in cash provided by operating activities is primarily due to marginal changes in working capital assets and liabilities. This was partially offset by a change in net income, which increased by $0.8 million, after adjusting for the $18.1 million gain on sale of our corporate housing subsidiary, as well as termination fees for both periods totaling $4.0 million and $7.9 million for the six month periods ended June 30, 2007 and 2006, respectively.

Investing Activities

The major components of the increase in cash used in investing activities during the six month period ended June 30, 2007 compared to the six month period ended June 30, 2006 were:

•  The purchase of two wholly-owned properties in 2007 compared to one in 2006. In February 2007, we purchased the Hilton Houston Westchase for $51.9 million followed by the purchase of the Westin Atlanta Airport in May 2007 for $76.1 million. In 2006 we purchased the Hilton Garden Inn Baton Rouge for $14.5 million.

•  In 2007, we invested a total of $1.2 million in two new joint ventures while receiving distributions totaling $2.8 million from four joint ventures. In 2006, we invested $6.0 million in three new joint ventures and made an additional contribution to an existing joint ventures of $0.2 million. 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 $1.1 million on property and equipment during the six month period ended June 30, 2007, which is primarily related to improvements at our owned hotels and general corporate additions.

•  The cash expenditures above were offset by proceeds of $35.0 million from the sale of our corporate housing subsidiary.

Financing Activities

The increase in cash provided by financing activities is primarily due to net borrowings on long-term debt of $88.0 million during 2007, compared to net repayments on long-term debt of $3.5 million during 2006. Borrowings in 2007 are primarily related to the $32.8 million and $50.0 million used for the purchase of the Hilton Westchase and Westin Atlanta Airport, respectively. Our hotel acquisition in 2006 was paid for with cash on hand. Repayments of principal in 2006 were made from cash provided by operating activities.

We incurred total financing fees of $3.3 million in connection with the new Credit Facility entered in March 2007 and the amendment to the Credit Facility in May 2007. In addition, during 2007, we received proceeds of $0.2 million in connection with the issuance of common stock related to equity based compensation, compared to $2.2 million during 2006.

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Liquidity

Liquidity Requirements — 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, capital improvements at our owned hotels and costs associated with potential acquisitions and continuing our growth strategy. We continually monitor our operating and cash flow models in order to forecast our compliance with the financial covenants. As of June 30, 2007, we were in compliance with all financial covenants under our Credit Facility.

We continue to implement our growth strategy, which involves the acquisition of whole ownership and joint venture interests in hotel properties. In February 2007, we acquired our fifth wholly-owned property, the Hilton Houston Westchase. We financed the purchase through a $32.8 million, non-recourse mortgage loan. In May 2007, we acquired our sixth wholly-owned property, the Westin Atlanta Airport. We financed the acquisition through cash on hand and borrowings of $50.0 million from our amended Credit Facility. Joint ventures also continue to play a strategic and vital role in the continued growth strategy of the Company. In March, we entered into another joint venture with a $0.5 million investment for a 15% ownership interest in the Radisson Cross Keys in Baltimore, Maryland.

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 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. In May 2007, we amended our Credit Facility to expand our availability under our revolving loan from $65.0 million to $85.0 million. As of June 30, 2007, all $85.0 million of capacity was available to us for borrowing. 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.

Long-Term Debt

Senior Credit Facility — In March 2007, we closed on our new $125.0 million Credit Facility. The new Credit Facility consisted of a $65.0 million term loan and a $60.0 million revolving loan. Upon entering into the new Credit Facility, we borrowed $65.0 million under the term loan and used a portion of those proceeds to pay off the remaining obligation under the old credit facility. In connection with the purchase of the Westin Atlanta Airport in May 2007, we amended the Credit Facility. The amendment increased our total borrowing capacity to $200.0 million, consisting of a $115.0 term loan and a $85.0 million revolving credit facility. In addition, we have the ability to increase the revolving credit facility and/or term loan by up to $75.0 million, in the aggregate, by seeking additional commitments from lenders. Under the amended Credit Facility, we are required to make quarterly payments on the term loan of approximately $0.3 million.

The actual interest rates on both the revolving loan and term loan depend on the results of certain financial tests. As of June 30, 2007, based on those financial tests, borrowings under the term and revolving loan bore interest at the 30-day LIBOR rate plus 275 basis points (a rate of 8.07% per annum). We incurred interest expense of $1.9 million and $2.7 million on the senior credit facilities for the three and six month periods ended June 30, 2007, respectively, and $1.4 million and $3.0 million for the three and six month periods ended June 30, 2006, 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. As of June 30, 2007, we were in compliance with all of these covenants.

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Mortgage Debt — The following table summarizes our mortgage debt as of June 30, 2007:

	Principal		Maturity		Spread Over		Interest Rate as of
	Amount		Date(1)		30-Day LIBOR		June 30, 2007
Hilton Arlington	$	24.7 million		November 2009		135 bps		6.7	%
Hilton Houston Westchase	$	32.8 million		February 2010		135 bps		6.7	%

(1) We are required to make interest-only payments until these loans mature, with two optional one-year extensions.

In April 2007, we repaid, in full, $19.0 million of mortgage debt relating to the Hilton Concord. Due to the structure of the loan agreement, we incurred no prepayment penalties in connection with the early repayment.

We incurred interest expense on the mortgage loans of $1.0 million and $2.1 million for the three and six month periods ended June 30, 2007, respectively, and $0.3 million and $0.7 million for the three and six month periods ended June 30, 2006, respectively. Based on the terms of these mortgage loans, a prepayment cannot be made during the first year after it has been entered. After one year, a penalty of 1% is assessed on any prepayments. The penalty is reduced ratably over the course of the second year. There is no penalty for prepayments made in the third year.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

In February 2007, we entered into an interest rate cap agreement in connection with the purchase of the Hilton Houston Westchase. The $32.8 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 February 9, 2010. In April 2007, we repaid the Hilton Concord $19.0 million mortgage loan and have cancelled the related interest rate cap agreement. The 30-day LIBOR rate, upon which our debt and interest rate cap agreements are based on, decreased from 5.4% per annum, as of December 31, 2006, to 5.3% per annum, as of June 30, 2007.

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 $0.4 million and $0.2 million for the three months ended June 30, 2007 and 2006, respectively, and by $0.6 million and $0.4 million for the six months ended June 30, 2007 and 2006, respectively.

Beyond those stated above, there were no other material changes to the information provided in Item 7A in our Annual Report on Form 10-K regarding our market risk.

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 15-d — 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 June 30, 2007.

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Changes in Internal Controls

There has not been any change in our internal control over financial reporting during the second quarter of 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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

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PART II. OTHER INFORMATION

Item 1.   Legal Proceedings

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

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

Our annual meeting of stockholders was held on May 31, 2007.

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

Item No. 1

To approve the adoption of the Interstate Hotels & Resorts, Inc. 2007 Equity Award Plan.

For	18,059,727
Against	5,752,421
Abstain	40,924

Item No. 2

To consider and vote upon ratification of the appointment of KPMG LLP as our independent Registered Public Accounting Firm for the fiscal year ending December 31, 2007.

For	28,422,120
Against	185,602
Abstain	19,331

Item No. 3

To approve the election or re-election as directors of the Company to serve terms expiring at the Annual Meeting in the year set forth and in accordance with their respective classes, and until their successors are duly elected and qualified.

	For		Against		Withheld
Class III: (term to expire at the Annual Meeting in 2008)
James F. Dannhauser		25,899,597		2,689,668		37,787
Class II: (term to expire at the Annual Meeting in 2009)
Ronald W. Allen		26,389,881		2,217,416		19,755
Class I: (term to expire at the Annual Meeting in 2010)
Leslie R. Doggett(1)		423,968		—		—
James B. McCurry		25,891,641		2,694,207		41,204
John J. Russell, Jr.		26,368,342		2,217,486		41,224

(1) Due to ministerial proxy card error, the shares voted “For” Ms. Doggett are only those shares voted in person at the Annual Meeting.

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Item 6.  Exhibits

(a) Exhibits

Exhibit No.			Description of Document
	3	.1	Amended and Restated Certificate of Incorporation of the Company, formerly MeriStar Hotels & Resorts, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form S-1/A filed with the Securities and Exchange Commission on July 23, 1998 (Registration No. 333-49881)).
	3	.1.1	Certificate of Amendment of the Restated Certificate of Incorporation of the Company dated June 30, 2001 (incorporated by reference to Exhibit 3.1.1 to the Company’s Form 10-K filed with the Securities and Exchange Commission on April 15, 2002).
	3	.1.2	Certificate of Merger of Interstate Hotels Corporation into MeriStar Hotels & Resorts, Inc. (incorporated by reference to Exhibit 3.1.2 to the Company’s Form 8-A/A filed with the Securities and Exchange Commission on August 2, 2002).
	3	.1.3	Certificate of Amendment of the Restated Certificate of Incorporation of the Company dated July 31, 2002 (incorporated by reference to Exhibit 3.1.3 to the Company’s Form 8-A/A filed with the Securities and Exchange Commission on August 2, 2002).
	3	.2	By-laws of the Company, formerly MeriStar Hotels & Resorts, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Form S-1/A filed with the Securities and Exchange Commission on July 23, 1998 (Registration No. 333-49881)).
	3	.2.1	Amendment to the By-laws of the Company (incorporated by reference to Exhibit 3.3 to the Company’s Form 8-A/A filed with the Securities and Exchange Commission on August 2, 2002).
	4	.1	Form of Common Stock Certificate of the Company (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-A/A filed with the Securities and Exchange Commission on August 2, 2002).
	4	.2	Preferred Share Purchase Rights Agreement, dated July 23, 1998, between the Company, formerly MeriStar Hotels & Resorts, Inc., and the Rights Agent (incorporated by reference to Exhibit 4.4 to the Company’s Form S-1/A filed with the Securities and Exchange Commission on July 23, 1998(Registration No. 333-49881)).
	4	.2.1	Amendment to Rights Agreement, dated December 8, 2000, between the Company, formerly MeriStar Hotels & Resorts, Inc., and the Rights Agent (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 12, 2000).
	4	.2.2	Second Amendment to Rights Agreement, dated May 1, 2002, between the Company, formerly MeriStar Hotels & Resorts, Inc., and the Rights Agent (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on May 3, 2002).
	4	.3	Form of Rights Certificate (incorporated by reference to Exhibit 4.3 to the Company’s Form S-1/A filed with the Securities and Exchange Commission on July 23, 1998 (Registration No. 333-49881)).
	4	.4	Registration Rights Agreement, dated June 30, 1999, between the Company (formerly MeriStar Hotels & Resorts, Inc.), Oak Hill Capital Partners, L.P. and Oak Hill Capital Management Partners, L.P. (incorporated by reference to Exhibit 4.7 to the Company’s Form 10-Q filed with the Securities and Exchange Commission for the three months ended June 30, 1999).
	10	.5.1*	First Amendment to the Senior Secured Credit Facility, dated May 24, 2007, among Interstate Operating Company, LP, Lehman Brothers Inc. and various other lenders.
	10	.6	Agreement of Purchase and Sale between Lepercq Atlanta Renaissance Partners, L.P., and affiliate of the Blackstone Group, and Interstate Atlanta Airport, LLC, dated May 4, 2007, for the purchase of the Westin Atlanta Airport (incorporated by reference to Exhibit 10.6 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on May 10, 2007).
	10	.7	Interstate Hotels & Resorts, Inc., 2007 Equity Award Plan (incorporated by reference to Annex A to the Company’s Form Def 14A filed with the Securities and Exchange Commission on April 24, 2007).
	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

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SIGNATURE

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

Interstate Hotels & Resorts, Inc.

By:  /s/  Denis S. McCarthy

Denis S. McCarthy

Chief Accounting Officer

Dated: August 9, 2007

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EX-10.5.1

Exhibit 10.5.1

AMENDMENT NO. 1

          AMENDMENT NO. 1, dated as of May 24, 2007 (this “Amendment”), by and among INTERSTATE OPERATING COMPANY, LP, a Delaware limited partnership (the “Borrower”), LEHMAN COMMERCIAL PAPER INC. (the “Administrative Agent”), and the Lenders party hereto to the Credit Agreement (as defined below).

W I T N E S S E T H:

          WHEREAS, the Borrower, the Administrative Agent, Lehman Brothers Inc. as sole lead arrange and sole bookrunner, Société Générale, as syndication agent, Calyon New York Branch and Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services, Inc. as co-documentation agents and the Lenders have entered into that certain Senior Secured Credit Agreement, dated as of March 9, 2007 (as amended, supplemented or otherwise modified from time to time, the “Credit Agreement”);

          WHEREAS, the Borrower has requested, among other things, (i) an increase in the Commitments in order to finance the acquisition of the Westin Atlanta Airport Hotel (as defined below), (ii) a modification of certain financial covenant levels and (iii) an incremental term loan facility;

          WHEREAS, the additional term loan and revolving credit facilities provided by this Amendment shall be considered the same as the original term loan and revolving credit facilities provided by the Credit Agreement; and

          WHEREAS, the Administrative Agent and the Lenders have agreed, subject to the terms and conditions hereinafter set forth, to amend the Credit Agreement as set forth below.

          NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

          1. Defined Terms. Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to such terms in the Credit Agreement.

          2. Amendments. Effective as of the Amendment No. 1 Effective Date (as defined in Section 3 of Amendment No. 1) and subject to the terms and conditions set forth herein, the Credit Agreement is hereby amended as follows:

          (a) Section 1.01 (Definitions and Accounting) of the Credit Agreement is hereby amended by inserting the following definitions in the appropriate alphabetical order:

          “Amendment No. 1” means the Amendment No. 1, dated as of May 24, 2007, by and among the Borrower, the Administrative Agent and the Lenders party thereto.”

          “Amendment No. 1 Effective Date” means the Amendment No. 1 Effective Date as defined in Amendment No. 1 to this Agreement.”

          “Applicable Margin Differential” has the meaning set forth in Section 2.17(b).”

          “Incremental Loan Extension Date” has the meaning set forth in Section 2.17(a).”

          “Incremental Term Advances” has the meaning set forth in Section 2.17(a).”

          “Initial Term Advance” means the term advance made by any Lender on the Effective Date.”

          “Second Term Advance” means the term advance made by any Lender on the Amendment No. 1 Effective Date.”

          “Westin Atlanta Airport Hotel” means Westin Atlanta Airport hotel located in Atlanta, Georgia.”

          (b) The following definitions in Section 1.01 (Definitions and Accounting) of the Credit Agreement are hereby amended and restated in their entirety as follows:

          “Revolving Commitment” means, for each Lender, the Revolving Commitment set forth for such Lender as its Revolving Commitment in the Register maintained by the Administrative Agent pursuant to Section 10.06(c). As of the Amendment No. 1 Effective Date, the aggregate amount of the Revolving Commitments under this Agreement is $85,000,000.”

          “Sliver Investments” shall mean debt and equity investments in partnerships, companies or limited liability companies (a) for which the Borrower’s direct or indirect ownership interest is less than 50% and (b) that own hospitality properties for which the Borrower or its wholly-owned subsidiary will have a Customary Property Agreement; provided, that, with respect to Investments of up to $15,000,000 in the aggregate, such Customary Property Agreement may be held by an entity which is not a wholly owned subsidiary of Borrower or of a Subsidiary of Borrower.”

          “Subsidiary” means, with respect to any Person, at any date, any other Person in whom such Person holds an Investment and whose financial results would be consolidated under GAAP with the financial results of such Person if such statements were prepared as of such date; provided, that, any entity in which Borrower or its Subsidiaries has invested pursuant to paragraph (d) of the definition of Permitted New Investments shall not be considered a Subsidiary, whether or not the entity is so consolidated so long as the Investment Amount therein shall not exceed $5,000,000 in the aggregate.”

          “Term Advance” means the combined Initial Term Advance and Second Term Advance.”

          “Term Commitment” means, for each Lender, the Term Commitment set forth for such Lender as its Term Commitment in the Register maintained by the Administrative Agent pursuant to Section 10.06(b); provided, however, that after the date of the Second Term Advance, the Term Commitment for such Lender shall be zero. As of the Amendment No. 1 Effective Date, the aggregate amount of the Term Commitments under this Agreement is $115,000,000.”

          (c) Section 2.07 (c)(iii) of the Credit Agreement is hereby amended and restated in its entirety as follows:

          “(iii) Term Advances. Commencing on July 1, 2007 and on each October 1, January 1, April 1 and July 1 thereafter, the Borrower shall repay the Term Advances by an amount equal to $287,500.”

          (d) Article II (THE ADVANCES AND LETTERS OF CREDIT) of the Credit Agreement is hereby amended by inserting the following:

     “Section 2.17. Incremental Loan Extensions.

          (a) The Borrower may from time to time (but no more than three times) after the Effective Date, request one or more new tranches of term loans (the “Incremental Term Advance”); provided, however, that (i) the aggregate amount of all Incremental Term Advance shall not exceed $75,000,000 and (ii) each Incremental Term Advance shall be in an amount not less than $20,000,000. Nothing in this Agreement shall be construed to obligate the Administrative Agent, the Arranger or any Lender to negotiate for (whether or not in good faith), solicit to or provide any Incremental Term Advance. The Administrative Agent shall promptly notify each Lender of each proposed Incremental Term Advance and of the proposed terms and conditions therefor agreed between the Borrower and the Administrative Agent. Each such Lender (and each of their Affiliates) may, in its sole discretion, commit to participate in such Incremental Term Advance by forwarding its commitment therefor to the

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Administrative Agent in form and substance satisfactory to the Administrative Agent. The Administrative Agent shall allocate, in its sole discretion but in amounts not to exceed for each such Lender the commitment received from such Lender or Affiliate, the Incremental Term Advance commitments to be made as part of such Incremental Term Advance, respectively, to the Lenders from which it has received such written commitments. Each Incremental Term Advance shall become effective on a date agreed by the Borrower and the Administrative Agent (each, an “Incremental Loan Extension Date”), which shall be in any case on or after the date of satisfaction of the conditions precedent set forth in Sections 3.02 and 3.03. The Administrative Agent shall notify the Lenders and the Borrower, on or before 1:00 p.m., New York City time, on the day following a Incremental Loan Extension Date of the effectiveness of an Incremental Term Advance and shall record in the Register all applicable additional information in respect of such Incremental Term Advance.

          (b) The Incremental Term Advance shall (i) not have a final maturity earlier than the Term Maturity Date, (ii) not have a weighted average life to maturity shorter than the remaining weighted average life to maturity of the Term Advance, (iii) if the Applicable Margin on such Incremental Term Advance exceeds by more than 25 basis points (the amount of such excess above 25 basis points being referred to as the “Applicable Margin Differential”) the Applicable Margin then in effect for any Term Advance, then the Applicable Margin then in effect for any Term Advance shall automatically be increased by the Applicable Margin Differential, effective upon the making of the Incremental Term Advance, (iv) share with the Term Advances, on a pro rata basis, any mandatory or optional prepayments made by the Borrower, (v) have the same Guaranty as, and be secured on a pari passu basis by the same Collateral securing, the Advances and (vi) have the same terms and conditions as the other Advances (except for any differences permitted hereby).

          (e) Article III (CONDITIONS OF LENDING) of the Credit Agreement is hereby amended by inserting the following:

     “Section 3.03. Conditions Precedent to Each Incremental Loan Extension. Each Incremental Term Advance shall not become effective prior to the satisfaction of all of the following conditions precedent:

          (a) The Administrative Agent shall have received on or prior to the Incremental Loan Extension Date each of the following, each dated as of such Incremental Loan Extension Date unless otherwise indicated or agreed to by the Administrative Agent and each in form and substance satisfactory to the Administrative Agent:

               (i) written commitments duly executed by existing Lenders (or their Affiliates) or new Lenders in an aggregate amount equal to the amount of the proposed Incremental Term Advance (not to exceed, in the aggregate, the maximum amount set forth in Section 2.17) and, in the case of each such new Lender, an assumption agreement in form and substance satisfactory to the Administrative Agent and duly executed by the Borrower, the Administrative Agent and such new Lender;

               (ii) an amendment to this Agreement, effective as of such Incremental Loan Extension Date and executed by the Borrower and the Administrative Agent, to the extent necessary to implement terms and conditions of such Incremental Term Advance as agreed by the Borrower and the Administrative Agent;

               (iii) certified copies of resolutions of the Board of Members (or equivalent governing body) of the Borrower and each Guarantor approving the consummation of such Incremental Term Advance and the execution, delivery and performance of the corresponding amendments to this Agreement and the other documents to be executed in connection therewith;

                    (1) a favorable opinion of counsel for the Borrower in form and substance reasonably satisfactory to the Administrative Agent; and

                    (2) such other documents as the Administrative Agent may reasonably request or as any Lender participating in such Incremental Term Loan may require as a condition to its commitment therein.

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               (iv) The Administrative Agent shall have received a certificate from a Responsible Officer of the Borrower, certifying that on the Incremental Loan Extension Date and immediately after giving effect to the Incremental Term Advance, the Parent shall be in compliance with the financial covenants contained in Article VII, in each case determined on a pro forma basis after giving effect to such Incremental Term Advance, as of the last day of the most recently ended fiscal quarter of the Parent for which financial statements have been delivered to the Administrative Agent pursuant to Section 5.05, as applicable, in each case in form and substance and with supporting documentation reasonably satisfactory to the Administrative Agent.

               (v) There shall have been paid to the Administrative Agent, for the account of itself and the Lenders, as applicable, all fees and expenses (including reasonable fees and expenses of counsel) due and payable on or before such Incremental Loan Extension Date.

               (vi) The conditions precedent set forth in Section 3.02 shall have been satisfied both before and after giving effect to such Incremental Term Advance.

               (vii) Such Incremental Term Advance shall have been made on the terms and conditions set forth in Section 2.17.”

          (f) Section 7.01 (Debt Service Coverage Ratio) and Section 7.02 (Leverage Ratio) of the Credit Agreement are hereby amended and restated in their entity as follows:

     “Section 7.01. Debt Service Coverage Ratio.’ The Parent shall maintain at the end of each Rolling Period a Debt Service Coverage Ratio of not less than (i) 2.25 to 1.00 for the Rolling Period ending December 31, 2008 and (ii) 2.50 to 1.00 for each Rolling Period thereafter.”

     “Section 7.02. Leverage Ratio.’ The Parent shall not on any date permit the Leverage Ratio to exceed 5.75 to 1.00.”

          3. Conditions to Effectiveness of this Amendment. This Amendment shall become effective as of the date (the “Amendment No. 1 Effective Date”) each of the following conditions precedent shall have been satisfied:

          (a) The Administrative Agent shall have received on or prior to the Amendment No. 1 Effective Date each of the following, each dated the Amendment No. 1 Effective Date unless otherwise indicated or agreed to by the Administrative Agent and in form and substance satisfactory to the Administrative Agent:

     (i) Lender Addendums in respect of the Amendment duly executed and delivered by each of the Borrower, the Administrative Agent and the Required Lenders under the Credit Agreement;

     (ii) the Borrower shall have acquired the Westin Atlanta Airport Hotel in accordance with the terms of the Credit Agreement;

     (iii) (A) a favorable written opinion of DeCampo, Diamond & Ash, special counsel for the Borrower, the Parent, and their Subsidiaries, in a form reasonably acceptable to the Administrative Agent and (B) such other legal opinions as the Administrative Agent may reasonably request;

     (iv) a certificate of the Secretary or an Assistant Secretary of the Parent on behalf of the Borrower certifying (A) the resolutions of the Board of Directors or the members of the Parent and such other Persons approving and authorizing the execution, delivery and performance of this Amendment and the other documents required hereunder to be executed and delivered and (B) that there have been no changes in the organizational documents of the Parent, the Borrower or any such other Persons previously delivered to the Administrative Agent on the Effective Date (or if there has been such a change, attaching a certified copy thereof); and

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     (v) a certificate of the Parent’s chief financial officer as to the Solvency of the Parent and its Subsidiaries after giving effect to the transactions contemplated hereby.

          (b) There shall have been paid to the Administrative Agent, for the account of itself and the Lenders, as applicable, all fees and expenses (including reasonable fees and expenses of counsel) due and payable on or before the Amendment No. 1 Effective Date.

          4. Representations and Warranties. The Borrower hereby represents and warrants to the Administrative Agent and the Lenders, on and as of the date hereof, that:

          (a) (i) The Borrower has taken all necessary action to authorize the execution, delivery and performance of this Amendment, (ii) this Amendment has been duly executed and delivered by the Borrower and (iii) this Amendment is the legal, valid and binding obligation of the Borrower, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles.

          (b) After giving effect to this Amendment, each of the representations and warranties made by any Loan Party in or pursuant to the Credit Documents is true and correct in all material respects on and as of the date hereof, as if made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date, in which case such representations and warranties are true and correct in all material respects as of such earlier date.

          (c) After giving effect to this Amendment, no Default or Event of Default has occurred and is continuing as of the date hereof.

          5. Affirmative Covenant.

          (a) The Borrower hereby agrees that the Borrower shall deliver to the Administrative Agent all Security Documents, including a Mortgage, an Assignment of Lease and a Title Policy for the Westin Atlanta Airport Hotel, as are necessary for the Administrative Agent on behalf of the Lender to have an Acceptable Lien on the Westin Atlanta Airport Hotel as and when required by the Credit Agreement.

          (b) The Borrower hereby agrees that within thirty (30) days after the Amendment No. 1 Effective Date, the Borrower shall take all necessary actions to properly characterize, for off-site disposal by a licensed contractor in accordance with Environmental Law, the drums and containers of unknown materials identified and currently located at the Westin Atlanta Airport Hotel.

          6. Reaffirmation.

          (a) Each Loan Party hereby consents to the execution, delivery and performance of this Amendment and agrees that each reference to the Credit Agreement in the Credit Documents shall, on and after the Amendment No. 1 Effective Date, be deemed to be a reference to the Credit Agreement as amended by this Amendment.

          (b) Each Loan Party acknowledges and agrees that, after giving effect to this Amendment, the additional term loan and revolving credit facilities provided by this Amendment shall be subject to the same rights and obligations as the original term loan and revolving credit facilities provided by the Credit Agreement.

          (c) Each Loan Party hereby acknowledges and agrees that, after giving effect to this Amendment, all of its respective obligations and liabilities under the Credit Documents to which it is a party are reaffirmed, and remain in full force and effect.

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          7. Lender Participation. Subject to the terms and conditions set forth in this Amendment, each Lender severally agrees to make a Second Term Advance to the Borrower on the Amendment No. 1 Effective Date, in an amount equal to the amount by which such Lender’s Term Commitment exceeds such Lender’s Initial Term Advance.

          8. Notes. The Borrower agrees that, upon the request to the Administrative Agent by any Lender, the Borrower will promptly execute and deliver to such Lender a promissory note of the Borrower evidencing the additional Revolving Advance or Second Term Advance, as the case may be, of such Lender, with appropriate insertions as to date and principal amount; provided, that delivery of Notes shall not be a condition precedent to the occurrence of the Amendment No. 1 Effective Date or the making of Advances.

          9. Continuing Effect. Except as expressly set forth in this Amendment, all of the terms and provisions of the Credit Agreement are and shall remain in full force and effect and the Borrower shall continue to be bound by all of such terms and provisions. The Amendment provided for herein is limited to the specific provisions of the Credit Agreement specified herein and shall not constitute an amendment of, or an indication of the Administrative Agent’s or the Lenders’ willingness to amend or waive, any other provisions of the Credit Agreement or the same sections for any other date or purpose. This Amendment is a Credit Document.

          10. Expenses. The Borrowers agree to pay and reimburse the Administrative Agent for all its reasonable out-of-pocket costs and expenses incurred in connection with the negotiation, preparation, execution and delivery of this Amendment, and other documents prepared in connection herewith, and the transactions contemplated hereby, including, without limitation, reasonable fees and disbursements and other charges of counsel to the Administrative Agent relating to the Amendment.

          11. Choice of Law. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED, AND ANY DISPUTE BETWEEN THE BORROWER, THE ADMINISTRATIVE AGENT, ANY LENDER, OR ANY INDEMNITEE ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH, THIS AGREEMENT, AND WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED IN ACCORDANCE WITH THE INTERNAL LAWS (INCLUDING, WITHOUT LIMITATION, SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW, BUT OTHERWISE WITHOUT REGARD TO THE CONFLICTS OF LAWS PROVISIONS) OF THE STATE OF NEW YORK; PROVIDED THAT THE PERFECTION OF THE LIENS OF THE ADMINISTRATIVE AGENT ON THE COLLATERAL AND THE EXERCISE OF REMEDIES AGAINST THE COLLATERAL SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE APPLICABLE JURISDICTION.

          12. Counterparts. This Amendment may be executed in any number of counterparts and by different parties and separate counterparts, each of which when so executed and delivered, shall be deemed an original, and all of which, when taken together, shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Amendment by facsimile or e-mail shall be effective as delivery of a manually executed counterpart of this Amendment.

          13. Integration. This Amendment, together with the other Credit Documents, incorporates all negotiations of the parties hereto with respect to the subject matter hereof and is the final expression and agreement of the parties hereto with respect to the subject matter hereof.

          14. Severability. In case any provision in this Amendment shall be invalid, illegal or unenforceable, such provision shall be severable from the remainder of this Amendment and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

          15. Waiver of Jury Trial. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR

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DELIVERED IN CONNECTION HEREWITH. EACH OF THE PARTIES HERETO AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.

[Signature Pages Follow]

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          IN WITNESS WHEREOF, the parties have entered into this Amendment as of the date first above written.

BORROWER:
INTERSTATE OPERATING COMPANY, LP,
a Delaware Limited partnership
	By: Interstate Hotels & Resorts, Inc.,
	its general partner
	By:	/s/ Christopher L. Bennett
	Name:	Christopher L. Bennett
	Title:	Executive Vice President

LEHMAN COMMERCIAL PAPER INC., as a Lender and as Administrative Agent
By:	/s/ Craig Malloy
	Name:	Craig Malloy
	Title:	Authorized Signatory

     IN WITNESS WHERE, the parties have acknowledged and agreed upon this Amendment as of the date first written above.

GUARANTORS:
INTERSTATE HOTELS & RESORTS, INC.
a Delaware corporation
	By:	/s/ Christopher L. Bennett
	Name:	Christopher L. Bennett
	Title:	Executive Vice President

INTERSTATE HOTELS COMPANY
a Delaware corporation

INTERSTATE PARTNER CORPORATION
a Delaware corporation

INTERSTATE PROPERTY CORPORATION
a Delaware corporation

NORTHRIDGE HOLDINGS, INC.
a Delaware corporation

INTERSTATE MEMBER INC.
a Delaware corporation

CROSSROADS HOSPITALITY MANAGEMENT COMPANY
a Delaware corporation

INTERSTATE MANAGEMENT SERVICES, INC.
a Delaware corporation

SUNSTONE HOTEL PROPERTIES, INC.
a Colorado corporation

By:	/s/ Christopher L. Bennett
Name:	Christopher L. Bennett
Title:	Executive Vice President

INTERSTATE BATON ROUGE, LLC
a Delaware limited liability company

INTERSTATE TESORO, LLC
a Delaware limited liability company

INTERSTATE CLEVELAND, LLC
a Delaware limited liability company

INTERSTATE SAWGRASS, LLC
a Delaware limited liability company

INTERSTATE DURHAM, LLC
a Delaware limited liability company

IHR DEVELOPMENT GROUP, LLC
a Delaware limited liability company

INTERSTATE INVESTMENTS I, LLC
a Delaware limited liability company

INTERSTATE AIRPORT ATLANTA, LLC
a Delaware limited liability company

By:	Interstate Operating Company, LP, its Member
	By:	Interstate Hotels & Resorts, Inc., its general partner
	By:	/s/ Christopher L. Bennett
	Name:	Christopher L. Bennett
	Title:	Executive Vice President

INTERSTATE MANAGEMENT COMPANY, LLC
a Delaware limited liability company

CAPSTAR ST. LOUIS COMPANY, L.L.C.
a Delaware limited liability company

MERISTAR STORRS COMPANY, LLC
a Delaware limited liability company

INTERSTATE CROSS KEYS, LLC
a Delaware limited liability company

INTERSTATE HOTEL MANAGEMENT SYSTEM, LLC
a Delaware limited liability company

By:	Interstate Operating Company, LP, its Member
	By:	Interstate Hotels & Resorts, Inc., its general partner
	By:	/s/ Christopher L. Bennett
	Name:	Christopher L. Bennett
	Title:	Executive Vice President

INTERSTATE PROPERTY PARTNERSHIP, L.P.
a Delaware limited partnership

By:	Interstate Property Corporation, its general partner
By:	/s/ Christopher L. Bennett
Name:	Christopher L. Bennett
Title:	Executive Vice President

INTERSTATE MANCHESTER COMPANY, L.L.C.
a Delaware limited liability company

By:	Interstate Property Partnership, L.P., its member
	By:	Interstate Property Corporation, its general partner
	By:	/s/ Christopher L. Bennett
	Name:	Christopher L. Bennett
	Title:	Executive Vice President

INTERSTATE HOTELS, LLC
a Delaware limited liability company

By:	Northridge Holdings, Inc., its member
By:	/s/ Christopher L. Bennett
Name:	Christopher L. Bennett
Title:	Executive Vice President

CONTINENTAL DESIGN & SUPPLIES COMPANY, L.L.C.
a Delaware limited liability company

CROSSROADS HOSPITALITY COMPANY, L.L.C.
a Delaware limited liability company

By:	Interstate Hotels, LLC, its managing member
	By:	Northridge Holdings, Inc., its member
	By:	/s/ Christopher L. Bennett
	Name:	Christopher L. Bennett
	Title:	Executive Vice President

INTERSTATE HOLDINGS, INC.
a Delaware corporation

By:	/s/ Christopher L. Bennett
Name:	Christopher L. Bennett
Title:	Executive Vice President

NORTHRIDGE INSURANCE COMPANY
a corporation organized under the laws of the Cayman Islands

By:	/s/ Christopher L. Bennett
Name:	Christopher L. Bennett
Title:    Director

MERISTAR MANAGEMENT (VANCOUVER-METROTOWN) LTD.
a British Columbia (Canada) corporation

By:	/s/ Christopher L. Bennett
Name:	Christopher L. Bennett
Title:    Executive Vice President

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.

Dated: August 9, 2007

/s/  THOMAS F. HEWITT

Thomas F. Hewitt

Chief Executive Officer

EX-31.2

EXHIBIT 31.2

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

I, 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.

Dated: August 9, 2007

/s/  BRUCE A. RIGGINS

Bruce A. Riggins

Chief Financial Officer

EX-32

EXHIBIT 32

Section 906 Certification

Certification of Chief Executive Officer and Chief Financial Officer

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

(i)  the accompanying quarterly report on Form 10-Q of the Company for the three months and six months ended June 30, 2007 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended;

and

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

Dated: August 9, 2007

/s/  THOMAS F. HEWITT

Thomas F. Hewitt

Chief Executive Officer

/s/  BRUCE A. RIGGINS

Bruce A. Riggins

Chief Financial Officer