10-Q

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

Form 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 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 November 1, 2007 was 31,718,817.

INTERSTATE HOTELS & RESORTS, INC.

INDEX

			Page
PART I. FINANCIAL INFORMATION
	Item 1:	Financial Statements (Unaudited):
		Consolidated Balance Sheets — September 30, 2007 and December 31, 2006		2
		Consolidated Statements of Operations and Comprehensive Income (Loss) — Three and nine months ended September 30, 2007 and 2006		3
		Consolidated Statements of Cash Flows — Nine months ended September 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		22
	Item 3:	Quantitative and Qualitative Disclosures About Market Risk		37
	Item 4:	Controls and Procedures		37
PART II. OTHER INFORMATION
	Item 1:	Legal Proceedings		39
	Item 6:	Exhibits		39

1

PART I. FINANCIAL INFORMATION

Item 1:   Financial Statements

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

	September 30,			December 31,
	2007			2006
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	21,576		$	25,308
Restricted cash		7,332			6,485
Accounts receivable, net of allowance for doubtful accounts of $375 and $253 respectively		22,039			31,511
Due from related parties, net of allowance for doubtful accounts of $1,110 and $1,110, respectively		998			1,469
Prepaid expenses and other current assets		7,423			2,592
Assets held for sale		—			28,383
Total current assets		59,368			95,748
Marketable securities		1,772			1,610
Property and equipment, net		229,693			103,895
Investments in and advances to affiliates		18,662			11,144
Notes receivable		6,935			4,962
Deferred income taxes, net		13,467			12,451
Goodwill		73,672			73,672
Intangible assets, net		29,474			30,208
Total assets	$	433,043		$	333,690
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,202		$	2,053
Accrued expenses		69,776			68,395
Liabilities related to assets held for sale		—			10,263
Current portion of long-term debt		862			3,750
Total current liabilities		72,840			84,461
Deferred compensation		1,712			1,541
Long-term debt		171,088			80,476
Total liabilities		245,640			166,478
Minority interest		324			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; 31,718,817, and 31,540,926 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively		317			316
Treasury stock		(69	)		(69	)
Paid-in capital		195,436			194,460
Accumulated other comprehensive income (loss)		(226	)		1,201
Accumulated deficit		(8,379	)		(29,212	)
Total stockholders’ equity		187,079			166,696
Total liabilities, minority interest and stockholders’ equity	$	433,043		$	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 (LOSS)
(Unaudited, in thousands, except per share amounts)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Revenue:
Lodging	$	20,628		$	7,154		$	52,325		$	18,609
Management fees		8,487			12,761			29,837			34,386
Management fees-related parties		1,147			1,305			2,846			12,030
Termination fees		935			16,995			4,928			18,774
Termination fees-related parties		—			—			—			6,117
Other		2,506			2,688			7,538			9,117
		33,703			40,903			97,474			99,033
Other revenue from managed properties		147,562			202,780			488,725			645,553
Total revenue		181,265			243,683			586,199			744,586
Expenses:
Lodging		14,675			5,210			36,714			13,670
Administrative and general		13,598			14,199			41,488			43,229
Depreciation and amortization		4,137			1,626			11,114			4,715
Asset impairments and write-offs		6			2,024			1,161			10,666
		32,416			23,059			90,477			72,280
Other expenses from managed properties		147,562			202,780			488,725			645,553
Total operating expenses		179,978			225,839			579,202			717,833
OPERATING INCOME		1,287			17,844			6,997			26,753
Interest income		515			514			1,672			1,445
Interest expense		(3,825	)		(2,197	)		(9,834	)		(6,222	)
Equity in earnings of affiliates		563			4,745			1,818			4,311
(LOSS) INCOME BEFORE MINORITY INTEREST AND INCOME TAXES		(1,460	)		20,906			653			26,287
Income tax benefit (expense)		654			(7,933	)		(201	)		(10,213	)
Minority interest expense		(1	)		(122	)		(63	)		(171	)
(LOSS) INCOME FROM CONTINUING OPERATIONS		(807	)		12,851			389			15,903
Income from discontinued operations, net of tax		2,836			2,347			20,444			3,050
NET INCOME	$	2,029		$	15,198		$	20,833		$	18,953
Other comprehensive income, net of tax:
Foreign currency translation (loss) gain		(219	)		66			(242	)		737
Unrealized gain on investments		21			55			39			67
COMPREHENSIVE INCOME	$	1,831		$	15,319		$	20,630		$	19,757
BASIC EARNINGS PER SHARE:
Continuing operations	$	(0.03	)	$	0.41		$	0.01		$	0.51
Discontinued operations		0.09			0.07			0.65			0.10
Basic earnings per share	$	0.06		$	0.48		$	0.66		$	0.61
DILUTIVE EARNINGS PER SHARE:
Continuing operations	$	(0.03	)	$	0.41		$	0.01		$	0.50
Discontinued operations		0.09			0.07			0.64			0.10
Dilutive earnings per share	$	0.06		$	0.48		$	0.65		$	0.60

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

3

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

	Nine Months Ended
	September 30,
	2007			2006
OPERATING ACTIVITIES:
Net income	$	20,833		$	18,953
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		11,114			4,715
Amortization of deferred financing fees		1,419			573
Stock compensation expense		863			788
Bad debt expense		80			865
Asset impairments and write-offs		1,161			10,666
Equity in earnings of affiliates		(1,818	)		(4,311	)
Operating distributions from unconsolidated affiliates		258			285
Minority interest		63			171
Deferred income taxes		(580	)		7,828
Excess tax benefits from share-based payment arrangements		(87	)		(880	)
Discontinued operations:
Depreciation and amortization		—			1,192
Gain on sale		(20,549	)		—
Changes in assets and liabilities:
Accounts receivable		9,527			(14,994	)
Due from related parties		471			4,503
Prepaid expenses and other current assets		(2,456	)		(3,679	)
Accounts payable and accrued expenses		1,178			2,527
Changes in asset and liability accounts for sale		93			—
Other changes in asset and liability accounts		418			595
Cash provided by operations		21,988			29,797
INVESTING ACTIVITIES:
Proceeds from the sale of discontinued operations		35,958			—
Change in restricted cash		(847	)		(972	)
Acquisition of hotels		(129,958	)		(14,538	)
Purchases related to discontinued operations		(68	)		(1,826	)
Purchases of property and equipment		(6,083	)		(4,932	)
Additions to intangible assets		(3,163	)		(1,417	)
Contributions to unconsolidated affiliates		(8,721	)		(13,192	)
Distributions from unconsolidated affiliates		3,187			15,754
Changes in notes receivable		(473	)		596
Cash used in investing activities		(110,168	)		(20,527	)
FINANCING ACTIVITIES:
Proceeds from borrowings		147,825			9,000
Repayment of borrowings		(60,101	)		(22,750	)
Excess tax benefits from share-based payment arrangements		87			880
Proceeds from issuance of common stock		190			2,810
Financing fees paid		(3,317	)		—
Cash provided by (used in) financing activities		84,684			(10,060	)
Effect of exchange rate on cash		(236	)		181
Net decrease in cash and cash equivalents		(3,732	)		(609	)
CASH AND CASH EQUIVALENTS, beginning of period		25,308			12,929
CASH AND CASH EQUIVALENTS, end of period	$	21,576		$	12,320
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes:
Interest	$	8,185		$	5,564
Income taxes		3,458			2,185

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 a premier hotel real estate investor and 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 the ownership of strategic hotel properties and a diversified portfolio of hotel management agreements. 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 has been related to owned hotels. We have two reportable operating segments: hotel ownership (through whole-ownership and joint ventures) and hotel management. 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 September 30, 2007, we owned six hotel properties, with 1,755 rooms, and held non-controlling minority interests in 15 joint ventures, which own or hold ownership interests in 20 of our managed properties. We and our affiliates also managed 184 hotel properties and five ancillary service centers (which consist of two laundry centers, two convention centers, and a spa facility), with 42,435 rooms in 36 states, the District of Columbia, Canada, Russia, Belgium, Ireland and Mexico.

Our corporate housing division was disposed of on January 26, 2007, with the sale of BridgeStreet. It 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 were presented as held for sale in our consolidated balance sheet 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 previous 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 in revenue, 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 September 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 (“Blackstone”), acquired MeriStar Hospitality Corporation (“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 taxes recognized in an enterprise’s financial statements in accordance with SFAS 109. FIN 48 also

6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

	Three Months Ended
	September 30, 2007								September 30, 2006
	Income/					Per Share			Income/				Per Share
	(Loss)			Shares		Amount			(Loss)		Shares		Amount
(Loss) Income from continuing operations	$	(807	)		31,701	$	(0.03	)	$	12,851		31,368	$	0.41
Income from discontinued operations, net of tax		2,836			—		0.09			2,347		—		0.07
Basic net income	$	2,029			31,701	$	0.06		$	15,198		31,368	$	0.48
Assuming exercise of outstanding employee stock options less shares repurchased at average market price		—			13		—			—		190		—
Assuming vesting of restricted stock grants		—			282		—			—		195		—
Diluted net income	$	2,029			31,996	$	0.06		$	15,198		31,753	$	0.48

7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Nine Months Ended
	September 30, 2007							September 30, 2006
	Income/				Per Share			Income/				Per Share
	(Loss)		Shares		Amount			(Loss)		Shares		Amount
Income from continuing operations	$	389		31,636	$	0.01		$	15,903		30,983	$	0.51
Income from discontinued operations, net of tax		20,444		—		0.65			3,050		—		0.10
Basic net income	$	20,833		31,636	$	0.66		$	18,953		30,983	$	0.61
Assuming exercise of outstanding employee stock options less shares repurchased at average market price		—		43		—			—		282		—
Assuming vesting of restricted stock grants		—		248		(0.01	)		—		159		(0.01	)
Diluted net income	$	20,833		31,927	$	0.65		$	18,953		31,424	$	0.60

4.   INVESTMENTS IN AND ADVANCES TO AFFILIATES

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

			Our Equity	September 30,		December 31,
Joint Venture Investments	Number of Hotels		Participation	2007		2006
CNL/IHC Partners, L.P.		3	15.0%	$	2,861	$	2,625
True North Tesoro Property Partners, L.P.		1	15.9%		—		1,381
Cameron S-Sixteen Hospitality, LLC		1	10.9%		467		487
Amitel Holdings, LLC		6	15.0%		4,005		3,903
RQB Resort/Development Investors, LLC		1	10.0%		1,145		447
Cameron S-Sixteen Broadway, LLC		1	15.7%		1,050		1,136
IHR Greenbuck Hotel Venture, LLC(1)		—	15.0%		1,573		362
Interstate Cross Keys, LLC		1	15.0%		582		—
IHR/Steadfast Hospitality Management, LLC(2)		—	50.0%		510		—
Other		3	12.5%-50.0%		769		803
Total		17		$	12,962	$	11,144
Advances to Affiliates
Steadfast Mexico, LLC(3)		3			5,700		—
Total		20		$	18,662	$	11,144

(1)	Hotel number is not listed since this joint venture is in the process of developing hotels.
(2)	Hotel number is not listed as this joint venture owns only a management company.
(3)	This investment was made through a convertible debt instrument expected to convert in the fourth quarter of 2007, see below for more information.

In March 2007, we invested $0.5 million to acquire a 15% interest in the 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 refinanced its existing debt and 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

8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

distribution, the investment balance was reduced to zero with the remainder recorded as a deferred gain. 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 an earnings process. The distribution did not impact our percentage investment ownership interest in the joint venture.

In July 2007, we invested in one entity and formed a new entity in two separate transactions with the Steadfast Companies (“Steadfast”) to own and manage hotels in Mexico. We invested $0.5 million for a 50% interest in a new joint venture to manage hotels. We have determined that we are not the primary beneficiary or otherwise do not control this joint venture, and therefore account for our interest using the equity method.

Simultaneous with formation of the management joint venture, we advanced $5.7 million, in the form of a convertible debt instrument, to an existing Steadfast entity that owns a three-property portfolio of Tesoro^® resorts. The debt is convertible into a 15% equity interest in this Steadfast entity upon the consent of the senior lender. We expect to receive the consent in the fourth quarter of 2007. The Steadfast entity then plans to invest $10.0 million for comprehensive renovations and improvements at all three resort properties in the near future. The new management joint venture described above took over management of the three-property portfolio of Tesoro^® resorts upon its formation and will serve as a platform for future growth in Mexico.

During 2007, we also invested an additional $1.2 million in the IHR Greenbuck Hotel Venture, LLC, a joint venture established to develop, construct and operate as many as five to ten aloft^® hotels over the next several years. Currently, the joint venture has begun the construction of two hotels located in Rancho Cucamonga, CA and Cool Springs, TN.

We had related party accounts receivable for management fees and reimbursable costs from the hotels currently owned by the joint ventures of $1.0 million and $1.4 million as of September 30, 2007 and December 31, 2006, respectively. We earned related party management fees from our joint ventures of $1.0 million and $2.7 million for the three and nine months ended September 30, 2007, respectively, and $1.3 million and $3.5 million for the three and nine months ended September 30, 2006, respectively.

The recoverability of the carrying values of our investments in and advances to affiliates 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 interests. 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 we 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):

	September 30,			December 31,
	2007			2006
Land	$	19,547		$	10,269
Furniture and fixtures		26,350			17,437
Building and improvements		188,274			75,566
Leasehold improvements		5,695			5,889
Computer equipment		6,505			4,978
Software		12,336			12,244
Total	$	258,707		$	126,383
Less accumulated depreciation		(29,014	)		(22,488	)
Property and equipment, net	$	229,693		$	103,895

9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

6.   INTANGIBLE ASSETS

Intangible assets consist of the following (in thousands):

	September 30,			December 31,
	2007			2006
Management contracts	$	36,771		$	35,940
Franchise fees		1,814			1,620
Deferred financing fees		3,629			2,538
Total cost		42,214			40,098
Less accumulated amortization		(12,740	)		(9,890	)
Intangible assets, net	$	29,474		$	30,208

We amortize the value of our intangible assets as they 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 nine months ended September 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 nine months ended September 30, 2006, the management contract impairment losses of $10.7 million primarily consisted of $9.7 million for the termination of management contracts related to 21 MeriStar/Blackstone properties and $0.7 million for 14 Sunstone REIT properties sold during the nine month period ended September 30, 2006.

We incurred scheduled amortization expense on our remaining management contracts and franchise fees of $1.3 million and $4.0 million for the three and nine months ended September 30, 2007, respectively, and $0.5 million and $2.0 million for the three and nine months ended September 30, 2006, respectively. We also incurred amortization expense related to deferred financing fees of $0.3 million and $1.4 million for the three and nine months ended September 30, 2007, respectively, and $0.2 million and $0.6 million for the three and nine months ended September 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 (“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 new Credit Facility. During the second quarter of 2007, we recorded an additional $0.8 million of financing fees in connection with the amendment of our new 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 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 September 30, 2007, we do not believe the carrying value of $24.8 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.

Our goodwill is related to our hotel management segment. 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 nine months ended September 30, 2007, no significant management contract losses or other transactions or events occurred which were not already considered in our analysis during the fourth quarter of 2006.

10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Based on this, we did not re-evaluate of our goodwill for impairment in the third quarter of 2007. Our impairment analysis performed in the fourth quarter of 2006 assumed the net loss of 45 management contracts in 2007. We are in the process of budgeting hotel operations and the resulting management fees for 2008 and future periods, assessing industry conditions and trends, and evaluating the stability of our existing management contract portfolio and pipeline. This information and other information will serve as the basis for our annual goodwill impairment analysis to be performed in the fourth quarter.

7.   ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

	September 30,		December 31,
	2007		2006
Salaries and employee related benefits	$	22,323	$	24,895
Deferred revenue		9,546		561
Other		37,907		42,939
Total	$	69,776	$	68,395

Deferred revenue is comprised of incentive fees for certain of our managed properties that will be recognized as revenue at the end of the contract year (the fourth quarter of 2007) in accordance with EITF D-96 “Accounting for Management Fees Based on a Formula”. Certain owners pay us estimated incentive fees prior to the end of the contract year. Other hotel owners pay us the incentive fees following the close of the contract year. 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.

8.   LONG-TERM DEBT

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

	September 30,			December 31,
	2007			2006
Senior credit facility — term loan	$	114,425		$	40,526
Mortgage debt		57,525			43,700
Total long-term debt		171,950			84,226
Less current portion		(862	)		(3,750	)
Long-term debt, net of current portion	$	171,088		$	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 relating to the purchase.

11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The actual interest rates on both the revolving loan and term loan depend on the results of certain financial tests. As of September 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 7.88% per annum). We incurred interest expense of $2.5 million and $5.2 million on the senior credit facilities for the three and nine months ended September 30, 2007, respectively, and $1.6 million and $4.5 million for the three and nine months ended September 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 September 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 September 30, 2007:

							Interest Rate as of
	Principal		Maturity		Spread over		September 30,
	Amount		Date(1)		30-Day LIBOR		2007
Hilton Arlington	$	24.7 million		November 2009		135 bps		7.2	%
Hilton Houston Westchase	$	32.8 million		February 2010		135 bps		7.2	%

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

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.

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 related to our mortgage loans of $1.0 million and $3.1 million for the three and nine months ended September 30, 2007, respectively, and $0.4 million and $1.0 million for the three and nine months ended September 30, 2006, respectively.

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 September 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 September 30, 2007, the total fair value of these interest rate cap agreements was approximately $15,000. The change in fair value for these interest rate cap agreements was immaterial and is recognized in the consolidated statement of operations.

12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

9.   SEGMENT INFORMATION

We are organized into two reportable segments: hotel ownership (through whole-ownership and joint ventures) and hotel management. 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 ownership includes our wholly-owned hotels and joint venture investments. For the hotel ownership segment presentation, we have allocated internal management fee expense of $0.7 million and $1.5 million for the three and nine months ended September 30, 2007, respectively, and $0.2 million and $0.5 million for the three and nine months ended September 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.

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, auto and employment practices liability coverage to our hotel owners.

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 $40.4 million as of September 30, 2006, are separately included within the corporate assets in the segment presentation below. As the corporate housing segment was sold, we have not presented it within the following segment presentation. See Note 12, “Acquisitions and Dispositions” for more information on the disposition of the segment.

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

13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Hotel			Hotel
	Management			Ownership			Corporate			Consolidated
Three months ended September 30, 2007
Revenue	$	13,075		$	20,628		$	—		$	33,703
Depreciation and amortization		1,879			2,243			15			4,137
Operating expense		12,307			15,325			647			28,279
Operating (loss) income		(1,111	)		3,060			(662	)		1,287
Interest expense, net		—			(3,222	)		(88	)		(3,310	)
Equity in earnings of affiliates		—			563			—			563
(Loss) income before minority interests and income taxes	$	(1,111	)	$	401		$	(750	)	$	(1,460	)
Capital expenditures	$	390		$	3,183		$	—		$	3,573
Three months ended September 30, 2006
Revenue	$	33,749		$	7,154		$	—		$	40,903
Depreciation and amortization		929			582			115			1,626
Operating expense		14,833			5,395			1,205			21,433
Operating (loss) income		17,987			1,177			(1,320	)		17,844
Interest expense, net		—			(991	)		(692	)		(1,683	)
Equity in earnings of affiliates		—			4,745			—			4,745
(Loss) income before minority interests and income taxes	$	17,987		$	4,931		$	(2,012	)	$	20,906
Capital expenditures	$	315		$	1,662		$	18		$	1,995

14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Hotel		Hotel
	Management		Ownership			Corporate			Consolidated
Nine months ended September 30, 2007
Revenue	$	45,149	$	52,325		$	—		$	97,474
Depreciation and amortization		5,424		5,459			231			11,114
Operating expense		37,496		38,190			3,677			79,363
Operating income (loss)		2,229		8,676			(3,908	)		6,997
Interest expense, net		—		(8,160	)		(2	)		(8,162	)
Equity in earnings of affiliates		—		1,818			—			1,818
Income (loss) before minority interests and income taxes	$	2,229	$	2,334		$	(3,910	)	$	653
Total assets	$	139,723	$	253,020		$	40,300		$	433,043
Capital expenditures	$	1,023	$	134,860		$	158		$	136,041
Nine months ended September 30, 2006
Revenue	$	80,424	$	18,609		$	—		$	99,033
Depreciation and amortization		2,896		1,481			338			4,715
Operating expense		49,393		14,211			3,961			67,565
Operating income (loss)		28,135		2,917			(4,299	)		26,753
Interest expense, net		—		(2,367	)		(2,410	)		(4,777	)
Equity in earnings of affiliates		—		4,311			—			4,311
Income (loss) before minority interests and income taxes	$	28,135	$	4,861		$	(6,709	)	$	26,287
Total assets	$	172,445	$	76,735		$	59,119		$	308,299
Capital expenditures	$	1,709	$	17,346		$	415		$	19,470

Revenues from continuing foreign operations, excluding reimbursable expenses, were as follows (in thousands)^{(1) (2)}:

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
	2007		2006		2007		2006
Russia	$	179	$	375	$	539	$	1,125
Other	$	192	$	158	$	430	$	416

(1)

Revenues for the United Kingdom and France related solely to BridgeStreet operations have been reclassified as discontinued operations on the consolidated statement of operations for the related periods due to the sale of BridgeStreet during the first quarter of 2007 and therefore have not been included in the above table. There have been no revenues from either region during the three month period ended September 30, 2007. BridgeStreet revenues from the United Kingdom and France were $2.8 million and $0.2 million, respectively, for the nine month period ended September 30, 2007. Revenues from the United Kingdom and France were $11.1 million and $0.8 million for the three months ended September 30, 2006, respectively, and $26.6 million and $1.9 million for the nine month period ended September 30, 2006, respectively.

(2)

Management fee revenues from our managed properties in Mexico are recorded through our joint venture, IHR/Steadfast Hospitality Management, LLC, and as such, are included in equity in earnings in our consolidated statements of operations for the three and nine months ended September 30, 2007.

A significant portion of our management fees for the three and nine month periods ended September 30, 2007 were derived from Blackstone and Sunstone REIT. As of September 30, 2007, we managed 17 hotels for Blackstone and 30 hotels and two ancillary service centers for Sunstone REIT. The total management fees for all Blackstone

15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

properties which we managed at September 30, 2007, accounted for $1.5 million, or 16%, of management fees for the three months ended September 30, 2007, and $4.9 million, or 15%, of management fees for the nine month period ended September 30, 2007. The Sunstone REIT properties accounted for $2.3 million, or 24%, of management fees for the three months ended September 30, 2007, and $6.6 million, or 20%, of management fees for the nine month period ended September 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 September 30, 2007, 46 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.

16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Leases

With the sale of BridgeStreet, we no longer lease apartments for our corporate housing division. As of September 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 September 30, 2007 were as follows (in thousands):

September 30, 2007-2008	$	3,481
September 30, 2008-2009		3,427
September 30, 2009-2010		3,509
September 30, 2010-2011		3,593
September 30, 2011-2012		3,679
Thereafter		4,091
Total	$	21,780

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):

September 30, 2007-2008	$	1,122
September 30, 2008-2009		1,167
September 30, 2009-2010		1,214
September 30, 2010-2011		1,263
September 30, 2011-2012		1,313
Thereafter		1,251
Total	$	7,330

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 $2.0 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.

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 September 30, 2007, we had ongoing renovation and property improvement projects with remaining expected costs to complete of approximately $20.2 million, of which $18.0 million is directly attributable to comprehensive renovations for the Westin Atlanta Airport.

Letters of Credit

As of September 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.

17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

12.   ACQUISITIONS & 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 September 30, 2007, hotel revenues and operating income of $8.2 million and $1.7 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 (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.

	Nine Months
	Ended September 30,
	2007		2006
Pro forma lodging revenues	$	66,645	$	36,863
Pro forma net income	$	22,033	$	21,020
Pro forma diluted earnings per share	$	0.69	$	0.67

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 September 30, 2007, hotel revenues and operating income of $11.8 million and $2.6 million, respectively, have been included in our consolidated statement of operations. The acquisition cost of the hotel was allocated as follows (in thousands):

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

18

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 income from discontinued operations, net of tax, of approximately $20.5 million. This gain has been recorded as part of discontinued operations for the nine months ended September 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):

	Nine Months
	Ended September 30,
	2007			2006
Revenue	$	8,500		$	101,066
Depreciation and amortization		—			1,193
Operating expense		8,969			95,403
Operating (loss) income	$	(469	)	$	4,470
Gain on sale		20,549			—
Interest expense		—			18
Income before minority interest and taxes	$	20,080		$	4,452
Income tax benefit (expense)		163			(1,402	)
Income from discontinued operations, net of taxes	$	20,243		$	3,050

19

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, there was a loss realized for tax purposes compared to the $20.5 million gain realized in our statement of operations, resulting in a tax benefit on this disposition for the nine month period ended September 30, 2007.

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 September 30, 2007, and changes during the nine months then ended is as follows:

						Aggregate
	Number of			Weighted Average		Intrinsic
	Shares			Exercise Price/Share		Value
Options outstanding at December 31, 2006		495,413		$	6.81
Granted		40,000		$	6.97
Exercised		(48,141	)	$	3.94
Forfeited		(35,850	)	$	15.23
Options outstanding at September 30, 2007		451,422		$	6.46	$	119,662
Options exercisable at September 30, 2007		350,596		$	6.56	$	119,662

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

				Weighted
	Number of			Average
	Restricted			Grant-Date
	Shares			Fair Value
Unvested at December 31, 2006		326,577		$	5.40
Granted		279,200		$	6.05
Vested		(141,246	)	$	5.30
Unvested at September 30, 2007		464,531		$	5.82

The total intrinsic value of restricted stock which vested during the nine months ended September 30, 2007 was approximately $0.9 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 $0.9 million for the three and nine month periods ended September 30, 2007, and $0.2 million and $0.8 million for the three and nine month periods ended September 30, 2006, respectively. As of September 30, 2007, there was

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$2.2 million and $0.1 million of total unrecognized compensation cost related to unvested restricted stock and unvested stock options, respectively.

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

The Internal Revenue Service recently changed the tax law related to the utilization of certain employee tax credits to now allow these credits to be utilized to offset alternative minimum tax. Effective in 2007, certain tax credits are now allowed to be utilized during the current year and carried back to 2006 to offset alternative minimum tax paid. We had previously been carrying a valuation allowance for the anticipated amount which would not have been utilized prior to the change in the tax law. This valuation was removed in the third quarter causing the reduction in our effective tax rate. This change resulted in a reduction in the annualized effective tax rate from 42% to 34% as of September 30, 2007. The tax rate for the quarter reflects the additional tax benefit resulting from the true-up of the annual effective rate.

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 nine months ended September 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 September 30, 2007, our open tax years for federal, state and local jurisdictions that remain subject to examination range from 2001 through 2006.

15.   SUBSEQUENT EVENT

In October 2007, Equity Inns completed the previously announced merger with an affiliate of Whitehall Street Global Real Estate Partnership 2007. As of September 30, 2007, we managed 38 properties for Equity Inns, consisting of 4,847 rooms. We continue to manage the 38 properties and notice has not been provided, nor any indication given, of the termination of the underlying management agreements for the 38 properties. We will continue to communicate with the new ownership as to its future plans concerning the management of the properties.

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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 (“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 a premier hotel real estate investor and 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 the ownership of a group of strategic hotel properties and a diversified portfolio of hotel management agreements. 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. As such, in 2007, a significant portion of our operating income has been related to owned hotels. We have two reportable operating segments: hotel ownership (through whole-ownership and joint ventures) and hotel management. A third reportable segment, corporate housing, was disposed of on January 26, 2007, with the sale of BridgeStreet, our corporate housing subsidiary. The results of this segment are reported as discontinued operations in our consolidated financial statements for all periods presented.

As of September 30, 2007, we owned six hotels with 1,755 rooms and held non-controlling minority interests in 15 joint ventures, which hold ownership interests in 20 of our managed properties. We and our affiliates also managed 184 properties, with 42,435 rooms in 36 states, the District of Columbia, Canada, Russia, Belgium, Ireland and Mexico. 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 65 different ownership groups.

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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.

During the first nine months of 2007, the U.S. economy experienced trended growth of real GDP by 3% which is expected to continue through the fourth quarter of 2007. In the second half of 2006 and throughout 2007, the significant growth that the lodging industry experienced in 2004 and 2005 began to decelerate. This trend is expected to continue into the fourth quarter of 2007 and through 2008. This deceleration may be compounded by the tightening credit markets, decline in the housing market, increases in oil and energy prices, lower productivity growth, and a broad uncertainty in the general U.S. economy.

During the first six months of 2007, RevPAR increased 5.5%, down from 9.5% during the same period in 2006, driven mostly by ADR growth in the current year. Looking forward, RevPAR is forecast to finish the year with an annual RevPAR growth rate of 5.7%, followed in 2008 and 2009 by growth rates of 5.3% and 4.5%, respectively. Supply additions continue to accelerate slightly, which has restrained occupancy growth, and is expected to continue through the remainder of 2007, and into 2009.

Our outlook remains optimistic in the near term, as our RevPAR for the nine month period ended September 30, 2007, has grown 8.9% compared to the same period in 2006. This growth has been driven primarily by ADR growth of 7.5%. Occupancy growth also contributed 1.2% to the overall growth.

Financial Highlights — During the first nine months of 2007, we continued to highlight our ability to successfully expand and stabilize our income generating activities through our acquisitions of strategic hospitality properties. In January 2007, we sold BridgeStreet for $40.5 million, resulting in a gain on sale of $20.5 million. This transaction provided the ability to recycle capital into our core business, the lodging and hospitality industry, allowing us to leverage our experience and forge stronger returns on our investments and serve as a catalyst for continued future growth. In February 2007, we purchased our fifth wholly-owned property, the Hilton Houston Westchase, and in May 2007, we purchased the Westin Atlanta Airport, our largest wholly-owned acquisition to date. For the nine months ended September 30, 2007, revenues from our owned-hotels were $52.3 million, an increase of $33.7 million compared to the same period in 2006. In addition, operating income from owned-hotels increased by $10.7 million while gross margins increased 330 basis points during the nine month period ended September 30, 2007 compared to the same period in the prior year.

While our overall operations have benefited from the acquisitions of wholly-owned real estate, we continue to experience the effects of the significant number of management contracts lost during 2006 and the first nine months of 2007. Total management fees were $32.7 million for the first nine months of 2007, a decrease of $10.5 million from the same period in 2006 (net of the $3.2 million of business interruption proceeds received in the first quarter of 2006). Although our management contract losses have been significant over the past eight quarters, we believe our overall portfolio of third party management agreements is beginning to stabilize as evidenced during the third quarter of 2007, where we realized a net decrease of only three properties.

In another effort to diversify our earnings sources, we have continued to expand internationally. In February 2007, we opened our first international office in Moscow in February to capitalize on the potential growth in the international markets. In addition, we commenced the management of four additional international hotels, including our first in Ireland and Belgium. We have also begun managing three resort properties in Mexico through one of our joint venture affiliates. During 2007, we and our affiliates have increased the number of international properties under management to 11 and will continue to diversify our earnings streams through whole and partnership acquisitions of strategic hospitality properties, as well as continue to source new management opportunities both domestically and internationally.

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 $51.9 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

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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 Credit Facility, we borrowed an additional $50.0 million of term loans to finance the acquisition, with the remainder paid from cash on hand. The hotel has commenced on 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 nine months 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 $1.2 million to 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, while the second location in Cool Springs, TN broke ground in August 2007.

In July 2007, we formed a strategic partnership with Steadfast Companies (“Steadfast”) to own and operate hotels in Mexico. We advanced $5.7 million to an entity owned by Steadfast in the form of a convertible debt instrument. The debt is convertible upon the approval of the senior lender. Upon conversion, the debt will convert to a 15% ownership interest in the Steadfast entity which currently owns a three-property portfolio of Tesoro^® resorts. We have received verbal approval for the conversion and are awaiting the completion of the documentation process of the approval from the senior lender, which we expect to receive in the fourth quarter of 2007. The joint venture plans to invest $10.0 million for comprehensive renovations and improvements at all three resort properties in the near future, of which our share will be approximately $1.5 million. We also invested $0.5 million for a 50% interest in a separate joint venture with Steadfast to manage hotels. The new management joint venture took over management of the three-property portfolio of Tesoro^® resorts upon its formation. This joint venture, which is a platform for further growth in Mexico, took over management of the three-property portfolio immediately upon its formation.

In August 2007, we entered a partnership with Premier Properties USA to build three hotels. We will operate all three properties upon the completion of construction and own a 15% equity interest in the partnership. Construction on the first hotel is expected to begin during the fourth quarter of 2007.

In September 2007, we, along with affiliates of Investcorp International, Inc., signed a definitive agreement to acquire the 321-room Hilton Seelbach Louisville in Kentucky, the 226-room Crowne Plaza Madison in Wisconsin and the 288-room Sheraton Columbia in Maryland from an affiliate of The Blackstone Group. The Hilton Seelbach and the Crowne Plaza Madison will be owned by a joint venture in which the Company will invest $4.7 million and hold a 15% equity interest.

As part of the overall transaction, we will acquire 100% of the third hotel, the Sheraton Columbia, for $46.5 million. We plan to invest $12 million in a comprehensive renovation of the property, including upgrades to all guest rooms and public spaces. We will finance the transaction with a combination of debt financing and cash on hand. The transaction is expected to close during the fourth quarter.

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 increase the available limit under our term loan and borrow an additional $50.0 million, increasing the total outstanding balance under our term loan to $115.0 million. The amendment also increased the availability under our revolving loan to $85.0 million. The proceeds from the additional $50.0 million of borrowings under our term loan were used to purchase the Westin Atlanta Airport. The Credit Facility provides for a total borrowing capacity of $200.0 million under the term loan and revolver, compared

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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 59 hotels during the first nine months of 2007 (two of which we purchased), including the loss of 22 properties owned by CNL Hotels & Resorts, Inc., which were sold as two portfolios. As a result, we were terminated as the manager of 17 of those properties and continue to manage five of these properties for the new owner as of September 30, 2007. In addition, Sunstone REIT sold seven hotels, which resulted in the termination of our management contracts for those properties.

During the first nine months of 2007, Blackstone sold 20 hotels, including the Hilton Houston Westchase and Westin Atlanta Airport, which we purchased in February 2007 and May 2007, respectively, and two hotels which we continued to manage as of September 30, 2007, for the new owners. We continued to manage 17 Blackstone properties at September 30, 2007, which accounted for $4.9 million in management fees for the nine months ended September 30, 2007. Termination fees due to us as of September 30, 2007 for hotels previously sold by Blackstone are $17.3 million (assuming Blackstone does not replace the lost management contracts).

In summary, the management fees earned for the 59 management contracts terminated in the first nine months of 2007 is as follows (in thousands):

	Number of			Number of		Nine Months		Nine Months
Owner Group	Properties			Rooms		Ended 9/30/2007		Ended 9/30/2006
Blackstone		18	(1)		5,122	$	2,091	$	4,262
Sunstone REIT		7			1,492		382		738
CNL		17			2,999		572		2,239
Others		17			2,926		667		1,517
Total		59			12,539	$	3,712	$	8,756

⁽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 16 Blackstone properties sold which we no longer own or manage.

We partially offset the loss of 11,747 rooms related to the 57 management contracts with the addition of 18 management contracts, totaling nearly 4,000 rooms.

Our goodwill is related to our hotel management segment. 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 nine months ended September 30, 2007, no significant management contract losses or other transactions and events occurred which were not already considered in our analysis during the fourth quarter of 2006. Based on this, we did not re-evaluate our goodwill for impairment in the third quarter of 2007. Our impairment analysis performed in the fourth quarter of 2006 assumed the net loss of 45 management contracts in 2007. We are in the process of budgeting hotel operations and the resulting management fees for 2008 and future periods, assessing industry conditions and trends, and evaluating the stability of our existing management contract portfolio and pipeline. This information and other information will serve as the basis for our annual goodwill impairment analysis to be performed in the fourth quarter.

In October 2007, Equity Inns completed the previously announced merger with an affiliate of Whitehall Street Global Real Estate Partnership 2007. As of September 30, 2007, we managed 38 properties for Equity Inns, consisting of 4,847 rooms. We continue to manage the 38 properties and notice has not been provided, nor any indication given, of the termination of the underlying management agreements for the 38 properties. We will continue to communicate with the new ownership as to its future plans concerning the management of the properties. The management contracts for the Equity Inns properties have minimal termination fee provisions. For the nine months ended September 30, 2007, we received approximately $2.0 million in management fees from the Equity Inns properties.

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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.

Results of Operations

Operating Statistics

Statistics related to our managed hotel properties (including wholly-owned hotels and hotels managed by affiliates):

	As of September 30,				Percent Change
	2007		2006		’07 vs. ’06
Hotel Management
Properties managed		184		233		(21.0	)%
Number of rooms		42,435		52,617		(19.4	)%
Hotel Ownership
Number of properties		6		3		100.0	%
Number of rooms		1,755		655		167.9	%

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Hotels under management decreased by a net of 49 properties as of September 30, 2007, compared to September 30, 2006, due to the following:

•  We acquired 19 additional management contracts from various owners.

•  Blackstone/MeriStar sold 24 properties, seven properties of which we either purchased or were retained as manager by the new owners.

•  CNL sold 22 properties, five of which we continue to manage for the new owner.

•  Sunstone sold eight properties which we no longer manage.

•  31 other properties were sold by various other owners, five of which we continue to manage for the new owners.

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

	Three Months
	Ended September 30,						Percent Change
	2007			2006			’07 vs. ’06
Hotel Management
RevPar	$	102.93		$	94.32			9.1	%
ADR	$	133.30		$	123.97			7.5	%
Occupancy		77.2	%		76.1	%		1.4	%

	Nine Months
	Ended September 30,						Percent Change
	2007			2006			’07 vs. ’06
Hotel Management
RevPar	$	100.62		$	92.42			8.9	%
ADR	$	133.20		$	123.95			7.5	%
Occupancy		75.5	%		74.6	%		1.2	%

⁽¹⁾ We present these operating statistics for the periods included in this report on a same-store basis. We define our same-store hotels as those which (i) are managed or owned by us for the entirety of the reporting periods being compared or have been managed by us for part of the reporting periods compared and we have been able to obtain operating statistics for the period of time in which we did not manage the hotel and (ii) have not sustained substantial property damage, business interruption or undergone large-scale capital projects during the periods being reported. In addition, the operating results of hotels for which we no longer manage as of September 30, 2007, are not included in same-store hotel results for the periods presented herein. Of the 184 properties that we and our affiliates managed as of September 30, 2007, 178 properties have been classified as same-store hotels.

Three months ended September 30, 2007, compared to the three months ended September 30, 2006

Revenues

Revenue consisted of the following (in thousands):

	Three Months
	Ended September 30,				Percent Change
	2007		2006		’07 vs. ’06
Lodging	$	20,628	$	7,154		>100	%
Management fees		9,634		14,066		(31.5	)%
Termination fees		935		16,995		(94.5	)%
Other		2,506		2,688		(6.8	)%
Other revenue from managed properties		147,562		202,780		(27.2	)%
Total revenue	$	181,265	$	243,683		(25.6	)%

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Lodging

The increase in lodging revenue is primarily due to the inclusion of $13.2 million in additional revenues during the three month period ended September 30, 2007 from the Hilton Arlington (acquired in October 2006), the Hilton Houston Westchase (acquired in February 2007), and the Westin Atlanta (acquired in May 2007). Combined RevPAR for the three other hotels which we owned for the full comparable periods increased 5.7%.

Management & termination fees

The decrease in management fee revenue is directly correlated to the loss of management properties over the past 12 months. Our average property count for the three month period ended September 30, 2007 decreased over 25% compared to the same period in 2006. In addition, these losses have been compounded as many of the properties have been full service properties, which on average, yield a higher management fee. We have been able to offset these losses by operational and economic gains and have recognized RevPAR growth of 9.1% at our managed properties quarter over quarter.

The decrease in termination fees is primarily due to the recognition of $15.1 million of termination fees from Blackstone during the third quarter of 2006, for management contracts terminated on, or before, October 1, 2006.

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

	Number of
	Properties @			Three Months		Three Months
Owner Group	9/30/2007			Ended 9/30/2007		Ended 9/30/2006
MANAGEMENT FEES(1):
Blackstone		17		$	1,518	$	1,581
Sunstone REIT		30			2,304		2,083
Equity Inns REIT		38			720		480
CNL/Ashford		5			148		143
International		8			333		434
Other		77			4,502		4,769
Owned Hotels(3)		6			—		306
Hotels terminated during 2007					109		2,655
Hotels terminated during 2006					—		1,615
Total management fees		181	(2)	$	9,634	$	14,066
TERMINATION FEES:
Blackstone				$	935	$	16,217
Other					—		778
Total termination fees				$	935	$	16,995

(1)	We also expect to earn incentive fees related to the management portfolio. 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 year. At September 30, 2007, we recorded deferred revenue of $7.3 million related to the international properties and $2.2 million related to our other managed properties. During the fourth quarter of 2007, we estimate that we will recognize in excess of $19 million in incentive management fee revenue assuming operation conditions remain as expected.
(2)	We have omitted three properties managed by one of our joint venture affiliates as we do not directly record management fee revenue. Our percentage of the earnings are recorded as equity in earnings in our consolidated statement of operations.
(3)	Management fees for Hilton Westchase, Hilton Arlington and Westin Atlanta Airport are eliminated in our consolidated statement of operations for the periods in which we own the hotels but are included for periods in which we managed these hotels for a third party prior to our acquisition.

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Other

Other revenues decreased $0.2 million primarily due to lower accounting fee revenue as a result of managing fewer properties. These decreases were offset by a slight increase in revenue from our purchasing and capital project management subsidiary.

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. Our payments of these costs are recorded as “other expenses from managed properties.” The decrease of $55.2 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):

	Three Months
	Ended September 30,				Percent Change
	2007		2006		’07 vs. ’06
Lodging	$	14,675	$	5,210		>100	%
Administrative and general		13,598		14,199		(4.2	)%
Depreciation and amortization		4,137		1,626		>100	%
Asset impairments and write-offs		6		2,024		(99.7	)%
Other expenses from managed properties		147,562		202,780		(27.2	)%
Total operating expenses	$	179,978	$	225,839		(20.3	)%

Lodging

The increase in lodging expense is primarily due to the inclusion of $9.4 million of expenses for the three month period ended September 30, 2007 from the Hilton Arlington, the Hilton Houston Westchase, and the Westin Atlanta Airport.

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 $0.5 million and expenses in our insurance subsidiary of $0.2 million.

Depreciation and amortization

We had a significant increase in depreciable assets due to the acquisition of the Hilton Arlington, the Hilton Houston Westchase, and the Westin Atlanta Airport which resulted in additional depreciation expense of $1.6 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 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 ending September 30, 2006, $2.0 million of asset impairments were recorded as a result of the sale and subsequent termination of three Blackstone and 13 Sunstone properties.

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Other expenses from managed properties

These amounts represent the payment 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 decrease of $55.2 million in other expense 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 Expenses

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

	Three Months
	Ended September 30,					Percent Change
	2007			2006		’07 vs. ’06
Interest expense, net	$	3,310		$	1,683		96.7	%
Equity in earnings of affiliates		563			4,745		(88.1	)%
Income tax (benefit) expense		(654	)		7,933		>(100	)%
Minority interest expense		1			122		(99.2	)%
Income from discontinued operations, net of tax		2,836			2,347		20.8	%

Interest expense

Net interest expense increased quarter over quarter by $1.6 million due to an increase in our total debt outstanding. Specifically, interest expense related to our Credit Facility increased by $0.9 million due to additional borrowings during 2007. In addition, our mortgage interest expense for the three month period ended September 30, 2007 has increased by $0.6 million in comparison with the same period during the prior year, due to the acquisitions of the Hilton Arlington and the Hilton Houston Westchase, partially offset by the repayment of the Hilton Concord mortgage during the second quarter of 2007. The amortization of capitalized loan fees was $0.3 million and $0.2 million for the three month periods ended September 30, 2007 and 2006, respectively.

Equity in earnings of affiliates

The decrease is primarily due to a gain of approximately $4.5 million recognized during the third quarter of 2006 from the sale of the Sawgrass Marriott Resort & Spa, of which we held a 10% interest. Excluding the $4.5 million gain, our share of earnings from our joint ventures has increased $0.3 million during the three month period ended September 30, 2007, in comparison with the same period of 2006.

Income tax expense

The decrease in income tax expense is partially driven by the decrease in our income from continuing operations. In addition, due to a change in the tax law, there was a reduction in the annualized effective tax rate to 34% as of September 30, 2007 from the 38% as of September 30, 2006. Effective in 2007, certain tax credits are now allowed to be utilized during the current year and carried back to 2006 to offset alternative minimum tax paid. We had previously been carrying a valuation allowance for the anticipated amount which would have not been utilized prior to the change in the tax law. This valuation was removed in the third quarter causing additional tax benefit in the quarter. The quarterly tax expense includes the tax benefit recognized utilizing the 34% tax rate as well as the additional tax benefit from the removal of the valuation allowance recorded in the first two quarters on the tax credits.

Income from discontinued operations, net of tax

Income from discontinued operations for the three months ended September 30, 2007 was due to additional gain recognized with the settlement of working capital on the sale of BridgeStreet, which occurred in January 2007. The 2006 discontinued operations relate to the operations of BridgeStreet.

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Nine months ended September 30, 2007, compared to nine months ended September 30, 2006

Revenues

Revenue consisted of the following (in thousands):

	Nine Months
	Ended September 30,				Percent Change
	2007		2006		’07 vs. ’06
Lodging	$	52,325	$	18,609		>100	%
Management fees		32,683		46,416		(29.6	)%
Termination fees		4,928		24,891		(80.2	)%
Other		7,538		9,117		(17.3	)%
Other revenue from managed properties		488,725		645,553		(24.3	)%
Total revenue	$	586,199	$	744,586		(21.3	)%

Lodging

The increase in lodging revenue is primarily due to the inclusion of $32.3 million in additional revenues during the nine month period ended September 30, 2007 from the Hilton Garden Inn Baton Rouge Airport (acquired in June 2006), the Hilton Arlington (acquired in October 2006), the Hilton Houston Westchase (acquired in February 2007), and the Westin Atlanta (acquired in May 2007). Combined RevPAR for the two other hotels which we owned for the full comparable periods increased 8.0%.

Management & termination fees

The decrease in management fee revenue is due in part to the non-recurrence of $3.2 million in business interruption proceeds that we received during the first quarter of 2006 associated with eight properties that were damaged or closed due to hurricanes in 2004. Excluding the one time payment of $3.2 million, management fees declined 24.4%, which is directly attributed to the decline in the number of properties under management. Our average property count for the nine month period ended September 30, 2007 decreased over 24% compared to the same period in 2006. In addition, these losses have been compounded as many of the properties have been full service properties which on average, yield a higher management fee. We have been able to partially offset these losses through operational and economic gains and have recognized RevPAR growth of 8.9% during the nine month period ended September 30, 2007, compared to the same period during the prior year. In addition, we continued to expand internationally during the first nine months of 2007 with the commencement of four additional international management agreements, including our first in Ireland and Belgium. We also opened our first international office in Moscow to capitalize on the potential growth in the international markets.

The decrease in termination fees is primarily due to the recognition of $15.1 million of termination fees from Blackstone during the third quarter of 2006 for management contracts terminated on, or before, October 1, 2006. During the first quarter of 2006, we also received one-time termination fees of $4.1 million from MeriStar due to its sale of ten properties. Termination fees for the nine months ended September 30, 2007 primarily relate to the recognition of $3.9 million of fees related to the termination of properties managed for Blackstone and $1.0 million related to the loss of other management contracts.

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

	Number of
	Properties @			Nine Months		Nine Months
Owner Group	9/30/2007			Ended 9/30/2007		Ended 9/30/2006
MANAGEMENT FEES(1):
Blackstone		17		$	4,891	$	4,882
Sunstone REIT		30			6,575		5,888
Equity Inns REIT		38			1,984		1,355
CNL/Ashford		5			442		423
International		8			910		1,290
Other		77			14,169		13,002
Owned Hotels(3)		6			300		992
Hotels terminated during 2007					3,412		8,369
Hotels terminated during 2006					—		7,020
Business interruption proceeds					—		3,195
Total management fees		181	(2)	$	32,683	$	46,416
TERMINATION FEES:
Blackstone				$	3,928	$	23,489
Sunstone REIT					215		—
Other					785		1,402
Total termination fees				$	4,928	$	24,891

(1)	We also expect to earn incentive fees related to the management portfolio. 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 year. At September 30, 2007, we recorded deferred revenue of $7.3 million related to the international properties and $2.2 million related to our other managed properties. During the fourth quarter of 2007, we estimate that we will recognize in excess of $19 million in incentive management fee revenue assuming operation conditions remain as expected.
(2)	We have omitted three properties managed by one of our joint venture affiliates as we do not directly record management fee revenue. Our percentage of the earnings are recorded as equity in earnings in our consolidated statement of operations.
(3)	Management fees for Hilton Westchase, Hilton Arlington and Westin Atlanta Airport are eliminated in our consolidated statement of operations for the periods in which we own the hotels but are included for periods in which we managed these hotels for a third party prior to our acquisition.

Other

Other revenues decreased $1.6 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. Our payments of these costs are recorded as “other expenses from managed properties.” The decrease of $156.8 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):

	Nine months
	ended September 30,				Percent Change
	2007		2006		’07 vs. ’06
Lodging	$	36,714	$	13,670		>100	%
Administrative and general		41,488		43,229		(4.0	)%
Depreciation and amortization		11,114		4,715		>100	%
Asset impairments and write-offs		1,161		10,666		(89.1	)%
Other expenses from managed properties		488,725		645,553		(24.3	)%
Total operating expenses	$	579,202	$	717,833		(19.3	)%

Lodging

The increase in lodging expense is primarily due to the inclusion of $22.5 million in additional expense during the nine month period ended September 30, 2007 from the Hilton Garden Inn Baton Rouge Airport, the Hilton Arlington, the Hilton Houston Westchase, and the Westin Atlanta.

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 continued reduction in employee compensation of $1.4 million as average headcount was lower. In addition, we realized a reduction in expenses of $1.0 million related to our insurance subsidiary due to lower claims. These savings are partially offset by an increase in several administrative and general expenses including severance and deal related costs.

Depreciation and amortization

We had a significant increase in depreciable assets during the nine month period ended September 30, 2007 in comparison with the same period of the prior year due to the acquisition of the Hilton Garden Inn Baton Rouge Airport, the Hilton Arlington, the Hilton Houston Westchase, and the Westin Atlanta Airport; all of which contributed to additional depreciation expense of $3.8 million. In addition, scheduled amortization expense for our management contracts increased by approximately $2.4 million as a result of revising the estimated economic lives of the management contracts for the remaining Blackstone properties 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 nine months ended September 30, 2007, we recognized impairment losses of $1.2 million, related specifically to 14 properties that were sold in 2007. For the nine months ended September 30, 2006, $8.3 million of asset impairments were recorded related to the sale of 18 MeriStar properties, $1.4 million in connection with three Blackstone terminated management contracts and $0.7 million associated with 14 properties sold by Sunstone.

Other expenses from managed properties

These amounts represent the payment 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 decrease of $156.8 million in other expense 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 Expenses

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

	Nine Months
	Ended September 30,				Percent Change
	2007		2006		’07 vs. ’06
Interest expense, net	$	8,162	$	4,777		70.9	%
Equity in earnings of affiliates		1,818		4,311		(57.8	)%
Income tax expense		201		10,213		(98.0	)%
Minority interest expense		63		171		(63.2	)%
Income from discontinued operations, net of tax		20,444		3,050		>100	%

Interest expense

Net interest expense for the nine months ended September 30, 2007 increased over the same period during the prior year by $3.4 million due to an increase in our total debt outstanding. Specifically, interest expense related to our Credit Facility increased by $0.7 million due to additional borrowings during 2007. In addition, our mortgage interest expense for the nine month period ended September 30, 2007 increased by $2.1 million in comparison with the same period during the prior year, due to the acquisitions of the Hilton Arlington and the Hilton Houston Westchase, offset by the repayment of the Hilton Concord mortgage during the second quarter of 2007. The amortization of capitalized loan fees was $1.4 million and $0.6 million for the nine months ended September 30, 2007 and 2006, respectively.

Equity in earnings of affiliates

The decrease is primarily due to a gain of approximately $4.5 million recognized during the third quarter of 2006 from the sale of our 10.0% interest in the joint venture that owned the Sawgrass Marriott Resort & Spa. During the second quarter of 2007, we recognized an additional $0.6 million gain related to the settlement of working capital and other purchase price true-ups from this sale. Excluding items related to the sale of the Sawgrass Marriott Resort & Spa, our equity in the earning of our affiliates increased $1.4 million for the nine month period ended September 30, 2007 over the prior year partially due to the sale of one of our joint ventures in which our share of losses for the first nine months of 2006 was $0.5 million. In addition, we have recorded $0.7 million of earnings in 2007 related to our new investment in the Sawgrass Marriott Resort & Spa, an increase of $0.5 million over the same period in the prior year.

Income tax expense

The decrease in income tax expense is partially driven by the decrease in our income from continuing operations. In addition, due to a change in the tax law, there was a reduction in the effective tax rate to 34% in 2007 from the 39% in 2006. Effective in 2007, certain tax credits are now allowed to be utilized during the current year and carried back to 2006 to offset alternative minimum tax paid. We had previously been carrying a valuation allowance for the anticipated amount which would have not been utilized prior to the change in the tax law. This valuation was removed in the third quarter causing the reduction in our effective tax rate.

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 $20.5 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, there was a loss realized for tax purposes compared to the $20.5 million gain recognized in our statement of operations for the nine month period ended September 30, 2007.

In September 2005, we sold Pittsburgh Airport Residence Inn by Marriott. We recognized an additional net gain on sale of $0.2 million in the second quarter of 2007, related to finalizing the working capital cutoff and costs associated with the transaction.

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Liquidity, Capital Resources and Financial Position

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

	Nine Months
	Ended September 30,						Percent Change
	2007			2006			’07 vs. ’06
Cash provided by operating activities	$	21,988		$	29,797			(26.2	)%
Cash used in investing activities		110,168			20,527			>100	%
Cash provided by (used in) financing activities		84,684			(10,060	)		>100	%
Working capital (deficit)		(13,472	)		3,543			>(100	)%
Cash interest expense		8,185			5,564			47.1	%
Debt balance		171,950			71,302			>100	%

Operating Activities

The decrease in cash provided by operating activities is primarily due to marginal changes in certain working capital assets and liabilities, after consideration of non-cash income and expense items including increased depreciation and amortization, offset by decreases in asset impairment and write-offs . This decrease in cash provided by operating activities was partially offset by a change in net income, which increased by $1.9 million, after adjusting for the $20.5 million gain on sale of our corporate housing subsidiary, as well as the decrease in accounts receivable of $20.5 million due to collections of termination fees primarily from Blackstone.

Investing Activities

The major components of the increase in cash used in investing activities in 2007 compared to 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 and a $2.0 million deposit associated with the future purchase of the Sheraton Columbia. In 2006, we purchased the Hilton Garden Inn Baton Rouge for $14.5 million.

•  In 2007, we invested a total of $3.0 million in joint ventures and advanced $5.7 million in the form of a convertible debt instrument in an entity owned by Steadfast to acquire a 15% interest in a joint venture. We received non-operating distributions totaling $3.2 million from four joint ventures. In 2006, we invested $13.0 million in four new joint ventures and made an additional contribution to existing joint ventures of $0.2 million. We received a distribution of $15.3 million from the sale of the Sawgrass Marriott Resort & Spa and $0.5 million from our Doral Tesoro joint venture. Distributions which are a return of our investment in the joint venture are recorded as investing cash flows while distributions which are a return on our investment are recorded as operating cash flows.

•  We spent an additional $1.2 million on property and equipment during the nine month period ended September 30, 2007, which is primarily related to improvements at our owned hotels and for general corporate purposes.

•  The cash expenditures above were offset by proceeds of $36.0 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 $87.7 million during 2007, compared to net repayments on long-term debt of $13.8 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. Repayments of principal in 2007 were made from cash provided by operating activities.

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We incurred total financing fees of $3.3 million in connection with the Credit Facility entered in March 2007 and the amendment to the Credit Facility in May 2007. In addition, we received proceeds of $0.2 million during 2007 in connection with the issuance of common stock related to equity based compensation, compared to $2.8 million during 2006.

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 September 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. In September 2007, we signed a purchase and sale agreement to acquire our seventh wholly-owned property, the Sheraton Columbia. We expect to finance the acquisition through a combination of debt financing and cash on hand. Joint ventures also continue to play a strategic and vital role in the continued growth strategy of the Company. During the first nine months of 2007, we have invested $8.7 million in seven joint ventures.

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. We may also seek to raise additional funding for future investments and growth opportunities by raising additional debt or equity from time to time based on the specific needs of those future investments.

Senior Credit Facility — In 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. As of September 30, 2007, all $85.0 million of capacity was available to us for borrowing. 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 September 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 7.88% per annum). We incurred interest expense of $2.5 million and $5.2 million on the senior credit facilities for the three and nine months ended September 30, 2007, respectively, and $1.6 million and $4.5 million for the three and nine months ended September 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

36

requirements and other customary restrictions. As of September 30, 2007, we were in compliance with all of these covenants.

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

							Interest Rate as of
	Principal		Maturity		Spread Over		September 30,
	Amount		Date(1)		30-Day LIBOR		2007
Hilton Arlington	$	24.7 million		November 2009		135 bps		7.2	%
Hilton Houston Westchase	$	32.8 million		February 2010		135 bps		7.2	%

⁽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 related to our mortgage loans of $1.0 million and $3.1 million for the three and nine months ended September 30, 2007, respectively, and $0.4 million and $1.0 million for the three and nine months ended September 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, increased from 5.3% per annum, as of December 31, 2006, to 5.4% per annum, as of September 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 September 30, 2007 and 2006, respectively, and by $1.0 million and $0.6 million for the nine months ended September 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 September 30, 2007.

37

Changes in Internal Controls

There has not been any change in our internal control over financial reporting during the third 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 6.   Exhibits

(a) Exhibits

Exhibit No.			Description of Document
	3	.1	Amended and Restated Certificate of Incorporation of the Company, formerly MeriStar Hotels & Resorts, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form S-l/A filed with the Securities and Exchange Commission on July 23, 1998 (Registration No. 333-49881)).
	3	.1.1	Certificate of Amendment of the Restated Certificate of Incorporation of the Company dated September 30, 2001 (incorporated by reference to Exhibit 3.1.1 to the Company’s Form 10-K filed with the Securities and Exchange Commission on April 15, 2002).
	3	.1.2	Certificate of Merger of Interstate Hotels Corporation into MeriStar Hotels & Resorts, Inc. (incorporated by reference to Exhibit 3.1.2 to the Company’s Form 8-A/A filed with the Securities and Exchange Commission on August 2, 2002).
	3	.1.3	Certificate of Amendment of the Restated Certificate of Incorporation of the Company dated July 31, 2002 (incorporated by reference to Exhibit 3.1.3 to the Company’s Form 8-A/A filed with the Securities and Exchange Commission on August 2, 2002).
	3	.2	By-laws of the Company, formerly MeriStar Hotels & Resorts, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Form S-l/A filed with the Securities and Exchange Commission on July 23, 1998 (Registration No. 333-49881)).
	3	.2.1	Amendment to the By-laws of the Company (incorporated by reference to Exhibit 3.3 to the Company’s Form 8-A/A filed with the Securities and Exchange Commission on August 2, 2002).
	4	.1	Form of Common Stock Certificate of the Company (incorporated by reference to Exhibit 4.1 to the Company’s Form 8- A/A filed with the Securities and Exchange Commission on August 2, 2002).
	4	.2	Preferred Share Purchase Rights Agreement, dated July 23,1998, between the Company, formerly MeriStar Hotels & Resorts, Inc., and the Rights Agent (incorporated by reference to Exhibit 4.4 to the Company’s Form S-l/A filed with the Securities and Exchange Commission on July 23, 1998 (Registration No. 333-49881)).
	4	.2.1	Amendment to Rights Agreement, dated December 8, 2000, between the Company, formerly MeriStar Hotels & Resorts, Inc., and the Rights Agent (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 12, 2000).
	4	.2.2	Second Amendment to Rights Agreement, dated May 1, 2002, between the Company, formerly MeriStar Hotels & Resorts, Inc., and the Rights Agent (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on May 3, 2002).
	4	.3	Form of Rights Certificate (incorporated by reference to Exhibit 4.3 to the Company’s Form S-l/A filed with the Securities and Exchange Commission on July 23, 1998 (Registration No. 333-49881)).
	10	.8*	Agreement of Purchase and Sale between MeriStar Columbia Owner SPE, LLC, MeriStar Seelbach SPE, LLC, Madison Motel Associates, LLP, affiliates of The Blackstone Group, and Interstate Columbia, LLC, an affiliate of Interstate Hotels & Resorts, Inc., and IHR Invest Hospitality Holdings, LLC, dated September 12, 2007, for the purchase of the Sheraton Columbia, the Hilton Seelbach, and the Crowne Plaza Madison.
	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: November 8, 2007

40

EX-10.8

OPERATING AGREEMENT
OF IHR INVEST HOSPITALITY HOLDINGS, LLC

by and among

HOTEL INVEST DEUCE MM, LLC,

as Managing Member,

and

HOTEL INVEST DEUCE LP, LLC,

and

INTERSTATE INVEST, LLC,

as Non-Managing Members.

Dated as of September ___, 2007

TABLE OF CONTENTS

	Page
ARTICLE 1 DEFINITIONS		2
ARTICLE 2 FORMATION OF COMPANY		8
2.01 Formation		8
2.02 Name		9
2.03 Principal Place of Business		9
2.04 Registered Office and Registered Agent		9
2.05 Term		9
ARTICLE 3 PURPOSE AND POWERS OF COMPANY		9
3.01 Purpose		9
3.02 Powers		9
ARTICLE 4 RIGHTS AND DUTIES OF MANAGING MEMBER AND THE EXECUTIVE COMMITTEE		10
4.01 Management		10
4.02 Other Power and Authority		13
4.03 Liability for Certain Acts		13
4.04 No Exclusive Duty to Company		14
4.05 Bank Accounts		15
4.06 Indemnity of Managing Member, Employees and Other Agents		15
4.07 Resignation or Termination of Managing Member		17
4.08 Expenses		17
4.09 Exculpation		18
ARTICLE 5 RIGHTS AND OBLIGATIONS OF MEMBERS		18
5.01 Limitation of Liability		18
5.02 Company Debt Liability		18
5.03 List of Members		19
5.04 Company Books		19
5.05 Company Property; Nature of Interests in the Company		19
5.06 Priority		19
5.07 Liability of a Member to the Company		19
5.08 Exculpation		19
5.09 Loans		19
ARTICLE 6 CONTRIBUTIONS TO THE COMPANY, PERCENTAGE INTERESTS AND CAPITAL ACCOUNTS		19
6.01 Members’ Capital Contributions		19
i

Table of Contents
(Continued)

	Page
6.02 Additional Contributions		19
6.03 Capital Accounts		20
6.04 Withdrawal or Reduction of Members’ Contributions to Capital		21
ARTICLE 7 REPRESENTATIONS, WARRANTIES AND COVENANTS		21
7.01 Representations and Warranties of the Members		21
7.02 Acknowledgment of the Partner Non-Managing Member		22
7.03 Partner Non-Managing Member Operating Agreement		22
7.04 Additional Representations and Warranties		23
ARTICLE 8 DISTRIBUTIONS, ALLOCATIONS, INCOME TAX, ELECTIONS AND REPORTS		23
8.01 Distributions		23
8.02 Limitation Upon Distributions		24
8.03 Allocations		24
8.04 Accounting Principles		25
8.05 Interest on and Return of Capital Contributions		25
8.06 Loans to Company		25
8.07 Accounting Period		25
8.08 Records, Audits and Reports		25
8.09 Tax Returns and Tax Elections		25
8.10 Tax Matters Member		26
ARTICLE 9 TRANSFERABILITY		27
9.01 General		27
9.02 Effect of Transfer		27
ARTICLE 10 DISSOLUTION AND TERMINATION		28
10.01 Dissolution		28
10.02 Winding-Up, Liquidation and Distribution of Assets		28
10.03 Articles of Dissolution		29
10.04 Effect of Filing of Articles of Dissolution		29
10.05 Return of Contribution Nonrecourse to Other Members		29
ARTICLE 11 RIGHT OF FIRST OFFER		30
11.01 First Offer Notice		30
ii

Table of Contents
(Continued)

	Page
11.02 Partner Non-Managing Member Election		30
11.03 Procedures		30
11.04 Remedies		31
ARTICLE 12 MISCELLANEOUS PROVISIONS		32
12.01 Notices		32
12.02 Governing Law		33
12.03 Waivers		34
12.04 Confidentiality		34
12.05 Amendments		35
12.06 Construction		35
12.07 Headings		36
12.08 Entirety; Waiver		36
12.09 Further Assurances		36
12.10 Consent		36
12.11 Severability		36
12.12 Heirs, Successors and Assigns		36
12.13 Waiver of Jury Trial		37
12.14 Creditors		37
12.15 Prevailing Party		37
12.16 Counterparts		37
iii

OPERATING AGREEMENT

     OPERATING AGREEMENT (this “Agreement”) of IHR INVEST HOSPITALITY HOLDINGS, LLC (the “Company”), dated as of September ___, 2007, by and among HOTEL INVEST DEUCE MM, LLC, a Delaware limited liability company, having an address at 280 Park Avenue, New York, New York 10017, as managing member (the “III Manager” or the “Managing Member”), and HOTEL INVEST DEUCE LP, LLC, a Delaware limited liability company, having an address at 280 Park Avenue, New York, New York 10017 (the “III Non-Managing Member”) and INTERSTATE INVEST, LLC, a Delaware limited liability company, having an address at 4501 North Fairfax Drive, Suite 500, Arlington, Virginia 22203 (the “Partner Non-Managing Member”), as non-managing members (the III Non-Managing Member and the Partner Non-Managing Member are, collectively, the “Non-Managing Members”). (The Managing Member and the Non-Managing Members are sometimes herein collectively referred to as the “Members”).

R E C I T A L S :

     A. Meles Madison, LLC (“Madison Purchaser”), Seelbach Louisville, LLC (“Seelbach Purchaser”), and Interstate Columbia, LLC (“Columbia Purchaser, together with Seelbach Purchaser and Madison Purchaser, collectively, the “Purchaser”), as purchasers, and Meristar Seelbach SPE, LLC, Madison Motel Associates, LLC, and Meristar Columbia Owner SPE, LLC, as sellers, have entered into that certain Agreement of Purchase and Sale, dated as of September ___, 2007 (as may be amended, modified and/or supplemented, the “Contract”) with respect to certain improved and unimproved real property as more particularly described on Exhibit “1” annexed hereto and made a part hereof.

     B. The Company intends, through the Project Entities (as hereinafter defined) to own, manage, operate, develop (i) the full service hotel (the “Seelbach Property”) commonly known as the “Seelbach Hilton” and located at 500 Fourth Avenue, Louisville, Kentucky, containing, among other things, a 10 story hotel with 321 guest units (including, 27 guest suites), a leased parking facility, a leased spa facility, a bar/lounge, restaurants, ballroom/meeting spaces and a gift shop (including, without limitation, all additional facilities, amenities, common areas and parking areas in connection therewith), and (ii) the full service hotel (the “Madison Property”) commonly known as the “Crowne Plaza Madison” and located at 4402 East Washington Ave., Madison, Wisconsin, containing, among other things, a 6 story hotel with 226 guest units (including, 34 guest suites), a bar/lounge, restaurants, ballroom/meeting spaces, a swimming pool and a gift shop (including, without limitation, all additional facilities, amenities, common areas and parking areas in connection therewith) (the Seelbach Property and the Madison Property are herein collectively, the “Project”); it being understood and agreed that neither the Company nor the Project Entities shall own or shall have an interest in the Sheraton Property (as defined in the Contract).

     C. The Managing Member and the Non-Managing Members wish to form a limited liability company under the laws of the State of Delaware for the purposes of, among other things, through the Project Entities (i) indirectly acquire the Project, and (b) owning, holding,

developing, operating, selling, financing, converting to cooperative or condominium ownership or otherwise dealing with and exercising all indices of ownership of the Project in accordance with and subject to the terms of this Agreement.

     D. The Members wish to enter into this Agreement to set forth the terms and conditions that will govern their relationship.

A G R E E M E N T :

     NOW, THEREFORE, in consideration of the premises, agreements and obligations set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Members hereby agree as follows:

ARTICLE 1

DEFINITIONS

     For the purposes of this Agreement, the following terms shall have the following meanings:

          “Act” shall mean the Delaware Limited Liability Company Act, 6 Del. C. §§ 18-101, et seq., as amended from time to time.

          “Additional Capital Contributions” shall have the meaning set forth in Section 6.02 hereof.

          “Affiliate” shall mean, with reference to a Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such Person. For the purposes of this Agreement, the term “control” (including “controlling”, “controlled by” and “under common control with”) means either (i) the possession, direct or indirect, of the power to direct or cause the direction of the management and the policies of a Person, whether through the ownership of voting securities, by contract or otherwise, or (ii) direct or indirect ownership of 25% or more of the outstanding voting interest of a Person.

          “Bankruptcy Action” shall mean, with respect to the affected Person: (i) the entry of an Order for Relief under Title 11 of the United States Code (the “Bankruptcy Code”), as amended; (ii) the admission by such Person of its inability to pay its debts as they mature; (iii) the making by it of an assignment for the benefit of creditors; (iv) the filing by it of a petition in bankruptcy or a petition for relief under the Bankruptcy Code or any other applicable federal or state bankruptcy or insolvency statute or any similar law; (v) the expiration of sixty (60) days after the filing of an involuntary petition under the Bankruptcy Code or an involuntary petition seeking liquidation, reorganization, arrangement or readjustment of its debts under any other federal or state insolvency law; provided, however, that the same shall not have been vacated, set aside or stayed within such sixty (60)-day period; (vi) an application or consenting to by such party for the appointment of a receiver or other similar official for the assets of such party; or

(vii) the imposition of a judicial lien on all or a substantial part of its assets unless such lien is discharged or vacated or the enforcement thereof stayed within thirty (30) days after its effective date.

          “Business Plan” shall mean the business plan adopted by the Managing Member from time to time for the operation and management of Company Property, including, without limitation, the capital budget, and the operating budget for the operation of the Company Property for the next calendar year, any proposed franchise agreement, any promotional and advertising materials relating to the Company Property, the acquisition, lease, financing, restructuring or disposition of any asset of the Company and/or any Project Entity, and the Company’s compliance with the terms of each contract and agreement binding upon the Company and/or any Project Entity (a copy of the initial Business Plan is annexed hereto and made a part hereof as Exhibit “2”).

          “Capital Contribution” shall mean, in the case of a Member, any cash or other property contributed from time to time to the capital of the Company (including, without limitation, any Additional Capital Contributions) by such Member.

          “Capital Expenditures” shall mean, for any given period, (a) other than expenditures funded from Capital Reserves all cash expenditures by the Company and/or any Project Entity which (i) under generally accepted accounting principles, consistently applied, or (ii) as otherwise approved in writing by the Managing Member, constitute Capital Expenditures for such period in connection with the ownership, operation and maintenance of the Company Property, and (b) all Capital Reserves established during such period.

          “Capital Reserves” shall mean capital reserves from time to time as provided in the Business Plan then in effect.

          “Capital Transaction” shall mean (a) the sale, transfer, assignment, financing or refinancing of any Company Property, or any part thereof or interest therein, (b) any casualty, condemnation or other event that causes the Company to receive any casualty insurance proceeds, condemnation awards, or (c) any similar transaction which, in accordance with generally accepted accounting principles, consistently applied, is attributable to capital.

          “Company” shall have the meaning set forth in the introductory paragraph hereof.

          “Company Interest” shall mean a Member’s interest in the Company, including such Member’s right to profits, losses and distributions, and the right, if any, to participate in the management of the business and affairs of the Company, in each case to the extent granted pursuant to the terms of this Agreement, together with the obligation to comply with the terms of this Agreement.

          “Company Percentage Interest” shall mean initially the percentage interests as set forth on Exhibit “A” annexed hereto and made a part hereof, as the same may be adjusted from time to time, such that as of any point in time, each Member’s Company Percentage Interest shall be equal to a fraction, expressed as a percentage, the numerator of which shall be the aggregate

amount of Capital Contributions made by such Member as of such point in time, and the denominator of which shall be the aggregate amount of all Capital Contributions made by all of the Members as of such point in time; provided, however, (a) upon the occurrence of the First IRR Hurdle Event, the Members’ Company Percentage Interests shall be as follow: (i) III Manager, 0.85%, (ii) III Non-Managing Member, 71.40%, and (iii) Partner Non-Managing Member, 27.75% and (b) upon the occurrence of the Second IRR Hurdle Event, the Members’ Company Percentage Interests shall be as follow: (i) III Manager, 0.80%, (ii) III Non-Managing Member, 67.20%, and (iii) Partner Non-Managing Member, 32%.

          “Company Property” shall mean the Company’s 100% interest in the Project Entities, which in turn own the Property, and any real estate asset or other property (real, personal or mixed) owned, leased or licensed by the Company, including, without limitation, the Property.

          “Confidential Information” shall have the meaning set forth in Section 12.04(a) hereof.

          “Consent” shall have the meaning set forth in Section 12.10 hereof.

          “Contract” shall have the meaning set forth in the Recitals hereof.

          “Contributing Member” shall have the meaning set forth in Section 6.02 hereof.

          “Courts” shall have the meaning set forth in Section 12.02 hereof.

          “Designated Price” shall have the meaning set forth in Section 11.01 hereof.

          “Distribution Amount” shall mean, as of any given point in time, an amount equal to the aggregate of the Net Capital Proceeds and Net Operating Cash Flow that have been distributed by the Company to the Members as of such point in time (excluding any amounts paid with respect to any Shortfall Loan).

          “Election Notice” shall have the meaning set forth in Section 11.02 hereof.

          “First IRR Hurdle Event” shall mean that each Member has received, on an aggregate cumulative basis, a 17.5% IRR on its aggregate Capital Contributions (including all Additional Capital Contributions).

          “First Offer Notice” shall have the meaning set forth in Section 11.01 hereof.

          “Franchise Agreement” shall mean collectively those certain franchise agreements to be executed and delivered at the Closing under the Contract , as the same may be amended, modified or supplemented from time to time.

          “Gross Capital Proceeds” shall mean (a) in connection with the disposition of Company Property or part thereof or any interest therein which is the subject of a Capital Transaction, the gross cash proceeds received by the Company, and (b) as approved in writing by

the Managing Member, any Capital Reserves established in connection with such Capital Transaction that are released but not applied to a Capital Expenditure.

          “Gross Operating Receipts” shall mean, for any given period, the sum of (a) any and all cash receipts (other than Gross Capital Proceeds, any Capital Contribution and any unapplied security deposits or other deposits with respect to any Property) received by the Company other than in connection with a Capital Transaction, and (b) as approved in writing by the Managing Member, Capital Reserves (which are not related to a Capital Transaction) and Operating Reserves which are released but not applied to the item for which they were reserved.

          “III Manager” shall mean HOTEL INVEST DEUCE MM, LLC, a Delaware limited liability company.

          “III Non-Managing Member” shall mean HOTEL INVEST DEUCE LP, LLC, a Delaware limited liability company.

          “Indemnified Party” shall have the meaning set forth in Section 4.06 hereof.

          “Initial Members” shall mean the III Manager, the III Non-Managing Member and the Partner Non-Managing Member.

          “Interstate” shall mean Interstate Hotels & Resorts, Inc., a Delaware corporation.

          “IRR” shall mean, with respect to any Member, the distribution of Distribution Amounts to such Member equal to all of such Members’ Capital Contributions to the Company and an internal rate of return (with reference to “XIRR” on Excel) on such Capital Contributions at the applicable percentage per annum, compounded monthly, based on a 365 day year for the actual number of days elapsed, commencing on the date or dates that each such Member’s applicable Capital Contribution is received by the Company, taking into account the timing and amounts of all such distributions of Distribution Amounts from the Company to such Member. IRR shall be computed by assuming that all such Capital Contributions made by a Member, and all such distributions received by a Member, occur on the day on which they are actually made or received.

          “IRR Hurdle Event” shall mean that each Member has received, on an aggregate cumulative basis, a 17.5% IRR on its aggregate Capital Contributions (including all Additional Capital Contributions).

          “Lender” shall mean the holder(s) of any loan(s) secured by all or any portion of the Property.

          “Loan” shall mean any loan(s) secured by all or any portion of the Property.

          “Loan Documents” shall mean the documents and instruments executed and delivered in connection with any Loan from time to time, as the same may be amended, modified or supplemented from time to time.

          “Managing Member” shall mean the III Manager or any other Person who is admitted as a Managing Member or otherwise engaged to serve as Managing Member of the Company in accordance with the terms of this Agreement and applicable law.

          “Member” shall mean each of the Initial Members and any Person who is admitted as a Member of the Company in accordance with the terms of this Agreement and applicable law.

          “Net Capital Proceeds” shall mean, with respect to each Capital Transaction, an amount equal to the excess, if any, of the Gross Capital Proceeds in connection therewith, over the sum of all payments or provisions for the payment, without duplication, of (a) all Capital Expenditures with respect to such Capital Transaction incurred with respect to any Company Property, (b) if appropriate, the application of the Gross Capital Proceeds to their intended use (e.g., capital leasehold improvements, repayment of accrued interest and/or principal of any existing third-party indebtedness or application of any insurance proceeds or condemnation awards toward restoration of the Property), (c) any and all costs and expenses incurred in connection with such Capital Transaction, including, without limitation, attorneys’ fees and disbursements, brokerage fees, transfer or similar taxes and any and all other reasonable and customary transaction costs, and (d) as approved in writing by the Managing Member, any amounts to be maintained as Capital Reserves or Operating Reserves on account of such Capital Transaction.

          “Net Operating Cash Flow” shall mean, for any given period, an amount equal to the excess, if any, of the Gross Operating Receipts for such period over the sum of Operating Expenses and Capital Expenditures which are not related to a Capital Transaction or satisfied by Capital Contributions, for such period.

          “Non-Contributing Member” shall have the meaning set forth in Section 6.02(b) hereof.

          “Non-Managing Member” shall mean the III Non-Managing Member, the Partner Non-Managing Member and/or any other Person who is admitted as a Non-Managing Member of the Company in accordance with the terms of this Agreement and applicable law.

          “Operating Expenses” shall mean, for any given period, the sum, without duplication, of (i) all cash expenses of the Company and/or any Project Entity during such period which constitute operating expenses under generally accepted accounting principles (modified for a cash method of accounting), consistently applied in connection with the ownership, operation, administration, leasing and maintenance of any Company Property, including, without limitation, regular periodic debt service under the Loan (including amortization) and under any Shortfall Loan, real estate taxes, federal, state or local income taxes paid by the Company (excluding, however, any such taxes paid with respect to a Capital Transaction), insurance premiums, utility charges, maintenance expenses, any general and administrative expenses, and (ii) all Operating Reserves during such period.

          “Operating Reserves” shall mean operating reserves from time to time as provided in the Business Plan then in effect.

          “Partner Non-Managing Member” shall mean Interstate Invest, LLC, a Delaware limited liability company.

          “Partner Termination Event” means if at any time any of the following events occur:

(i) Dissolution and termination of the organizational existence of the Partner Non-Managing Member and/or Property Manager (as long as Property Manager is an Affiliate of Partner Non-Managing Member), which is not reinstated within thirty (30) after written notice thereof from the Managing Member;

(ii) Cessation of the conduct of business by the Partner Non-Managing Member and/or Property Manager (as long as Property Manager is an Affiliate of Partner Non-Managing Member) which continues for a period of thirty (30) consecutive days;

(iii) A Bankruptcy Action to which the Partner Non-Managing Member or Property Manager (as long as Property Manager is an Affiliate of Partner Non-Managing Member) is a party (whether voluntary or involuntary);

(iv) The termination of the Property Management Agreement by Owner (as defined in the Property Management Agreement) due to an Event of Default (as defined in the Property Management Agreement) by the Property Manager under Article XVII thereof (for avoidance of doubt excluding any Change of Control (as defined in the Management Agreement) by the Manager); or

(v) The Partner Non-Managing Member’s and/or Property Manager’s (as long as Property Manager is an Affiliate of Partner Non-Managing Member) Chief Executive Officer, Chief Financial Officer, Chief Investment Officer, General Counsel or Head of Operations, or if the General Manager or the Director of Finance for Madison Property and/or the Seelbach Property shall commit any act which constitutes fraud, theft, embezzlement or any gross misdemeanor or greater crime or any similar criminal act involving dishonesty in the course of performing his or her duties on behalf of the Partner Non-Managing Member and/or Property Manager.

          “Person” shall mean any individual, partnership, corporation, limited liability company, trust or other entity.

          “Project” shall have the meaning set forth in the Recitals hereof.

          “Project Entities” shall mean collectively Meles Madison, LLC and Seelbach Louisville, LLC, each a Delaware limited liability company, and IHR Invest Madison Corp, Inc. and IHR Invest Louisville Corp, Inc., each a Delaware corporation.

          “Property” shall mean collectively the Seelbach Property, the Madison Property and any other real or personal property acquired pursuant to the terms of the Contract, and any other improved and unimproved real property acquired by the Company from time to time, and any other property associated therewith.

          “Property Management Agreement” shall mean collectively those certain Hotel Management Agreements with respect to the Seelbach Property and the Madison Property, as the same may be amended, modified or supplemented from time to time.

          “Property Manager” shall mean Interstate Management Company, LLC, a Delaware limited liability company, and its permitted successors and assigns.

          “Replacement Managing Member” shall have the meaning set forth in Section 4.07 hereof.

          “ROFO Price” shall have the meaning set forth in Section 11.03 hereof.

          “Second IRR Hurdle Event” shall mean that each Member has received, on an aggregate cumulative basis, a 25% IRR on its aggregate Capital Contributions (including all Additional Capital Contributions).

          “Shortfall Loan” shall have the meaning set forth in Section 6.02(b) hereof.

          “Tax Matters Member” shall have the meaning set forth in Section 8.10 hereof.

          “Transfer” shall have the meaning set forth in Section 9.01 hereof.

          “Withdrawal Event” shall have the meaning set forth in Section 10.01 hereof.

ARTICLE 2

FORMATION OF COMPANY

     2.01 Formation.

          (a) The Members hereby agree to form the Company as a limited liability company under and pursuant to the provisions of the Act.

          (b) The Managing Member shall execute, deliver and file a certificate of formation and any amendment thereto, and any and all certificates, documents and instruments, in each case with the Delaware Secretary of State or otherwise as appropriate, and shall make such other filings as may be required under the Act or the laws of any other jurisdiction in which the Company shall carry on its business.

     2.02 Name. The name of the Company is “IHR INVEST HOSPITALITY HOLDINGS, LLC.” The business of the Company may be conducted in compliance with all applicable laws under any other name designated by the Managing Member from time to time.

     2.03 Principal Place of Business. The principal place of business of the Company shall be c/o Investcorp International Inc., 280 Park Avenue, New York, New York 10017. From time to time, upon ten (10) days’ notice to the Members, the Managing Member may change the location of the Company’s principal place of business.

     2.04 Registered Office and Registered Agent. The Company’s registered agent and office in Delaware shall be at 2711 Centreville Road, Suite 400, Wilmington, Delaware 19801, and the name of the registered agent of the Company in the State of Delaware at such address is Corporation Service Company. From time to time, the Managing Member may designate another registered agent and/or registered office.

     2.05 Term. The term of the Company shall commence on the date of filing of the Certificate with the Secretary of State of the State of Delaware, and shall continue until dissolved in accordance with the terms of this Agreement.

ARTICLE 3

PURPOSE AND POWERS OF COMPANY

     3.01 Purpose. The purpose of the Company is to acquire, own, manage, develop, operate, improve, build upon, rehabilitate, alter, lease, ground lease, license, repair, finance, refinance, securitize, sell, convert to condominium or cooperative ownership and otherwise deal with and dispose of Company Property, and to engage in any and all activities necessary, appropriate, proper, advisable, incidental or convenient thereto.

     3.02 Powers. Except as otherwise set forth in this Agreement, the Company shall have the power and authority to take any and all actions necessary, appropriate, proper, advisable, incidental or convenient to, or for the furtherance of, the purpose set forth in Section 3.01 hereof, including, without limitation, the power:

          (a) To conduct its business, carry on its operations and have and exercise the powers granted to a limited liability company by the Act in any state, territory, district or possession of the United States, or in any foreign country that may be necessary, appropriate, proper, advisable, incidental or convenient to the accomplishment of the purposes of the Company;

          (b) Directly, and/or through the Project Entities, to take any action or refrain from taking any action under, pursuant to or in furtherance of the Contract;

          (c) Directly, and/or through the Project Entities, to enter into, take any action or refrain from taking any action under, pursuant to, or in furtherance of any and all other contracts of any kind, including, without limitation, contracts with any Member or any Affiliate

thereof, or any agent of the Company, in each case to the extent that such contracts are necessary, appropriate, proper, advisable, incidental or convenient to the accomplishment of the purposes of the Company;

          (d) Directly, and/or through the Project Entities, to borrow money pursuant to the terms of any Loan Documents;

          (e) Directly, and/or through the Project Entities, to invest and reinvest its funds to the extent necessary, appropriate, proper, advisable, incidental or convenient to the accomplishment of the purposes of the Company; and

          (f) To conduct all other activities determined by the Managing Member to be necessary, appropriate, proper, advisable, incidental or convenient to the accomplishment of the purposes of the Company.

ARTICLE 4

RIGHTS AND DUTIES OF MANAGING MEMBER AND THE
EXECUTIVE COMMITTEE

     4.01 Management.

          (a) The business, affairs and assets of the Company shall be managed by the Managing Member. Except as expressly set forth herein, the Managing Member shall have full, complete and exclusive authority, power and discretion to direct, manage and control the business, affairs and assets of the Company, to exercise any of the powers of the Company, to make all decisions regarding those matters, and to perform any and all other acts or activities it deems necessary, appropriate, proper, advisable or convenient with respect thereto. The Managing Member shall exercise its authority as such in its capacity as a Member of the Company. Except as expressly set forth herein, none of the Members other than the Managing Member shall participate in the management or control of the Company or have any right to approve, vote on or otherwise consent to any matter relating to the business, affairs or assets of the Company (including, without limitation, the sale, transfer, recapitalization, exchange or other disposition of all or substantially all of the Company Property).

          (b) Supplementing the foregoing, the Members acknowledge and consent to the Properties being managed by the Property Manager pursuant and subject to the terms and conditions set forth in the Property Management Agreement. The Property Manager shall have the right, power and authority, on behalf of and in the name of the Company and the Project Entities, to carry out the day-to-day objectives and purposes of the Company and the Project Entities and to manage the Company Property subject to and in accordance with the Property Management Agreement, the Franchise Agreement and in all events subject to and in accordance with the Business Plan then in effect. The Partner Non-Managing Member agrees that neither the Partner Non-Managing Member nor the Property Manager shall take any action with respect to the Company and the Project Entities or the Company Property to the extent that such action is

(x) reserved to the Managing Member under this Agreement, and/or (y) is inconsistent with the Business Plan then in effect.

     (c) Supplementing the terms of Section 4.01 hereof, the Managing Member’s full, complete and exclusive power and authority shall include, without limitation, the right, on behalf of the Company or any Project Entity:

          (1) To acquire the Property, and to enter into one or more Loans and execute and deliver Loan Documents in connection therewith (including without limitation any Loans being obtained and/or assumed at the Closing under the Contract), and to take any action, or refrain from taking any action, under, pursuant to, or in furtherance thereof (including, without limitation, (x) requiring contribution of Additional Capital Contributions, and (y) prepaying any Loan or borrowing additional funds pursuant to the terms of any Loan Documents), provided, however, that in connection with any Loans, the Partner Non-Managing Member shall not be required to provide any guaranties or recourse obligations other than standard non-recourse carve-outs and/or environmental indemnities without the Partner Non-Managing Member’s prior written consent (it being understood and agreed that the Partner Non-Managing Member shall provide such standard non-recourse carve-out guaranties and/or environmental indemnities either directly or pursuant to Section 4.06 hereof).

          (2) To approve, reject, amend, modify or supplement any Business Plan from time to time;

          (3) Directly or indirectly, to acquire by purchase, lease, contribution of property or otherwise any real or personal property, with funds of the Company or any Project Entity, to the extent permitted by the Company pursuant to this Agreement, provided, however, the Managing Member shall not have the right to cause the Company to acquire real property (other than real property that is incidental to the use, operation and ownership of the Property) that requires Additional Capital Contributions without the Partner Non-Managing Member’s prior written consent (it being understood and agreed that the Partner Non Managing Member hereby consents to the acquisition of any of real or personal property pursuant to the Contract);

          (4) Directly or indirectly, to sell, exchange or otherwise dispose of all or any portion of the Company Property (including any transaction structured as a sale of membership interests in a Project Entity or a merger or consolidation of a Project Entity with an unrelated Person or a transfer of a Project Entity’s interest in the Property);

          (5) Subject to Section 9.01 hereof, the proviso in clause 1 above and the proviso in clause 13 below, directly or indirectly, to take any action, refrain from taking any action, with respect to the management (subject to the terms of the Property Management Agreement), sale, master lease (including, without limitation, any restructure of, or additional payments under, any financing arrangements affecting the Property), restructuring (including, without limitation, any restructure of, or additional payments under, any financing arrangements affecting the Property), recapitalization, ground lease, license, lease, transfer or other disposition, development, improvement, rehabilitation, alteration, repair or completion of construction of any Company Property;

          (6) To take any action or refrain from taking any action under, pursuant to, or in furtherance of the Property Management Agreement (including, without limitation, waiving any rights of the Company and/or any Project Entity or terminating the Property Management Agreement in accordance with the terms thereof);

          (7) To purchase liability and other forms of insurance to protect the Company Property and any business in connection therewith in such amounts as Managing Member shall determine;

          (8) To hold and own any Company Property in the name of the Company;

          (9) To invest any Company funds in any manner selected by the Managing Member to the extent necessary, appropriate, proper, advisable, incidental or convenient to the accomplishment of the purposes of the Company;

          (10) Subject to the provisos in clause (1) and clause (3) above, to make any expenditure or incur any obligation by or on behalf of the Company;

          (11) To execute on behalf of the Company all instruments and documents, including, without limitation, management agreements; sub-management agreements; checks; drafts; documents providing for the disposition of Company Property; assignments; bills of sale; leases; partnership agreements; operating agreements of other limited liability companies; and any other instruments or documents which the Managing Member deems necessary, appropriate, advisable, incidental or convenient to the accomplishment of the purposes of the Company;

          (12) Except as expressly prohibited hereunder without the consent of the Partner Non-Managing Member, to take any action, or refrain from taking any action, with respect to any Project Entity;

          (13) To enter into agreements with Affiliates of the Company or the Managing Member; provided, however, that the terms of any such agreement shall be arms-length and shall be no less favorable to the Company than would be available in a contract between the Company and a Person unaffiliated with the Company or the Managing Member;

          (14) To determine Net Operating Cash Flow and Net Capital Proceeds;

          (15) To employ, engage or retain (and dismiss) any Persons (including any Affiliate of any Member) to act as brokers, accountants, attorneys, managers, employees, engineers or in such other capacities as the Managing Member may determine are necessary, appropriate, proper, advisable, incidental, or convenient to the accomplishment of the purposes of the Company (provided, however, the Company shall have no paid employees), and the Managing Member shall be entitled to rely in good faith upon the recommendations, reports and advice given by any such Persons in the course of their professional engagement;

          (16) To (i) file any voluntary petition in bankruptcy on behalf of the Company or any Project Entity, (ii) consent to the filing of any involuntary petition in bankruptcy against the Company or any Project Entity, (iii) file any petition seeking, or consenting to,

reorganization or relief under any applicable federal or state law relating to bankruptcy or insolvency with respect to the Company or any Project Entity, (iv) consent to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or any Project Entity or a substantial part of its property, (v) make any assignment for the benefit of creditors of the Company or any Project Entity, (vi) admit in writing the inability of the Company or any Project Entity to pay its debts generally as they come due, and (vii) take any action on behalf of the Company or any Project Entity in furtherance of any such action;

          (17) To cause the voluntary dissolution of the Company or any Project Entity, and to take all actions in connection with such dissolution, which dissolution shall not require the consent of any other Member;

          (18) To institute any legal proceeding (including, without limitation, any tax protest proceeding) in the name of the Company or any Project Entity, settle any legal proceeding against the Company or any Project Entity and confess any judgment against the Company or Project Entity or any Company Property;

          (19) To establish Operating Reserves or Capital Reserves which are not either required under any agreement entered into by the Company or any Project Entity or contemplated by the Business Plan then in effect;

          (20) To implement any capital improvement project with respect to Company Property;

          (21) To establish leasing guidelines and grant or withhold approval of any lease for space at the Property which is outside of such approved leasing guidelines; and/or

          (22) To do and perform all other acts as the Managing Member may determine to be necessary, appropriate, proper, advisable, incidental or convenient to implement the Business Plan then in effect or otherwise to conduct the Company’s business.

     Notwithstanding anything contained herein to the contrary, without the consent of the Members, the Managing Member shall not have the right to change any compensation or the timing or allocation of distributions due to the Members in a manner which materially adversely affects the Members.

     4.02 Other Power and Authority. Unless authorized in writing to do so by this Agreement or by the Managing Member, no attorney-in-fact, employee or other agent of the Company shall have any power or authority to bind the Company in any way, to pledge its credit or to render it liable pecuniarily for any purpose. No Member shall have any power or authority to bind the Company unless the Member has been authorized in writing by the Managing Member to act as an agent of the Company in accordance with the previous sentence.

     4.03 Liability for Certain Acts. The Managing Member shall devote such time to the Company business as the Managing Member deems to be necessary or desirable in connection with its respective duties and responsibilities hereunder. So long as the Managing Member is not grossly negligent and does not engage in gross negligence, willful misconduct or fraud in

performing its duties, it shall have no liability by reason of being or having been the Managing Member of the Company. The Managing Member does not, in any way, guarantee a profit for the Members from the operations of the Company. The Managing Member shall not be liable to the Company or to any Member for any loss or damage sustained by the Company or any Member (including, without limitation, as a result of any claim of breach of fiduciary duty of the Managing Member), unless and only to the extent that the loss or damage is primarily attributable to the direct gross negligence, willful misconduct or fraud of the Managing Member.

     4.04 No Exclusive Duty to Company. (a) The Members recognize that the Members and their respective officers, directors, shareholders, members, partners, employees and Affiliates have or may have in the future other business interests, activities and investments, some of which may be in conflict or competition with the business of the Company, and, subject to the terms of clause (b) below, that the Members and their respective officers, directors, shareholders, members, partners, employees and Affiliates are entitled to carry on such other business interests, activities and investments. Subject to the terms of clause (b) below, the Members and their respective officers, directors, shareholders, members, partners, employees and Affiliates may engage in or possess an interest in any other business or venture of any kind, independently or with others, including, without limitation, owning, financing, acquiring, leasing, promoting, developing, improving, operating, managing and servicing real and personal property on its own behalf or on behalf of other entities with which any Member is affiliated or otherwise. Subject to the terms of clause (b) below, the Members and their respective officers, directors, shareholders, members, partners, employees and Affiliates may engage in such activities, whether or not competitive with the Company, without any obligation to offer any interest in such activities to the Company or to the other Members. Subject to the terms of clause (b) below, neither the Company nor any other Member shall have any right, by virtue of this Agreement or otherwise, in or to such activities, or the income or profits derived therefrom, and the pursuit of such activities, even if competitive with the business of the Company, shall not be deemed wrongful or improper.

     (b) As a material inducement to the III Manager and the III Non-Managing Member to execute and delivery this Agreement, the Partner Non-Managing Member acknowledges and agrees that during the term of this Agreement, neither the Partner Non-Managing Member, Property Manager nor any Affiliate of the Partner Non-Managing Member or Property Manager shall, without prior written consent of the III Manager, directly or indirectly (i) own, operate (other than ordinary property management) or invest in (such that the Partner Non-Managing Member or Property Manager, is in possession, direct or indirect, of the power to direct or cause the direction of the management and the policies of such hotel (in a capacity other than a third party manager acting as an agent or independent contractor of a hotel owner or lessee), whether through the ownership of voting securities, by contract or otherwise) any hotel, including, without limitation, any residential condominium, timeshare, interval or fractional ownership projects and/or “condominium hotels” located within the area (the “Restricted Area”) delineated on Exhibit “4” annexed hereto and made a part hereof (or enter into any agreement to do any of the foregoing activities within the Restricted Area), (ii) solicit or otherwise attempt to persuade hotel occupants to book rooms or lease any space in any hotel within the Restricted Area other than the Madison Property or the Seelbach Property, as the case may be, and/or (iii) acquire all or any portion of any Loan.

     4.05 Bank Accounts. Subject to the terms of the Property Management Agreement, the Franchise Agreement, and the Loan Documents, the Managing Member may from time to time open bank accounts in the name of the Company, and the Managing Member shall be the sole signatory thereon, unless the Managing Member determines otherwise.

     4.06 Indemnity of Managing Member, Employees and Other Agents.

     (a) The Company shall, to the fullest extent permitted by applicable law, indemnify and defend the Managing Member and each direct or indirect member, shareholder, partner or other holder of any direct or indirect equity interest in the Managing Member, or any manager, shareholder, employee, officer, director, agent, representative or Affiliate or successor or assign of any of the foregoing (each individually an “Indemnified Party”) and hold each Indemnified Party harmless from and against all losses, claims, damages, liabilities and expenses (including, without limitation, reasonable attorneys’ fees and expenses) which such Indemnified Party may suffer or incur or to which such Indemnified Party may become subject, arising from or in connection with this Agreement or the Company’s business or affairs, except for (and only to the extent that) any loss, claim, damage, liability or expense attributable to the gross negligence or willful misconduct of such Indemnified Party. If any Indemnified Party becomes involved in any capacity in any action, proceeding or investigation in connection with any matter arising from or in connection with this Agreement or the Company’s business or affairs, the Company shall reimburse such Indemnified Party for its reasonable legal and other reasonable out-of-pocket expenses (including the cost of any investigation and preparation) as and when they are incurred, provided that such Indemnified Party shall promptly repay to the Company the amount of any such reimbursed expenses if it shall ultimately be determined that such Indemnified Party was not entitled to be indemnified by the Company in connection with such action, proceeding or investigation. If for any reason (other than the gross negligence or willful misconduct of the Indemnified Party in question) the foregoing indemnification is unavailable to the Indemnified Party in question or is insufficient to hold it harmless, then the Company shall contribute to the amount paid or payable by the Indemnified Party in question as a result of such loss, claim, damage, liability or expense, in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Indemnified Party in question on the other hand or, if such allocation is not permitted by applicable law, to reflect not only the relative benefits referred to above but also any other relevant equitable considerations.

     (b) Notwithstanding anything to the contrary contained in this Agreement, in the event that any direct or indirect member, principal or affiliate of the Managing Member (individually and collectively, the “III Guarantor”) shall incur any Losses arising from the III Guarantor’s obligations with respect to any “bad boy” guaranty, environmental indemnity or non-recourse guaranty executed by the III Guarantor in favor of any Lender (any such Losses being hereafter referred to as “III Mortgage Loan Liability”), then, in any such event, the Partner Non-Managing Member shall indemnify the III Guarantor for 15% of such III Mortgage Loan Liability; provided, however, that (x) (i) if distributions of Distribution Amounts are being made pursuant to Section 8.01(b)(III) hereof, then, in such event, the Partner Non-Managing Member shall indemnify the III Guarantor for 27.75% of such III Mortgage Loan Liability incurred by the III Guarantor to the extent of the funds the Partner Non-Managing Member has received pursuant to Section 8.01(b)(III) hereof and then 15% of the remaining III Mortgage Loan

Liability, (ii) if distributions of Distribution Amounts are being made pursuant to Section 8.01(b)(IV) hereof, then, in such event, the Partner Non-Managing Member shall indemnify the III Guarantor for 32% of such III Mortgage Loan Liability incurred by the III Guarantor to the extent of the funds the Partner Non-Managing Member has received pursuant to Section 8.01(b)(IV) hereof and then 15% of the remaining III Mortgage Loan Liability, (y) the Partner Non-Managing Member shall have no such obligation to indemnify the III Guarantor if the III Guarantor incurs any III Mortgage Loan Liability and (1) the act and/or omission giving rise to such III Mortgage Loan Liability results from the gross negligence, willful misconduct or bad faith of the Managing Member and/or its Affiliates, or (2) the act and/or omission giving rise to such III Mortgage Loan Liability was taken or omitted by the Managing Member and/or its Affiliates in violation of the terms of this Agreement or the Property Management Agreement, unless such act or omission was taken or not taken with the prior written consent of the Partner Non-Managing Member or its Affiliates, and (z) the Partner Non-Managing Member shall indemnify the III Guarantor for any and all III Mortgage Loan Liability if the III Guarantor incurs any such III Mortgage Loan Liability and (1) the act and/or omission giving rise to such III Mortgage Loan Liability results from the gross negligence, willful misconduct or bad faith of the Partner Non-Managing Member and/or its Affiliates, or (2) the act and/or omission giving rise to such III Mortgage Loan Liability was taken or omitted by the Partner Non-Managing Member and/or its Affiliates in violation of the terms of this Agreement or the Property Management Agreement, unless such act or omission was taken or not taken with the prior written consent of the Managing Member.

     (c) Notwithstanding anything to the contrary contained in this Agreement, in the event that any direct or indirect member, principal or affiliate of the Partner Non-Managing Member (individually and collectively, the “Interstate Guarantor”) shall incur any Losses arising from the Interstate Guarantor’s obligations with respect to any “bad boy” guaranty, environmental indemnity or non-recourse guaranty executed by the Interstate Guarantor in favor of any Lender (any such Losses being hereafter referred to as “Interstate Mortgage Loan Liability”), then, in any such event, the III Non-Managing Member shall indemnify the Interstate Guarantor for 84% of such Interstate Mortgage Loan Liability and the III Manager shall indemnify the Interstate Guarantor for 1% of such Interstate Mortgage Loan Liability; provided, however, that (x) (i) if distributions of Distribution Amounts are being made pursuant to Section 8.01(b)(III) hereof, then, in such event, (a) the III Non-Managing Member shall indemnify the Interstate Guarantor for 71.4% of such Interstate Mortgage Loan Liability incurred by the Interstate Guarantor to the extent of the funds the III Non-Managing Member has received pursuant to Section 8.01(b)(III) hereof and then 84% of the remaining Interstate Mortgage Loan Liability, and (b) the III Manager shall indemnify the Interstate Guarantor for 0.85% of such Interstate Mortgage Loan Liability incurred by the Interstate Guarantor to the extent of the funds the III Manager has received pursuant to Section 8.01(b)(III) hereof and then 1% of the remaining Interstate Mortgage Loan Liability, (ii) if distributions of Distribution Amounts are being made pursuant to Section 8.01(b)(IV) hereof, then, in such event, (a) the III Non-Managing Member shall indemnify the Interstate Guarantor for 67.20% of such Interstate Mortgage Loan Liability incurred by the Interstate Guarantor to the extent of the funds the III Non-Managing Member has received pursuant to Section 8.01(b)(IV) hereof and then 84% of the remaining Interstate Mortgage Loan Liability and (b) the III Manager shall indemnify the Interstate

Guarantor for 0.80% of such Interstate Mortgage Loan Liability incurred by the Interstate Guarantor to the extent of the funds the III Manager has received pursuant to Section 8.01(b)(IV) hereof and then 1% of the remaining Interstate Mortgage Loan Liability, (y) the III Non-Managing Member and the III Manager shall have no such obligation to indemnify the Interstate Guarantor if the Interstate Guarantor incurs any Interstate Mortgage Loan Liability and (1) the act and/or omission giving rise to such Interstate Mortgage Loan Liability results from the gross negligence, willful misconduct or bad faith of the Interstate Non-Managing Member and/or its Affiliates, or (2) the act and/or omission giving rise to such Interstate Mortgage Loan Liability was taken or omitted by the Partner Non-Managing Member, the Property Manager and/or their Affiliates in violation of the terms of this Agreement or the Property Management Agreement, unless such act or omission was taken or not taken with the prior written consent of the III Non-Managing Member, the III Manager or its Affiliates, and (z) the III Non-Managing Member and/or the III Manager shall indemnify the Interstate Guarantor for any and all Interstate Mortgage Loan Liability if the Interstate Guarantor incurs any such Interstate Mortgage Loan Liability and (1) the act and/or omission giving rise to such Interstate Mortgage Loan Liability results from the gross negligence, willful misconduct or bad faith of the III Manager, the III Non-Managing Member and/or its Affiliates, or (2) the act and/or omission giving rise to such Interstate Mortgage Loan Liability was taken or omitted by the III Manager, III Non-Managing Member and/or its Affiliates in violation of the terms of this Agreement or the Property Management Agreement, unless such act or omission was taken or not taken with the prior written consent of the Partner Non-Managing Member and/or the Property Manager.

     4.07 Resignation or Termination of Managing Member. The Managing Member may resign at any time by giving written notice to the Members of the Company; provided, however, that:

          (a) if the III Manager or a Replacement Managing Member resigns as the Managing Member at a time when the III Non-Managing Member or an Affiliate thereof holds any Company Interest in the Company, then, in such event, the III Non-Managing Member or any such Affiliate shall have the sole right to appoint in its place a successor (a “Replacement Managing Member”) which is an Affiliate of the III Non-Managing Member and controls, is controlled by or under common control with Investcorp International Realty, Inc. (or its successor or assigns), and such Replacement Managing Member shall thereafter hold all of the rights and obligations of the Managing Member hereunder; and

          (b) if, at any time, the III Non-Managing Member disposes of its entire Company Interest in the Company or the III Non-Managing Member elects to appoint a Replacement Managing Member which is not an Affiliate of the III Non-Managing Member which controls, is controlled by or under common control with Investcorp International Realty, Inc. (or its successors or assigns), then, at such time as the III Manager or the Replacement Managing Member, as the case may be, shall cease to serve as Managing Member, a successor Managing Member shall be, and any successor Managing Member thereafter shall be, selected by the unanimous vote of the holders of the outstanding Company Interests in the Company.

     4.08 Expenses.

          (a) Except as otherwise provided in this Agreement and only to the extent set forth on the sources and uses set forth Exhibit “3” annexed hereto and made a part hereof, the Company shall be responsible for paying, and shall pay, whether incurred before or after the date hereof, all costs and expenses related to the organization of the Company and its Members, all costs and expenses related to the business of the Company and of acquiring, holding, owning, developing, servicing, collecting upon and operating any Company Property (including, without limitation, the cost of any environmental, engineering or similar report(s), the cost of all surveys obtained in connection with the acquisition of the Property, and any Loan, any title insurance fees and premiums incurred in connection with the acquisition of the Property or any Loan, legal fees and expenses incurred by the Company, its Members and affiliates in connection with the acquisition of the Property, any Loan, the execution and delivery of the Contract, the Property Management Agreement, the Franchise Agreement and all fees, expenses and costs (including, without limitation, origination fees and legal fees and expenses of any Lender’s counsel) incurred in connection with any Loan). In the event any such costs and expenses are or have been paid or incurred by any Member, including legal expenses and other costs and expenses incurred by the Managing Member prior to the formation of the Company, such Member shall be entitled to be reimbursed for such payment so long as such payment is reasonably necessary for Company business or operations and has been approved by the Managing Member or is set forth on Exhibit “3” hereto. Notwithstanding the foregoing, in no event shall the Company have any obligation to pay or reimburse any Member for any general overhead expense of such Member.

          (b) Supplementing the foregoing, the reasonable out-of-pocket expenses incurred after the date hereof by the Managing Member from time to time hereunder shall be reimbursed by the Company upon demand of the Managing Member.

     4.09 Exculpation. The Managing Member shall not be liable to the Company or to any Member for damages (including, without limitation, consequential damages) for any losses, claims, damages or liabilities arising from any act or omission performed or omitted by such party in connection with this Agreement or the Company’s business or affairs (including, without limitation, as a result of any claim of breach of fiduciary duty of the Managing Member), except for (and only to the extent that) any such loss, claim, damage or liability is primarily attributable to direct the gross negligence or willful misconduct of the Managing Member.

ARTICLE 5

RIGHTS AND OBLIGATIONS OF MEMBERS

     5.01 Limitation of Liability. Each Member’s liability shall be limited as set forth in this Agreement and the Act.

     5.02 Company Debt Liability. A Member will not be personally liable for any debts or losses of the Company beyond its respective Company Interest except as provided in Section 5.07 herein.

     5.03 List of Members. Upon written request of any Member, the Managing Member shall provide a list showing the names, addresses and Company Interests of all Members.

     5.04 Company Books. The Managing Member shall maintain and preserve, during the term of the Company, the accounts, books, and other relevant Company documents described in Section 8.08 hereof. Upon reasonable written request, each Member shall have the right, at a time during ordinary business hours, to inspect and copy, at the requesting Member’s expense, the Company documents which the Member, in its discretion, deems appropriate.

     5.05 Company Property; Nature of Interests in the Company. All property of the Company shall be owned by the Company subject to the terms and provisions of this Agreement, and no Member shall have any interest in any specific asset of the Company. The Company Interests and percentage interests (whether vested or unvested) of all Members in the Company are personal property.

     5.06 Priority. Except as may be expressly provided in Article 10 hereof and Section 8.01 hereof, no Member shall have priority over any other Member as to distributions, provided, however, that this section shall not apply to loans which a Member has made to the Company.

     5.07 Liability of a Member to the Company. A Member who receives a distribution from the Company is liable to the Company only to the extent provided by the Act.

     5.08 Exculpation. No Member shall be liable to the Company or to any other Member for damages (including, without limitation, consequential damages) for any losses, claims, damages or liabilities arising from any act or omission performed or omitted by it in connection with this Agreement or the Company’s business or affairs except for (and to the extent of) any such loss, claim, damage or liability is attributable to the gross negligence or willful misconduct of such Member.

     5.09 Loans. No Member shall be required nor entitled to guaranty or otherwise be liable for any indebtedness of the Company.

ARTICLE 6

CONTRIBUTIONS TO THE COMPANY, PERCENTAGE INTERESTS
AND CAPITAL ACCOUNTS

     6.01 Members’ Capital Contributions. Each of the Members is contemporaneously with its execution hereof making a Capital Contribution to the Company as set forth on Exhibit “B” annexed hereto and made a part hereof.

     6.02 Additional Contributions.

          (a) If at any time (and from time to time) following the date hereof, the Managing Member determines that additional capital contributions (“Additional Capital Contributions”) are required to meet the obligations or needs of the Company, then, in any such

event, the Managing Member shall give written notice to each of the Members to contribute its pro rata share (based on Company Percentage Interests) of the Additional Capital Contributions. Upon the contribution of any Additional Capital Contributions by any Contributing Member(s) and the continuing failure of any Non-Contributing Member(s) to make the required contributions within ten (10) business days after written notice from the Managing Member that such contributions are due, the Company Percentage Interests of the Contributing Member(s) and the Non-Contributing Member(s) shall be adjusted to reflect such contributions and failure(s) to make such contributions.

          (b) If any Member (a “Non-Contributing Member”) fails to contribute any portion of its pro rata share of any Additional Capital Contributions, then, as their sole remedy against a Non-Contributing Member for failing to make Additional Capital Contributions, each Member who has contributed all of its pro rata share of such Additional Capital Contribution (a “Contributing Member”) may, but shall not be required to, provide a loan (a “Shortfall Loan”) to the Company for all or part of the amount of the Additional Capital Contributions. If more than one Contributing Member elects to make a Shortfall Loan, then, in such event, such Shortfall Loan shall be provided by such electing Contributing Members pro rata based on their Company Interests or in such other proportion as they may agree. Each Shortfall Loan shall bear interest and compound at the annual rate of twenty-five percent (25%). Interest on each Shortfall Loan shall be payable monthly in arrears. Shortfall Loans, and interest thereon, shall be repaid from Net Operating Cash Flow and Net Capital Proceeds prior to any distributions to Members. Payments made in respect of Shortfall Loans shall be deemed first to be repayment of interest accrued on such Shortfall Loans and then to be repayment of the principal amount thereof.

          If any applicable law is ever judicially interpreted so as to deem any payment with respect to a Shortfall Loan as being in excess of the maximum rate or amount of interest permitted by applicable law, then it is the express intent of the Members and the Company that all amounts in excess of the highest lawful rate or amount theretofore collected be credited against any other distributions, contributions, payments or other amounts to be paid by the recipient of the excess amount or refunded to the appropriate Person, and the provisions of this Agreement immediately be deemed reformed, without the necessity of the execution of any new document, so as to comply with the applicable law, but so as to permit the payment of the fullest amount otherwise required hereunder. All sums paid or agreed to be paid that are judicially determined to be interest shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the term of such obligation so that the rate or amount of interest on account of such obligation does not exceed the maximum rate or amount of interest permitted under applicable law.

     6.03 Capital Accounts.

          (a) Exhibit “C” annexed hereto and made a part hereof is a description of the determination of the Members’ capital accounts and other provisions which the Company and the Members have agreed shall govern the allocation of profits and losses and other tax compliance and accounting matters.

          (b) No Member shall have any liability to restore all or any portion of a deficit balance in such Member’s Capital Account.

     6.04 Withdrawal or Reduction of Members’ Contributions to Capital.

          (a) Except as provided in Section 10.02 hereof, a Member shall not receive out of Company Property any part of its Capital Contribution until all liabilities of the Company, except liabilities to Members on account of their Capital Contributions, have been paid or there remains property of the Company sufficient to pay them.

          (b) Except as provided in Section 10.02 hereof, a Member, irrespective of the nature of its Capital Contribution, has only the right to receive cash in return for its Capital Contribution.

     6.05 Return of Capital. No Member shall be liable for the return of the Capital Contributions (or any portion thereof) of any other Member, it being expressly understood that any such return shall be made solely from the assets of the Company.

ARTICLE 7

REPRESENTATIONS, WARRANTIES AND COVENANTS

     7.01 Representations and Warranties of the Members. Each Member hereby represents, warrants and covenants to the other Members (and each Person admitted to the Company shall represent, warrant and covenant as a condition to its admission) as follows:

          (a) It is duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, with all requisite power and authority to enter into and perform this Agreement.

          (b) This Agreement has been duly authorized, executed and delivered by such Member and constitutes the legal, valid and binding obligation of such Member, enforceable in accordance with its terms.

          (c) No consents or approvals are required from any governmental authority or other Person for such Member to enter into this Agreement and form the Company. All limited liability company, corporate or partnership action on the part of such Member necessary for the authorization, execution and delivery of this Agreement, and the consummation of the transactions contemplated hereby, have been duly taken.

          (d) Neither the execution and delivery of this Agreement by such Member, nor the consummation of the transactions contemplated hereby, conflict with or contravene the provisions of its organic documents or any agreement or instrument by which it or its properties are bound, or any law, rule, regulation, order or decree to which it or its properties are subject.

          (e) On behalf of itself and each assignee or transferee of it, that (i) the direct and indirect ownership interests in such Member have been issued in compliance with all applicable laws, orders, judgments, ordinances, rules, regulations and requirements of all federal, state and local governmental and quasi-governmental authorities, agencies, departments, commissions, bureaus and instrumentalities (including, without limitation, those promulgated by or under the Securities Act of 1933 and the Securities Exchange Act of 1934), (ii) such Member is acquiring its Company Interest for its own account for investment and not with a view to the distribution or resale thereof, or with the present intention of distributing or reselling such interest, and that it will not transfer or attempt to transfer its Company Interest in violation of the Securities Act of 1933 (as amended, the “Securities Act”), the Securities Exchange Act of 1934 or any other applicable federal, state or local securities law, and (iii) each Member is an accredited investor under Regulation D of the Securities Act. Nothing herein shall be construed to create or impose on the Company or any Member an obligation to register any transfer of any Company Interest or any portion thereof.

          (f) Neither it, nor any of its affiliates (or any of their respective principals, partners or funding sources), is or will become (i) a Person designated by the U.S. Department of Treasury’s Office of Foreign Asset Control as a “specially designated national or blocked person” or similar status, (ii) a Person described in Section 1 of U.S. Executive Order 13224 issued on September 23, 2001; (iii) a Person otherwise identified by a governmental or legal authority as a Person with whom the Company or any Member is prohibited from transacting business; (iv) directly or indirectly owned or controlled by the government of any country that is subject to an embargo by the United States government; or (v) a Person acting on behalf of a government of any country that is subject to an embargo by the United States government. Such Member agrees that it will notify the Company and each other Member in writing immediately upon the occurrence of any event which would render the foregoing representations and warranties contained in this Section 7.01(f) incorrect.

     7.02 Acknowledgment of the Partner Non-Managing Member. The Partner Non-Managing Member hereby represents and warrants that, as of the date hereof, its sole member is Interstate Operating Company, L.P., a Delaware limited partnership. With respect to the obligations, conditions and rights contemplated by the transaction described in this Agreement, no other person has any right or option to acquire shares in the Partner Non-Managing Member. The Partner Non-Managing Member represents and warrants that neither the Partner Non-Managing Member nor any Affiliate of the Partner Non-Managing Member is a party to any agreement restricting, restraining or preventing such Person from competing with any other Person or engaging in any lawful business which such Person would breach or violate as a result of performing the obligations under this Agreement or the Property Management Agreement.

     7.03 Partner Non-Managing Member Operating Agreement. The Partner Non-Managing Member hereby represents, warrants and covenants to the other Members that (a) it has delivered a true, correct and complete copy of the limited liability company agreement governing the Partner Non-Managing Member, (b) there are no other documents or instruments governing or affecting the formation, business and/or operation of the Partner Non-Managing Member, (c) Interstate Operating Company, L.P. is, and until any Transfer (as hereinafter defined) of any or

all of its direct interests in the Partner Non-Managing Member as permitted under Section 9.01 hereof, shall be the sole managing member of the Partner Non-Managing Member, (d) for so long as Interstate Operating Company, L.P. is the sole member of the Partner Non-Managing Member, the limited liability company agreement of the Partner Non-Managing Member shall not, without the prior written consent of the Managing Member, be amended, modified or supplemented in any manner which would have the effect of further limiting the ability of Interstate Operating Company, L.P. to act as the sole member of the Partner Non-Managing Member (or increasing any percentage interest necessary to approve or consent any matter), and (e) without the prior written consent of the Managing Member, no Transfer shall occur with respect to any direct or indirect interest in the Partner Non-Managing Member in violation of Section 9.01(d) hereof.

     7.04 Additional Representations and Warranties. In connection with any permitted sale or other transfer of any direct or indirect interest in the Company, it shall be a condition to the effectiveness of such sale or transfer that such sale or transfer (a) be exempt from registration under or all applicable federal and state securities laws, (b) not require the Managing Member or the Company to register as an Investment Company or an investment adviser under the Investment Advisers Act of 1940, as amended, (c) not cause the Company to terminate for tax purposes, including, without limitation, by reason of being taxable as a corporation or association, under the Internal Revenue Code of 1986, as amended (the “Code”), and (d) not violate any laws, orders, judgments, ordinances, rules, regulations or requirements, now or hereafter existing, of any federal, state or local governmental or quasi-governmental authority, agency, department, commission, bureau or instrumentality of any of them.

ARTICLE 8

DISTRIBUTIONS, ALLOCATIONS,
INCOME TAX, ELECTIONS AND REPORTS

     8.01 Distributions.

          (a) Except as provided in Section 10.02 hereof, a Member has no right to demand and receive any distribution in any form other than cash. Subject to the terms of Section 8.02 hereof, the Managing Member shall make distributions of Net Operating Cash Flow and Net Capital Proceeds after payment in full of any Shortfall Loan, not less often than monthly within three (3) business days after the end of each month.

          (b) Net Operating Cash Flow and Net Capital Proceeds available for distribution on each date for distribution shall be distributed to the Members as follows:

               (I) first, to the payment of any Shortfall Loan, then,

               (II) second, to the Members (pro rata in accordance with their Company Percentage Interests) until each of the Members has received, on an aggregate

cumulative basis, a 17.5% IRR on its aggregate Capital Contributions (including all Additional Capital Contributions), then

               (III) third, (A) so long as a Partner Termination Event has not occurred and the Property Manager has not received a Termination Fee (as defined in the Property Management Agreement) under the Property Management Agreement, 15% to the Partner Non-Managing Member, and 85% to the Managing Member, the III Non-Managing Member and the Partner Non-Managing Member pro rata (in accordance with their Company Percentage Interests) until each of the Members has received a 25% IRR on its aggregate Capital Contributions (including all Additional Capital Contributions); and (B) in the event that a Partner Termination Event occurs or the Property Manager receives a Termination Fee under the Property Management Agreement, the terms of clause (A) of this clause (III) shall be disregarded and Net Operating Cash Flow and Net Capital Proceeds shall be distributed to the Members pro rata in accordance with their Company Percentage Interests.

               (IV) fourth, (A) so long as a Partner Termination Event has not occurred and the Property Manager has not received a Termination Fee (as defined in the Property Management Agreement) under the Property Management Agreement, 20% to the Partner Non-Managing Member, and 80% to the Managing Member, the III Non-Managing Member and the Partner Non-Managing Member pro rata (in accordance with their Company Percentage Interests); and (B) in the event that a Partner Termination Event occurs or the Property Manager receives a Termination Fee under the Property Management Agreement, the terms of clause (A) of this clause (IV) shall be disregarded and Net Operating Cash Flow and Net Capital Proceeds shall be distributed to the Members pro rata in accordance with their Company Percentage Interests.

     8.02 Limitation Upon Distributions.

          (a) No distribution or return of Capital Contribution shall be declared and paid if, after such distribution or return is made:

               (i) the Company would be insolvent; or

               (ii) the net assets of the Company would be less than zero.

          (b) The Managing Member may base a determination that a distribution or return of Capital Contribution may be made under Section 8.02(a) in good faith reliance upon a balance sheet and profit and loss statement of the Company represented to be correct by the person having charge of its books of account or certified by an independent public or certified public accountant or firm of accountants to fairly reflect the financial condition of the Company.

     8.03 Allocations. Exhibit “C” hereto sets forth a description of certain tax allocations by the Company.

     8.04 Accounting Principles. All decisions as to accounting principles for the Company shall be made by the Managing Member subject to the terms of this Agreement.

     8.05 Interest on and Return of Capital Contributions. No Member shall be entitled to interest on its Capital Contribution.

     8.06 Loans to Company. Nothing in this Agreement shall prevent any Member from making secured or unsecured loans to the Company by agreement with the Company.

     8.07 Accounting Period. The Company’s accounting period shall be the calendar year.

     8.08 Records, Audits and Reports. At the expense of the Company, the Managing Member shall maintain or cause to be maintained the books, records and accounts of all operations and expenditures of the Company. At a minimum, the Company shall keep at its principal place of business the following records:

          (a) a current list of the full name and last known address of each Member setting forth the percentage interest (whether vested or unvested) and the amount of cash each Member has contributed, a description and statement of the agreed value of the other property or services each Member has contributed or has agreed to contribute in the future, and the date on which each became a Member;

          (b) a copy of the certificate of formation of the Company, this Agreement and all amendments thereto, together with executed copies of any powers of attorney pursuant to which any amendment has been executed;

          (c) copies of any financial statements of the Company for the three (3) most recent years;

          (d) any written consents obtained from Members for actions taken by Members without a meeting; and

          (e) a writing prepared by the Managing Member setting out the following:

               (i) the times at which or events on the happening of which any additional contributions agreed to be made by each Member are to be made;

               (ii) any right of a Member to receive distributions that include a return of all or any part of the Member’s Capital Contributions; and

               (iii) any power of a Member to grant the right to become an assignee of any part of the Member’s interest, and the terms and conditions of the power.

     8.09 Tax Returns and Tax Elections.

          (a) The Managing Member shall cause to be prepared and filed, at the expense of the Company, all required state and federal informational tax returns for the

Company on or before the date that such returns are due. The Company shall prepare and file (or cause to be prepared and filed), and deliver to the Members on or prior to August 15^th of each calendar year during the term of this Agreement tax returns and K-1’s for each of the Members and the Project Entities. All expenses incurred in connection with the above shall be borne by the Company.

          (b) Except as otherwise expressly provided herein, the Managing Member shall make all applicable elections, determinations and other decisions under the Code (or any other federal or state law), including, without limitation, the deductibility of a particular item of expense and the positions to be taken on the Company’s tax return, and shall approve the settlement or compromise of all audit matters raised by the Internal Revenue Service or other taxing authority affecting the Members generally. The Members each shall take reporting positions on their respective federal, state and local income tax returns consistent with the positions determined for the Company.

     8.10 Tax Matters Member.

          (a) The Managing Member is designated the “Tax Matters Partner” (as defined in Code Section 6231 and for purposes of this Agreement defined as the Tax Matters Member), and, subject to the further terms of this Section 8.10, is authorized and required to represent the Company (at the Company’s expense) in connection with all examinations of the Company’s affairs by tax authorities, including, without limitation, administrative and judicial proceedings, subject to the further terms of this Section 8.10, and to expend Company funds for professional services and costs associated therewith. The Members agree to cooperate with each other and to do or refrain from doing any and all things reasonably required to conduct such proceedings. All expenses incurred in connection with any such audit and with any other tax investigation, settlement or review shall be borne by the Company.

          (b) In the event that the Company shall be the subject of an audit by any federal, state or local taxing authority, to the extent that the Company is treated as an entity for purposes of such audit, including administrative settlement and judicial review, the Tax Matters Member shall be authorized to act for, and its decision shall be final and binding upon, the Company and each Member thereof; provided, however, that the Tax Matters Member shall (i) notify the Members of any administrative proceeding with respect to the Company pursuant to Section 6223(c) of the Code, (ii) furnish the Members with any material correspondence or communication relating to the Company from the Internal Revenue Service received by the Tax Matters Member, (iii) consult with the other Members prior to taking any material action relating to the tax affairs of the Company, and (iv) make all decisions affecting the tax affairs of the Company in good faith using its reasonable business judgment (it being understood and agreed that for the purposes of this Agreement, the term “reasonable business judgment” shall refer to the “business judgment rule” as the same would be applied under applicable law if the Person in question were a director of a corporation).

          (c) The Company shall indemnify and reimburse the Tax Matters Member for all reasonable expenses, including, without limitation, legal and accounting fees, claims,

liabilities, losses and damages incurred in connection with any administrative or judicial proceeding with respect to the tax liability of the Members.

ARTICLE 9

TRANSFERABILITY

     9.01 General. No Member shall sell, assign, pledge, hypothecate, transfer, exchange or otherwise transfer for consideration, or gift, bequeath or otherwise transfer for no consideration (whether or not by operation of law) (a “Transfer”), directly or indirectly, all or any portion of its Company Interest in the Company (including, without limitation, any right to receive distribution, dividends or profits from the Company), except as permitted by this Section 9.01, it being understood and agreed that (a) to the extent that any Member or any owner of an indirect ownership interest in the Company is an individual, a Transfer by such Member or such holder of an indirect interest, as the case may be, to a trust or other entity established and maintained solely for purposes of estate planning shall not be deemed a Transfer so long as the Managing Member received prior written notice thereof and the sole beneficiaries of such transferee (other than de minimis interests held by charitable organizations) are and continue to be such Member’s or such interest holder’s, as the case may be, brothers and sisters, spouse, ancestors or lineal descendants, (b) at any time and from time to time the members in the III Non-Managing Member may Transfer any direct or indirect interest in the III Non-Managing Member so long as Investcorp International Realty, Inc. or its Affiliates (or its successors or assigns) controls, is controlled by or is under common control with the III Non-Managing Member, and subject to the terms of the Loan Documents, (c) the Managing Member shall not consent to admit any new Member without the prior written consent of the other Members, unless, subject to the terms of the Loan Documents, if such new Member is an Affiliate of any then existing Member, then the Managing Member shall not require the consent of the other Members to such admission, (d) direct or indirect interests in the Partner Non-Manager Member may be Transferred without the prior written consent of the Managing Member, so long as (x) such Transfer does not result in any default under the Loan Documents, (y) Interstate at all times controls the Partner Non-Managing Member, and (z) in the case of a Transfer of direct interests such Transfer is to a wholly owned subsidiary of Interstate and such Transfer does not result in any tax or administrative consequences to the Company, the III Manager and/or the III Non-Managing Member, and (e) except in connection with a Transfer of all of the Company Interests of the III Non-Managing Member, the III Manager may Transfer all or any portion of its Company Interests only to an Affiliate of the III Manager so long as Investcorp International Realty, Inc. or its Affiliates (or its successors or assigns) controls, is controlled by or is under common control the III Manager. Any Transfer made or attempted to be made in violation of this Section 9.01 shall be null and void ab initio.

     9.02 Effect of Transfer. No new Member shall be entitled to any retroactive allocation of losses, income or expense deductions incurred by the Company. The Managing Member may, at its option, at the time a Member is admitted, close the Company books (as though the Company’s tax year had ended) or make pro rata allocations of loss, income and expense deductions to a new Member for that portion of the Company’s tax year in which a Member was

admitted in accordance with the provisions of Section 706(d) of the Code and the Treasury Regulations promulgated thereunder.

ARTICLE 10

DISSOLUTION AND TERMINATION

     10.01 Dissolution.

          (a) The Company shall be dissolved upon the determination of the Managing Member to dissolve and wind up the Company.

          (b) The death, retirement, resignation, expulsion, withdrawal, bankruptcy or dissolution of a Member or occurrence of any other event, which terminates, the continued interest of a Member in the Company (a “Withdrawal Event”), shall not result in dissolution of the Company, and the business of the Company shall continue without interruption despite the occurrence of any such Withdrawal Event. Upon the occurrence of any event that causes the last remaining Member of the Company to cease to be a Member of the Company, to the fullest extent permitted by law, the personal representative of such Member is hereby authorized to, and shall, within 90 days after the occurrence of the event that terminated the continued membership of such Member in the Company, agree in writing (i) to continue the Company, and (ii) to the admission of the personal representative or its nominee or designee, as the case may be, as a substitute Member of the Company, effective as of the occurrence of the event that terminated the continued membership of the last remaining Member of the Company in the Company.

     10.02 Winding-Up, Liquidation and Distribution of Assets.

          (a) Upon dissolution of the Company, an accounting shall be made by the Company’s independent accountants of the accounts of the Company and of the Company’s assets, liabilities and operations, from the date of the immediately preceding accounting until the date of dissolution. The Managing Member shall immediately proceed to wind up the affairs of the Company.

          (b) If the Company is dissolved and its affairs are to be wound up, the Managing Member shall:

          (i) sell or otherwise liquidate all of the Company’s assets as promptly as practicable;

          (ii) allocate any profit or loss resulting from such sales to the Member’s Capital Accounts in accordance with Exhibit “C” hereof;

          (iii) discharge all liabilities of the Company, including liabilities to Members who are creditors, to the extent otherwise permitted by law, other than liabilities to Members for distributions, and establish such reserves as may be reasonably necessary to provide for contingent liabilities of the Company (for purposes of

          determining the Capital Accounts of Members, the amounts of such reserves shall be deemed to be an expense of the Company); and

          (iv) distribute the remaining assets as follows:

          (x) to the Members in accordance with Article 8 hereof; and

          (y) if any assets of the Company are to be distributed in kind, such assets shall be distributed by agreement of the Members. Such assets shall be deemed to have been sold as of the date of dissolution for their fair market value, and the Capital Accounts of the Members shall be adjusted pursuant to the provisions of Article 8 hereof to reflect such deemed sale.

          (c) [Intentionally Blank.]

          (d) Upon completion of the winding-up, liquidation and distribution of the assets, the Company shall be deemed terminated.

          (e) The Managing Member shall comply with any applicable requirements of applicable law pertaining to the winding-up of the affairs of the Company and the final distribution of its assets.

     10.03 Articles of Dissolution. When all debts, liabilities and obligations of the Company have been paid and discharged or adequate provisions have been made therefor and all of the remaining property and assets of the Company have been distributed, articles of dissolution as required by the Act shall be executed and filed by the Managing Member with the Delaware Secretary of State.

     10.04 Effect of Filing of Articles of Dissolution. Upon the filing of articles of dissolution with the Delaware Secretary of State, the existence of the Company shall cease, except for the purpose of suits, other proceedings and appropriate action as provided in the Act. The Managing Member shall have authority to distribute any Company property discovered after dissolution, to convey real estate and to take such other action as may be necessary on behalf of and in the name of the Company.

     10.05 Return of Contribution Nonrecourse to Other Members. Except as provided by law or as expressly provided in this Agreement, upon dissolution, each Member shall look solely to the assets of the Company for the return of its Capital Contribution. If the Company property remaining after the payment or discharge of the debts and liabilities of the Company is insufficient to return the Capital Contribution of one or more Members, such Member or Members shall have no recourse against any other Member.

ARTICLE 11

RIGHT OF FIRST OFFER

     11.01 First Offer Notice. If, at any time the Managing Member determines to sell, assign or otherwise transfer the Madison Property and/or the Seelbach Property, as the case may be, in its sole discretion, then, in such event, the III Member (as offeror) shall deliver to the Partner Non-Managing Member (as offeree) a written notice (the “First Offer Notice”) of such determination setting forth the offer price (the “Designated Price”) and all other material terms and conditions, as the Managing Member may determine, of the proposed offer.

     11.02 Partner Non-Managing Member Election. Within 30 business days after receipt of a First Offer Notice, time being of the essence, the Partner Non-Managing Member shall deliver a notice to the III Member (the “Election Notice”) of the Partner Non-Managing Member’s intent to either (i) elect to purchase the Madison Property and/or the Seelbach Property, as the case may be, upon the terms and conditions set forth in the First Offer Notice, or (ii) elect not to purchase the Madison Property and/or the Seelbach Property, as the case may be. If the Partner Non-Managing Member elects to purchase the Madison Property and/or the Seelbach Property, as the case may be, upon the terms and conditions set forth in the First Offer Notice by delivering timely the Election Notice, then, in such event, the terms set forth in the First Offer Notice and Section 11.03 hereof shall apply.

     If (I) the Partner Non-Managing Member elects not to purchase hereunder or if the Partner Non-Managing Member fails to deliver the Election Notice within the required time period, time being of the essence, or (II) the Partner Non-Managing Member fails to deposit a five percent nonrefundable down payment pursuant to the terms of Section 11.03 hereof, then, in such event, the Company, shall have the right to sell, assign or otherwise transfer the Madison Property and/or the Seelbach Property, as the case may be, to a third party; provided, however, that if (A) the offeror desires to sell, assign or otherwise transfer the Madison Property and/or the Seelbach Property, as the case may be, to a third party for a purchase price which is less than 95% of the Designated Price set forth in the First Offer Notice, (B) on material terms and conditions that are less favorable to the Company than those set forth in the First Offer Notice, or (C) the offeror desires to sell, assign or otherwise transfer the Madison Property and/or the Seelbach Property, as the case may be, to a third party and a closing of such sale does not occur within 180 days following the date of the Election Notice, then, in such event, the terms of this Article 11 shall once again apply and the III Member shall be required to deliver another First Offer Notice to the Partner Non-Managing Member prior to consummating a sale of the Madison Property and/or the Seelbach Property, as the case may be.

     11.03 Procedures.

          (a) In order for the Election Notice to be effective, the Partner Non-Managing Member must simultaneously deliver a nonrefundable deposit to the III Member, by wire - transfer of immediately available federal funds, together with the Election Notice, in an amount equal to 5% of the ROFO Price (as hereinafter defined).

          (b) The Members hereby agree that the parties shall use their reasonable efforts to minimize the costs involved in such transaction, as well as to structure the purchase in such a way as to minimize, to the extent possible, any taxes that will inure to any of the Members as a result of such purchase.

          (c) The purchase price (the “ROFO Price”) for any transaction contemplated under this Article 11 shall be the amount which the III Manager and the III Non-Managing Member would have received if the Madison Property and/or the Seelbach Property, as the case may be, had been sold at the Designated Price (adjusted in the manner described below) on the closing date, and the Net Capital Proceeds distributed to the Members pursuant to the provisions of Section 8.01 hereof; provided, however, that at the closing, the Designated Price shall be adjusted by prorations, in accordance with the applicable local custom where the Property is located, on and as of the closing date, of operating expenses and operating revenue allocable to the Madison Property and/or the Seelbach Property, as the case may be.

          (d) Notwithstanding anything contained herein, it shall be a condition precedent to any sale under this Article 11 that all existing loans and guaranties made by the III Manager and/or an Affiliate thereof, to or on behalf of the Company shall be repaid in full (with interest) and/or discharged and released, as the case may be, on or prior to the closing date.

          (e) The closing of the purchase and sale contemplated by this Article 11 shall occur at the time and on the date set forth in the First Offer Notice; provided, however, that such date shall not be earlier than 60 days following the First Offer Notice.

          (f) At the closing, the Members shall execute and deliver all such documents and take such further action as shall be reasonably necessary or appropriate to consummate the transactions contemplated by this Article 11.

          (g) At the closing, Partner Non-Managing Member shall deliver to the III Manager and the III Non-Managing Member by wire transfer of immediately available funds the balance of the that portion of the ROFO Price which is to be paid.

          (h) Each Member shall pay its own legal fees in connection with any purchase and sale hereunder. All other actual closing costs shall be allocated in accordance with local custom.

          (i) Partner Non-Managing Member shall assume the Property Management Agreement and neither the Company, III Manager nor III Non-Managing Member shall be required to pay or otherwise be liable for any termination fees under the Property Management Agreement.

     11.04 Remedies.

          (a) The parties acknowledge and agree that if the Partner Non-Managing Member fails to close as provided in Article 11, then, in such event, (x) the III Manager and the III Non-Managing Member may, as their sole and exclusive remedy, retain any down payment as liquidated and agreed upon damages, and (y) the terms of this Article 11 shall no longer apply

and the III Manager shall not be required to deliver another First Offer Notice to the Partner Non-Managing Member prior to consummating a sale of the Madison Property and/or the Seelbach Property, as the case may be.

          (b) If the III Manager fails to close because of a default by the III Manager in any material respect, then, in such event, the Partner Non-Managing Member, as its sole and exclusive remedy, shall have the right to specific performance of the terms of this Article 11.

ARTICLE 12

MISCELLANEOUS PROVISIONS

     12.01 Notices.

          (a) All notices, demands, requests, consents and waivers under this Agreement shall be in writing, shall refer to this Agreement and shall be (i) delivered personally, (ii) sent by registered or certified mail, postage prepaid, return receipt requested, (iii) sent by a nationally recognized overnight courier, or (iv) sent by telecopier, with written confirmation of the receipt of such telecopy, addressed as set forth below. If delivered personally, any notice shall be deemed to have been given on the first (1st) business day on or after the date delivered or refused. If mailed, any notice shall be deemed to have been given on the earlier to occur of the first (1st) business day on or after the date of delivery or the third (3rd) business day after such notice has been deposited in the U.S. mail in accordance with this Section 12.01. If sent by overnight courier, any notice shall be deemed to have been given on the first (1st) business day on or after the date following the date such notice was delivered to or picked up by the courier. If sent by telecopier, any notice shall be deemed to have been given (I) on the first (1st) business day on or after the date sent, if confirmation of receipt hereof is given on or before 5:00 p.m. (New York City time), or (II) on the next business day, if confirmation of receipt thereof is given after 5:00 p.m. (New York City time). Copies of all notices shall be given in accordance with the above as follows:

If to the Company, the III Manager or the III Non-Managing Member:

280 Park Avenue, 37th Floor
New York, New York 10017
Attention: John R. Fraser and Bradley S. Seiden
Telephone No.: 212-599-4700
Telecopier No.: 212-983-7073

and with a copy to:

Gibson, Dunn & Crutcher LLP
200 Park Avenue
New York, New York 10166
Attention: David J. Furman, Esq.
Telephone No.: 212-351-4000
Telecopier No.: 212-351-4035

If to the Partner Non-Managing Member:

c/o Interstate Hotel & Resorts, Inc.
4501 N. Fairfax Drive, Suite 500
Arlington, VA 22203
Attention: Executive Vice President and General Counsel
Telephone No.: (703)-387-3100
Telecopier No.: (703) 387-3389

and with a copy to:

Eckert Seamans Cherin & Mellott, LLC
600 Grant Street, 44th Floor
Pittsburgh, PA 15219
Attention: Timothy Q. Hudak, Esq.
Telephone No.: 412-566-2584
Telecopier No.: 412-566-6099

          (b) Any counsel designated above or any replacement counsel which may be designated respectively by the Company, the III Manager, the III Non-Managing Member or Partner Non-Managing Member or such counsel by written notice to the other parties is hereby authorized to give notices hereunder on behalf of its respective client.

     12.02 Governing Law.

          (a) This Agreement shall be interpreted and enforced in accordance with (i) the provisions hereof, without the aid of any canon, custom or rule of law requiring or suggesting construction against the party drafting or causing the drafting of the provision in question, and (ii) the internal laws of the State of Delaware, and specifically the Act, as the same may from time to time exist, without giving effect to the principles of conflict of laws.

          (b) Each Member hereby irrevocably and unconditionally (i) submits itself and its property, solely for the purposes of any legal action or proceeding relating to this Agreement or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive jurisdiction of the Supreme Court of the State of New York located in New York

County, the courts of the United States of America for the Southern District of New York, and appellate courts thereof (collectively, the “Courts”), (ii) consents to the bringing of any such action or proceeding in the Courts and waives any objection that it may now or hereafter have to the venue or any such action or proceeding in any such court, including, without limitation, any objection that such action or proceeding was brought in an inconvenient court, and agrees not to plead or otherwise assert the same, (iii) agrees to service upon it or him of any and all process in any such action or proceeding at the address set forth in Section 12.01 hereof, (iv) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law, and (v) agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. The parties hereto agree that any legal action or proceeding relating to this Agreement shall be brought in the Courts only; provided, however, that, if any Member breaches or seeks to resist any term, covenant or condition set forth in this Section 12.02, the other Members shall not be bound by the limitations of this sentence with respect to such Member’s breaching or seeking to resist any term, covenant or condition of this Section 12.02.

     12.03 Waivers. Except as otherwise expressly provided herein, each Non-Managing Member irrevocably waives during the term of the Company any right that it may have:

          (a) To cause the Company or any of its assets to be partitioned;

          (b) To cause the appointment of a receiver for all or any portion of the assets of the Company;

          (c) To compel any sale of all or any portion of the assets of the Company pursuant to applicable law; or

          (d) To file a complaint, or to institute any proceeding at law or in equity, or to cause the termination, dissolution or liquidation of the Company.

     12.04 Confidentiality.

          (a) The terms of this Agreement, the identity of any Person with whom the Company may be holding discussions with respect to any provision of services, investment, acquisition, disposition or other transaction, and all other business, financial and other information relating to the conduct of the business and affairs of the Company or the relative or absolute rights or interests of any of the Members (collectively, “Confidential Information”) that (x) is not otherwise available to the public, or (y) has not been disclosed pursuant to authorization by the Managing Member is confidential and proprietary information of the Company, the disclosure of which would cause irreparable harm to the Company and the Members. Accordingly, each Member represents that it has not disclosed Confidential Information to any Person, and each Member agrees that it and its Affiliates will not, and will direct its shareholders, partners, members, officers, directors, agents and advisors not to, disclose Confidential Information to any Person or confirm any statement made by any Person regarding Confidential Information unless and until the Company has disclosed such Confidential Information pursuant to authorization by the Members and the Managing Member and has

notified each Member that it has done so; provided, however, that any Member (or its Affiliates) may disclose such Confidential Information if required by law (it being specifically understood and agreed that anything set forth in a registration statement or any other document filed pursuant to law will be deemed required by law) or if necessary for it to perform any of its duties or obligations hereunder.

          (b) Subject to the provisions of Section 12.04(a), each Member agrees not to disclose any Confidential Information to any Person (other than a Person providing consulting services to such Member who agrees to maintain all Confidential Information in strict confidence, or a judge, magistrate or referee in any action, suit or proceeding relating to or arising out of this Agreement or otherwise) and to keep confidential all documents (including, without limitation, responses to discovery requests) containing any Confidential Information. Each Member hereby agrees not to contest any motion for any protective order brought by any other Member represented as being intended by the movant to implement the purposes of this Section 12.04, provided that, if a Member receives a request to disclose any Confidential Information under the terms of a valid and effective order issued by a court or governmental agency and the order was not sought by or on behalf of or consented to by such Members when such Member may disclose the Confidential Information to the extent required if the Member as promptly as practicable (i) notifies each of the other Members of the existence, terms and circumstances of the order, (ii) consults in good faith with each of the other Members on the advisability of taking legally available steps to resist or to narrow the order, and (iii) if disclosure of the Confidential Information is required, exercises its best efforts to obtain a protective order or other reliable assurance that confidential treatment will be accorded to the portion of the disclosed Confidential Information that any other Member designates. The cost (including, without limitation, attorneys’ fees and expenses) of obtaining a protective order covering Confidential Information designated by such other Member will be borne by the Company.

          (c) Notwithstanding anything in the foregoing or anything else contained in this Agreement to the contrary, each Member (and any employee, representative or other agent thereof) may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the offering and ownership of Company Interests and any transaction described in this Section 12.04 or elsewhere in this Agreement and all materials of any kind (including opinions and other tax analyses) that are provided to such Member relating to such tax treatment and tax structure. For this purpose, “tax structure” means any facts relevant to the federal income tax treatment of the offering and ownership of Company Interests and any transaction described in this Section 12.04 or elsewhere in this Agreement.

          (d) The covenants contained in this Section 12.04 shall survive any transfer of a Company Interest and the dissolution of the Company.

     12.05 Amendments. This Agreement may not be amended except in writing by a unanimous written vote of the Members.

     12.06 Construction. Whenever the singular number is used in this Agreement and when required by the context, the same shall include the plural and vice versa, and the masculine gender shall include the feminine and neuter genders and vice versa.

     12.07 Headings. The headings in this Agreement are inserted for convenience only and are in no way intended to describe, interpret, define, or limit the scope, extent or intent of this Agreement or any provision hereof.

     12.08 Entirety; Waiver.

          (a) This Agreement, together with the agreements and instruments delivered pursuant hereto, contains the entire agreement between the parties and supersedes all prior agreements and understandings related to the subject matter hereof. This Agreement may be amended or supplemented only by an instrument in writing executed by the party against whom enforcement is sought.

          (b) Failure by any party to enforce against any other party any term or provision of this Agreement shall not waive such party’s right to enforce against any other party the same or any other term or provision. No waiver by any party hereto of any condition hereunder for its benefit shall constitute a waiver of any other or further right, nor shall any single or partial exercise of any right preclude any other or further exercise thereof or any other rights. The waiver of any breach hereunder shall not be deemed to be a waiver of any other or subsequent breach hereof. No extensions of time for the performance of any obligations shall be deemed or construed as an extension of time for the performance of any other obligation.

     12.09 Further Assurances. Upon the written request of any party hereto, from time to time, from and after the date hereof, the other party or parties shall do, execute, acknowledge and deliver, at the sole cost and expense of the requesting party, such further acts, deeds, conveyances, assignments, notices of assignment or transfer and assurances as the requesting party may reasonably require in order to better assure, convey, grant, assign, transfer and confirm upon the requesting party the rights now or hereafter intended to be granted under this Agreement or any other instrument executed in connection with this Agreement; provided, however, no party shall be obligated to provide any further assurance that would materially increase the liabilities or obligations of such party hereunder or materially reduce the rights and benefits of such party hereunder.

     12.10 Consent. Except as expressly provided herein that the Managing Member shall not unreasonably withhold its Consent within a specified period of time, in any instance hereunder where the Managing Member’s consent, approval, acceptance, satisfaction, determination, waiver or other action or decision (collectively, “Consent”) is sought or required, such Consent may be withheld, delayed or conditioned by the Managing Member in its sole and absolute discretion.

     12.11 Severability. If any provision of this Agreement or the application thereof to any person or circumstance shall be invalid, illegal or unenforceable to any extent, the remainder of this Agreement and the application thereof shall not be affected and shall be enforceable to the fullest extent permitted by law.

     12.12 Heirs, Successors and Assigns. Each and all of the covenants, terms, provisions and agreements herein contained shall be binding upon and inure to the benefit of the parties

hereto and, to the extent permitted by this Agreement, their respective heirs, legal representatives, successors and assigns.

     12.13 Waiver of Jury Trial. EACH OF THE MEMBERS HEREBY WAIVES TRIAL BY JURY IN ANY ACTION ARISING OUT OF MATTERS RELATED TO THIS AGREEMENT, WHICH WAIVER IS INFORMED AND VOLUNTARY.

     12.14 Creditors. None of the provisions of this Agreement shall be for the benefit of, or enforceable by, any creditor of the Company.

     12.15 Prevailing Party. If any Member brings any action or suit against any other Member or the Company by reason of any breach of any of the covenants, agreements or provisions of this Agreement, then, in such event, the prevailing party, as determined in such action or suit, shall be entitled to have and recover from the other party or parties all costs and expenses of such action or suit, including, without limitation, reasonable attorneys’ fees and expenses resulting therefrom, it being understood and agreed that the determination of the prevailing party shall be included in the matters which are the subject of such action or suit.

     12.16 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument.

     12.17 Intentionally Blank.

     12.18 Contract. Notwithstanding anything contained in this Agreement, including, without limitation, Section 4.08, the provisions of this Section 12.18 shall apply until the closing of the transactions contemplated by the Contract:

     a. Upon the execution of this Agreement, the III Non-Managing Member and the Managing Member collectively shall fund an amount of $2,550,000 on account of the Deposit (as defined in the Contract) under the Contract and Partner Non-Managing Member shall fund an amount of $450,000 on account of the Deposit under the Contract; it being understood and agreed, that the Columbia Purchaser shall fund all amounts due under the Contract on account of the Sheraton Property, as more particularly set described in that certain side letter (the “Side Letter”) entered into by the Seelbach Purchaser, the Madison Purchaser, the Columbia Purchaser, the Company, IHR, the III Non-Managing Member, the Managing Member, and the Partner Non-Managing Member dated as of the date hereof. In the event that the Managing Member elects, in its sole and absolute discretion, to fund the Additional Deposit (as defined in Section 2.4 of the Contract), then, in any such event, no later than one (1) business day following the delivery of a notice of any such election from the Managing Member, the Partner Non-Managing Member shall contribute fifteen percent (15%) of such Additional Deposit and the Managing Member and the III Non-Managing Member collectively shall contribute eighty-five percent (85%) of such Additional Deposit.

     b. The Members acknowledge and agree that for the convenience of the Members attached hereto as Exhibit “3” is a putative “sources and uses” schedule reflecting, among other things, capital contributions to be funded by the Members to the Company upon the closing of

the Transaction and the uses of such capital contributions and other funds of the Company; it being understood and agreed such putative “sources and uses” is for illustrative purposes only and is subject to change. Subject to the remainder of this Section 12.18, in accordance with the terms of Section 4.01(c)(1), the Members shall fund all remaining capital amounts required in connection with the closing of the acquisition of the Seelbach Property and the Madison Property under the Contract (the “Transaction”) as more particularly set forth on Exhibit “3” attached hereto; it being understood and agreed the Columbia Purchaser shall be required to fund all amounts due under the Contract relating to the Sheraton Property. In the event that either III Non-Managing Member, the Managing Member or the Partner Non-Managing Member (the “Non-Funding Member”) fails to fund any portion of the capital amounts required to be funded by such Member in connection with the closing of the Transaction or in connection with the funding of the Additional Deposit, (i) the other Members shall be permitted to fund such capital amounts in lieu of the Non-Funding Member, (ii) the Non-Funding Member shall be deemed to have forfeited its portion of the Deposit and any costs and expenses incurred, and (iii) the Non-Funding Member shall be deemed to have immediately and automatically withdrawn as a Member under this Agreement and shall have no further rights whatsoever under either this Agreement or the Property Management Agreement. If the closing of the Transaction occurs with all Members funding their respective required amounts, any costs and expenses paid or incurred by the Members shall be adjusted at the closing of the Transaction in accordance with section 4.08 hereof.

     c. Notwithstanding anything in this Agreement, all elections and notices of the Company, Purchaser and/or the Project Entities under the Contract (other than with respect to the Sheraton Property (as defined in the Contract)) shall be made by and approved in writing in advance by Managing Member. In the event that the Purchaser has a termination right under the Contract (a “Termination Option”) and, prior to the expiration of the Termination Option, a Member elects not to proceed with the Transaction in accordance with such Termination Option, such Member (the “Electing Party”) shall deliver a written notice (the “Election Notice”) to the other Members (the “Non-Electing Party”) that it does not elect to proceed with the Transaction. On or before the earlier of (1) the date that is two (2) business days after receipt of the Election Notice, or (2) the expiration of the applicable Termination Option, the Non-Electing Party shall deliver written notice to the Electing Party stating that it elects either: (x) not to proceed with the Transaction without the Electing Party, in which case, subject to the further terms of this Agreement and the Side Letter, each party shall be responsible for (1) the amount of the Deposit funded by such party, to the extent any portion of the Deposit is not returned to the Purchaser under the Contract, and (2) its Proportionate Share (as hereinafter defined) of the costs and expenses incurred by such party in connection with the Transaction, or (y) to proceed with the Transaction without the Electing Party, in which case the Non-Electing Party shall deliver to the Electing Party, within two (2) business days of the Non-Electing Party’s election under this clause (y), by wire transfer of immediately available federal funds, an amount equal to the portion of the Deposit paid by the Electing Party, if any, plus any costs and expenses paid or incurred by the Electing Party (and the Non-Electing Party shall assume responsibility to pay such costs and expense). For purposes of this Section 12.18(c), “Proportionate Share” shall mean 15% with respect to the Partner Non-Managing Member, 1% with respect to the Managing Member and 84% with respect to the III Non-Managing Member.

     d. Notwithstanding anything to the contrary, in the event that both parties elect not to proceed with the Transaction pursuant to Section 12.18(c)(x) above, but one party subsequently elects, within 120 days after the date of the Election Notice, to proceed with the Transaction (or a transaction on materially the same terms and conditions as the Transaction), then, in such event, the party proceeding with the Transaction shall be deemed to have made the election provided for in Section 12.18(c)(y) and shall be obligated to make the payments and reimbursements as provided therein (it being understood and agreed that if the Contract has been terminated and the Deposit has been retained by the seller thereunder or returned to the Purchaser in accordance with the Contract, then, in such event, there shall be no reimbursement obligation under this clause (e) with respect to the Deposit).

     e. The parties hereby acknowledge and agree that, except as set forth herein, each party shall be responsible for its costs and expenses incurred, as of the date of the Election Notice, in connection with the Transaction.

     f. If (i) there is a default or breach under the Contract which is attributable to any act or omission of either III Non-Managing Member, the Managing Member or the Partner Non-Managing Member, or (ii) either III Non-Managing Member, the Managing Member or the Partner Non-Managing Member fails to fund any amounts required under Section 12.18(b) hereof, then, in such event, subject to the terms and conditions of the Side Letter, the party to whom such act or omission is attributable shall indemnify, defend and hold harmless the other party for any and all losses, costs, liabilities, claims, damages (excluding, however, punitive or consequential damages) and expenses arising out of or in connection with such default or breach. If the Non-Electing Party elects to proceed with the Transaction pursuant to Section 12.18 (c) or 12.18(d) of this Agreement, then, in such event, the Electing Party shall not be responsible for any costs, expenses, fees or liabilities whatsoever arising from and after the date of the Election Notice in connection with the Transaction, and the Non-Electing Party agrees to indemnify, defend and hold harmless the Electing Party for any and all losses, costs, liabilities, claims, damages (excluding, however, punitive or consequential damages) and expenses arising out of or in connection with the events or actions with respect to the Transaction from and after the date of the Election Notice.

     g. Each Member hereby represents and warrants to the others that it has available funds sufficient to fund any and all amounts required to be paid by it hereunder.

     h. The Members hereby consent to the execution and delivery of the Contract and any documents in connection with the acquisition of any of real or personal property pursuant to the Contract and hereby authorize John Fraser to execute such documents on behalf of the Company and the Project Entities and to take any actions and execute any documents as they deem necessary and advisable to effectuate the foregoing.

          12.19 Put/Call Provisions.

          a. Notwithstanding anything in this Agreement, the III Non-Managing Member hereby irrevocably grants to the Partner Non-Managing Member an option (the “Partner Put Right”) to require the III Non-Managing Member and the III Manager (pro rata based on

Company Percentage Interests) to purchase the Partner’s Non-Managing Member’s Company Interest exercisable in the manner and on the terms set forth in this Section 12.19. If the Property Management Agreement is terminated by owner thereunder for any reason other than due to (i) an Event of Default by Property Manager under Article XVII of the Property Management Agreement, (ii) a Penetration Deficiency or GOP Deficiency under Section 18.9 of the Property Management Agreement, (iii) sale of the Hotel under Section 18.10 of the Property Management Agreement, or (iv) a Change of Control (as defined in the Management Agreement), then, in such event, the Partner Non-Managing Member shall have the right, but not the obligation, in its sole and absolute discretion, to deliver written notice (the “Partner 100% Put Notice”) to the III Non-Managing Member and the III Manager requiring the III Non-Managing Member and the III Manager (pro rata based on Company Percentage Interests) to purchase the Partner Non-Managing Member’s Company Interest and the III Non-Managing Member and the III Manager unconditionally agrees that the III Non-Managing Member and the III Manager (pro rata based on Company Percentage Interests) shall purchase the Partner Non-Managing Member’s Company Interest for a purchase price equal to the Partner 100% Put Price (as hereinafter defined). If the Property Management Agreement is terminated by owner due to a Penetration Deficiency or GOP Deficiency under Section 18.9 of the Property Management Agreement, then, in such event, the Partner Non-Managing Member shall have the right, but not the obligation, in its sole and absolute discretion, to deliver written notice (the “Partner 85% Put Notice”) to the III Non-Managing Member and the III Manager requiring the III Non-Managing Member and the III Manager (pro rata based on Company Percentage Interests) to purchase the Partner Non-Managing Member’s Company Interest and the III Non-Managing Member and the III Manager unconditionally agrees that the III Non-Managing Member and the III Manager (pro rata based on Company Percentage Interests) shall purchase the Partner Non-Managing Member’s Company Interest for a purchase price equal to the Partner 85% Put Price (as hereinafter defined). Failure by the Partner Non-Managing Member to deliver the Partner 100% Put Notice or the Partner 85% Put Notice, as the case may be, within ten (10) business days after termination of the Property Management Agreement as provided above shall be deemed to be a waiver of the Partner 100% Put Notice or the Partner 85% Put Notice, as the case may be.

          Notwithstanding anything in this Agreement, the Partner Non-Managing Member hereby irrevocably grants to the III Non-Managing Member and the III Manager an option (the “III Call Right”) to purchase the Partner Non-Managing Member’s Company Interest exercisable in the manner and on the terms set forth in this 12.19. If the Property Management Agreement is terminated due to an Event of Default by the Property Manager under Article XVII thereof, the III Non-Managing Member or the III Manager shall have the right, but not the obligation, in its sole and absolute discretion, to deliver written notice (the “III 85% Call Notice”) to the Partner Non-Managing Member to purchase the Partner Non-Managing Member’s Company Interest and the Partner Non-Managing Member unconditionally agrees that the III Non-Managing Member and the III Manager (pro rata based on Company Percentage Interests) may purchase the Partner Non-Managing Member’s Company Interest for a purchase price equal to the III 85% Call Price (as hereinafter defined). If the Property Management Agreement is terminated due to a Change of Control (as defined in the Property Management Agreement), the III Non-Managing Member or the III Manager shall have the right, but not the obligation, in its sole and absolute discretion, to deliver written notice (the “III 100% Call Notice”) to the Partner Non-Managing Member to

purchase the Partner Non-Managing Member’s Company Interest and the Partner Non-Managing Member unconditionally agrees that the III Non-Managing Member and the III Manager (pro rata based on Company Percentage Interests) may purchase the Partner Non-Managing Member’s Company Interest for a purchase price equal to the III 100% Call Price (as hereinafter defined).

          The Members acknowledge and agree that in connection with the Partner 100% Put Notice, the Partner 85% Put Notice, the III 100% Call Notice or the III 85% Call Notice no additional purchase and sale contract shall be required to be executed and delivered, it being understood and agreed that the terms of this 12.19 shall constitute a purchase and sale contract.

          For the purposes of this Agreement the term “Partner 100% Put Price” shall mean an amount equal to the Fair Market Value (as hereinafter defined) of the Partner Non-Managing Member’s Company Interest. For the purposes of this Agreement the term “Partner 85% Put Price” shall mean an amount equal to eighty five percent (85%) the Fair Market Value of the Partner Non-Managing Member’s Company Interest. For the purposes of this Agreement the term “III 85% Call Price” shall mean an amount equal to eighty-five percent (85%) the Fair Market Value of the Partner’s Non-Managing Member’s Company Interest. For the purposes of this Agreement the term “III 100% Call Price” shall mean an amount equal to the Fair Market Value of the Partner’s Non-Managing Member’s Company Interest.

          For the purposes of this Agreement, the term “Fair Market Value” shall mean the fair market value of the Partner Non-Managing Member’s Company Interest. If the Partner Non-Managing Member delivers the Partner 100% Put Notice or the Partner 85% Put Notice or the III Manager or the III Non-Managing Member delivers the III 100% Call Notice or the III 85% Call Notice, as the case may be, then, in any such event, promptly thereafter the Members shall meet to determine the Fair Market Value. If the Members fail to reach agreement upon the Fair Market Value of the Partner Non-Managing Member’s Company Interest within fifteen (15) days after delivery of the Partner 100% Put Notice, the Partner 85% Put Notice, the III 100% Call Notice or the III 85% Call Notice, the parties shall engage an Appraiser (as hereinafter defined) who shall determine the Fair Market Value within thirty (30) days after such engagement by the Members. If the Members agree on a single Appraiser, such Appraiser’s valuation shall be final and binding on the Company and the Members. If (i) the Members cannot agree on Appraiser within fifteen (15) days after delivery of the Partner 100% Put Notice, the Partner 85% Put Notice, the III 100% Call Notice or the III 85% Call Notice, or (ii) the Appraiser selected by the Members fails to provide the valuation within thirty (30) days after engagement, then, in any such event, each of the Partner Non-Managing Member and the III Non-Managing Member or the III Manager shall each select an Appraiser, each of whom shall determine the Fair Market Value within thirty (30) days after such engagement. If the dollar amount of the Fair Market Value of the Partner’s Non-Managing Member’s Company Interest determined by the Appraiser selected by the Partner Non-Managing Member and the Appraiser selected by the III Non-Managing Member and/or the III Manager is within a 10% range, then, in such event, the arithmetic average of such two amounts shall be the Fair Market Value, and such amount shall be final and binding on the Company and the Members. If the dollar amounts are not within a 10% range, then the Appraiser selected by the Partner Non-Managing Member and the Appraiser selected by the III Non-Managing Member and/or the III Manager shall jointly select a third Appraiser who shall make his own independent determination of the Fair Market Value within

thirty (30) days of being appointed. If a third Appraiser is appointed, the Fair Market Value shall be the amount determined by such Appraiser and shall be final and binding on the Company and the Members.

          If there is a single Appraiser, the Partner Non-Managing Member and the III Non-Managing Member and/or the III Manager shall each pay one-half of such Appraiser’s fees and expenses. If there are three Appraisers, the Partner Non-Managing Member and the III Non-Managing Member and/or the III Manager shall each pay the fees and expenses of the Appraiser selected by it, and shall each pay one-half of the third Appraiser’s fees and expenses.

          For purposes of this Agreement, the term “Appraiser” shall mean independent third party valuation consultant with at least ten (10) years experience in hospitality investment valuation.

          b. The following procedures shall apply to any Partner 100% Put Notice, the Partner 85% Put Notice, III 100% Call Notice or the III 85% Call Notice:

          (i) At the closing, the Partner Non-Manager Member shall execute and deliver an assignment of its Company Percentage Interest, with the representation that the Partner Non-Manager Member owns its right, title and interest in and to the Company, free and clear of all liens and encumbrances;

          (ii) The purchase and sale of the Company Interest of the Partner’s Non-Managing Member shall be consummated (the “Put/Call Closing”) thirty (30) days after the later of (i) receipt of the Partner 100% Put Notice, the Partner 85% Put Notice, the III 100% Call Notice or the III 85% Call Notice, and (ii) determination of the Fair Market Value of the Partner’s Non-Managing Member’s Company Interests in accordance with this Section 12.19; provided, however, that the III Non-Manager Member shall have the right to accelerate the date for closing; and

          (iii) If the Partner Non-Managing Member defaults in its obligations to close the acquisition in accordance with the terms of this Section 12.19, time being of the essence, then, in such event, (i) such default shall constitute an Partner Termination Event and the Partner Non-Managing Member shall lose all of its voting, management and consent rights under this Agreement and the III Non-Managing Member shall have the sole right to make all decisions on behalf of the Company, and (ii) the III Non-Managing Member shall have any right or remedy, at law, in equity or otherwise.

          (iv) The Partner 100% Put Price, the Partner 85% Put Price, the III 100% Call Price or the III 85% Call Price, as the case may be, shall be paid by the III Non-Managing Member at the Put/Call Closing by wire transfer of immediately available federal funds.

          12.20 Exculpation. Except to the extent set forth in the Joinder hereto, the Side Letter and/or the Property Management Agreement, the Partner Non-Managing Member, the III Manager and the III Non-Managing Member, as the case may be, for

itself and on behalf of its Affiliates (collectively, “Claiming Parties”), hereby agree that if the Claiming Parties, together or individually, make any claim of any nature whatsoever, whether legal or equitable, including claims based on federal or state law, against another Member or its Affiliates arising out of or relating to this Agreement, the negotiations and representations of the parties preceding or following the execution of this Agreement, any alleged breach of this Agreement, or any proposed transactions described in this Agreement, then any judgment against such Member or its Affiliates shall be enforceable against them only to the extent of the interest of such Member in the Company Property.

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

MEMBERS: HOTEL INVEST DEUCE MM, LLC, a Delaware limited liability company
By:	/s/  John R. Fraser
	Name:	John R. Fraser
	Title:	President
HOTEL INVEST DEUCE LP, LLC, a Delaware limited liability company
By:	/s/  John R. Fraser
	Name:	John R. Fraser
	Title:	President
INTERSTATE INVEST, LLC a Delaware limited liability company
By:	/s/  James A. Crolle III
	Name:	James A. Crolle III
	Title:	Assistant General Counsel

JOINDER BY INTERSTATE HOTEL AND RESORTS, INC.

     INTERSTATE HOTELS & RESORTS, INC., a Delaware corporation (“IHR”) is executing this Agreement for the purposes of guaranteeing the payment and performance of the terms of Section 4.06(b). IHR hereby guarantees to the Company and the III Manager and the III Non-Managing Member the due and punctual payment and performance of the Partner Non-Managing Member’s obligations under Section 4.06(b).

     The terms of this Joinder and IHR’s obligations hereunder are a continuing and irrevocable obligation of IHR and shall remain in full force during the term of the Agreement until payment, performance and/or observation in full of the obligations hereunder. IHR’s guaranty and liability under this Joinder are absolute and unconditional and shall not be affected, released, terminated, discharged or impaired, in whole or in part, by any or all of the following: (i) any lack of genuineness, regularity, validity, legality or enforceability, or the voidability of, this Agreement; (ii) the failure of the Company or any Member to exercise or to exhaust any right or remedy or take any action against any Person or any collateral or other security available to it; (iii) any amendment or modification of the terms of this Agreement; (iv) any failure or delay of the Company or the Members to exercise, or any lack of diligence in exercising, any right or remedy with respect to this Agreement; (v) any dealings or transactions between the Company and/or any of the Members or any of their Affiliates relating to this Agreement, whether or not IHR shall be a party to or cognizant of the same; (vi) the failure to give IHR notice of any breach; and/or (vii) any other circumstance which might constitute a legal or equitable discharge or defense available to the Partner Non-Managing Member, whether similar or dissimilar to the foregoing, other than the defense of (a) payment and performance, or (b) the claim against the Partner Non-Managing Member is not due and owing under the terms of this Agreement or that the Partner Non-Managing Member has performed. IHR expressly waives the following: (a) notice of acceptance of this Agreement; (b) any requirement of promptness, diligence, presentment, protest, notice of dishonor, notice of demand and notice of acceptance; (c) the right to trial by jury in any action or proceeding of any kind arising on, under, out of, or by reason of or relating, in any way, to its obligations under this Joinder, or the interpretation, breach or enforcement of such obligations; and (d) all rights of subrogation and any other claims that it may now or hereafter acquire against the Partner Non-Managing Member or any insider that arise from the existence, payment, performance or enforcement of IHR’s obligations under this Joinder until such time as IHR’s obligations under this Joinder are performed and paid in full. IHR’s guaranty under this Joinder is a present guaranty of payment and performance and not of collection. Notwithstanding anything to the contrary contained herein, IHR’s liability shall extend to all amounts and performance of all of its obligations under this Joinder notwithstanding the fact that this Agreement become unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding.

     IHR hereby represents, warrants and certifies to the III Manager and the III Non-Managing Member and the Company as follows: (i) the execution, delivery and performance under this Joinder by IHR will not violate any provision of any law, regulation, order or decree of any governmental authority, bureau or agency or of any court binding on IHR, or of any contract, undertaking or agreement to which IHR is a party or which is binding on IHR, or of any contract, undertaking or agreement to which IHR is a party or which is binding upon or any of its

property or assets, (ii) this Agreement, with respect to this Joinder, has been duly authorized, executed and delivered by IHR and constitutes a legal, valid and binding obligation of IHR, enforceable against IHR in accordance with its terms, subject as to enforcement of remedies to any applicable bankruptcy, reorganization, moratorium or other laws affecting the enforcement of creditors’ rights generally and doctrines of equity affecting the availability of specific enforcement as a remedy; and (iii) all necessary resolutions, consents, licenses, approvals and authorizations of any Person required in connection with the execution, delivery and performance of this Joinder have been duly obtained and are in full force and effect.

INTERSTATE HOTELS & RESORTS, INC.
By:	/s/  James A. Crolle III
	Name:	James A. Crolle III
	Title:	Assistant General Counsel

JOINDER BY INVESTCORP PROPERTIES LIMITED

     INVESTCORP PROPERTIES LIMITED, a Delaware corporation (“IPL”) is executing this Agreement for the purposes of guaranteeing the payment and performance of the terms of Section 4.06(c). IPL hereby guarantees to the Company and the Partner Non-Managing Member the due and punctual payment and performance of the obligations of the III Manager and the III Non-Managing Member (collectively, the “Investcorp Member”) under Section 4.06(c).

     The terms of this Joinder and IPL’s obligations hereunder are a continuing and irrevocable obligation of IPL and shall remain in full force during the term of the Agreement until payment, performance and/or observation in full of the obligations hereunder. IPL’s guaranty and liability under this Joinder are absolute and unconditional and shall not be affected, released, terminated, discharged or impaired, in whole or in part, by any or all of the following: (i) any lack of genuineness, regularity, validity, legality or enforceability, or the voidability of, this Agreement; (ii) the failure of the Company or any Member to exercise or to exhaust any right or remedy or take any action against any Person or any collateral or other security available to it; (iii) any amendment or modification of the terms of this Agreement; (iv) any failure or delay of the Company or the Members to exercise, or any lack of diligence in exercising, any right or remedy with respect to this Agreement; (v) any dealings or transactions between the Company and/or any of the Members or any of their Affiliates relating to this Agreement, whether or not IPL shall be a party to or cognizant of the same; (vi) the failure to give IPL notice of any breach; and/or (vii) any other circumstance which might constitute a legal or equitable discharge or defense available to the Investcorp Member, whether similar or dissimilar to the foregoing, other than the defense of (a) payment and performance, or (b) the claim against the Investcorp Member is not due and owing under the terms of this Agreement or that the Investcorp Member has performed. IPL expressly waives the following: (a) notice of acceptance of this Agreement; (b) any requirement of promptness, diligence, presentment, protest, notice of dishonor, notice of demand and notice of acceptance; (c) the right to trial by jury in any action or proceeding of any kind arising on, under, out of, or by reason of or relating, in any way, to its obligations under this Joinder, or the interpretation, breach or enforcement of such obligations; and (d) all rights of subrogation and any other claims that it may now or hereafter acquire against the Investcorp Member or any insider that arise from the existence, payment, performance or enforcement of IPL’s obligations under this Joinder until such time as IPL’s obligations under this Joinder are performed and paid in full. IPL’s guaranty under this Joinder is a present guaranty of payment and performance and not of collection. Notwithstanding anything to the contrary contained herein, IPL’s liability shall extend to all amounts and performance of all of its obligations under this Joinder notwithstanding the fact that this Agreement become unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding.

     IPL hereby represents, warrants and certifies to the Partner Non-Managing Member and the Company as follows: (i) the execution, delivery and performance under this Joinder by IPL will not violate any provision of any law, regulation, order or decree of any governmental authority, bureau or agency or of any court binding on IPL, or of any contract, undertaking or agreement to which IPL is a party or which is binding on IPL, or of any contract, undertaking or

agreement to which IPL is a party or which is binding upon or any of its property or assets, (ii) this Agreement, with respect to this Joinder, has been duly authorized, executed and delivered by IPL and constitutes a legal, valid and binding obligation of IPL, enforceable against IPL in accordance with its terms, subject as to enforcement of remedies to any applicable bankruptcy, reorganization, moratorium or other laws affecting the enforcement of creditors’ rights generally and doctrines of equity affecting the availability of specific enforcement as a remedy; and (iii) all necessary resolutions, consents, licenses, approvals and authorizations of any Person required in connection with the execution, delivery and performance of this Joinder have been duly obtained and are in full force and effect.

INVESTCORP PROPERTIES LIMITED, a Delaware corporation
By:	/s/  John R. Fraser
	Name:	John R. Fraser
	Title:	President

EXHIBIT “1”

PROPERTY DESCRIPTION

EXHIBIT “2”

INITIAL BUSINESS PLAN

EXHIBIT “3”

SOURCES AND USES

EXHIBIT “4”

RESTRICTED AREA

EXHIBIT “5”

[INTENTIONALLY BLANK]

EXHIBIT “A”

PERCENTAGE INTERESTS

Member	Percentage Interest
HOTEL INVEST DEUCE LP, LLC		84	%
INTERSTATE INVEST, LLC		15	%
HOTEL INVEST DEUCE MM HOLDINGS, LLC		1	%
		100	%

EXHIBIT “B”

CAPITAL CONTRIBUTIONS

Member	Contribution
HOTEL INVEST DEUCE LP, LLC	$	24,328,343.01
HOTEL INVEST DEUCE MM, LLC	$	289,623.13
INTERSTATE INVEST, LLC	$	4,344,346.97
TOTAL	$	28,962,313.11

EXHIBIT “C”

TAX ALLOCATIONS

     Section 1. Allocations Of Profits And Losses.

     1.1 In General. For accounting and federal, state and local income tax purposes, all Profits and Losses shall be determined and allocated with respect to each year of the Company as of the end of such year and at such other times as the Manager shall determine. Subject to the other provisions of this Agreement, an allocation to a Member of a share of Profits or Losses shall be treated as an allocation of the same share of each item of income, gain, loss or deduction that is taken into account in computing Profits or Losses.

     1.2 Allocations of Profits and Losses. After giving effect to the special allocations set forth in Section 2 of this Exhibit C, Profits and Losses with respect to any year shall be allocated to the Members as follows:

     1.2.1 First, Profits (or items thereof) shall be allocated to those Members having deficit balances in their Capital Accounts (computed after taking into account all distributions with respect to such taxable period and after adding back each Members’ share of Company Minimum Gain and Member Minimum Gain) in proportion to such deficit balances until such deficit balances have been eliminated;

     1.2.2 Second, any remaining Profits and Losses shall be allocated among the Members such that each Member’s Capital Account balance (computed after taking into account all distributions with respect to such taxable period and increased by such Members’ share of Company Minimum Gain and Member Minimum Gain), would, as nearly as possible, be equal to the amount that each Member would receive if all of the remaining assets of the Company were sold for their Book Basis, all liabilities of the Company were satisfied (limited, with respect to nonrecourse liabilities, to the Book Basis of the assets securing such liabilities) and the remaining assets were distributed pursuant to Section 8.01 of the Agreement, all as of the last day of the period for which the allocations are being made.

     1.3 Allocations in Anticipation of Liquidation. Notwithstanding Section 1.2, in any year in which the Company sells substantially all of its assets or liquidates (or in any prior open year if the Manager reasonably believes it necessary to accomplish the purposes of this Section 1.3), each Member shall be allocated Profits or Losses (or items thereof) to the extent necessary to cause its Capital Account balance to reflect the amount that will be distributable to such Member in liquidation of the Company pursuant to the Agreement.

     Section 2. Regulatory Allocations.

     2.1 Minimum Gain Chargeback. The Manager shall allocate items of Company income and gain among the Members at such times and in such amounts as necessary to satisfy the minimum gain chargeback requirements of Regulation Sections 1.704-2(f) and 1.704-2(i)(4).

     2.2 Qualified Income Offset. The Manager shall specially allocate Losses and items of income and gain when and to the extent required to satisfy the “qualified income offset” requirement within the meaning of Regulation Section 1.704-1(b)(2)(ii)(d).

     2.3 Loss Allocations. No allocation of Losses, or items thereof, will be made to any Member if such allocation would create or increase such Members’ Adjusted Capital Account Deficit. Any such disallowed allocation will be made to the Members entitled to receive such allocation under the Section 704(b) Regulations. Any Member that would have a deficit balance in its Capital Account in excess of any amount such Member is obligated to restore, or is deemed obligated to restore under Regulation Sections 1.704-2(g)(1) and 1.704-2(i)(5), will be specially allocated items of income and gain to eliminate such deficit balance as quickly as possible.

     2.4 Nonrecourse Deductions. Nonrecourse Deductions (within the meaning of Regulation Section 1.704-2) will be allocated (as nearly as possible) among the Members pro-rata in proportion to their respective Percentage Interests.

     2.5 Member Nonrecourse Deductions. Member Nonrecourse Deductions, within the meaning of Regulation Section 1.704-2(i), shall be allocated to the Member who has the economic risk of loss in a manner consistent with requirements of Regulation Sections 1.704-2(i)(2) and 1.704-2(j)(l).

     2.6 Code Section 754 Adjustment. To the extent an adjustment to the tax basis of any Company asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulation Section 1.704-l(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of the adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases basis), and the gain or loss shall be specially allocated to the Members in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to that Section of the Regulations.

     2.7 Guaranteed Payments. To the extent any compensation paid to any Member by the Company is determined by the Internal Revenue Service not to be a guaranteed payment under Code Section 707(c) or is not paid to the Member other than in the Person’s capacity as a Member within the meaning of Code Section 707(a), the Member shall be specially allocated gross income of the Company in an amount equal to the amount of that compensation, and the Member’s Capital Account shall be adjusted to reflect the payment of that compensation.

     Section 3. Special Rules.

     3.1. Tax Allocations. Except as provided in Section 3.2 hereof, for federal, state and local income tax purposes, Company income, gain, loss, deduction or expense (or any item thereof) for each year shall be allocated to and among the Members to reflect the allocations made pursuant to the provisions of this Exhibit C for such year.

     3.2. Section 704(c) Compliance. In accordance with Section 704(c) of the Code and the applicable Regulations thereunder, income, gain, loss, deduction and tax depreciation with

respect to any property which has a Book Basis different than its adjusted tax basis, will, solely for federal income tax purposes, be allocated among the Members in accordance with Section 704(c) of the Code and the Regulations thereunder to take into account such difference, using any method selected in the reasonable determination of the Manager.

     3.3. Modifications. The Manager shall be authorized to make appropriate amendments to the allocations of items pursuant to this Exhibit C if necessary in order to comply with Section 704 of the Code or applicable Regulations thereunder; provided that no such change shall have a material adverse effect upon the amount distributable to any Member hereunder.

     3.4 Allocations on Transfer of Interests. In the event there is any Transfer of a Member’s Membership Interest during any year, Profits, Losses and other items shall be allocated among the Members from time to time during such year in accordance with Code Section 706 using any convention permitted by law and selected in the reasonable discretion of the Manager.

     Section 4. Capital Accounts.

     4.1. Establishment and Maintenance. A separate Capital Account will be maintained for each Member pursuant to the requirements set forth in Regulation Section 1.704-1(b)(2)(iv). The Capital Account of each Member will be determined and adjusted as follows:

          4.1.1. Each Member’s Capital Account will be credited with the fair market value of a Member’s Capital Contributions, the Member’s distributive share of Profits, and the amount of any Company liabilities that are assumed by the Member or secured by any Company property distributed to the Member.

          4.1.2. Each Member’s Capital Account will be debited with the amount of cash and the Book Basis of any Company property distributed to the Member under any provision of this Agreement, the Member’s distributive share of Losses and the amount of any liabilities of the Member assumed by the Company or which are secured by any property contributed by the Member to the Company.

          4.1.3. The Capital Account of the Member also shall be adjusted appropriately to reflect any other adjustment required pursuant to Regulation Section 1.704-1 or 1.704-2, including, without limitation, the requirements set forth in Regulation Sections 1.704-1(b)(2)(iv)(g) and 1.704-1(b)(2)(iv)(m).

          4.1.4. If any Membership Interest is transferred in accordance with the terms of the Agreement, the transferee will succeed to the Capital Account of the transferor to the extent it relates to the transferred interest.

     Section 5. Other Matters.

     5.1. Distributions in Kind. If any assets of the Company are distributed in kind pursuant to this Agreement, the amount of Profit or Loss that would have been realized had such

assets been sold at their fair market value shall be allocated to the Capital Accounts of the Members pursuant to this Exhibit C immediately prior to such distribution.

     5.2. Classification as a Partnership. The Manager shall not make an election to treat the Company as an association pursuant to Regulation Section 301.7701-3 (and thus a corporation under Regulation Section 301.7701-2(b)(2)).

     5.3. Fiscal Year. Except as otherwise required by the Code, the Fiscal Year of the Company for tax and accounting purposes shall be the 12 month (or shorter) period ending on the last day of December of each year.

     Section 6. Definitions.

     Unless otherwise defined in this Exhibit C, all capitalized terms shall have the meanings ascribed to such terms in the Agreement or Exhibit A.

     “Adjusted Capital Account Deficit” means, with respect to any Member for any taxable year, the deficit balance, if any, in such Member’s Capital Account as of the end of such taxable year, as the same is specially computed to reflect the adjustments required or permitted to be taken into account in applying Regulations Section 1.704-1(b)(2)(ii)(d) (including any amount such Member is obligated to restore or is deemed obligated to restore under Regulation Section 1.704-2(g)(1) and 1.704-2(i)(5)).

     “Book Basis” means, with respect to any asset, the asset’s adjusted basis for federal income tax purposes; provided, however, (a) if property is contributed to the Company, the initial Book Basis of such Property will equal its fair market value on the date of contribution, and (b) if the Capital Accounts of the Company are adjusted pursuant to Regulation Section 1.704-1(b) to reflect the fair market value of any Company assets, the Book Basis of such assets will be adjusted to equal its respective fair market value as of the time of such adjustment in accordance with such Regulation. The Book Basis of all assets will be further adjusted thereafter by depreciation or amortization as provided in Regulation Section 1.704-1(b)(2)(iv)(g).

     “Code” means the Internal Revenue Code of 1986, as amended from time to time.

     “Company Minimum Gain” means “partnership minimum gain” as defined in Regulation Section 1.704-2(b)(2).

     “Member Minimum Gain” means “partner nonrecourse debt minimum gain” as defined in Regulation Section 1.704-2(i)(2).

     “Member Nonrecourse Debt” means “partner nonrecourse debt” as defined in Regulation Section 1.704-2(b)(4).

     “Profits” and “Losses” mean, for each taxable year or other period, an amount equal to the Company’s taxable income or loss for the year or other period, determined in accordance with Section 703(a) of the Code (including all items of income, gain, loss or deduction required to be stated separately under Section 703(a)(1) of the Code), with the following adjustments:

     (a) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses will be added to taxable income or loss;

     (b) Any expenditures of the Company described in Section 705(a)(2)(B) of the Code or treated as Section 705(a)(2)(B) expenditures under Regulation Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses, will be subtracted from taxable income or loss;

     (c) Gain or loss resulting from any disposition of Company property with respect to which gain or loss is recognized for federal income tax purposes will be computed by reference to the Book Basis of the property, notwithstanding that the adjusted tax basis of the property differs from its Book Basis;

     (d) Any depreciation, amortization and other cost recovery deductions shall be subject to the rules set forth in Regulations Section 1.704-1(b)(2)(iv)(g); and

     (e) Profits or Losses of the Company shall be computed without regard to the amount of any items of gross income, gain, loss or deduction that are specially allocated under Section 2 hereof.

     “Regulations” means the regulations promulgated by the United States Department of the Treasury pursuant to and in respect of provisions of the Code. All references herein to sections of the Regulations shall include any corresponding provisions of succeeding, similar, substitute proposed or final Regulations.

EX-31.1

EXHIBIT 31.1

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

 

I, Thomas F. Hewitt, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Interstate Hotels & Resorts, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/  Thomas F. Hewitt

Thomas F. Hewitt
Chief Executive Officer

Dated: November 8, 2007

EX-31.2

EXHIBIT 31.2

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

 

I, Bruce A. Riggins, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Interstate Hotels & Resorts, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/  Bruce A. Riggins

Bruce A. Riggins
Chief Financial Officer

Dated: November 8, 2007

EX-32

EXHIBIT 32

Section 906 Certification

Certification of Chief Executive Officer and Chief Financial Officer

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

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

/s/  Thomas F. Hewitt

Thomas F. Hewitt
Chief Executive Officer

/s/  Bruce A. Riggins

Bruce A. Riggins
Chief Financial Officer

Dated: November 8, 2007