Management's Discussion and Analysis of Financial Condition and Results of Operations, which we refer to as MD&A, is intended to help the reader understand Interstate Hotels & Resorts Inc., our operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated interim financial statements and the accompanying notes and the MD&A included in our Form 10-K for the year ended December 31, 2007.

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, 2007 and in Item 1A of this Form 10-Q.

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 leading hotel real estate investor and the nation's largest independent hotel management company, as measured by number of rooms under management and gross annual revenues of the managed portfolio. We have two reportable operating segments: hotel ownership (through whole-ownership and joint ventures) and hotel management. A third reportable operating segment, corporate housing, was disposed of on January 26, 2007 with the sale of BridgeStreet. The results of this segment are reported as discontinued operations in our consolidated financial statements for all periods presented.

As of September 30, 2008, we wholly-owned and managed seven hotels with 2,050 rooms and held non-controlling joint venture equity interests in 19 joint ventures, which owned or held ownership interests in 50 of our managed properties.

As of September 30, 2008, we and our affiliates managed 226 hotel properties with 46,194 rooms and six ancillary service centers (which consist of a convention center, a spa facility, two restaurants and two laundry centers), in 37 states, the District of Columbia, Russia, Mexico, Canada, Belgium and Ireland. Our portfolio of managed properties is diversified by location/market, franchise and brand affiliations, and ownership group(s). We manage hotels represented by more than 30 franchise and brand affiliations in addition to operating 17 independent hotels. Our managed hotels are owned by more than 60 different ownership groups.

Industry Overview - The lodging industry, of which we are a part, is subject to both national and international extraordinary events. Over the past several years we have continued to be impacted by events including the ongoing war on terrorism, the potential outbreak and epidemic of infectious disease, natural disasters, the continuing change in the strength and performance of regional and global economies and the level of hotel transaction activity by

private equity investors and other acquirers of real estate. More recently, the collapse of the financial markets has also impacted the lodging industry.

Although the lodging industry experienced a tremendous period of growth from 2003 through 2007, demand has declined in the nine months of 2008 as a result of the slowing economic growth coupled with higher oil prices, the rising cost of airline travel and companies attempting to limit or reduce spending. This decrease in demand has been most notable in transient business, which is composed of the travelers generally paying the highest rate, but it has also affected group and leisure business as well. The collapse of the financial markets in the fourth quarter is expected to further exacerbate the decline in demand through the remainder of 2008 and into 2009.

During the first nine months of 2008 we achieved year over year RevPAR growth of 3.1%, but this growth is significantly slower than the 8.9% RevPAR growth achieved in the first nine months of 2007. In order to partially mitigate the decrease in demand and maximize our ability to maintain rate we have focused our properties' efforts on adjusting the business mix by shifting efforts toward group sales, managing off-peak periods, and increasing sales efforts at both the local and national levels in order to capture the highest amount of available business. We have also installed cost control measures and contingency plans at every hotel in order to hold or reduce salary, energy, maintenance and other overhead costs to ensure the effect to operating margins is minimized during this slowdown.

The financial market crisis and dramatic decline in the overall economy is expected to cause RevPAR to decline in the fourth quarter and in 2009. We believe we have taken steps to partially mitigate the effects, to the extent possible, of current economic conditions and their impact on the lodging industry. We have maintained higher cash balances and reviewed our capital expenditure plans for 2009 to ensure that we are positioned to meet our short term obligations. However, we believe the uncertainty of the current economy does not allow us to give any assurances that further decline in the economy will not lead to further decline in our hotel revenues and our earnings both from our owned portfolio and our managed portfolio. These declines could cause impairment of our goodwill and other long lived assets as well as the underlying value of the long lived assets owned by our joint ventures. Any impairment of these assets could have a material effect on our results of operations.

Investments in and Acquisitions of Real Estate - In the first nine months of 2008, we continued to implement our growth strategy of selective hotel ownership primarily through joint venture investments. In February 2008, our joint venture with Harte closed on the purchase of a four property portfolio from affiliates of Blackstone, for an aggregate price of $208.7 million. We invested $11.6 million representing our 20 percent equity interest in the portfolio. At the time of our investment, we managed three of the properties and had previously managed the fourth. The joint venture plans to invest more than $30 million of additional funds for comprehensive renovations of the hotels over the 30 months following the acquisition, with our contribution expected to be approximately $2 million. The four properties included in the joint venture acquisition were as follows:

           Property                          Location       Guest Rooms

           Sheraton Frazer Great Valley   Frazer, PA                 198
           Sheraton Mahwah                Mahwah, NJ                 225
           Latham Hotel Georgetown        Washington, DC             142
           Hilton Lafayette               Lafayette, LA              327

In February 2008, our joint venture, Budget Portfolio Properties, LLC, acquired a portfolio of 22 properties located throughout the Midwest in Illinois, Iowa, Michigan, Minnesota, Wisconsin and Texas. We invested $1.7 million, representing our 10 percent equity interest in the portfolio. Upon closing, all 22 properties, representing 2,397 rooms, were converted to various Wyndham Worldwide brands. The properties are located along major interstates and proximate to major commercial and leisure demand generators. Our investment includes our share of planned capital improvements to re-brand, re-image, and reposition the hotels.

In February 2008, we and JHM formed a joint venture management company in which we hold a 50 percent ownership interest. The joint venture will seek management opportunities throughout India and has already signed its first management agreement in April 2008. Management of this hotel will commence in early 2009. We provided to our partner, JHM, $0.5 million in the form of a convertible note towards the working capital of the joint venture, which is expected to convert to an equity interest in the joint venture by the end of 2008. Simultaneous with the formation of this management company, we and JHM each committed to invest $6.25 million in the Duet Fund,

which will seek opportunities to purchase and/or develop hotels throughout India. As of September 30, 2008, we had invested $6.25 million in the Duet Fund. In return for our investment, the Duet Fund will give our management company joint venture the right of first look to manage all hotels that it invests which are not already encumbered by an existing management contract.

In February 2008, True North Tesoro Property Partners, L.P., a joint venture in which we hold a 15.9 percent equity interest, sold the Doral Tesoro Hotel & Golf Club, located near Dallas, Texas. Our portion of the joint venture's gain on sale of the hotel was approximately $2.4 million before post-closing adjustments. In March 2008, we received $1.8 million in proceeds from the sale. This transaction serves as a primary example of the value we seek to create through the operational expertise we provide to owners, combined with the realization of the equitable appreciation of the underlying real estate asset. The joint venture also owns a separate entity that holds mineral rights and receives royalties related to gas production activities which was not marketed in the sale of the hotel and we continue to own this entity and expect to receive royalty payments periodically.

In June 2008, IHR Greenbuck Hotel Venture, a joint venture in which we hold a 15.0 percent equity interest, opened the first aloft branded hotel in the United States. The aloft brand is a new upscale and select-service Starwood brand. The hotel has 136 rooms and is located in Rancho Cucamonga, California. In September 2008, the joint venture opened its second, 143-room aloft hotel in Cool Springs, Tennessee. We manage both newly built hotels.

In July 2008, we formed a joint venture with an affiliate of Madison W Properties, LLC to recapitalize the existing ownership of the 367-room Radisson Plaza Hotel Lexington and adjacent 234,000 square foot class A office building in Lexington, Kentucky. Upon transition, the hotel was renamed the Lexington Downtown Hotel & Conference Center. We invested $1.0 million for a 5% equity interest in the joint venture. The hotel is undergoing a comprehensive, $13 million renovation encompassing guest rooms and public spaces, as well as a restaurant. Following completion of the renovation, the hotel will be re-branded as a Hilton. We currently manage the hotel and will operate the property as an independent hotel until the renovation is complete and the hotel is reflagged.

Turnover of Management Contracts - During the first nine months of 2008, we continued to see a reduction in the number of hotel real estate transactions, leading to further stabilization in our third-party managed portfolio. The increased transaction activity beginning in 2005 had created a higher level of contract attrition within our portfolio; however, due to the tightening of the credit markets and the reduction in transaction activity during the past three quarters, we have seen our managed portfolio stabilize and begin to grow.

During the third quarter of 2008, we have grown our management contract portfolio by a net five properties, providing a net increase of 234 additional rooms. Although our management contract losses were significant between 2005 and 2007, principally due to Blackstone's disposition of substantially all of the hotel assets they acquired from Meristar Hospitality, we believe the attrition we have experienced within our portfolio of third party management agreements has leveled off, and we have begun to expand our portfolio once again, as evidenced by a net increase of 42 properties over the past four quarters.

The following table highlights the contract activity within our managed portfolio:

                                            Number of       Number of
                                           Properties         Rooms

                As of December 31, 2007            191          42,620
                New contracts                       51           7,205
                Lost contracts                     (16 )        (3,631 )

                As of September 30, 2008           226          46,194

As of September 30, 2008, we continued to manage eight Blackstone properties, which accounted for $0.8 million and $2.5 million in management fees for the three and nine months ended September 30, 2008, respectively. During the first nine months of 2008, Blackstone sold four hotels which we managed, all of which we now continue to manage through one of our joint venture partnerships. Unpaid termination fees due to us from Blackstone as of September 30, 2008 for hotels previously sold by Blackstone are $15.4 million. For 21 of the hotels sold and with respect to $13.3 million of the unpaid fees, Blackstone retains the right to replace a terminated management contract during the 48 month payment period with a replacement contract on a different hotel and reduce the amount of any remaining unpaid fees.

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, 2007.

Results of Operations

Operating Statistics

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


                                    As of September 30,         Percent Change
                                     2008           2007          '08 vs.'07

           Hotel Ownership
           Number of properties             7            6                 16.7 %
           Number of rooms              2,050        1,757                 16.7 %
           Hotel Management(1)
           Properties managed             226          184                 22.8 %
           Number of rooms             46,194       42,435                  8.9 %

(1) Statistics related to hotels in which we hold a partial ownership interest through a joint venture or wholly-owned have been included in hotel management.

Hotels under management increased by a net of 42 properties as of September 30, 2008 compared to September 30, 2007, due to the following:

• We acquired 22 management contracts through our investment in the Budget Portfolio Properties, LLC joint venture.

• We signed 7 new management contracts with Equity Inns, Inc.

• We secured 11 additional management contracts from Inland Lodging Corporation.

• We obtained 21 new management contracts with various other owners.

• 19 properties owned by various owners were transitioned out of our system.

The operating statistics related to our managed hotels, including wholly-owned hotels, on a same-store basis(2) were as follows:

                                     Three Months
                                 Ended September 30,         Percent Change
                                  2008           2007         '08 vs. '07

            Hotel Management
            RevPAR             $    103.93     $ 102.32                  1.6 %
            ADR                $    139.84     $ 132.99                  5.2 %

            Occupancy                 74.3 %       76.9 %               (3.4 )%



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                                     Nine Months
                                 Ended September 30,         Percent Change
                                  2008           2007         '08 vs. '07

            Hotel Management
            RevPAR             $    103.30     $ 100.21                  3.1 %
            ADR                $    140.72     $ 133.03                  5.8 %

(2) 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, 2008 are not included in same-store hotel results for the periods presented herein. Of the 226 properties that we managed as of September 30, 2008, 174 properties have been classified as same-store hotels.

Three months ended September 30, 2008 compared to three months ended September 30, 2007

Revenue

Revenue consisted of the following (in thousands):


                                                Three Months
                                            Ended September 30,         Percent Change
                                             2008          2007          '08 vs. '07

  Lodging                                 $   22,456     $  20,628                  8.9 %
  Management fees                             10,451         9,634                  8.5 %
  Termination fees                             1,446           935                 54.7 %
  Other                                        2,447         2,506                 (2.4 )%
  Other revenue from managed properties      155,448       147,562                  5.3 %

  Total revenue                           $  192,248     $ 181,265                  6.1 %

Lodging
The increase in lodging revenue of $1.8 million in the third quarter of 2008 compared to the same period in 2007 was primarily due to the inclusion of revenues of $2.9 million from the Sheraton Columbia, which was purchased in November 2007, however, this was offset by a decrease in revenues in 2008 of $1.0 million from the Westin Atlanta as the property was impacted by the on-going renovations.

Management fees and termination fees
The increase in management fee revenue of $0.8 million in the third quarter of 2008 compared to the same period in 2007 was primarily due to the increase in average total properties under management.

The increase in termination fees of $0.5 million in the third quarter of 2008 compared to the same period in 2007 was primarily due to the recognition of $0.2 million related to the sale by Blackstone of the Radisson Plaza Lexington property to one of our joint ventures and $0.3 million related to the sales of various other properties by Blackstone.

Other revenue from managed properties
These amounts represent the payroll and related costs, and certain other costs of the hotel's operations that are contractually reimbursed to us by the hotel owners, the payments of which are recorded as "other expenses from managed properties." The increase of $7.9 million in other revenue from managed properties in the third quarter of 2008 compared to the same period in 2007 is primarily due to the increase in the average total properties under management.

Operating Expenses

Operating expenses consisted of the following (in thousands):


                                                Three Months
                                            Ended September 30,         Percent Change
                                             2008          2007          '08 vs. '07

 Lodging                                  $   16,803     $  14,604                 15.1 %
 Administrative and general                   13,550        13,669                 (0.9 )%
 Depreciation and amortization                 4,886         3,665                 33.3 %
 Asset impairments and write-offs                282           801                (64.8 )%
 Other expenses from managed properties      155,448       147,562                  5.3 %

 Total operating expenses                 $  190,969     $ 180,301                  5.9 %

Lodging
The increase in lodging expense of $2.2 million in the third quarter was primarily due to the inclusion of lodging expense of $2.1 million from the Sheraton Columbia, which was purchased in November 2007.

Administrative and general
These expenses consisted 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 remained flat in the third quarter of 2008 compared to the same period in 2007.

Depreciation and amortization
We had a significant increase in depreciable assets as we acquired the Sheraton Columbia subsequent to the third quarter of 2007 and underwent renovations at the Westin Atlanta, which resulted in additional depreciation expense for these two properties of $1.0 million and $0.6 million, respectively, in the third quarter of 2008 compared to the same period in 2007. These changes were offset by the decrease of approximately $0.4 million in amortization expense of intangibles associated with management contracts that were terminated.

Asset impairments and write-offs
For the three months ended September 30, 2008, $0.3 million of asset impairment was recorded primarily on the termination of the management contract intangible asset related to the sale of the Radisson Plaza Lexington property by Blackstone to our MPVF IHR Lexington, LLC joint venture. For the three months ended September 30, 2007, $0.8 million of asset impairment was recorded as a result of the termination of management contracts related to four properties that were sold during the period.

Other expenses from managed properties
These expenses represent the payroll and related costs, and certain other costs of the hotel's operations that are contractually reimbursed to us by the hotel owners and are also recorded as "other revenues from managed properties." The increase of $7.9 million in other expenses from managed properties in the third quarter of 2008 compared to the same period in 2007 was primarily due to increase in the average total properties under management

Other Income and Expense

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


                                                                 Three Months
                                                              Ended September 30,         Percent Change
                                                              2008            2007          '08 vs. '07

Interest expense, net                                      $    3,210        $ 3,310                 (3.0 )%
Equity in (losses) earnings of unconsolidated entities            (29 )          563               > (100 )%
Income tax (benefit) expense                                     (554 )          252               > (100 )%
Minority interest (benefit) expense                                (3 )            1               > (100 )%
Income from discontinued operations, net of tax                     -          2,836                 (100 )%

Interest expense, net
The decrease in net interest expense of $0.1 million in the third quarter of 2008 compared to the same period in 2007 was primarily due to $1.3 million in interest savings as a result of significantly lower interest rates during the period offset by additional interest expense of $0.9 million due to the increase in total debt outstanding. Furthermore, the significantly lower interest rates resulted in a decrease of $0.3 million in interest income in the third quarter of 2008 compared to the same period in 2007.

Equity in earnings of unconsolidated entities The decrease of $0.6 million in equity in earnings of unconsolidated entities in the third quarter of 2008 compared to the same period in 2007 was primarily due to decreased activity at certain of our joint venture properties as a result of a combination of renovations and the slowdown in the economy.

Income tax expense
For the three months ended September 30, 2008, we recorded an income tax benefit of $0.6 million compared with an income tax expense of $0.2 million for the three months ended September 30, 2007. The $0.2 million income tax expense in 2007 includes an adjustment of approximately $0.7 million to reduce the income tax benefit that was previously recorded in the first two quarters of 2007. This adjustment resulted from a change in tax laws that allowed us to utilize certain tax credits which we previously recorded a tax valuation allowance against. This resulted in a reduction of our annualized effective tax rate.

Income from discontinued operations, net of tax Income from discontinued operations for the three months ended September 30, . . .