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, 2008.

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, 2008.

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 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. As of June 30, 2009, we wholly-owned and managed seven hotels with 2,052 rooms and held non-controlling equity interests in 17 joint ventures, which owned or held ownership interests in 49 of our managed properties. As of June 30, 2009, we and our affiliates managed 221 hotel properties with 45,350 rooms and various ancillary service centers (which include convention centers, spa facilities, restaurants and 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 18 independent hotels. Our managed hotels are owned by more than 60 different ownership groups.

The severe economic recession, tight credit markets and negative consumer sentiment contributed to a very challenging operating environment for us during the first six months of 2009. We experienced contraction in demand for hotel rooms across every segment as both business and leisure travelers reduced discretionary spending. Consequently, revenue per available room ("RevPAR"), average daily rate ("ADR") and occupancy for our wholly-owned and managed properties decreased. As a result, management fee revenue decreased as management fees are based on a percentage of hotel revenues. In addition, lodging revenues decreased as they were directly affected by the trends in the industry as whole as well as the markets in which our wholly-owned hotels are located. During these uncertain periods, we maintained our focus and continued to execute on our strategy of preserving cash and

strengthening our balance sheet, maximizing profitability through reducing costs, and retaining and growing our management contract business.

The report from our independent registered public accounting firm included in our Form 10-K for the year ended December 31, 2008 included an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern due to potential Credit Facility covenant violations. In July 2009, we successfully amended the terms of our Credit Facility to extend the maturity date from March 2010 to March 2012 and restructure existing financial and non-financial covenants. See Note 2, "Summary of Significant Accounting Policies," and Note 8, "Long-Term Debt," to our consolidated interim financial statements for further information and additional details on our Amended Credit Facility.

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.

In 2008, conditions in the lodging industry deteriorated with the sharp decline in the economy and collapse of financial markets. The combination of a deteriorating economy, turbulent financial and credit markets, and rising unemployment eroded consumer confidence and spending, particularly with respect to discretionary spending, such as travel. Likewise, companies reduced or limited travel spending which contributed to significant contraction in hotel room demand in the second half of 2008 and through the first half of 2009. The economy continues to be in a severe recession and we anticipate lodging demand will not improve in the near term until the current economic trends reverse course, particularly the contraction in GDP, rising unemployment and lack of liquidity in the credit markets. While we believe current negative conditions will not be permanent, we cannot predict when a meaningful recovery will occur.

Cost-Savings Program - In order to partially mitigate the effects of current economic conditions on the lodging industry and to ensure that we are positioned to meet our short term obligations and liquidity requirements, we implemented a cost-savings program in January 2009 that we anticipate will reduce corporate overhead during the year by $17 million. The cost-savings program consisted of eliminating 45 corporate positions, reducing pay up to 10 percent for senior management, placing a freeze on merit increases for all corporate employees, suspending the company match for 401(K) and non-qualified deferred compensation plans for 2009, restructuring the corporate bonus plan, reducing the annual fee by 25 percent and eliminating restricted stock grants during 2009 for the company's board of directors, and reducing all other corporate expenses, including advertising, travel, training, and employee relations expenses. In the six months ended June 30, 2009, we have already been able to reduce administrative and general expense by $9.2 million compared to the same period in 2008.

We have also implemented 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. In order to partially mitigate the decrease in demand and maximize our ability to maintain rates, 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.

Turnover of Management Contracts - The tightening of the credit markets and the related reduction in hotel real estate transaction activity between 2008 and 2009 resulted in the stabilization of our managed portfolio after the significant attrition experienced between 2005 and 2007. During the second quarter of 2009, we had minimal change in our managed portfolio, with a net loss of three management contracts. In addition, we have an active pipeline, which includes 13 signed management contracts for properties under construction or development, that will further add to our portfolio over the next several years. The illiquidity in the credit and real estate markets remained throughout the second quarter of 2009. However, as the credit environment improves and hotel real estate transaction activity increases, we believe we will be in position to further grow our managed portfolio.

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

                                           Number of       Number of
                                          Properties         Rooms

                As of December 31, 2008           226          46,448
                New contracts                       4             651
                Lost contracts                     (9 )        (1,749 )

                As of June 30, 2009               221          45,350

Unpaid termination fees due to us from Blackstone as of June 30, 2009 for hotels previously sold by Blackstone are $11.0 million. For 21 of the hotels sold and with respect to $9.6 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, 2008.

Recently Issued Accounting Pronouncements

See Note 2, "Summary of Significant Accounting Policies," to our consolidated interim financial statements for additional information relating to recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted.

Results of Operations

Operating Statistics

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


                                      As of June 30,          Percent Change
                                     2009         2008         '09 vs. '08

            Hotel Ownership
            Number of properties          7            7                    -
            Number of rooms           2,052        2,045                  0.3 %
            Hotel Management(1)
            Properties managed          221          221                    -
            Number of rooms          45,350       45,960                 (1.3 )%

(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.

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

                                 Three Months Ended
                                      June 30,              Percent Change
                                  2009          2008         '09 vs. '08

             Hotel Ownership
             RevPAR            $    73.38     $  87.79                (16.4 )%
             ADR               $   107.18     $ 122.69                (12.6 )%
             Occupancy               68.5 %       71.6 %               (4.3 )%




                                  Six Months Ended
                                      June 30,             Percent Change
                                  2009         2008         '09 vs. '08

              Hotel Ownership
              RevPAR            $  69.85     $  83.34                (16.2 )%
              ADR               $ 109.43     $ 122.34                (10.6 )%
              Occupancy             63.8 %       68.1 %               (6.3 )%

(2) Operating statistics for our wholly-owned hotels includes our entire portfolio of 7 hotels, including the Sheraton Columbia and the Westin Atlanta Airport, both of which underwent comprehensive renovation programs throughout 2008.

The operating statistics related to our managed hotels, including wholly-owned hotels, on a same-store basis(3) were as follows:

                                  Three Months Ended
                                       June 30,              Percent Change
                                   2009          2008         '09 vs. '08

             Hotel Management
             RevPAR             $    81.81     $ 104.08                (21.4 )%
             ADR                $   122.30     $ 140.26                (12.8 )%
             Occupancy                66.9 %       74.2 %               (9.8 )%




                                   Six Months Ended
                                       June 30,             Percent Change
                                   2009         2008         '09 vs. '08

              Hotel Management
              RevPAR             $  77.54     $  97.52                (20.5 )%
              ADR                $ 122.15     $ 137.89                (11.4 )%
              Occupancy              63.5 %       70.7 %              (10.2 )%

(3) 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 current period being reported. In addition, the operating results of hotels for which we no longer managed as of June 30, 2009 are not included in same-store hotel results for the periods presented herein. Of the 221 properties that we managed as of June 30, 2009, 193 properties have been classified as same-store hotels.

Three months ended June 30, 2009 compared to three months ended June 30, 2008

Revenue

Revenue consisted of the following (in thousands):

                                            Three Months Ended
                                                 June 30,              Percent Change
                                            2009          2008          '09 vs. '08

  Lodging                                 $  21,225     $  25,796                (17.7 )%
  Management fees                             8,758        10,820                (19.1 )%
  Termination fees                            1,995         1,194                 67.1 %
  Other                                       2,039         2,693                (24.3 )%
  Other revenue from managed properties     133,657       157,333                (15.0 )%

  Total revenue                           $ 167,674     $ 197,836                (15.2 )%

Lodging

The decrease in lodging revenue of $4.6 million in the second quarter of 2009 compared to the same period in 2008 was primarily due to the significant decrease in RevPAR of 16.4 percent for our wholly-owned portfolio. The decrease in RevPAR was a result of a reduction in occupancy of 4.3 percent driven by the ongoing economic recession, along with a significant decrease in ADR of 12.6 percent. ADR was negatively impacted by increasingly intense competition within each market as travel demand decreased, along with corporate travel and meeting planners requiring rate reductions to secure continued business.

Management fees and termination fees

The decrease in management fee revenue of $2.1 million in the second quarter of 2009 compared to the same period in 2008 was primarily due to the current economic environment and its impact on lodging demand as management fees are based on a percent of total revenues for the hotels we manage.

The increase in termination fees of $0.8 million in the second quarter of 2009 compared to the same period in 2008 was primarily due to $0.7 million in termination fees recognized in the second quarter of 2009 relating to two properties sold by Sunstone Hotel Investors, one of which continued under our management for the new owner.

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 also recorded as "other expenses from managed properties." The decrease of $23.7 million in other revenue from managed properties in the second quarter of 2009 compared to the same period in 2008 is primarily due to the cost control measures implemented at our managed properties, which included reductions in salary and certain other costs.

Operating Expenses

Operating expenses consisted of the following (in thousands):


                                             Three Months Ended
                                                  June 30,              Percent Change
                                             2009          2008          '09 vs. '08

  Lodging                                  $  15,224     $  17,510                (13.1 )%
  Administrative and general                  10,783        15,331                (29.7 )%
  Depreciation and amortization                3,849         4,901                (21.5 )%
  Restructuring costs                             90             -                  100 %
  Asset impairments and write-offs               236            29                 >100 %
  Other expenses from managed properties     133,657       157,333                (15.0 )%

  Total operating expenses                 $ 163,839     $ 195,104                (16.0 )%

Lodging

The decrease in lodging expense of $2.3 million in the second quarter of 2009 compared to the same period in 2008 was primarily due to a corresponding decrease in lodging revenue and our focus on cost containment at our wholly-owned properties. Although our cost containment efforts have been successful in partially mitigating the decrease in lodging demand, the gross margin of our wholly-owned hotels has decreased from 31.7 percent in the second quarter of 2008 to 27.6 percent in the second quarter of 2009 on a portfolio basis.

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 decreased by $4.5 million for the second quarter of 2009 compared to the same period in 2008 primarily due to the elimination of 45 corporate positions, pay reductions for senior management, and other measures implemented as part of the cost-savings program initiated in January 2009, combined with a reduction of $1.5 million in legal fees.

Depreciation and amortization

The decrease in depreciation and amortization expense of $1.1 million in the second quarter of 2009 compared to the same period in 2008 was primarily due to a decrease in depreciation expense of $0.7 million and $0.2 million for the Westin Atlanta Airport and the Sheraton Columbia, respectively, as the furniture, fixtures and equipment acquired with the properties were fully depreciated and replaced during their comprehensive renovation programs.

Asset impairments and write-offs

For the three months ended June 30, 2009, we recognized impairment losses of $0.2 million related to management contracts for two properties that were sold during the quarter, one of which was retained as a managed property under the new owner. For the second quarter of 2008, less than $0.1 million of asset impairment was recorded related to two properties.

Other Income and Expense

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


                                                            Three Months Ended
                                                                 June 30,               Percent Change
                                                            2009           2008          '09 vs. '08

Interest expense, net                                    $     3,101      $ 3,053                   1.6 %
Equity in (losses) earnings of unconsolidated entities        (3,713 )        535                 >(100 )%
Income tax expense                                             3,733           79                  >100 %

Equity in (losses) earnings of unconsolidated entities

The decrease of $4.2 million in equity in earnings of unconsolidated entities in the second quarter of 2009 compared to the same period in 2008 was primarily due to a $3.0 million impairment charge recorded on our investment in the RQB Resort/Development Investors, LLC joint venture. The sole property owned by this joint venture, the Sawgrass Marriott Resort and Spa, has experienced lower than anticipated current and projected operating cash flows. There were no similar charges in the second quarter of 2008. Furthermore, other joint ventures experienced losses during the quarter given the challenging economic and operating conditions.

Income tax (expense) benefit

In the first quarter of 2009, we entered into a foreign intellectual property license transaction which was designed to accelerate the utilization of certain U.S. tax attributes. This attributed to our effective annual tax rate of (250.4) percent for the first quarter of 2009. In the second quarter of 2009, we established a full valuation allowance against our net deferred tax assets. As a result, our effective annual tax rate was determined to be 1.2 percent during the second quarter.

Six months ended June 30, 2009 compared to six months ended June 30, 2008

Revenue

Revenue consisted of the following (in thousands):

                                             Six Months Ended
                                                 June 30,              Percent Change
                                            2009          2008          '09 vs. '08

  Lodging                                 $  40,261     $  49,714                (19.0 )%
  Management fees                            17,109        20,729                (17.5 )%
  Termination fees                            3,241         4,204                (22.9 )%
  Other                                       3,923         4,792                (18.1 )%
  Other revenue from managed properties     265,746       308,347                (13.8 )%

  Total revenue                           $ 330,280     $ 387,786                (14.8 )%

Lodging

The decrease in lodging revenue of $9.5 million in the six months ended June 30, 2009 compared to the same period in 2008 was primarily due to the significant decrease in RevPAR of 16.2 percent for our wholly-owned portfolio. The decrease in RevPAR was a result of a reduction in occupancy of 6.3 percent driven by the ongoing economic recession, along with a significant decrease in ADR of 10.6 percent. ADR was negatively impacted by increasingly intense competition within each market as travel demand decreased, along with corporate travel and meeting planners requiring rate reductions to secure continued business.

Management fees and termination fees

The decrease in management fee revenue of $3.6 million in the six months ended June 30, 2009 compared to the same period in 2008 was primarily due to the current economic environment and its impact on lodging demand as management fees are based on a percent of total revenues for the hotels we manage.

The decrease in termination fees of $1.0 million in the six months ended June 30, 2009 compared to the same period in 2008 was primarily due to $1.4 million in termination fees recognized in the first quarter of 2008 relating to three properties our Harte IHR joint venture purchased from Blackstone for which all contingencies were removed.

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 also recorded as "other expenses from managed properties." The decrease of $42.6 million in other revenue from managed properties in the six months ended June 30, 2009 compared to the same period in 2008 is primarily due to the cost control measures implemented at our managed properties, which included reductions in salary and certain other costs.

Operating Expenses

Operating expenses consisted of the following (in thousands):


                                              Six Months Ended
                                                  June 30,              Percent Change
                                             2009          2008          '09 vs. '08
. . .