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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997

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INTERSTATE HOTELS COMPANY
FOSTER PLAZA TEN
680 ANDERSEN DRIVE
PITTSBURGH, PENNSYLVANIA 15220
(412) 937-0600

PENNSYLVANIA 1-11731 25-1788101
(State of Incorporation) (Commission File No.) (IRS Employer
Identification No.)

The Company (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the period that the Company
was required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days.

The number of shares of the Company's Common Stock, par value $0.01 per
share, outstanding at May 14, 1997 was 35,326,468.

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2

INDEX

INTERSTATE HOTELS COMPANY

PAGE NO.
--------

PART I FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).................................... 2

Consolidated Balance Sheets--December 31, 1996 and March 31, 1997... 2

Consolidated Statements of Operations--Pro Forma Three Months Ended
March 31, 1996 and March 31, 1997................................... 3

Consolidated Statements of Operations--Historical Three Months Ended
March 31, 1996 and March 31, 1997................................... 4

Consolidated Statements of Cash Flows--Three Months Ended March 31,
1996 and March 31, 1997............................................. 5

Notes to Consolidated Financial Statements.......................... 6

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 8

PART II OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K.................................... 12

PART I--FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).

INTERSTATE HOTELS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

DECEMBER 31, MARCH 31,
1996 1997
------------ ----------
(A) (UNAUDITED)

ASSETS
Current assets:
Cash and cash equivalents..................................... $ 32,323 $ 35,230
Accounts receivable, net...................................... 21,556 42,031
Stock subscription receivable, net............................ 14,286 --
Deferred income taxes......................................... 1,649 1,893
Prepaid expenses and other assets............................. 11,961 9,891
-------- ----------
Total current assets..................................... 81,775 89,045
Restricted cash............................................... 15,995 6,813
Property and equipment, net................................... 709,151 823,879
Investments in hotel real estate.............................. 5,605 12,096
Officers and employees notes receivable....................... 4,643 5,497
Intangible and other assets................................... 66,592 68,752
-------- ----------
Total assets............................................. $883,761 $1,006,082
======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable--trade....................................... 12,152 10,106
Accounts payable--health trust................................ 2,440 5,196
Accrued payroll and related benefits.......................... 15,072 10,507
Income taxes payable.......................................... -- 1,818
Other accrued liabilities..................................... 23,926 40,191
Current portion of long-term debt............................. 11,767 14,002
-------- ----------
Total current liabilities................................ 65,357 81,820
Long-term debt................................................ 396,044 484,137
Deferred income taxes......................................... 4,081 6,233
Other liabilities............................................. 1,213 1,213
-------- ----------
Total liabilities........................................ 466,695 573,403
-------- ----------
Minority interests.............................................. 7,768 11,387
-------- ----------
Shareholders' equity:
Preferred stock, $.01 par value; 25,000 shares authorized; no
shares outstanding as of March 31, 1997.................... -- --
Common stock, $.01 par value; 75,000 shares authorized; 35,326
shares issued and outstanding as of March 31, 1997......... 352 353
Paid-in capital............................................... 407,784 409,561
Retained earnings............................................. 1,432 11,640
Unearned compensation......................................... (270) (262)
-------- ----------
Total shareholders' equity............................... 409,298 421,292
-------- ----------
Total liabilities and shareholders' equity............... $883,761 $1,006,082
======== ==========

- ---------

(A) The year-end balance sheet information was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles.

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

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4

INTERSTATE HOTELS COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

PRO FORMA (NOTE 2)
-----------------------
THREE MONTHS ENDED
MARCH 31,
-----------------------
1996 1997
-------- --------

Lodging revenues:
Rooms.......................................................... $ 83,690 $ 91,745
Food and beverage.............................................. 28,773 27,981
Other departmental............................................. 7,206 8,127
Management and related fees...................................... 10,129 11,381
-------- --------
129,798 139,234
-------- --------
Lodging expenses:
Rooms.......................................................... 19,243 21,008
Food and beverage.............................................. 21,664 21,902
Other departmental............................................. 3,128 3,482
Property costs................................................. 36,587 37,794
General and administrative....................................... 2,721 2,553
Payroll and related benefits..................................... 4,710 4,741
Lease expense.................................................... 10,492 12,568
Depreciation and amortization.................................... 9,509 9,030
-------- --------
108,054 113,078
-------- --------
Operating income.......................................... 21,744 26,156
Other expense:
Interest, net.................................................. 9,337 8,971
Other, net..................................................... 368 514
-------- --------
Income before income tax expense.......................... 12,039 16,671
Income tax expense............................................... 4,575 6,335
-------- --------
Net income................................................ $ 7,464 $ 10,336
======== ========
Pro forma earnings per common share and common share
equivalent..................................................... $ .21 $ .29
======== ========
Pro forma weighted average number of common shares and common
share equivalents outstanding.................................. 35,686 35,686
======== ========

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

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INTERSTATE HOTELS COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

HISTORICAL
----------------------
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1997
------- --------

Lodging revenues:
Rooms........................................................... $ -- $ 85,217
Food and beverage............................................... -- 25,756
Other departmental.............................................. -- 7,360
Management and related fees....................................... 12,295 11,523
------- --------
12,295 129,856
------- --------
Lodging expenses:
Rooms........................................................... -- 19,136
Food and beverage............................................... -- 20,150
Other departmental.............................................. -- 3,133
Property costs.................................................. -- 34,649
General and administrative........................................ 2,338 2,788
Payroll and related benefits...................................... 4,249 4,741
Lease expense..................................................... -- 12,568
Depreciation and amortization..................................... 1,101 8,388
------- --------
7,688 105,553
------- --------
Operating income........................................... 4,607 24,303
Other (expense) income:
Interest, net................................................... (487) (7,355)
Other, net...................................................... 116 (483)
------- --------
Income before income tax expense........................... 4,236 16,465
Income tax expense................................................ -- 6,257
------- --------
Net income................................................. $ 4,236 $ 10,208
======= ========

Earnings per common share and common share equivalent............. $ -- $ .29
======= ========
Weighted average number of common shares and common share
equivalents outstanding......................................... -- 35,604
======= ========

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

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6

INTERSTATE HOTELS COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)

THREE MONTHS ENDED
MARCH 31,
-----------------------
1996 1997
------- ---------

Cash flows from operating activities:
Net income..................................................... $ 4,236 $ 10,208
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 1,101 8,388
Minority interests' share of equity income from investments
in hotel real estate...................................... 8 662
Deferred income taxes....................................... -- 1,908
Other....................................................... (106) (122)
Cash (used) provided by assets and liabilities:
Accounts receivable, net.................................... (4,998) (20,475)
Prepaid expenses and other assets........................... (120) 2,122
Accounts payable............................................ 1,704 710
Income taxes payable........................................ -- 1,818
Other accrued liabilities................................... 3,120 11,700
------- --------
Net cash provided by operating activities................. 4,945 16,919
------- --------
Cash flows from investing activities:
Change in restricted cash...................................... 160 (12,416)
Acquisition of hotels, net of cash received.................... -- (84,344)
Purchase of property and equipment, net........................ (114) (15,032)
Restricted funds used to purchase property and equipment....... -- 21,598
Investments in hotel real estate............................... -- (6,417)
Change in notes receivable, net................................ (646) (854)
Other.......................................................... (5,679) (3,812)
------- --------
Net cash used in investing activities..................... (6,279) (101,277)
------- --------
Cash flows from financing activities:
Proceeds from long-term debt................................... -- 75,500
Repayment of long-term debt.................................... (212) (6,948)
Financing costs paid, net...................................... (135) (334)
Minority interests, net........................................ -- 2,957
Proceeds from issuance of Common Stock......................... -- 14,286
Proceeds from issuance of Common Stock to Employee Stock
Purchase Plan............................................... -- 1,804
Funds advanced to shareholders................................. (260) --
Dividends and capital distributions paid....................... (20) --
------- --------
Net cash (used in) provided by financing activities....... (627) 87,265
------- --------
Net (decrease) increase in cash and cash equivalents............. (1,961) 2,907
Cash and cash equivalents at beginning of period................. 14,035 32,323
------- --------
Cash and cash equivalents at end of period....................... $12,074 $ 35,230
======= ========
Supplemental disclosure of cash flow information:
Cash paid for interest......................................... $ 859 $ 7,392
Cash paid for income taxes..................................... -- 74
Supplemental disclosure of noncash investing and financing
activities:
Notes payable issued to shareholders........................... $30,000 $ --
Assumption of long-term debt related to a hotel acquisition.... -- 21,776

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

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7

INTERSTATE HOTELS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN THOUSANDS)

1. ORGANIZATION AND BASIS OF PRESENTATION:

Interstate Hotels Company (the "Company") was formed in April 1996 in
anticipation of an initial public offering of the Company's Common Stock in June
1996 (the "IPO"). As of March 31, 1997, the Company owned, managed, leased or
performed related services for 211 hotels with 43,125 rooms. The Company owned
or had a controlling interest in 30 of these hotels (the "Owned Hotels"). In
addition, the Company entered into 55 long-term leases (the "Leased Hotels") in
connection with and since the acquisition of the management and leasing
businesses affiliated with Equity Inns, Inc., a publicly traded real estate
investment trust, in November 1996 (the "Equity Inns Transaction").

The consolidated financial statements of the Company consist of the
historical results of Interstate Hotels Corporation and Affiliates, the
Company's predecessor, and the operations of the Owned Hotels from the
respective dates of their acquisitions. The working capital and operating
results of the Leased Hotels are also included in the Company's consolidated
financial statements because the operating performance associated with such
hotels is guaranteed by the Company. Prior to the IPO, the consolidated
financial statements reflect only the historical activity of the predecessor.

The accompanying consolidated interim financial statements have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC"). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. The consolidated interim financial
statements should be read in conjunction with the financial statements, notes
thereto and other information included in the Company's Annual Report on Form
10-K for the year ended December 31, 1996, as filed with the SEC on March 21,
1997.

The accompanying unaudited consolidated interim financial statements
reflect, in the opinion of management, all adjustments necessary for a fair
presentation, in all material respects, of the financial position and results of
operations for the periods presented. The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions. Such estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. The results of operations for the interim periods
are not necessarily indicative of the results for the entire year.

2. PRO FORMA INFORMATION:

The unaudited pro forma consolidated statements of operations for the
three-month periods ended March 31, 1996 and 1997 are presented to include the
effects of the IPO, the acquisitions of Owned Hotels in connection with and
since the IPO, the Equity Inns Transaction, the Company's second public offering
in December 1996 and certain other adjustments as if all of the transactions had
occurred on January 1, 1996. In management's opinion, all pro forma adjustments
necessary to reflect the effects of these transactions have been made. The pro
forma information does not include earnings on the Company's pro forma cash and
cash equivalents or certain one-time charges to income, and does not purport to
present what the actual results of operations of the Company would have been if
the previously mentioned transactions had occurred on such dates or to project
the results of operations of the Company for any future period.

3. EARNINGS PER SHARE:

Prior to the consummation of the IPO, the predecessor of the Company was
organized as S corporations, partnerships and limited liability companies.
Accordingly, the Company believes that the earnings per share calculations
required to be presented are not meaningful for periods prior to the IPO and,
therefore, have not been provided. As such, earnings per share for the
three-month period ended March 31, 1997 and the pro

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(UNAUDITED, DOLLARS IN THOUSANDS)

3. EARNINGS PER SHARE, CONTINUED

forma earnings per share for the three-month periods ended March 31, 1996 and
1997 are a more meaningful measure of the Company's results of operations.

4. SUBSEQUENT EVENTS:

The Company acquired one hotel in April 1997 for a purchase price of
approximately $40,500. This acquisition has not been included in the pro forma
financial results of the Company.

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9

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

PRO FORMA THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO PRO FORMA THREE MONTHS
ENDED MARCH 31, 1996

Pro forma total revenues increased by $9.4 million, or 7.3%, from $129.8
million in the three months ended March 31, 1996 (the "1996 Three Months") to
$139.2 million in the three months ended March 31, 1997 (the "1997 Three
Months"). The most significant portion of this increase related to lodging
revenues, which consists of rooms, food and beverage and other departmental
revenues. Pro forma lodging revenues increased by $8.1 million, or 6.8%, from
$119.7 million in the 1996 Three Months to $127.8 million in the 1997 Three
Months. This increase was due to the overall improvement in the operating
performance of the Owned Hotels, which was attributed to changes in franchise
affiliations and market repositioning for certain of the Owned Hotels, and an
overall improvement in economic conditions in certain geographic regions. The
increase in lodging revenues was consistent with the increase in the Owned and
Leased Hotels' room revenues of $8.0 million, or 9.6%, to $91.7 million in the
1997 Three Months. The pro forma average daily room rate ("ADR") for the Owned
Hotels increased by 9.3%, from $105.52 during the 1996 Three Months to $115.34
during the 1997 Three Months, and the pro forma average occupancy rate remained
steady at 71.1%. This resulted in a 9.3% increase in pro forma room revenue per
available room ("REVPAR") to $82.04 during the 1997 Three Months. The Chicago,
Denver, Philadelphia and San Jose markets had a significant positive impact on
average rate and REVPAR growth. Pro forma management and related fees increased
by $1.3 million, or 12.4%, from $10.1 million in the 1996 Three Months to $11.4
million in the 1997 Three Months primarily due to the performance improvement of
the Company's portfolio of managed hotels and incremental revenues associated
with the net addition of new hotels, many of which provide for incentive
management fees and utilize the Company's other contractual services.

Pro forma lodging expenses, which consists of rooms, food and beverage,
property costs and other departmental expenses, increased by $3.6 million, or
4.4%, from $80.6 million in the 1996 Three Months to $84.2 million in the 1997
Three Months. The pro forma operating margin of the Owned and Leased Hotels
increased from 32.6% during the 1996 Three Months to 34.2% during the 1997 Three
Months. This increase was attributed to the increase in pro forma revenues and
the overall improvement in operating performance and operating efficiencies of
the Owned and Leased Hotels.

General and administrative expenses are associated with the management of
hotels and consist primarily of centralized management expenses such as
operations management, sales and marketing, finance and other hotel support
services, as well as general corporate expenses. Pro forma general and
administrative expenses in the three-month periods in 1996 and 1997 remained
relatively consistent due to the nonvariable nature of these expenses. Pro forma
general and administrative expenses as a percentage of pro forma revenues
decreased to 1.8% during the 1997 Three Months compared to 2.1% during the 1996
Three Months as a result of operating leverage.

Pro forma payroll and related benefits expenses remained consistent in the
three-month periods in 1996 and 1997. Pro forma payroll and related benefits
expenses as a percentage of pro forma revenues decreased to 3.4% during the 1997
Three Months compared to 3.6% during the 1996 Three Months.

Lease expense represents base rent and participating rent that is based on
a percentage of room and food and beverage revenues from the Leased Hotels. Pro
forma lease expense increased by $2.1 million, or 19.8%, from $10.5 million in
the 1996 Three Months to $12.6 million in the 1997 Three Months. This increase
was due to higher Leased Hotels' room revenues. The pro forma ADR for the Leased
Hotels increased by 6.7%, from $62.18 during the 1996 Three Months to $66.35
during the 1997 Three Months, and the pro forma average occupancy rate increased
from 66.0% to 67.2%, respectively. This resulted in an 8.6% increase in pro
forma REVPAR to $44.57 during the 1997 Three Months.

Pro forma depreciation and amortization decreased by $0.5 million, or 5.0%,
from $9.5 million in the 1996 Three Months to $9.0 million in the 1997 Three
Months. This decrease was primarily due to certain investments in management
contracts becoming fully amortized in 1996.

Pro forma operating income increased by $4.5 million, or 20.3%, from $21.7
million in the 1996 Three Months to $26.2 million in the 1997 Three Months.
Accordingly, the pro forma operating margin increased

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10

from 16.8% during the 1996 Three Months to 18.8% during the 1997 Three Months.
As discussed above, the improvement in the pro forma operating margin was
attributed to the increase in pro forma revenues and the overall decrease in pro
forma operating expenses as a percentage of pro forma revenues.

Pro forma net interest expense decreased by $0.3 million, or 3.9%, from
$9.3 million in the 1996 Three Months to $9.0 million in the 1997 Three Months.
This decrease was due to lower outstanding debt balances resulting primarily
from escalating scheduled principal payments.

Pro forma income tax expense in the three-month periods in 1996 and 1997
was computed as if the Company were subject to federal and state income taxes,
based on an effective tax rate of 38%.

As a result of the changes noted above, pro forma net income increased by
$2.8 million, or 38.5%, from $7.5 million in the 1996 Three Months to $10.3
million in the 1997 Three Months. Accordingly, the pro forma net income margin
increased from 5.8% during the 1996 Three Months to 7.4% during the 1997 Three
Months.

HISTORICAL THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO HISTORICAL THREE MONTHS
ENDED MARCH 31, 1996

Total revenues increased by $117.6 million, or 956.2%, from $12.3 million
in the 1996 Three Months to $129.9 million in the 1997 Three Months. This
increase related to lodging revenues, which increased by $118.3 million due to
the operations of the Owned Hotels since their respective acquisition dates and
the Leased Hotels. The ADR for the Owned Hotels was $113.44 during the 1997
Three Months and the average occupancy rate was 70.3%. This resulted in REVPAR
of $79.80. Management and related fees decreased slightly by $0.8 million, or
6.7%, from $12.3 million in the 1996 Three Months to $11.5 million in the 1997
Three Months primarily due to the Company's acquisitions of previously managed
hotels which resulted in the elimination of third-party management and related
fees.

The Company had lodging expenses of $77.1 million in the 1997 Three Months
due to the operations of the Owned Hotels since their respective acquisition
dates and the Leased Hotels. The operating margin of the Owned and Leased Hotels
was 34.9% during the 1997 Three Months.

General and administrative expenses increased slightly by $0.5 million, or
19.2%, from $2.3 million in the 1996 Three Months to $2.8 million in the 1997
Three Months. This increase was primarily due to incremental expenses associated
with the growth of the Company's hotel management business and the acquisitions
of the Owned Hotels, as well as additional costs associated with managing and
administering a publicly held company. General and administrative expenses as a
percentage of revenues decreased to 2.1% during the 1997 Three Months compared
to 19.0% during the 1996 Three Months as a result of the operations of the Owned
Hotels since their respective acquisition dates and the Leased Hotels.

Payroll and related benefits expenses increased slightly by $0.5 million,
or 11.6%, from $4.2 million in the 1996 Three Months to $4.7 million in the 1997
Three Months. This increase was related to the addition of corporate management
and staff personnel as the Company's portfolio of hotels for which it provides
management and other services grew. Payroll and related benefits expenses as a
percentage of revenues decreased to 3.7% during the 1997 Three Months compared
to 34.6% during the 1996 Three Months as a result of the operations of the Owned
Hotels since their respective acquisition dates and the Leased Hotels.

The Company had lease expense of $12.6 million in the 1997 Three Months due
to the addition of the Leased Hotels. The ADR for the Leased Hotels was $66.35
during the 1997 Three Months and the average occupancy rate was 67.2%. This
resulted in REVPAR of $44.57.

Depreciation and amortization increased by $7.3 million, or 661.9%, from
$1.1 million in the 1996 Three Months to $8.4 million in the 1997 Three Months
due to incremental depreciation related to the acquisitions of the Owned Hotels,
the amortization of deferred financing fees and the amortization of goodwill and
the cost of lease contracts associated with the Equity Inns Transaction.

Operating income increased by $19.7 million, or 427.5%, from $4.6 million
in the 1996 Three Months to $24.3 million in the 1997 Three Months. The
operating margin decreased from 37.5% during the 1996 Three Months to 18.7%
during the 1997 Three Months. This decrease in the operating margin reflects the
inclusion

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of the operating results of the Owned Hotels, which were not reflected in the
Company's results prior to their respective acquisition dates, and the Leased
Hotels.

Net interest expense increased by $6.9 million to $7.4 million in the 1997
Three Months primarily due to additional borrowings related to the acquisitions
of the Owned Hotels.

Other expense of $0.5 million in the 1997 Three Months consisted primarily
of minority interests.

Income tax expense in the 1997 Three Months was computed based on an
effective tax rate of 38%. In the 1996 Three Months, the Company's predecessor
was organized as S corporations, partnerships and limited liability companies
and, accordingly, was not subject to federal and certain state income taxes.

As a result of the changes noted above, net income increased by $6.0
million, or 141.0%, from $4.2 million in the 1996 Three Months to $10.2 million
in the 1997 Three Months. The net income margin decreased from 34.5% during the
1996 Three Months to 7.9% during the 1997 Three Months. This decrease in the net
income margin reflects the inclusion of the operating results of the Owned
Hotels, which were not reflected in the Company's results prior to their
respective acquisition dates, and the Leased Hotels, as well as income tax
expense.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal sources of liquidity during the 1997 Three Months
were cash from operations, proceeds from the issuance of Common Stock and
borrowings under its credit facility. Net cash provided by operations was $16.9
million in the 1997 Three Months. The Company used cash of $101.3 million in
investing activities which principally related to the acquisitions of Owned
Hotels in the amount of $84.3 million, net of cash received. Net cash provided
by financing activities in the amount of $87.3 million was primarily used to
finance these acquisitions. The principal sources of this cash were $16.1
million from the issuance of Common Stock, primarily pursuant to the exercise of
the underwriters' over-allotment option relating to the Company's December 1996
public offering, and $75.5 million from proceeds from long-term debt, offset by
long-term debt repayments of $6.9 million. The Company's cash and cash
equivalent assets were $35.2 million at March 31, 1997.

At March 31, 1997, the Company's total indebtedness was $498.1 million,
comprised of $290.6 million of term loans, $93.8 million of borrowings under its
revolving credit facility, $29.3 million of mortgage indebtedness encumbering
six Owned Hotels in which the Company owns a 75% controlling interest, $83.6
million of loans related to the acquisitions of four Owned Hotels, and $0.8
million of other debt. The Company's available funds under its revolving credit
facility totaled $106.2 million at March 31, 1997. In addition, at that date,
the credit facility permitted $183.1 million of third-party nonrecourse and
subordinated indebtedness to fund acquisitions. The Company utilizes various
interest rate hedge contracts to limit its interest rate exposures on
indebtedness. Future changes in interest rates applicable to outstanding
borrowings are therefore not expected to have a material impact on the Company's
results of operations.

Management of the Company believes that, with respect to its current
operations, the Company's cash on hand and funds from operations will be
sufficient to cover its reasonably foreseeable working capital, ongoing capital
expenditure and debt service requirements. In the 1997 Three Months, the Company
spent $15.0 million on capital expenditures. The Company's capital expenditure
budget relating to existing operations for 1997 is $45.2 million.

The Company intends to pursue a growth-oriented strategy involving, among
other things, the acquisition of interests in additional hotel properties and
hotel management companies and selective development projects, as well as the
acquisition of additional management contracts (which may from time to time
require capital expenditures by the Company). Management believes that the
available funds remaining under the Company's revolving credit facility,
permitted third-party nonrecourse and subordinated indebtedness and cash
provided by operations will be sufficient to pursue the Company's acquisition
strategy and to fund its other presently foreseeable capital requirements.
However, the Company believes that, absent a presently unforeseen change,
additional acquisition opportunities will continue to exist for the foreseeable
future, and depending upon conditions in the capital and other financial markets
as well as other factors, the Company

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may increase its borrowing capacity and consider the issuance of debt or other
securities, the proceeds of which could be used to finance acquisitions, to
refinance debt or for other general corporate purposes.

SEASONALITY

The lodging industry is affected by seasonal patterns. At most of the
Company's hotels, demand is higher in the second and third quarters than during
the remainder of the year.

INFLATION

The effects of inflation, as measured by fluctuations in the consumer price
index, have not had a material impact on the Company's revenues or net income in
recent years.

NEW ACCOUNTING PRONOUNCEMENT

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128 "Earnings Per Share." The new standard,
which is effective for the fiscal year ended December 31, 1997, revises the
disclosure requirements and simplifies the computations of earnings per share.
Management believes that the impact of this standard will not be material.

FORWARD-LOOKING STATEMENTS

This Report contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of the Company's
management, as well as assumptions made by and information currently available
to the Company's management. When used herein, words such as "anticipate,"
"believe," "estimate," "expect," "intend" and similar expressions, as they
relate to the Company or the Company's management, identify forward-looking
statements. Such statements reflect the current views of the Company with
respect to future events and are subject to certain risks, uncertainties and
assumptions, relating to the operations and results of operations of the
Company, the Company's rapid expansion, the ownership and leasing of real
estate, competition from other hospitality companies and changes in economic
cycles, as well as the other factors described herein. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results or outcomes may vary materially from those described
herein as anticipated, estimated, expected or intended.

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PART II--OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(A) Exhibits.

EXHIBIT NO. DESCRIPTION
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27.1 Financial Data Schedule

(B) Reports on Form 8-K.

1. January 13, 1997--Report of the announcement that the Company acquired
substantially all of the equity interests in two full-service luxury
resorts located in Key West, Florida: the 311-room Marriott's Casa
Marina Resort and the 149-room Marriott's Reach Resort for a total,
including estimated capital expenditures for anticipated renovations and
closing costs, of $94.3 million.

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SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Pittsburgh, in the
Commonwealth of Pennsylvania, on May 14, 1997.

INTERSTATE HOTELS COMPANY

By: /s/ J. WILLIAM RICHARDSON
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J. William Richardson
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)