Three Months Ended           Six Months Ended
                                  June 30,                   June 30,
                             2004        2003           2004          2003
    Revenues:
    Rooms                  $86,247      $77,580      $171,393      $156,567
    Food and beverage       43,380       40,592        85,117        81,047
    Other hotel operating
     revenue                13,527       13,749        27,196        27,461
                           143,154      131,921       283,706       265,075
    Lease revenue            8,649        7,480        15,228        16,263

        Total revenues     151,803      139,401       298,934       281,338

    Operating Costs and
     Expenses:
    Rooms                   22,112       19,543        43,608        39,276
    Food and beverage       33,125       30,710        65,645        62,008
    Other departmental
     expenses               39,127       35,998        77,497        71,681
    Management fees          5,168        5,070        10,288         9,697
    Other property level
     expenses                8,897        9,460        18,157        18,736
    Depreciation and
     amortization           19,906       20,072        40,057        42,456
    Corporate expenses      13,671        6,210        20,194        11,517

        Total operating
         costs and
         expenses          142,006      127,063       275,446       255,371

           Operating
            income           9,797       12,338        23,488        25,967

    Interest expense        25,588       24,584        50,843        54,301
    Interest income           (445)        (477)         (969)       (1,628)
    Loss on early
     extinguishment
     of debt                24,134            -        21,946        11,551
    Other expenses, net      3,238        2,843         2,043         3,310

    Loss before income
     taxes, minority
     interests and
     discontinued
     operations            (42,718)     (14,612)      (50,375)      (41,567)
    Income tax expense         109            -           355           749
    Minority interests      (1,014)         270          (928)        2,679

    Loss from continuing operations (41,813)     (14,882)      (49,802)      (44,995)
    Income from
     discontinued
     operations                  -        9,144        75,662        24,909

    Net (Loss) Income      (41,813)      (5,738)       25,860       (20,086)

    Basic (Loss) Income
     Per Share:
    Loss from continuing operations per share   $(2.17)    $(0.78)     $(2.59)     $(3.02)
    Income from discontinued
     operations per share        -         0.48          3.94          1.67
    Net (loss) income per share                  $(2.17)      $(0.30)        $1.35        $(1.35)
    Weighted-average common
     shares outstanding     19,273       19,008        19,192        14,920
    Diluted (Loss) Income
     Per Share:
    Loss from continuing operations per share  $(2.19)    $(0.78)     $(2.63)       $(3.02)
    Income from discontinued
     operations per share        -         0.48          3.92          1.67
    Net (loss) income per share                  $(2.19)      $(0.30)        $1.29        $(1.35)
    Weighted-average common
     shares outstanding     19,501       19,008        19,306        14,920
 

                Strategic Hotel Capital, Inc. and Subsidiaries
               Unaudited Condensed Consolidated Balance Sheets
                                (In Thousands)
                                                    June 30,   December 31,
                                                      2004          2003
    Assets
    Property and equipment                          $844,709     $1,881,840
    Less accumulated depreciation                   (200,111)      (472,645)

              Net property and equipment             644,598      1,409,195

    Goodwill                                          55,224        259,150
    Assets of discontinued operations                      -         80,519
    Investment in hotel joint ventures                10,473         23,392
    Cash and cash equivalents                         58,765        107,437
    Restricted cash and cash equivalents              21,105         85,697
    Accounts receivable (net of allowance for
     doubtful accounts of $348 and $772)             221,235         31,030
    Deferred costs (net of accumulated
     amortization of $0 and $8,609)                   11,639         29,247
    Other assets                                      67,250         53,854

         Total assets                               $890,289     $2,079,521

    Liabilities and Owners' Equity Liabilities:
      Accounts payable and accrued expenses          $52,473       $124,422
      Bank credit facility                            31,500              -
      Mortgages and other debt payable               415,418      1,505,984
      Convertible debt                                     -        122,030
      Liabilities of discontinued operations               -         68,153
      Deferred fees on management contracts            2,421         12,256
      Deferred gain on sale of hotels                109,209              -

         Total liabilities                           611,021      1,832,845

    Minority interests                                79,591        107,608
    Owners' equity:
      Members' capital                                    -         875,767
      Distributions to members                      (227,829)      (439,377)
      Common shares ($0.01 par value; 150,000,000
       common shares authorized; 26,254,034 common
       shares issued and outstanding)                    263              -
      Additional paid-in capital                     686,065              -
      Deferred compensation                           (2,921)             -
      Accumulated deficit                           (259,346)      (285,206)
      Accumulated other comprehensive income (loss)    3,445        (12,116)

         Total owners' equity                        199,677        139,068

         Total liabilities and owners' equity       $890,289     $2,079,521
 

                Strategic Hotel Capital, Inc. and Subsidiaries
Reconciliation of Net Income (Loss) to Funds From Operations (FFO) and EBITDA
                                 (Unaudited)
    We present two non-GAAP financial measures herein that we believe are useful to investors as key measures of our operating performance: Funds From Operations, or FFO; and Earnings Before Interest Expense, Taxes, Depreciation and Amortization, or EBITDA.
    We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, or NAREIT, which adopted a definition of FFO in order to promote an industry-wide standard measure of REIT operating performance that would not have certain drawbacks associated with net income under generally accepted accounting principals (GAAP). NAREIT defines FFO as net income (or loss) (computed in accordance with GAAP) excluding gains (or losses) from sales of property plus real estate-related depreciation and amortization, and after adjustments for our portion of these items related to unconsolidated partnerships and joint ventures. We also present herein diluted FFO, which is FFO less convertible debt interest expense and minority interest expense on convertible minority interests. We believe that the presentation of FFO and diluted FFO provides useful information to investors regarding our results of operations because they are measures of our ability to service debt, fund capital expenditures and expand our business. In addition, FFO is widely used in the real estate industry to measure operating performance without regard to items such as depreciation and amortization. EBITDA represents net income (losses) excluding: (i) interest expense, (ii) income tax expense, including deferred income tax benefits and expenses applicable to our foreign subsidiaries and income taxes applicable to sale of assets; and (iii) depreciation and amortization. EBITDA also excludes interest expense, income tax expense and depreciation and amortization of our equity method investments. We believe EBITDA is useful to an investor in evaluating our operating performance because it provides investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe it helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our asset base (primarily depreciation and amortization) from our operating results. Our management also uses EBITDA as one measure in determining the value of acquisitions and dispositions.
    We caution investors that amounts presented in accordance with our definitions of FFO, diluted FFO and EBITDA may not be comparable to similar measures disclosed by other companies, since not all companies calculate these non-GAAP measures in the same manner. FFO, diluted FFO and EBITDA should not be considered as alternative measures of our net loss or operating performance. FFO, diluted FFO and EBITDA may include funds that may not be available for our discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions and other commitments and uncertainties. Although we believe that FFO, diluted FFO and EBITDA can enhance your understanding of our financial condition and results of operations, these non-GAAP financial measures, when viewed individually, are not necessarily a better indicator of any trend as compared to comparable GAAP measures such as net loss. In addition, you should be aware that adverse economic and market conditions may negatively impact our cash flow. Below, we include a quantitative reconciliation of FFO, diluted FFO and EBITDA to the most directly comparable GAAP financial performance measure, which is net income (loss), and provide an explanatory description by footnote of the items excluded from FFO, diluted FFO and EBITDA.

                             Three months ended           Six months ended
                                  June 30,                    June 30,
                             2004          2003          2004         2003
                                             (In thousands)

    Net (loss) income     $(41,813)      $(5,738)      $25,860     $(20,086)
    Depreciation and
     amortization-
     continuing
     operations             19,906        20,072        40,057       42,456
    Depreciation and
     amortization-
     discontinued
     operations                  -         1,248             -        3,252
    Gain on sale of
     assets-discontinued
     operations                  -        (5,894)      (75,982)     (20,973)
    Minority interests         (10)         (115)         (124)        (250)
    Joint venture adjustments  828           928         1,799        1,733

    FFO-basic              (21,089)       10,501        (8,390)       6,132
      Convertible debt
       interest expense      2,052         2,188         4,105       10,708
      Convertible minority
       interests            (1,004)          385          (804)       2,929

    FFO-diluted           $(20,041)      $13,074       $(5,089)     $19,769

    Net (loss) income     $(41,813)      $(5,738)      $25,860     $(20,086)
    Depreciation and
     amortization-
     continuing
     operations             19,906        20,072        40,057       42,456
    Depreciation and
     amortization-
     discontinued
     operations                  -         1,248             -        3,252
    Interest expense-
     continuing
     operations             25,588        24,584        50,843       54,301
    Interest expense-
     discontinued
     operations                  -         1,451           577        3,485
    Income taxes               495           860           841        1,626
    Minority interest adjustments               (18)         (263)         (278)        (526)
    Joint venture
     adjustments             1,870         2,692         4,698        3,841

    EBITDA                  $6,028       $44,906      $122,598      $88,349
 
 

                Strategic Hotel Capital, Inc. and Subsidiaries
  Reconciliation of Net Loss to EBITDA for 3rd and 4th Quarter 2004 Forecast

                                                  Three Months    Three Months
                                                     Ended           Ended
                                                 September 30,   September 30,
                                                      2004            2004
                                                 (in millions)   (in millions)
                                                  Low-End of      High-End of
                                                     Range            Range

    Net (loss) income                                (3.5)            (2.7)
    Depreciation and amortization                    10.9             10.9
    Deferred Recognition of Gain on Sale of Asset    (1.2)            (1.2)
    Interest Expense                                  6.1              6.1
    Income Taxes                                      0.9              0.9
    Minority Interest adjustment                     (1.1)            (0.9)
    Joint Venture Adjustments                         1.4              1.4

    EBITDA                                           13.5             14.5
 

                                                  Three Months    Three Months
                                                     Ended           Ended
                                                  December 31,    December 31,
                                                      2004            2004
                                                 (in millions)   (in millions)
                                                  Low-End of      High-End of
                                                     Range            Range

    Net (loss) income                                (1.6)            (0.8)
    Depreciation and amortization                    12.1             12.1
    Deferred Recognition of Gain on Sale of Asset    (1.2)            (1.2)
    Interest Expense                                  7.2              7.2
    Income Taxes                                      1.3              1.3
    Minority Interest adjustment                     (0.5)            (0.2)
    Joint Venture Adjustments                         1.5              1.5

    EBITDA                                           18.9             19.9
 

                Strategic Hotel Capital, Inc. and Subsidiaries
          Discussion of REIT Hotel Results and Operating Statistics
                                 (Unaudited)
    The Company's Consolidated Statements of Operations for the second quarter and year to date 2004 include:
   1)  for the entire period, the results of the 14 hotels currently owned and leased by the Company, referred to as the REIT Hotels, and
   2)  through June 29th, the date of the IPO, the results of 7 other hotels which were distributed out of the Company and in which the Company no longer has an ownership interest.

    The results of operations of the distributed assets are not reflected as discontinued operations because we are deemed to have continuing involvement as a result of our agreement to asset manage those assets. As a result of this accounting presentation, we also present for REIT hotels operating results (revenues, expenses, and adjusted operating profit) and selected operating statistics (RevPAR, average daily rate, average occupancy and operating margins).
    We present these hotel operating results on a REIT hotel basis because we believe that doing so provides investors and management with useful information for evaluating the period-to-period performance of our hotels and facilitates comparisons with other hotel REITs and hotel owners. In particular, these measures assist management and investors in distinguishing whether increases or decreases in revenues and/or expenses are due to operations at the REIT hotels or from the distributed assets. While management believes that presentation of REIT hotel results is a supplemental measure that provides useful information in evaluating the ongoing performance of the Company, this measure is not used to allocate resources or to assess the operating performance of each of these hotels, as these decisions are based on data for individual hotels and are not based on REIT hotel results. For these reasons, we believe that REIT hotel operating results, when combined with the presentation of GAAP operating profit, revenues and expenses, provide useful information to investors and management.
    As a result of the elimination of the non-REIT hotel net loss, the REIT hotel operating results we present do not represent our total revenues, expenses or operating profit and should not be used to evaluate our performance as a whole. Our consolidated statements of operations include such amounts, all of which should be considered by investors when evaluating our performance.
                Strategic Hotel Capital, Inc. and Subsidiaries
                           Schedule of REIT Hotels
    REIT Hotel                            Location          Number of Rooms
    North American:
    Four Seasons Punta Mita Resort        Punta Mita, Mexico            140
    Four Seasons Mexico City              Mexico City, Mexico           240
    Hyatt Regency La Jolla at Aventine    La Jolla, CA                  419
    Hyatt Regency Phoenix                 Phoenix, AZ                   712
    Hyatt Regency New Orleans             New Orleans, LA             1,184
    Loews Santa Monica Beach Hotel        Santa Monica, CA              342
    Hilton Burbank Airport and
     Convention                           Center Burbank, CA            488
    Embassy Suites Lake Buena Vista
     Resort                               Lake Buena Vista, FL          333
    Marriott Rancho Las Palmas Resort     Rancho Mirage, CA             444
    Marriott Lincolnshire Resort          Lincolnshire, IL              390
    Marriott Chicago Schaumburg           Schaumburg, IL                398

         Total Number of North
           American Rooms                                             5,090
    European:
    Paris Marriott Champs-Elysees (1)     Paris, France                 192
    Marriott Hamburg (2)                  Hamburg, Germany              277
    Inter.Continental Prague (3)          Prague, Czech Republic        372

         Total Number of European Rooms                                 841

            Total Number of Rooms                                     5,931
 

    (1)  On June 29, 2004, we eliminated the collateralized guarantee related to the Paris Marriott Champs Elysees and no longer have continuing involvement as defined by GAAP. Accordingly, a sale of the Paris Marriott Champs Elysees was recorded and the leaseback has now been recorded as an operating lease as of June 29, 2004. SHCI eliminated the finance obligation on the consolidated balance sheet and now records rent expense instead of mortgage interest and depreciation expense.
   (2)  On March 1, 2004 we acquired the 65% interest we did not previously own in the joint venture that leases the Marriott Hamburg. On June 29, 2004, we eliminated the collateralized guarantee related to the property and no longer have continuing involvement as defined by GAAP. Accordingly, a sale of the Hamburg Marriott was recorded and the leaseback has now been recorded as an operating lease as of June 29, 2004. SHCI eliminated the finance obligation on the consolidated balance sheet and now records rent expense instead of mortgage interest and depreciation expense.
   (3)  We have a 35% interest in the joint venture that owns the Inter.Continental Prague and account for our investment under the equity method of accounting. Our equity in earnings (loss) of the hotel joint venture is included in other expenses, net in our consolidated statements of operations.
 

Strategic Hotel Capital, Inc. and Subsidiaries
                          REIT Hotel Operating Data
                                 (Unaudited)
                             Three months ended         Six months ended
                                  June 30,                  June 30,
                              2004         2003         2004         2003
                                         (Dollars in thousands)

    REIT hotel revenues:
      Room                 $44,197      $42,236      $93,323      $88,794
      Food and beverage     23,988       22,878       49,271       48,201
      Other hotel operating
       revenue               9,010        9,220       18,502       18,731
                            77,195       74,334      161,096      155,726
      Lease revenue (1)      6,012        5,700       11,693       12,598

        REIT hotel
         revenues           83,207       80,034      172,789      168,324
    REIT hotel expenses:
      Room                   9,780        9,144       19,695       18,292
      Food and beverage     17,573       16,635       35,780       34,696
      Other departmental
       expenses             23,013       21,822       46,206       43,823
      Management fees        3,588        3,694        7,367        7,118
      Other property level
       expenses              4,086        4,316        8,388        8,361
         REIT hotel
          expenses          58,040       55,611      117,436      112,290
    REIT Hotel Adjusted
     Operating Income       25,167       24,423       55,353       56,034
      Interest expense, net 14,125       12,740       27,648       30,640
      Loss on early
       extinguishment
       of debt              11,481            -        9,292        5,584
      Other expenses,
       net (2)               3,242        2,843        2,047        3,311

    (Loss) income before
     income taxes and
     minority interests     (3,681)       8,840       16,366       16,499
       Income tax expense      108            -          355          749
       Minority interests   (1,014)         270         (928)       2,679

    REIT Hotel Net (Loss)
     Income                 (2,775)       8,570       16,939       13,071
    REIT depreciation and
     amortization          (10,332)      (9,562)     (20,373)     (19,589)
    Corporate expenses     (13,672)      (6,210)     (20,194)     (11,517)
    Non-REIT hotel results, net                   (15,034)      (7,680)     (26,174)     (26,960)
    Income from
     discontinued
     operations                  -        9,144       75,662       24,909
    Net (Loss) Income     $(41,813)     $(5,738)     $25,860     $(20,086)

   (1)  Until March 1, 2004, the Hamburg Marriott was accounted for under the equity method. After March 1, 2004 when we acquired our joint venture partner's 65% leasehold interest in the property, lease revenues for the Hamburg Marriott are included. Lease revenue for the three and six months ended June 30, 2004 and 2003 includes revenues from the Hyatt Regency New Orleans. On June 29, 2004, we converted the Hyatt Regency New Orleans lease to a management agreement and recorded a sale and leaseback related to the Paris Marriott Champs Elysees.  Subsequent to June 29, 2004, we only earn lease revenue from the Hamburg Marriott and the Paris Marriott Champs Elysees. Prior to June 29, 2004, the Paris Marriott Champs Elysees was accounted for as a finance obligation and we consolidated its results because of a continuing involvement in supporting the financing of the property through a collateralized guarantee.
    (2)  Other expenses, net includes our equity in earnings or losses of our investments in the Prague hotel joint venture for the three and six months ended June 30, 2004 and 2003. Earnings or losses from our investment in the Hamburg Marriott hotel joint venture are included in the three and six months ended June 30, 2003 and are included in the six months ended June 30, 2004 until the acquisition of our joint venture partner's interest in the property on March 1, 2004.
 

Strategic Hotel Capital, Inc. and Subsidiaries
                   Selected REIT Hotel Operating Statistics
    North American Hotels (as of June 30, 2004)
    11 Properties
    5,090 Rooms

                       Three months ended June 30,  Six months ended June 30,
                          2004      2003    Change    2004     2003    Change

    Average Daily Rate $153.53   $152.80    0.5%    $163.26  $163.24     -
    Average Occupancy     70.7%     66.7%   4.0pts     70.6%    68.7%  1.9pts
    RevPAR             $108.62   $101.90    6.6%    $115.28  $112.11   2.8%
    Operating Profit
     Margin               34.9%     36.0%  (1.1)pts    37.3%    38.6% (1.3)pts

    European Hotels (as of June 30, 2004)
    3 Properties
    841 Rooms

                       Three months ended June 30,  Six months ended June 30,
                          2004      2003    Change    2004     2003    Change

    Average Daily Rate $231.58   $226.72    2.1%    $216.83  $209.78   3.4%
    Average Occupancy     86.8%     81.3%   5.5pts     78.0%    72.3%  5.7pts
    RevPAR             $200.99   $184.43    9.0%    $169.13  $151.73  11.5%
    Operating Profit
     Margin               50.6%     54.2%  (3.6)pts    46.2%    48.0% (1.8)pts