Morgans Hotel Group - Investor Relations

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2008


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-33738

MORGANS HOTEL GROUP CO.

(Exact name of registrant as specified in its charter)


Delaware		16-1736884
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification no.)

475 Tenth Avenue
New York, New York		10018
(Address of principal executive offices)		(Zip Code)

212-277-4100
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of August 8, 2008 was 31,080,047.

FORWARD LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for “forward-looking statements” made by or on behalf of a company. We may from time to time make written or oral statements that are “forward-looking,” including statements contained in this report and other filings with the Securities and Exchange Commission and in reports to our stockholders. These forward-looking statements reflect our current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ materially from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Important risks and factors that could cause our actual results to differ materially from any forward-looking statements include, but are not limited to, the risks discussed in the Company’s Annual Report on Form 10-K under the section titled “Risk Factors” and in this Quarterly Report on Form 10-Q under the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; downturns in economic and market conditions, particularly levels of spending in the business, travel and leisure industries; hostilities, including future terrorist attacks, or fear of hostilities that affect travel; risks related to natural disasters, such as earthquakes and hurricanes; risks associated with the acquisition, development and integration of properties; the seasonal nature of the hospitality business; changes in the tastes of our customers; increases in real property tax rates; increases in interest rates and operating costs; the impact of any material litigation; the loss of key members of our senior management; general volatility of the capital markets and our ability to access the capital markets; and changes in the competitive environment in our industry and the markets where we invest.

We are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Morgans Hotel Group Co.

Consolidated Balance Sheets

(in thousands, except share data)


	June 30,			December 31,
	2008			2007
	(unaudited)
Assets
Property and equipment, net	$	557,069		$	535,609
Goodwill		73,698			73,698
Investments in and advances to unconsolidated joint ventures		116,738			110,208
Cash and cash equivalents		72,919			122,712
Restricted cash		23,166			28,604
Accounts receivable, net		10,557			10,333
Related party receivables		4,500			3,422
Prepaid expenses and other assets		11,235			11,369
Deferred income taxes		32,892			27,636
Other, net		18,499			19,532

Total assets	$	921,273		$	943,123

Liabilities and Stockholders’ Equity
Long-term debt and capital lease obligations	$	729,766		$	729,199
Accounts payable and accrued liabilities		32,047			36,126
Other liabilities		27,899			27,979

Total liabilities		789,712			793,304
Minority interest		19,137			19,833
Commitments and contingencies
Common stock, $.01 par value; 200,000,000 shares authorized; 36,277,495 shares issued at June 30, 2008 and December 31, 2007, respectively		363			363
Treasury stock, at cost, 4,107,548 and 3,057,581 shares of common stock at June 30, 2008 and December 31, 2007, respectively		(72,979	)		(54,361	)
Additional paid-in capital		224,089			216,494
Comprehensive income		(6,600	)		(7,771	)
Accumulated deficit		(32,449	)		(24,739	)

Stockholders’ equity		112,424			129,986

Total liabilities and stockholders’ equity	$	921,273		$	943,123

See accompanying notes to consolidated financial statements.

Morgans Hotel Group Co.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(in thousands, except share data)

(unaudited)


	Three Months			Three Months		Six Months			Six Months
	Ended			Ended		Ended			Ended
	June 30, 2008			June 30, 2007		June 30, 2008			June 30, 2007
Revenues
Rooms	$	46,867		$	47,266	$	93,021		$	92,528
Food and beverage		26,554			26,793		53,123			52,350
Other hotel		3,350			3,597		6,823			7,243

Total hotel revenues		76,771			77,656		152,967			152,121
Management fee-related parties		4,552			5,014		9,088			8,971

Total revenues		81,323			82,670		162,055			161,092
Operating Costs and Expenses
Rooms		11,896			12,355		25,065			24,983
Food and beverage		18,355			17,250		37,722			34,792
Other departmental		1,924			1,943		4,009			3,970
Hotel selling, general and administrative		14,599			14,746		30,372			30,103
Property taxes, insurance and other		3,729			4,259		7,782			9,956

Total hotel operating expenses		50,503			50,553		104,950			103,804
Corporate expense		12,310			9,559		22,647			18,614
Depreciation and amortization		6,018			4,877		12,109			9,684

Total operating costs and expenses		68,831			64,989		139,706			132,102
Operating income		12,492			17,681		22,349			28,990
Interest expense, net		10,327			11,215		20,831			21,814
Equity in loss of unconsolidated joint ventures		865			2,282		8,910			6,936
Minority interest in consolidated joint ventures		1,208			1,020		2,599			2,122
Other non-operating expenses (income)		1,406			1,607		2,468			(4,117	)

(Loss) income before income tax expense and minority interest		(1,314	)		1,557		(12,459	)		2,235
Income tax expense (benefit)		(572	)		689		(4,512	)		917

(Loss) income before minority interest		(742	)		868		(7,947	)		1,318
Minority interest		(11	)		27		(236	)		40

Net (loss) income	$	(731	)	$	841	$	(7,711	)	$	1,278

Other comprehensive income (loss)
Unrealized gain on interest rate swap, net of tax	$	5,493		$	4,703	$	1,136		$	3,484
Foreign currency translation gain		21			236		35			66

Comprehensive income (loss)	$	4,783		$	5,780	$	(6,540	)	$	4,828

(Loss) income per share:
Basic and diluted	$	(0.02	)	$	0.03	$	(0.24	)	$	0.04
Weighted average number of common shares outstanding:
Basic		32,191			32,361		32,276			32,628
Diluted		32,191			32,689		32,276			32,956

See accompanying notes to consolidated financial statements.

Morgans Hotel Group Co.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Six Months			Six Months
	Ended			Ended
	June 30, 2008			June 30, 2007
Cash flows from operating activities
Net (loss) income	$	(7,711	)	$	1,278
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation		11,775			9,343
Amortization of other costs		334			341
Amortization of deferred financing costs		1,440			954
Stock based compensation		7,349			5,329
Accretion of interest on capital lease obligation		743			—
Equity in loss from unconsolidated joint ventures		8,910			6,936
Loss on disposal of property and equipment		117			623
Deferred income taxes		(4,119	)		(2,995	)
Change in value of interest rate caps and swaps, net		—			2,880
Minority interest		2,363			(240	)
Changes in assets and liabilities:
Accounts receivable, net		(224	)		551
Related party receivables		(1,078	)		(1,469	)
Restricted cash		3,461			(3,796	)
Prepaid expenses and other assets		(963	)		(2,218	)
Accounts payable and accrued liabilities		(4,158	)		1,398
Other liabilities		358			802

Net cash provided by operating activities		18,597			18,113

Cash flows from investing activities
Additions to property and equipment		(33,349	)		(19,175	)
Withdrawals from (deposits into) capital improvement escrows, net		1,977			(545	)
Distributions and reimbursements from unconsolidated joint ventures		667			12,015
Investments in unconsolidated joint ventures		(16,049	)		(42,643	)

Net cash used in investing activities		(46,754	)		(50,348	)

Cash flows from financing activities
Proceeds from long-term debt		—			43,248
Payments on long-term debt and capital lease obligations		(176	)		(5,263	)
Cash paid in connection with vesting of stock based awards		(73	)		—
Repurchase of Company’s common stock		(19,173	)		(20,556	)
Distributions to holders of minority interest in consolidated subsidiaries		(2,186	)		—
Financing costs		(28	)		(217	)

Net cash (used in) provided by financing activities		(21,636	)		17,212

Net decrease cash and cash equivalents		(49,793	)		(15,023	)
Cash and cash equivalents, beginning of period		122,712			27,549

Cash and cash equivalents, end of period	$	72,919		$	12,526


Supplemental disclosure of cash flow information
Cash paid for interest	$	17,568		$	18,281

Cash paid for taxes	$	952		$	1,257

See accompanying notes to consolidated financial statements.

Morgans Hotel Group Co.

Notes to Consolidated Financial Statements

1. Organization and Formation transaction

Morgans Hotel Group Co. (the “Company”) was incorporated on October 19, 2005 as a Delaware corporation to complete an initial public offering (“IPO”) that was part of the formation and structuring transactions described below. The Company operates, owns, acquires and redevelops hotel properties.

The Morgans Hotel Group Co. predecessor (the “Predecessor”) comprised the subsidiaries and ownership interests that were contributed as part of the formation and structuring transactions from Morgans Hotel Group LLC, now known as Residual Hotel Interest LLC (“Former Parent”), to Morgans Group LLC, our operating company. The Former Parent was owned approximately 85% by NorthStar Hospitality, LLC, a subsidiary of NorthStar Capital Investment Corp. (“NorthStar”), and approximately 15% by RSA Associates, L.P.

In connection with the IPO, the Former Parent contributed the subsidiaries and ownership interests in nine operating hotels in the United States and the United Kingdom to Morgans Group LLC in exchange for membership units. Simultaneously, Morgans Group LLC issued additional membership units to the Predecessor in exchange for cash raised by the Company from the IPO. The Former Parent also contributed all the membership interests in its hotel management business to Morgans Group LLC in return for 1,000,000 membership units in Morgans Group LLC exchangeable for shares of the Company’s common stock. The Company is the managing member of Morgans Group LLC, and has full management control. On April 24, 2008, 45,935 outstanding membership units in Morgans Group LLC were redeemed in exchange for 45,935 shares of the Company’s common stock. As of June 30, 2008, 954,065 membership units in Morgans Group LLC remain outstanding.

On February 17, 2006, the Company completed its IPO. The Company issued 15,000,000 shares of common stock at $20 per share resulting in net proceeds of approximately $272.5 million, after underwriters’ discounts and offering expenses. On February 17, 2006, the Company paid down $294.6 million of long-term debt which included principal and interest, and paid in full the preferred equity in Clift due a related party of $11.4 million, which included outstanding interest and distributed $9.5 million to certain stockholders.

These financial statements have been presented on a consolidated basis and reflect the Company’s assets, liabilities and results from operations. The assets and liabilities are presented at the historical cost of the Former Parent. The equity method of accounting is utilized to account for investments in joint ventures over which the Company has significant influence, but not control.

The Company has one reportable operating segment; it operates, owns, acquires and redevelops boutique hotels.

Operating Hotels

The Company’s operating hotels as of June 30, 2008 are as follows:


		Number of
Hotel Name	Location	Rooms		Ownership
Delano Miami	Miami Beach, FL		194		(1	)
Hudson	New York, NY		807		(5	)
Mondrian Los Angeles	Los Angeles, CA		237		(1	)
Morgans	New York, NY		113		(1	)
Royalton	New York, NY		168		(1	)
Sanderson	London, England		150		(2	)
St Martins Lane	London, England		204		(2	)
Shore Club	Miami Beach, FL		309		(3	)
Clift	San Francisco, CA		363		(4	)
Mondrian Scottsdale	Scottsdale, AZ		194		(1	)
Hard Rock Hotel & Casino	Las Vegas, NV		646		(6	)

(1)		Wholly-owned hotel.

(2)		Owned through a 50/50 unconsolidated joint venture.

(3)		Operated under a management contract, with an unconsolidated minority ownership interest of approximately 7%.

(4)		The hotel is operated under a long-term lease, which is accounted for as a financing.

(5)		The hotel is structured as a condominium, in which the Company owns approximately 96% of the square footage of the entire building.

(6)		Operated under a management contract and owned through an unconsolidated joint venture, in which the Company owned approximately 27.4% at June 30, 2008 based on cash contributions.

Restaurant Joint Venture

The food and beverage operations of certain of the hotels are operated under a 50/50 joint venture with a third party restaurant operator.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The Company consolidates all wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in combination.

Financial Accounting Standards Board (“FASB”) Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51, as amended (“FIN 46R”), requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Pursuant to FIN 46R, the Company consolidates five ventures that provide food and beverage services at the Company’s hotels as the Company absorbs a majority of the ventures’ expected losses and residual returns. FIN 46R has been applied retroactively. These services include operating restaurants including room service at five hotels, banquet and catering services at four hotels and a bar at one hotel. No assets of the Company are collateral for the venturers’ obligations and creditors of the venturers have no recourse to the Company.

Derivative Instruments and Hedging Activities

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted (“SFAS No. 133”), establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS No. 133, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction.

The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, the Company primarily uses interest rate swaps and caps as part of its cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. During 2008, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.

The Company has interest rate caps that are not designated as hedges. These derivatives are not speculative and are used to manage the Company’s exposure to interest rate movements and other identified risks, but the Company has elected not to designate these instruments in hedging relationships based on the provisions in SFAS No. 133. The changes in fair value of derivatives not designated in hedging relationships have been recognized in earnings.

A summary of the Company’s derivative and hedging instruments that have been recognized in earnings as of June 30, 2008 and December 31, 2007 is as follows (in thousands):


							Estimated			Estimated
							Fair Market			Fair Market
							Value at			Value at
		Type of	Maturity	Strike			June 30,			December 31,
Notional Amount		Instrument	Date	Rate			2008			2007
$	285,000	Sold interest cap	—		4.25	%		(1,372	)		(1,793	)
	285,000	Interest cap	July 9, 2010		4.25	%		1,438			1,831
	85,000	Interest cap	July 15, 2010		7.00	%		30			15
	85,000	Sold interest cap	—		7.00	%		(28	)		(15	)

Fair value of derivative instruments not designated as hedges							$	68		$	38

A summary of the Company’s derivative instruments that have been designated as hedges under SFAS No. 133 as of June 30, 2008 and December 31, 2007 is as follows (in thousands):


							Estimated			Estimated
							Fair Market			Fair Market
							Value at			Value at
		Type of	Maturity	Strike			June 30,			December 31,
Notional Amount		Instrument	Date	Rate			2008			2007
$	285,000	Interest swap	July 9, 2010		5.04	%	$	(9,265	)	$	(9,409	)
	85,000	Interest swap	July 15, 2010		4.91	%		(2,583	)		(2,537	)
	18,000	Interest swap	June 1, 2009		6.00	%		—			—
	22,000	Interest swap	June 1, 2009		6.00	%		—			—

Fair value of derivative instruments designated as effective hedges							$	(11,848	)	$	(11,946	)

Total fair value of derivative instruments							$	(11,780	)	$	(11,908	)

Total fair value included in other assets							$	1,468		$	1,846

Total fair value included in other liabilities							$	(13,248	)	$	(13,754	)

On January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.

SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Currently, the Company uses interest rate caps and interest rate swaps to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. To comply with the provisions of SFAS No. 157, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2008, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. As of June 30, 2008, the total value of the interest rate caps and swaps valued under SFAS No. 157 included in other assets is approximately $1.5 million and the amounts included in other liabilities is approximately $13.2 million.

Stock-based Compensation

The Company accounts for stock based employee compensation using the fair value method of accounting described in SFAS No. 123R, Accounting for Stock-Based Compensation (“SFAS No. 123”) (as amended by SFAS No. 148 and SFAS No. 123(R)). For share grants, total compensation expense is based on the price of the Company’s stock at the grant date. For option grants, the total compensation expense is based on the estimated fair value using the Black-Scholes option-pricing model. Compensation expense is recorded ratably over the vesting period, if any.

Income (Loss) Per Share

Basic net income (loss) per common share is calculated by dividing net income (loss) available to common stockholders, less any dividends on unvested restricted common stock, by the weighted-average number of common stock outstanding during the period. Diluted net income (loss) per common share is calculated by dividing net income (loss) available to common stockholders, less dividends on unvested restricted common stock, by the weighted-average number of common stock outstanding during the period, plus other potentially dilutive securities, such as unvested shares of restricted common stock and warrants.

Minority Interest

The percentage of membership units in Morgans Group LLC, our operating company, owned by the Former Parent is presented as minority interest in Morgans Group LLC in the consolidated balance sheet and was approximately $18.1 million as of June 30, 2008 and $19.2 million as of December 31, 2007. The minority interest in Morgans Group LLC is (i) increased or decreased by the limited members’ pro rata share of Morgans Group LLC’s net income or net loss, respectively; (ii) decreased by distributions; (iii) decreased by redemptions of membership units for the Company’s common stock; and (iv) adjusted to equal the net equity of Morgans Group LLC multiplied by the limited members’ ownership percentage immediately after each issuance of units of Morgans Group LLC and/or shares of the Company’s common stock and after each purchase of treasury stock through an adjustment to additional paid-in capital. Net income or net loss allocated to the minority interest in Morgans Group LLC is based on the weighted-average percentage ownership throughout the period.

Additionally, $1.0 million and $0.6 million was recorded as minority interest as of June 30, 2008 and December 31, 2007, respectively, which represents our third-party food and beverage joint venture partner’s interest in the restaurant venture at certain of our hotels.

New Accounting Pronouncements

On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). This statement permits companies and not-for-profit organizations to make a one-time election to carry eligible types of financial assets and liabilities at fair value, even if fair value measurement is not required under GAAP. SFAS No. 159 must be applied prospectively, and the effect of the first re-measurement to fair value, if any, should be reported as a cumulative effect adjustment to the opening balance of retained earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 had no material impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS No. 160”) which, among other things, provides guidance and establishes amended accounting and reporting standards for a parent company’s noncontrolling or minority interest in a subsidiary and the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company is currently evaluating the impact of adopting the Statement.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations (“SFAS No. 141R”), which replaces SFAS No. 141. SFAS No. 141R, among other things, establishes principles and requirements for how an acquirer entity recognizes and measures in its financial statements the identifiable assets acquired (including intangibles), the liabilities assumed and any noncontrolling interest in the acquired entity. Additionally, SFAS No. 141R requires that all transaction costs will be expensed as incurred. The Company is currently evaluating the impact of adopting the Statement, which is effective for fiscal years beginning on or after December 15, 2008. Adoption is prospective and early adoption is not permitted.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No.161 required enhanced disclosures related to derivative and hedging activities and thereby seeks to improve the transparency of financial reporting. Under SFAS No. 161, entities are required to provide enhanced disclosure related to (i) how and why an entity uses derivative instruments (ii) how derivative instruments and related hedge items are accounted for under SFAS No.133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations; and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No.161 must be applied prospectively to all derivative instruments and non-derivative instruments that are designated and qualify as hedging instruments and related hedged items accounted for under SFAS No. 133 for all financial statements issued for fiscal years and interim period beginning after November 15, 2008 with early application encouraged. We are currently evaluating the impact that SFAS No. 161 will have on the Company’s financial statements.

In May 2008, the FASB issued FASB Staff Position No. APB 14-1 (“FSP APB 14-1”) which clarifies the accounting for the Company’s convertible notes payable. FSP APB 14-1 requires the initial debt proceeds from the sale of the Company’s convertible notes to be allocated between a liability component and an equity component. The resulting debt discount must be amortized over the period the debt is expected to remain outstanding as additional interest expense. FSP APB 14-1 will require retroactive application to all periods presented and would be effective for fiscal years beginning after December 15, 2008. The FSP APB 14-1 is effective for us as of January 1, 2009 and early adoption is not permitted. The Company is currently evaluating the impact that FSP APB 14-1 will have on its consolidated financial statements once adopted.

Reclassifications

Certain prior year financial statement amounts have been reclassified to conform to the current year presentation.

3. Income (Loss) Per Share

Basic earnings per share is calculated based on the weighted average number of common stock outstanding during the period. Diluted earnings per share include the effect of potential shares outstanding, including dilutive securities. Potential dilutive securities may include shares and options granted under the Company’s stock incentive plan and membership units in Morgans Group LLC, which may be exchanged for shares of the Company’s common stock under certain circumstances. The 954,065 outstanding Morgans Group LLC membership units (which may be converted to common stock) at June 30, 2008 have been excluded from the diluted net income (loss) per common share calculation, as there would be no effect on reported diluted net income (loss) per common share. All unvested restricted stock units, LTIP Units (as defined in Note 7), stock options and contingent convertible Notes (as defined in Note 6) are excluded from loss per share as they are anti-dilutive.

The table below details the components of the basic and diluted loss per share calculations (in thousands, except for per share data):


	Three months ended								Six months ended
	June 30, 2008								June 30, 2008
				Weighted								Weighted
				Average		EPS						Average		EPS
	Loss			Shares		Amount			Loss			Shares		Amount
Basic loss per share	$	(731	)		32,191	$	(0.02	)	$	(7,711	)		32,276	$	(0.24	)
Effect of dilutive stock compensation		—			—		—			—			—		—

Diluted loss per share	$	(731	)		32,191	$	(0.02	)	$	(7,711	)		32,276	$	(0.24	)

On July 1, 2008, the Company’s board of directors authorized the repurchase of up to $30.0 million of the Company’s common stock, or approximately 9% of its outstanding shares based on the then current market price. The Company will repurchase its stock through the open market or in privately negotiated transactions. The timing and actual number of shares repurchased depends on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. As of July 31, 2008, the Company has repurchased 1,099,900 shares for approximately $12.2 million under this board of directors approved plan. This repurchase authorization was in addition to the $75.0 million that was previously authorized by our board of directors under separate plans in 2006 and 2007. The Company repurchased a total of 4,277,412 shares for approximately $74.8 million under these previous plans which have expired or been fully utilized.

4. Investments in and Advances to Unconsolidated Joint Ventures

The Company’s investments in and advances to unconsolidated joint ventures and its equity in earnings (losses) of unconsolidated joint ventures are summarized as follows (in thousands):

Investments


	As of			As of
	June 30,			December 31,
Entity	2008			2007
Morgans Hotel Group Europe Ltd.	$	17,161		$	13,679
Restaurant Venture — SC London		(827	)		(479	)
Mondrian South Beach		16,447			13,373
Hard Rock Hotel & Casino		26,582			36,767
Shore Club		57			—
Echelon Las Vegas		44,061			40,826
Mondrian SoHo		5,051			5,051
Mondrian Chicago		2,471			834
Ames Boston		5,634			834
Other		101			157

Total	$	116,738		$	110,208

Equity in income (losses) from unconsolidated joint ventures


	Three Months			Three Months			Six Months			Six Months
	Ended			Ended			Ended			Ended
	June 30, 2008			June 30, 2007			June 30, 2008			June 30, 2007

Morgans Hotel Group Europe Ltd	$	3,434		$	2,459		$	3,424		$	3,314
Restaurant Venture — SC London		135			(231	)		315			(487	)
Mondrian South Beach		(193	)		(674	)		(714	)		(2,042	)
Hard Rock Hotel & Casino		(3,802	)		(3,838	)		(11,328	)		(7,655	)
Echelon Las Vegas		(441	)		—			(611	)		—
Other		2			2			4			(66	)

Total	$	(865	)	$	(2,282	)	$	(8,910	)	$	(6,936	)

Morgans Hotel Group Europe Limited

As of June 30, 2008, the Company owned interests in two hotels in London, England, St Martins Lane, a 204-room hotel, and Sanderson, a 150-room hotel, through a 50/50 joint venture known as Morgans Hotel Group Europe Limited (“Morgans Europe”) with Walton MG London Investors V, L.L.C.

Under a management agreement with Morgans Europe, the Company earns management fees and a reimbursement for allocable chain service and technical service expenses. The Company is also entitled to an incentive management fee and a capital incentive fee. The Company did not earn any incentive fees during the six months ended June 30, 2008 or 2007.

Net income or loss and cash distributions or contributions are allocated to the partners in accordance with ownership interests. The Company accounts for this investment under the equity method of accounting.

Mondrian South Beach

On August 8, 2006, the Company entered into a 50/50 joint venture (the “South Beach Venture”) with an affiliate of Hudson Capital. The South Beach Venture is renovating and converting an apartment building on Biscayne Bay in South Beach Miami into a condominium hotel operated under the Company’s Mondrian brand. The Company expects to operate Mondrian South Beach under a long-term incentive management contract. The hotel, which is scheduled to open in late 2008, expects to have approximately 330 units comprised of studios, one and two-bedroom units, and four penthouse suites.

The South Beach Venture acquired the existing building and land for a gross purchase price of $110.0 million. The South Beach Venture expects that ongoing renovations will cost a total of approximately $90.0 million. An initial equity investment of $15.0 million from each of the Company and Hudson Capital was funded at closing. Additionally, the South Beach Venture received financing of approximately $124.0 million at a rate of LIBOR, based on the rate set date, plus 300 basis points, or 5.5% at June 30, 2008. The South Beach Venture has paid down a portion of this debt with proceeds obtained from condominium sales. The balance of this loan at June 30, 2008 was $90.2 million. This loan matures in August 2009.

During the six months ended June 30, 2008, the Company and Hudson Capital each funded an additional $4.1 million of equity. Further, in April 2008, the South Beach Venture obtained a mezzanine loan of $28.0 million bearing interest at LIBOR, based on the rate set date, plus 600 basis points, or 8.8% at June 30, 2008. The mezzanine loan also matures in August 2009.

The South Beach Venture is in the process of selling units as condominiums, subject to market conditions. The South Beach Venture anticipates that unit buyers will have the opportunity to place their units into the hotel’s rental program. In addition to hotel management fees, the Company could also realize fees from the sale of condominium units.

Hard Rock Hotel & Casino

On May 11, 2006, the Company and its wholly-owned subsidiary, MHG HR Acquisition Corp. (“Acquisition Corp”), entered into an Agreement and Plan of Merger with Hard Rock Hotel, Inc. (“HRH”) pursuant to which the Acquisition Corp agreed to acquire HRH in an all cash merger (the “Merger”). Additionally, an affiliate of the Company entered into several asset purchase agreements with HRH or affiliates of HRH to acquire a development land parcel adjacent to the Hard Rock Hotel & Casino in Las Vegas (“Hard Rock”) and certain intellectual property rights related to the Hard Rock (such asset purchases, together with the Merger, the “Transactions”). The aggregate consideration for the Transactions was $770.0 million.

On November 7, 2006, the Company entered into a definitive agreement with an affiliate of DLJ Merchant Banking Partners (“DLJMB”), as amended in December 2006, under which DLJMB and the Company agreed to form a joint venture in connection with the acquisition and development of the Hard Rock. The joint venture agreement included certain affiliates of DLJMB and Morgans Group LLC as additional members. DLJMB and such affiliates are referred to as the DLJMB Parties. The Company and Morgans Group LLC are referred to as the Morgans Parties.

The closing of the Transactions and completion of the Merger occurred on February 2, 2007. The Morgans Parties funded one-third of the equity, or approximately $57.5 million, and the DLJMB Parties funded two-thirds of the equity, or approximately $115.0 million, through a joint venture. The remainder of the $770.0 million purchase price was financed with mortgage financing under a credit agreement entered into by the joint venture. The credit agreement provides for a secured term loan facility, with a term of two years or more, consisting of a $760.0 million loan for the acquisition, including $35.0 million of renovation costs, $48.2 million of financing costs and $56.3 million of cash reserves and working capital, and a loan for future expansion of the Hard Rock, discussed further below. On November 6, 2007, the joint venture entered into an amended and restated credit agreement in which the lender exercised its right to split the loan made pursuant to the original credit agreement into a mortgage loan, which is comprised of a construction loan component and an acquisition loan component, and three mezzanine loans. The proceeds of the mezzanine loans were used to prepay the acquisition loan portion of the mortgage loan made pursuant to the original credit agreement.

On June 6, 2008, the joint venture closed on the construction financing for the expansion of the Hard Rock. The construction financing consists of a construction loan of up to $620.0 million under the Hard Rock’s existing loan facility. The Morgans Parties and DLJMB Parties also amended their joint venture agreement to reflect DLJMB’s commitment to make additional capital contributions to the Hard Rock of up to $144.0 million for the expansion project and up to $110.0 million to satisfy the minimum sales price or amortization payment requirements under the loan facility relating to the approximately 15.0 acres of excess land held for sale by the Hard Rock.

As of June 30, 2008, the Company has issued approximately $11.1 million of letters of credit toward the expansion following the closing of the Transactions. Except for the funding of these letters of credit, the Company does not currently intend to fund future expansion costs.

On August 1, 2008, a subsidiary of the Hard Rock joint venture obtained a loan to finance $50.0 million of the $110.0 million necessary to purchase an 11-acre parcel of land located adjacent to the Hard Rock from another subsidiary of the joint venture. The loan becomes due and payable no later than the maturity date of August 9, 2009, subject to two six-month extension options, and is subject to acceleration upon the occurrence of events of default, as set forth in the loan agreement. NorthStar Realty Finance Corp. is a participant lender in the loan. In connection with the loan, Morgans Group LLC, together with DLJMB, as guarantors, entered into a non-recourse carve-out guaranty agreement in favor of Column Financial, Inc., the lender.

The DLJMB Parties contributed an aggregate of approximately $74.0 million to the Hard Rock joint venture to fund the remaining portion of the $110.0 million of proceeds necessary to complete the intercompany land purchase and to pay for all costs and expenses in connection with its closing and related financing. The proceeds from the financing, together with the equity contribution from the DLJMB Parties, were used to fully satisfy the $110.0 million amortization payment under the joint venture’s commercial mortgage backed securities loan facility.

As a result of the contributions by the DLJMB Parties, the Company holds approximately a 20.6% ownership interest in the joint venture as of August 1, 2008.

Also on August 1, 2008, the DLJMB Parties and the Morgans Parties amended their Hard Rock joint venture agreement. Among other things, the amended joint venture agreement clarifies certain obligations of the parties in the event that capital contributions are required for additional costs and expenses relating to the 11-acre parcel. In general, any decision to call for such additional capital contributions will be in the discretion of the Hard Rock joint venture’s board of directors. Subject to certain terms and conditions, the DLJMB Parties could also cause the Hard Rock joint venture to fund such additional capital contributions from third parties. However, each member that is not in default under the joint venture agreement will be given an opportunity to participate in the funding. The amended joint venture agreement also clarifies certain provisions used to calculate each member’s percentage interest in the Hard Rock joint venture in the event that such additional capital contributions are funded.

Under an amended property management agreement, the Company operates the hotel, retail, food and beverage, entertainment and all other businesses related to the Hard Rock, excluding the casino until March 1, 2008, as discussed below. Under the terms of the agreement, the Company receives a management fee and a chain service expense reimbursement of all non-gaming revenue including casino rents and all other rental income. The Company can also earn an incentive management fee based on EBITDA, as defined, above certain levels. The term of the management contract is 20 years with two 10-year renewals. Beginning in 2009 or 12 months following completion of the expansion, whichever is later, the Company’s management fees are subject to certain performance tests.

At the closing of the Merger and Transactions, the joint venture had entered into a lease agreement with Golden Gaming Inc. (“Golden Gaming”) to operate the casino at the Hard Rock. Under the lease, the joint venture was entitled to receive base rent plus reimbursements for certain expenses and Golden Gaming was entitled to an annual management fee. The lease agreement with Golden Gaming was terminated effective February 29, 2008 and on March 1, 2008, the Company began operating the casino at Hard Rock.

Echelon Las Vegas

In January 2006, the Company entered into a 50/50 joint venture with a subsidiary of Boyd Gaming Corporation (“Boyd”), through which the joint venture planned to develop Delano Las Vegas and Mondrian Las Vegas as part of Boyd’s Echelon project. On June 30, 2008, the Company and Boyd amended this joint venture agreement to, among other things, extend from June 30, 2008 to September 15, 2008 the deadline by which the joint venture must obtain construction financing for the development of Delano Las Vegas and Mondrian Las Vegas.

On August 1, 2008, Boyd announced that it will delay the entire Echelon project due to the difficult environment surrounding today’s capital markets and current economic conditions. Given Boyd’s announcement and the difficulties in the credit markets, the Company believes that the joint venture will be unable to secure financing at favorable rates and conditions by September 15, 2008. The Company does not intend to further extend the joint venture agreement on its current terms but expects to evaluate future proposals relating to the project with Boyd. As a result, the $30.0 million deposit the Company made toward the project upon consummation of the Hard Rock transaction is expected to be refunded to the Company and the Company expects to be released from an incremental future funding obligation of approximately $46.1 million. Management will assess the recoverability of the investment in excess of the $30.0 million deposit after determining to what extent, if any, the Company will continue its involvement with the project.

Mondrian SoHo

In June 2007, the Company contributed approximately $5.0 million for a 20% equity interest in a joint venture with Cape Advisors Inc. to acquire and develop a Mondrian hotel in the SoHo neighborhood of New York City. The Mondrian SoHo is currently expected to have approximately 270 rooms, a restaurant, bar, ballroom, meeting rooms, exercise facility and a penthouse suite with outdoor space that can be used as a guest room or for private events. Upon completion, the Company is expected to operate the hotel under a 10-year management contract with two 10-year extension options.

Mondrian Chicago

In June 2007, the Company formed a joint venture with M Development to lease and develop a Mondrian hotel in Chicago. The Company has a 49% equity interest in the joint venture and expects to contribute approximately $15.0 million to the project, of which approximately $2.3 million was contributed as of June 30, 2008. The Mondrian Chicago is currently expected to have 216 rooms and feature a restaurant and bar, meeting rooms, an exercise facility, as well as outdoor food and beverage operations. Upon completion, the Company is expected to operate the hotel under a 20-year management contract with two five-year extension options.

The development of Mondrian Chicago is expected to be financed by a construction loan, which has not yet been obtained. Given the current state of the credit markets, the joint venture may not be able to obtain adequate project financing in a timely manner or at all. If adequate project financing is not obtained, the joint venture may seek additional equity investors to raise capital, limit the scope of the project, defer the project or cancel the project altogether.

Mondrian Palm Springs

On January 14, 2008, the Company announced a new joint venture with Re:Loft Partners Palm Springs, LLC to develop Palm Springs Hotel & Residences, or the Resort, in downtown Palm Springs, California. The Resort plans call for a Mondrian hotel with approximately 200 rooms, as well as residences available for sale. Upon completion, the Company expects to operate the hotel under a 10-year management contract with two five-year extension options and to have some equity ownership in the Resort.

The development of Mondrian Palm Springs is expected to be financed by a construction loan, which has not yet been obtained. Given the current state of the credit markets, the joint venture may not be able to obtain adequate project financing in a timely manner or at all. If adequate project financing is not obtained, the joint venture may seek additional equity investors to raise capital, limit the scope of the project, defer the project or cancel the project altogether.

Ames Boston

On June 17, 2008 the Company, Normandy Real Estate Partners, and Ames Hotel Partners entered into a joint venture agreement as part of the development of the Ames Boston hotel in Boston, Massachusetts, located near Government Center, Boston Common and Faneuil Hall. Upon completion, the Company expects to operate the hotel under a long-term management contract. Ames Boston is expected to open in the latter half of 2009 and to have approximately 115 guest rooms, a restaurant, bar and exercise facility.

The total development budget for the project is approximately $71.1 million with the Company committing approximately $10.0 million for a 35% interest in the joint venture. The project is expected to qualify for federal and state historic rehabilitation tax credits, which would reduce the equity investment. Normandy Real Estate Partners has closed on a development loan from UBS for up to $46.5 million.

5. Other Liabilities

Other liabilities consist of the following (in thousands):


	As of		As of
	June 30,		December 31,
	2008		2007
Interest swap liability (Note 2)	$	13,248	$	13,754
Designer fee payable		12,825		12,478
Clift pre-petition liabilities		1,826		1,746
Other		—		1

	$	27,899	$	27,979

6. Long-Term Debt and Capital Lease Obligations

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


	As of		As of		Interest rate at
	June 30,		December 31,		June 30,
Description	2008		2007		2008
Notes secured by Hudson and Mondrian(a)	$	370,000	$	370,000	LIBOR + 1.25%
Clift debt(b)		80,835		80,092		9.6	%
Promissory note(c)		10,000		10,000		8.5	%
Note secured by Mondrian Scottsdale(d)		40,000		40,000	LIBOR + 2.30%
Liability to subsidiary trust(e)		50,100		50,100		8.68	%
Revolving credit(f)		—		—			(f)
Convertible Notes(g)		172,500		172,500		2.375	%
Capital lease obligations		6,331		6,507		various

Total long-term debt	$	729,766	$	729,199

(a) Mortgage Agreement — Notes secured by Hudson and Mondrian Los Angeles

On October 6, 2006, subsidiaries of the Company entered into mortgage financings, consisting of two separate mortgage loans and a mezzanine loan. These loans, a $217.0 million first mortgage note secured by Hudson, a $32.5 million mezzanine loan secured by a pledge of the equity interests in the Company’s subsidiary owning Hudson, and a $120.5 million first mortgage note secured by Mondrian Los Angeles (collectively, the “Mortgages”), all mature on July 15, 2010.

The Mortgages bear interest at a blended rate of 30-day LIBOR plus 125 basis points. The Company has the option of extending the maturity date of the Mortgages to October 15, 2011. The Company maintains interest rate swaps beginning on July 9, 2007 that effectively fixes the LIBOR rate on the debt at approximately 5.0% through the maturity date.

The Company may prepay the Mortgages in whole or in part on any business day, along with a spread maintenance premium (equal to the amount of the prepayment multiplied by the applicable LIBOR margin multiplied by the ratio of the number of months between the prepayment date and October 31, 2007 divided by 12).

The Mortgages require the Company’s subsidiary borrowers to fund reserve accounts to cover monthly debt service payments. Those subsidiary borrowers are also required to fund reserves for property, sales and occupancy taxes, insurance premiums, capital expenditures and the operation and maintenance of those hotels. Reserves are deposited into restricted cash accounts and are released as certain conditions are met. The Company’s subsidiary borrowers are not permitted to have any liabilities other than certain ordinary trade payables, purchase money indebtedness and capital lease obligations.

The Mortgages prohibit the incurrence of additional debt on Hudson and Mondrian Los Angeles. Furthermore, the subsidiary borrowers (entities owning Hudson and Mondrian Los Angeles) are not permitted to incur additional mortgage debt or partnership interest debt. In addition, the Mortgages do not permit (1) transfers of more than 49% of the interests in the subsidiary borrowers, Morgans Group LLC or the Company or (2) a change in control of the subsidiary borrowers or in respect of Morgans Group LLC or the Company itself without, in each case, complying with various conditions or obtaining the prior written consent of the lender.

The Mortgages provide for events of default customary in mortgage financings, including, among others, failure to pay principal or interest when due, failure to comply with certain covenants, certain insolvency and receivership events affecting the subsidiary borrowers, Morgans Group LLC or the Company, and breach of the encumbrance and transfer provisions. In the event of a default under the Mortgages, the lender’s recourse is limited to the mortgaged property, unless the event of default results from insolvency, a voluntary bankruptcy filing or a breach of the encumbrance and transfer provisions, in which event the lender may also pursue remedies against Morgans Group LLC.

(b) Clift Debt

In October 2004, Clift Holdings LLC sold the hotel to an unrelated party for $71.0 million and then leased it back for a 99-year lease term. Under this lease, the Company is required to fund operating shortfalls including the lease payments and to fund all capital expenditures. This transaction did not qualify as a sale due to the Company’s continued involvement and therefore is treated as a financing.

The lease payment terms are as follows:


Years 1 and 2		$2.8 million per annum (completed in October 2006)
Years 3 to 10		$6.0 million per annum
Thereafter		Increased at 5-year intervals by a formula tied to increases in the Consumer Price Index. At year 10, the increase has a maximum of 40% and a minimum of 20%. At each payment date thereafter, the maximum increase is 20% and the minimum is 10%.

(c) Promissory Note

The purchase of the building across the street from Delano Miami was partially financed with the issuance of a $10.0 million three-year interest only promissory note by the Company to the seller, which matures on January 24, 2009. The note bore interest at 8.5% through January 24, 2008 and currently bears interest at 10.0%.

(d) Mondrian Scottsdale Debt

In May 2006, the Company obtained mortgage financing on Mondrian Scottsdale. The $40.0 million loan, which accrues interest at LIBOR plus 2.3%, matured in May 2008 and has three one-year extensions. The Company exercised its extension option and extended the maturity date to May 2009. Further extensions are subject to certain performance tests. The Company purchased an interest rate cap which limits the interest rate exposure to 6.0%. This interest rate cap expires on June 1, 2009.

(e) Liability to Subsidiary Trust Issuing Preferred Securities

On August 4, 2006, a newly established trust formed by the Company, MHG Capital Trust I (the “Trust”), issued $50.0 million in trust preferred securities in a private placement. The Company owns all of the $0.1 million of outstanding common stock of the Trust. The Trust used the proceeds of these transactions to purchase $50.1 million of junior subordinated notes issued by the Company’s operating company and guaranteed by the Company (the “Trust Notes”) which mature on October 30, 2036. These Trust Notes represent all of the Trust’s assets. The terms of the junior subordinated notes are substantially the same as preferred securities issued by the Trust. The Trust Notes and the trust preferred securities have a fixed interest rate of 8.68% per annum during the first 10 years, after which the interest rate will float and reset quarterly at the three-month LIBOR rate plus 3.25% per annum. The securities are redeemable by the Trust, at the Company’s option, after five years at par. To the extent the Company redeems the Trust Notes, the Trust is required to redeem a corresponding amount of trust preferred securities. The Trust Note agreement requires that the Company maintain a fixed charge coverage ratio, as defined, of not less than 1.4 to 1.0.

FIN 46R requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Company has identified that the Trust is a variable interest entity under FIN 46R. Based on management’s analysis, the Company is not the primary beneficiary since it does not absorb a majority of the expected losses, nor is it entitled to a majority of the expected residual returns. Accordingly, the Trust is not consolidated into the Company’s financial statements. The Company accounts for the investment in the common stock of the Trust under the equity method of accounting.

(f) Revolving Credit Facility

On October 6, 2006, the Company and certain of its subsidiaries entered into a revolving credit facility in the initial amount of $225.0 million, which includes a $50.0 million letter of credit sub-facility and a $25.0 million swingline sub-facility (collectively, the “Revolving Credit Agreement”).

The amount available from time to time under the Revolving Credit Agreement is contingent upon the amount of an available borrowing base calculated by reference to collateral described below. The available borrowing base is currently approximately $64.0 million, but that amount may be increased up to $225.0 million at the Borrower’s (defined below) option by increasing the amount of the mortgage on Delano Miami granted by the Delano Miami mortgage lender (discussed below) and upon payment of the related additional recording tax, assuming financial ratios are maintained, as discussed below. Had the Borrower exercised this option, the available borrowing base as of June 30, 2008 (assuming an increase in the Delano Miami mortgage and payment of the related additional recording tax) would have been approximately $133.3 million, based on current covenant calculations. That availability may also be increased through procedures specified in the Revolving Credit Agreement for adding property to the borrowing base and for revaluation of the property that constitutes the borrowing base.

The commitments under the Revolving Credit Agreement terminate on October 5, 2011, at which time all outstanding amounts under the Revolving Credit Agreement will be due and payable. A subsidiary of the Company, Morgans Group LLC (the “Borrower”), may, at its option, with the prior consent of the lender and subject to customary conditions, request an increase in the aggregate commitment under the Revolving Credit Agreement to up to $350.0 million.

The interest rate per annum applicable to loans under the Revolving Credit Agreement is a fluctuating rate of interest measured by reference to, at the Company’s election, either LIBOR or a base rate, plus a borrowing margin. LIBOR loans have a borrowing margin of 1.35% to 1.90% determined based on the Borrower’s total leverage ratio (with an initial borrowing margin of 1.35%) and base rate loans have a borrowing margin of 0.35% to 0.90% determined based on the Borrower’s total leverage ratio (with an initial borrowing margin of 0.35%). The Revolving Credit Agreement also provides for the payment of a quarterly unused facility fee equal to the average daily unused amount for each quarter multiplied by 0.25%.

The Revolving Credit Agreement requires the Borrower to maintain for each four-quarter period a total leverage ratio (total indebtedness, which does not include indebtedness related to the convertible notes issued by the Company in October 2007, to consolidated EBITDA) of no more than 7.0 to 1.0 at any time during 2008, and 6.0 to 1.0 at any time after December 31, 2008, and a fixed charge coverage ratio (consolidated EBITDA to fixed charges) of no less than 1.75 to 1.00 at all times. The Revolving Credit Agreement contains negative covenants, subject in each case to certain exceptions, restricting incurrence of indebtedness, incurrence of liens, fundamental changes, acquisitions and investments, asset sales, transactions with affiliates and restricted payments, including, among others, a covenant prohibiting the Company from paying cash dividends on its common stock.

The Revolving Credit Agreement provides for customary events of default, including failure to pay principal or interest when due, failure to comply with covenants, any representation proving to be incorrect, defaults relating to other indebtedness of at least $10.0 million in the aggregate, certain insolvency and receivership events affecting the Company or its subsidiaries, judgments in excess of $5.0 million in the aggregate being rendered against the Company or its subsidiaries, the acquisition by any person of 40% or more of any outstanding class of capital stock having ordinary voting power in the election of directors of the Company, and the incurrence of certain ERISA liabilities in excess of $5.0 million in the aggregate.

Obligations under the Revolving Credit Agreement are secured by, among other collateral, a mortgage on Delano Miami and the pledge of equity interests in the Borrower and certain subsidiaries of the Borrower, including the owners of Delano Miami, Morgans and Royalton, as well as a security interest in other significant personal property (including trademarks and other intellectual property, reserves and deposits) relating to those hotels.

The Revolving Credit Agreement is available on a revolving basis for general corporate purposes, including acquisitions. As of June 30, 2008, there was no borrowings outstanding under the Revolving Credit Agreement.

(g) October 2007 Convertible Notes Offering

On October 17, 2007, the Company issued $172.5 million aggregate principal amount of its 2.375% Senior Subordinated Convertible Notes (the “Notes”) in a private offering. Net proceeds from the offering were approximately $166.8 million.

The Notes are senior subordinated unsecured obligations of the Company and are guaranteed on a senior subordinated basis by the Company’s operating company, Morgans Group LLC. The Notes will be convertible into shares of the Company’s common stock under certain circumstances and upon the occurrence of specified events.

Interest on the Notes is payable semi-annually in arrears on April 15 and October 15 of each year, beginning on April 15, 2008, and the Notes will mature on October 15, 2014, unless previously repurchased by the Company or converted in accordance with their terms prior to such date. The initial conversion rate for each $1,000 principal amount of Notes is 37.1903 shares of the Company’s common stock, representing an initial conversion price of approximately $26.89 per share of common stock. The initial conversion rate is subject to adjustment under certain circumstances.

In connection with the issuance of the Notes, the Company entered into convertible note hedge transactions with respect to the Company’s common stock (the “Call Options”) with Merrill Lynch Financial Markets, Inc. and Citibank, N.A. (collectively, the “Hedge Providers”). The Call Options are exercisable solely in connection with any conversion of the Notes and provide for the Company to receive shares of the Company’s common stock from the Hedge Providers equal to the number of shares issuable to the holders of the Notes upon conversion. The Company paid approximately $58.2 million for the Call Options.

In connection with the sale of the Notes, the Company also entered into separate warrant transactions with Merrill Lynch Financial Markets, Inc. and Citibank, N.A., whereby the Company issued warrants (the “Warrants”) to purchase 6,415,327 shares of common stock, subject to customary anti-dilution adjustments, at an exercise price of approximately $40.00 per share of common stock. The Company received approximately $34.1 million from the issuance of the Warrants.

The Company recorded the purchase of the Call Options, net of the related tax benefit of approximately $20.3 million, as a reduction of paid-in-capital and the proceeds from the Warrants as an addition to paid-in-capital in accordance with EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled In, a Company’s Own Stock, and other relevant literature.

In February 2008, the Company filed a registration statement with the Securities and Exchange Commission to cover the resale of shares of the Company’s common stock that may be issued from time to time upon the conversion of the Notes.

7. Omnibus Stock Incentive Plan

On February 9, 2006, the board of directors of the Company adopted the Morgans Hotel Group Co. 2006 Omnibus Stock Incentive Plan (the “2006 Stock Incentive Plan”). The 2006 Stock Incentive Plan provides for the issuance of stock-based incentive awards, including incentive stock options, non-qualified stock options, stock appreciation rights, shares of common stock of the Company, including restricted stock units (“RSUs”) and other equity-based awards, including membership units in Morgans Group LLC which are structured as profits interests (“LTIP Units”), or any combination of the foregoing. The eligible participants in the 2006 Stock Incentive Plan included directors, officers and employees of the Company. An aggregate of 3,500,000 shares of common stock of the Company were reserved and authorized for issuance under the 2006 Stock Incentive Plan, subject to equitable adjustment upon the occurrence of certain corporate events. On April 23, 2007, the board of directors of the Company adopted, and at the annual meeting of stockholders on May 22, 2007, the stockholders approved, the Company’s 2007 Omnibus Incentive Plan (the “2007 Incentive Plan”), which amended and restated the 2006 Stock Incentive Plan and increased the number of shares reserved for issuance under the plan by up to 3,250,000 shares to a total of 6,750,000 shares. Awards other than options and stock appreciation rights reduce the shares available for grant by 1.7 shares for each share subject to such an award. On April 10, 2008, the board of directors of the Company adopted, and at the annual meeting of stockholders on May 20, 2008, the stockholders approved, an amended and restated 2007 Omnibus Incentive Plan (the “Amended 2007 Incentive Plan”) which, among other things, increased the number of shares reserved for issuance under the plan by 1,860,000 shares from 6,750,000 shares to 8,610,000 shares.

In April 2008, the Company issued an aggregate of 344,217 stock options, 159,432 RSUs and 399,384 LTIPs to the Company’s executive officers and other senior executives and newly appointed non-employee directors under the 2007 Incentive Plan. All grants made to executive officers and other senior executives and newly appointed non-employee directors vest one-third of the amount granted on each of the first three anniversaries of the grant date so long as the recipient continues to be an eligible participant. The fair value of each such RSU and LTIP granted in April 2008 ranged between $15.42 and $15.39 at the grant date. The fair value for each such option granted was estimated at the date of grant using the Black-Scholes option-pricing model, an allowable valuation method under SFAS No. 123R with the following assumptions: risk-free interest rate of approximately 2.9% for, expected option lives of 5.85 years, 40% volatility, no dividend rate and 10% forfeiture rate. The fair value of each such option was $6.56 at the date of grant.

In May and June 2008, the Company issued an aggregate of 329,100 RSUs and 74,913 LTIPs to the Company’s executive officers, other senior executives, employees and non-employee directors under the Amended 2007 Incentive Plan. All grants made to employees vest one-third of the amount granted on each of the first three anniversaries of the grant date so long as the recipient continues to be an eligible participant. All LTIP grants made to non-employee directors were immediately vested upon grant. The fair value of each such RSU and LTIP granted in May and June 2008 ranged between $13.80 and $12.59 at the grant date.

A summary of stock-based incentive awards as of June 30, 2008 is as follows (in units, or shares, as applicable):


	Restricted Stock
	Units			LTIP Units		Stock Options
Outstanding as of January 1, 2008		572,460			1,210,875		1,873,811
Granted during 2008		488,532			474,297		344,217
Distributed/exercised during 2008		(69,047	)		—		(7,085	)
Forfeited during 2008		(24,586	)		—		(41,718	)

Outstanding as of June 30, 2008		967,359			1,658,172		2,169,225

Vested as of June 30, 2008		17,372			753,110		821,814

Total stock compensation expense, which is included in corporate expense on the accompanying financial statements, was $4.4 million and $3.1 million for the three months ended June 30, 2008 and June 30, 2007, respectively, and $7.3 million and $5.4 million for the six months ended June 30, 2008 and June 30, 2007, respectively.

8. Related Party Transactions

The Company earned management fees, chain services fees and fees for certain technical services and has receivables from unconsolidated joint ventures. These fees totaled approximately $4.6 million and $5.0 million for the three months ended June 30, 2008 and 2007, respectively, and $9.1 million and $9.0 million for the six months ended June 30, 2008 and 2007, respectively.

As of June 30, 2008 and December 31, 2007, the Company had receivables from these affiliates of approximately $4.5 million and $3.4 million, respectively, which are included in receivables from related parties on the accompanying consolidated balance sheets.

Insurance Proceeds Sharing Agreement

In connection with the Settlement (as defined and discussed below in Note 9), the Company and NorthStar entered into an Insurance Proceeds Sharing Agreement on January 18, 2008, pursuant to which NorthStar paid the Company one-half of the aggregate insurance proceeds received by NorthStar in connection with the Litigations (as defined in Note 9) under the Insurance Policies (as defined in Note 9) as of the date of the Insurance Proceeds Sharing Agreement. The parties have also agreed that all future insurance proceeds received from the Insurance Policies in connection with the Litigations will be allocated equally among the parties.

David Hamamoto, the Chairman of the Board, and Marc Gordon, the Company’s Chief Investment Officer and Executive Vice President, Capital Markets, are beneficial owners of equity interests in NorthStar and Mr. Hamamoto is the Co-Chairman of the Board of Directors and Co-Chief Executive Officer of NorthStar. In addition, NorthStar, through its status as an affiliate of NorthStar Partnership, L.P., has certain rights to request, subject to certain limitations, that the Company register shares of the Company’s common stock owned by NorthStar pursuant to a registration rights agreement.

Guaranty to Column Financial, Inc. for Hard Rock

On August 1, 2008, Morgans Group LLC, together with DLJMB, as guarantors, entered into a $50.0 million non-recourse carve-out guaranty, as discussed above in Note 4. David T. Hamamoto, Chairman of the Board of Directors of the Company, is also Chairman of the Board, President, Chief Executive Officer and equity holder of NorthStar Realty Finance Corp., which is a participant lender in the loan.

9. Litigation

Shore Club Litigation

In 2002, the Company, through a wholly-owned subsidiary, Shore Club Holdings, LLC, invested in the Shore Club, and the management company, Morgans Hotel Group Management LLC (“MHG Management Company”), took over management of the property. The management agreement expires in 2022.

In January 2006, an action was brought in New York state court against several defendants, including two subsidiaries of the Company and certain officers and directors of NorthStar and the Company, including David Hamamoto, the Company’s Chairman of the Board and the Co-Chairman of the Board of Directors and Co-Chief Executive Officer of NorthStar, styled Philips South Beach, LLC v. Morgans Hotel Group Management, LLC et al., Index No. 06/600147 (N.Y. Sup. Ct.), which we refer to as the Shore Club Litigation. An additional action was commenced in March 2006 in New York state court against several defendants, including the company, NorthStar, David Hamamoto, and certain other individuals and entities, styled Century Operating Associates v. NorthStar Hospitality LLC, et al., Index No. 601007/06-E (N.Y. Sup. Ct.), which we refer to as the Century Litigation (together with the Shore Club Litigation, the “Litigations”).

On April 4, 2008, the Company and certain of its subsidiaries entered into a global settlement agreement with Philips South Beach, LLC, Century Operating Associates, Philip Pilevsky and certain of his affiliates, Residual Hotel Interest LLC and certain of its affiliates, Becker-Paramount LLC, W. Edward Scheetz, David T. Hamamoto, RSA Associates, L.P., NorthStar and certain of its subsidiaries, Clark SB II LLC, Clark SB LLC, The Clark Foundation, The Scriven Foundation, Jane Clark and Kevin Moore, pursuant to which the Shore Club litigation, regarding the management of Shore Club, and the Century Litigation, regarding the structuring transactions that were part of the Company’s IPO and the IPO itself, along with related litigations and an additional litigation in which we are not involved, have been settled (the “Settlement”).

The Company was not required to make any cash payments as part of the Settlement. Under the terms of the Settlement, the management agreement pursuant to which MHG Management Company manages Shore Club was amended to provide for, among other things, a reduction beginning in 2009 in the management and chain services fees, a reduction beginning in 2012 in the termination payment to be made by the owner of Shore Club to MHG Management Company upon termination of the management agreement, and certain changes to operating procedures at Shore Club.

The Litigations have been submitted for coverage by NorthStar under certain primary and excess insurance policies (“Insurance Policies”), issued to NorthStar under which certain subsidiaries of the Company and certain individual defendants in the Litigations, including Mr. Hamamoto, are also insured. The insurers have paid certain amounts to NorthStar in connection with the Litigations under the Insurance Policies.

Hard Rock Financial Advisory Agreement

In July 2008, the Company received an invoice from Credit Suisse Securities (USA) LLC (“Credit Suisse”) for $9.4 million related to the Financial Advisory Agreement the Company entered into with Credit Suisse in July 2006. Under the terms of the Financial Advisory Agreement, Credit Suisse received a transaction fee (the “Transaction Fee”) for placing DLJMB, an affiliate of Credit Suisse, in the Hard Rock joint venture. The Transaction Fee was paid by the Hard Rock joint venture at the closing of the Transactions, as defined above in Note 4, and was based upon an agreed upon percentage of the initial equity contribution made by DLJMB in entering into the joint venture. The invoice received in July 2008 alleges that as a result of events subsequent to the closing of the Transactions, Credit Suisse is due additional transaction fees. The Company believes this invoice is invalid, and would otherwise be a Hard Rock joint venture liability.

Other Litigation

The Company is involved in various lawsuits and administrative actions in the normal course of business. In management’s opinion, disposition of these lawsuits is not expected to have a material adverse effect on the Company’s financial positions, results of operations or liquidity.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to, those set forth under “Risk Factors” and elsewhere in our Annual Report on Form 10-K.

Overview

We are a fully integrated hospitality company that operates, owns, acquires, develops and redevelops boutique hotels primarily in gateway cities and select resort markets in the United States and Europe. Over our 24-year history, we have gained experience operating in a variety of market conditions.

The historical financial data presented herein is the historical financial data for:

	•		our Owned Hotels, consisting of Morgans, Royalton and Hudson in New York, Delano Miami in Miami, Mondrian Los Angeles in Los Angeles, Clift in San Francisco, and Mondrian Scottsdale in Scottsdale;

	•		our Joint Venture Hotels, consisting of the London hotels (Sanderson and St Martins Lane), Shore Club and Hard Rock;

	•		our investments in hotels under construction, such as Mondrian South Beach, Mondrian SoHo, and Ames Boston and our investment in other proposed properties;

	•		our investment in certain joint ventures food and beverage operations at our Owned Hotels and Joint Venture Hotels, discussed further below;

	•		our management company subsidiary, MHG Management Company; and

	•		the rights and obligations contributed to Morgans Group LLC in the formation and structuring transactions described in Note 1 to the Consolidated Financial Statements, included elsewhere in this report.

We consolidate the results of operations for all of our Owned Hotels. Certain food and beverage operations at five of our Owned Hotels are operated under 50/50 joint ventures with restauranteur Jeffrey Chodorow. The Asia de Cuba restaurant at Mondrian Scottsdale is operated under license and management agreements with China Grill Management, a company controlled by Jeffrey Chodorow. We believe that we are the primary beneficiary of these entities because we are responsible for the majority of the entities’ expected losses or residual returns. Therefore, these entities are consolidated in our financial statements with our partner’s share of the results of operations recorded as minority interest in the accompanying consolidated financial statements. This minority interest is based upon 50% of the income of the applicable entity after giving effect to rent and other administrative charges payable to the hotel.

We own partial interests in the Joint Venture Hotels and certain food and beverage operations at two of the Joint Venture Hotels, Sanderson and St Martins Lane. We account for these investments using the equity method as we believe we do not exercise control over significant asset decisions such as buying, selling or financing, nor are we the primary beneficiary of the entities. Under the equity method, we increase our investment in unconsolidated joint ventures for our proportionate share of net income and contributions and decrease our investment balance for our proportionate share of net losses and distributions.

On February 2, 2007, we began managing the hotel operations at the Hard Rock. We also have signed agreements to manage the Mondrian South Beach, Mondrian SoHo, and Ames Boston once development is complete. We have signed agreements to manage Mondrian Las Vegas and Delano Las Vegas, but as we announced on August 1, 2008 and, as discussed below in “Recent Trends and Events - Recent Events”, we are unsure of the future of the development of these hotels. We have also signed agreements to manage Mondrian Chicago and Mondrian Palm Springs, but as discussed below in “Recent Trends and Events — Recent Trends”, we are unsure of the future of the development of these hotels as financing has not yet been obtained. As of June 30, 2008, we operated the following Joint Venture Hotels under management agreements which expire as follows:

	•		Sanderson — April 2010 (with two 10-year extensions at our option);

	•		St Martins Lane — September 2009 (with two 10-year extensions at our option);

	•		Shore Club — July 2022; and

	•		Hard Rock — February 2027 (with two 10-year extensions).

These agreements are subject to early termination in specified circumstances.

Factors Affecting Our Results of Operations

Revenues. Changes in our revenues are most easily explained by three performance indicators that are commonly used in the hospitality industry:

	•		occupancy;

	•		average daily rate, or ADR; and

	•		revenue per available room, or RevPAR, which is the product of ADR and average daily occupancy, but does not include food and beverage revenue, other hotel operating revenue such as telephone, parking and other guest services, or management fee revenue.

Substantially all of our revenue is derived from the operation of our hotels. Specifically, our revenue consists of:

	•		Rooms revenue. Occupancy and ADR are the major drivers of rooms revenue.

	•		Food and beverage revenue. Most of our food and beverage revenue is earned by our 50/50 restaurant joint ventures and is driven by occupancy of our hotels and the popularity of our bars and restaurants with our local customers.

	•		Other hotel revenue. Other hotel revenue, which consists of ancillary revenue such as telephone, parking, spa, entertainment and other guest services, is principally driven by hotel occupancy.

	•		Management fee — related parties revenue. We earn fees under our management agreements. These fees may include management fees as well as reimbursement for allocated chain services.

Fluctuations in revenues, which tend to correlate with changes in gross domestic product, are driven largely by general economic and local market conditions but can also be impacted by major events, such as terrorist attacks or natural disasters, which in turn affect levels of business and leisure travel.

The seasonal nature of the hospitality business can also impact revenues. We experience some seasonality in our business. For example, our Miami hotels are generally strongest in the first quarter, whereas our New York hotels are generally strongest in the fourth quarter.

In addition to economic conditions, supply is another important factor that can affect revenues. Room rates and occupancy tend to fall when supply increases, unless the supply growth is offset by an equal or greater increase in demand. One reason why we focus on boutique hotels in key gateway cities is because these markets have significant barriers to entry for new competitive supply, including scarcity of available land for new development and extensive regulatory requirements resulting in a longer development lead time and additional expense for new competitors. A recent trend among hotel owners is the conversion of hotel rooms to condominium apartments which further reduces the available supply of hotel rooms resulting in increased demand for the remaining hotels.

Finally, competition within the hospitality industry can affect revenues. Competitive factors in the hospitality industry include name recognition, quality of service, convenience of location, quality of the property, pricing, and range and quality of food services and amenities offered. In addition, all of our hotels, restaurants and bars are located in areas where there are numerous competitors, many of whom have substantially greater resources than us. New or existing competitors could offer significantly lower rates or more convenient locations, services or amenities or significantly expand, improve or introduce new service offerings in markets in which our hotels compete, thereby posing a greater competitive threat than at present. If we are unable to compete effectively, we would lose market share, which could adversely affect our revenues.

Operating Costs and Expenses. Our operating costs and expenses consist of the costs to provide hotel services, including:

	•		Rooms expense. Rooms expense includes the payroll and benefits for the front office, housekeeping, concierge and reservations departments and related expenses, such as laundry, rooms supplies, travel agent commissions and reservation expense. Like rooms revenue, occupancy is a major driver of rooms expense, which has a significant correlation with rooms revenue.

	•		Food and beverage expense. Similar to food and beverage revenue, occupancy of our hotels and the popularity of our restaurants and bars are the major drivers of food and beverage expense, which has a significant correlation with food and beverage revenue.

	•		Other departmental expense. Occupancy is the major driver of other departmental expense, which includes telephone and other expenses related to the generation of other hotel revenue.

	•		Hotel selling, general and administrative expense. Hotel selling, general and administrative expense consist of administrative and general expenses, such as payroll and related costs, travel expenses and office rent, advertising and promotion expenses, comprising the payroll of the hotel sales teams, the global sales team and advertising, marketing and promotion expenses for our hotel properties, utility expense and repairs and maintenance expenses, comprising the ongoing costs to repair and maintain our hotel properties.

	•		Property taxes, insurance and other. Property taxes, insurance and other consist primarily of insurance costs and property taxes.

	•		Corporate expenses. Corporate expenses consist of the cost of our corporate office, net of any cost recoveries, which consists primarily of payroll and related costs, stock-based compensation expenses, office rent and legal and professional fees and costs associated with being a public company.

	•		Depreciation and amortization expense. Hotel properties are depreciated using the straight-line method over estimated useful lives of 39.5 years for buildings and five years for furniture, fixtures and equipment.

Other Items

	•		Interest expense, net. Interest expense, net includes interest on our debt and amortization of financing costs and is presented net of interest income and interest capitalized.

	•		Equity in (income) loss of unconsolidated joint ventures. Equity in (income) loss of unconsolidated joint ventures constitutes our share of the net profits and losses of our Joint Venture Hotels and our investments in hotels under development.

	•		Minority interest. Minority interest expense constitutes the third-party food and beverage joint venture partner’s interest in the profits of the restaurant ventures at certain of our hotels.

	•		Other non-operating expenses include gains and losses on sale of assets and asset restructurings, costs of abandoned development projects and financings, certain litigation costs, gain on early extinguishment of debt and other items that do not relate to the ongoing operating performance of our assets.

	•		Income tax expense. One of our foreign subsidiaries is subject to United Kingdom corporate income taxes. Income tax expense is reported at the applicable rate for the periods presented. The Company is subject to Federal and state income taxes. Income taxes for the six months ended June 30, 2008 and 2007 were computed using our calculated effective tax rate. We also recorded net deferred taxes related to cumulative differences in the basis recorded for certain assets and liabilities.

Most categories of variable operating expenses, such as operating supplies and certain labor such as housekeeping, fluctuate with changes in occupancy. Increases in RevPAR attributable to increases in occupancy are accompanied by increases in most categories of variable operating costs and expenses. Increases in RevPAR attributable to improvements in ADR typically only result in increases in limited categories of operating costs and expenses, primarily credit card and travel agent commissions. Thus, improvements in ADR have a more significant impact on improving our operating margins than occupancy.

Notwithstanding our efforts to reduce variable costs, there are limits to how much we can accomplish because we have significant costs that are relatively fixed costs, such as depreciation and amortization, labor costs and employee benefits, insurance, real estate taxes and other expenses associated with owning hotels that do not necessarily decrease when circumstances such as market factors cause a reduction in our hotel revenues.

Recent Trends and Events

Recent Trends.

We believe that the economic drivers that impact underlying lodging fundamentals, such as growth in GDP, business investment and employment, have weakened in the first and second quarters of 2008 and will continue to weaken for the remainder of 2008. The expected decline in these drivers will likely result in a significantly lower revenue growth rate for our hotels than was experienced in prior years. We believe this demand could be partially offset by increased international travelers visiting the United States taking advantage of a weakened dollar. In general, the Company has experienced a change in the mix of revenues with an increase in revenues generated from non-U.S. guests and a decrease in revenues from corporate customers, primarily those from the financial services industry.

Further, while demand growth could moderate as a result of slowing economic drivers, projections for new supply in the markets in which we own hotels suggest that supply growth will also continue to fall short of long-term historical averages. Although the pace of new lodging supply in various phases of development has increased over the past several quarters, the majority of new projects scheduled for completion in the near-term are largely concentrated in the economy and mid-scale segments and are located outside of major urban markets. Therefore, we do not expect most of the new hotel supply to directly compete with our core portfolio. We also believe the timing of some of these projects may be affected by increased building costs and the reduced availability of financing. These factors may further dampen the pace of new supply development, including ours, beyond 2008.

As we believe the trends in the lodging industry provide less opportunity for improvements in our business in 2008, there can be no assurances that any increases in hotel revenues or earnings at our properties will continue or that any losses will not increase for any number of reasons, including, but not limited to, slower than anticipated growth in the economy and changes in travel patterns.

Finally, global credit markets continue to tighten, with less credit available generally and on less favorable terms than were obtainable in the recent past. Given the current state of the credit markets, some of our new joint venture projects, such as Mondrian Chicago and Mondrian Palm Springs, may not be able to obtain adequate project financing in a timely manner or at all. If adequate project financing is not obtained, the joint ventures may seek additional equity investors to raise capital, limit the scope of the project, defer the project or cancel the project altogether.

Recent Events.

Global Settlement of Litigation and Insurance Proceeds Sharing Agreement. On April 4, 2008, we and certain of our subsidiaries entered into a global settlement agreement with various parties pursuant to which the Shore Club litigation, regarding the management of the Shore Club hotel, and the Century litigation, regarding the structuring transactions that were part of the Company’s IPO and the IPO itself, along with related litigations and an additional litigation in which we are not involved, have been settled. In addition, on January 18, 2008, we entered into an insurance proceeds sharing agreement with NorthStar regarding these litigations. See “Item 1. Legal Proceedings” for additional information regarding the global settlement and insurance proceeds sharing agreement.

Ames Boston. In June 2008, the Company, Normandy Real Estate Partners, and Ames Hotel Partners entered in a joint venture agreement as part of the development of the Ames Boston hotel in Boston, Massachusetts, which represents a new addition to the Company’s brand portfolio. Upon completion, the Company expects to operate the hotel under a long-term management contract. Ames Boston is expected to open in the third quarter of 2009 and to have approximately 115 guest rooms, a restaurant, bar and exercise facility. The total development budget for the project is approximately $71.1 million with the Company committing approximately $10.0 million for a 35% interest in the joint venture. As of June 30, 2008, our investment in the Ames Boston joint venture was $5.6 million.

Share Repurchase. On July 1, 2008, the Company’s board of directors authorized the repurchase of up to $30.0 million of the Company’s common stock, or approximately 9% of its outstanding shares based on the then current market price. We will repurchase our stock through the open market or in privately negotiated transactions. The timing and actual number of shares repurchased depends on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. As of July 31, 2008, we had repurchased 1,099,900 shares for approximately $12.2 million under this plan.

Expansion of the Board of Directors. On July 25, 2008, the Company’s board of directors increased its size from seven to ten members and appointed David J. Moore, Deepak Chopra and Marc Gordon, the Company’s Chief Investment Officer and Executive Vice President, Capital Markets, to fill the newly created directorships on the Board, effective immediately.

There is no arrangement or understanding between either Messrs. Moore or Chopra and any other persons pursuant to which either of them was selected as director of the Company. Mr. Gordon was appointed to the board, in part, in consideration of his Amended and Restated Employment Agreement, effective as of April 1, 2008, which provides that the Company shall recommend Mr. Gordon’s addition as a director upon the expansion of the board to include additional independent directors.

Stockholder Protection Rights Agreement. Also on July 25, 2008, the board of directors resolved to amend the Company’s Stockholder Protection Rights Agreement (the “Rights Agreement”) to extend the date on which the Rights Agreement will expire from October 9, 2008 to October 9, 2009 (assuming there is no earlier redemption or triggering of the rights). The Rights Agreement was not adopted in response to any specific effort to obtain control of our Company but rather to continue to deter abusive takeover tactics that otherwise could be used to deprive stockholders of the full value of their investment. The terms of the Rights Agreement provide that the board of directors may amend the agreement in any respect without shareholder approval at any time before a triggering event. The Rights Agreement is otherwise unchanged.

Hard Rock Land Sale. On August 1, 2008, a subsidiary of the Hard Rock joint venture obtained a loan to finance $50 million of the $110 million necessary to purchase an 11-acre parcel of land located adjacent to the Hard Rock from another subsidiary of the joint venture. The loan becomes due and payable no later than the maturity date of August 9, 2009, subject to two six-month extension options, and is subject to acceleration upon the occurrence of events of default, as set forth in the loan agreement. NorthStar Realty Finance Corp. is a participant lender in the loan. In connection with the loan, Morgans Group LLC, together with DLJMB, as guarantors, entered into a non-recourse carve-out guaranty agreement in favor of Column Financial, Inc., the lender.

As a result of the contributions by the DLJMB Parties, the Company holds approximately a 20.6% ownership interest in the joint venture as of August 1, 2008.

Echelon Las Vegas. In January 2006, the Company entered into a 50/50 joint venture with a subsidiary of Boyd Gaming Corporation (“Boyd”), through which the venture planned to develop Delano Las Vegas and Mondrian Las Vegas as part of Boyd’s Echelon project. On June 30, 2008, the Company and Boyd amended this joint venture agreement to, among other things, extend from June 30, 2008 to September 15, 2008 the deadline by which the joint venture must obtain construction financing for the development of Delano Las Vegas and Mondrian Las Vegas.

On August 1, 2008, Boyd announced that it will delay the entire Echelon project due to the difficult environment surrounding today’s capital markets and current economic conditions. Given Boyd’s announcement and the difficulties in the credit markets, we believe that the joint venture will be unable to secure financing at favorable rates and conditions by September 15, 2008. We do not intend to further extend the joint venture agreement on its current terms but expect to evaluate future proposals relating to the project with Boyd. As a result, the $30.0 million deposit the Company made toward the project upon consummation of the Hard Rock transaction is expected to be refunded to the Company and the Company expects to be released from an incremental future funding obligation of approximately $46.1 million.

Operating Results

Comparison of Three Months Ended June 30, 2008 to June 30, 2007

The following table presents our operating results for the three months ended June 30, 2008 and the three months ended June 30, 2007, including the amount and percentage change in these results between the two periods. The consolidated operating results for the three months ended June 30, 2008 is comparable to the Company’s consolidated operating results for the three months ended June 30, 2007, with the exception of the renovation of Mondrian Los Angeles and closure for renovation of Morgans in New York during the three months ended June 30, 2008 and the closure for renovation of Royalton during the three months ended June 30, 2007. The consolidated operating results are as follows:


	Three Months Ended
	June 30,			June 30,
	2008			2007		Change ($)			Change (%)
	(in thousands, except percentages)
Revenues
Rooms	$	46,867		$	47,266	$	(399	)		(0.8	)%
Food and beverage		26,544			26,793		(249	)		(0.9	)%
Other hotel		3,350			3,597		(247	)		(6.9	)%

Total hotel revenues		76,771			77,656		(885	)		(1.1	)%
Management fee—related parties		4,552			5,014		(462	)		(9.2	)%

Total revenues		81,323			82,670		(1,347	)		(1.6	)%

Operating Costs and Expenses
Rooms		11,896			12,355		(459	)		(3.7	)%
Food and beverage		18,355			17,250		1,105			6.4	%
Other departmental		1,924			1,943		(19	)		(1.0	)%
Hotel selling, general and administrative		14,599			14,746		(147	)		(1.0	)%
Property taxes, insurance and other		3,729			4,259		(530	)		(12.4	)%

Total hotel operating expenses		50,503			50,553		(50	)		(0.1	)%
Corporate expense		12,310			9,559		2,751			28.8	%
Depreciation and amortization		6,018			4,877		1,141			23.4	%

Total operating costs and expenses		68,831			64,989		3,842			5.9	%

Operating income		12,492			17,681		(5,189	)		(29.3	)%
Interest expense, net		10,327			11,215		(888	)		(7.9	)%
Equity in loss of unconsolidated joint ventures		865			2,282		(1,417	)		(62.1	)%
Minority interest in joint ventures		1,208			1,020		188			18.4	%
Other non-operating expense		1,406			1,607		(201	)		(12.5	)%

(Loss) income before income tax expense and minority interest		(1,314	)		1,557		(2,871	)			⁽¹⁾
Income tax expense		(572	)		689		(1,261	)			⁽¹⁾

(Loss) income before minority interest		(742	)		868		(1,610	)			⁽¹⁾
Minority interest		(11	)		27		(38	)			⁽¹⁾

Net (loss) income		(731	)		841		(1,572	)			⁽¹⁾
Other comprehensive income (loss):
Unrealized gain on interest rate swap, net of tax		5,493			4,703		790			16.8	%
Foreign currency translation gain		21			236		(215	)		(91.1	)%

Comprehensive income (loss)	$	4,783		$	5,780	$	(997	)		(17.2	)%


⁽¹⁾		Not meaningful.

Total Hotel Revenues. Total hotel revenues decreased 1.1% to $76.8 million for the three months ended June 30, 2008 compared to $77.7 million for the three months ended June 30, 2007. RevPAR from our comparable Owned Hotels, which excludes Mondrian Los Angeles and Morgans which were both under renovation during the three months ended June 30, 2008 and Royalton, which was under renovation during the three months ended June 30, 2007, increased by 4.3% to $256 for the three months ended June 30, 2008 compared to $245 for the same period in 2007. The components of RevPAR from our comparable Owned Hotels for the three months ended June 30, 2008 and 2007 are summarized as follows:


	Three Months Ended
	June 30,			June 30,
	2008			2007			Change ($)		Change (%)
Occupancy		83.9	%		82.8	%		—		1.3	%
ADR	$	304		$	296		$	8		3.0	%
RevPAR	$	256		$	245		$	11		4.3	%

Rooms revenue decreased 0.8% to $46.9 million for the three months ended June 30, 2008 as compared to $47.3 million for the three months ended June 30, 2007. The overall decrease in rooms revenue was primarily attributable to disruptions due to renovations at Mondrian Los Angeles and Morgans during the quarter, offset by an increase in room revenues at Royalton which was closed for renovations during part of the comparable period in 2007. RevPAR decreased 40.4% and 11.1% at Mondrian Los Angeles and Morgans, respectively, for the three months ended June 30, 2008 as compared to the same period in 2007. These decreases were offset by increases in room revenues at Royalton, which was closed for renovation during a portion of the three months ended June 30, 2007 and reopened in October 2007. RevPAR at Royalton increased 17.2% for the three months ended June 30, 2008 as compared to the same period in 2007.

Food and beverage revenue decreased 0.9% to $26.5 million for the three months ended June 30, 2008 as compared to $26.8 million for the three months ended June 30, 2007. The food and beverage revenues at Mondrian Los Angeles decreased 28.6% for the three months ended June 30, 2008 as compared to the same period in 2007 due to the hotel renovations currently underway. Offsetting this decrease were increases in food and beverage revenues of 26.4% and 78.4% at Delano Miami and Royalton, respectively. Delano Miami benefitted from The Florida Room nightclub and lounge which opened in December 2007. The increase in revenues at Royalton is due primarily to the new restaurant, Brasserie 44 and the recently renovated bar, both of which opened in October 2007 when the newly renovated hotel reopened.

Other hotel revenue decreased by 6.9% to $3.4 million for the three months ended June 30, 2008 as compared to $3.6 million for the three months ended June 30, 2007. Our Owned Hotels experienced a decline in telephone revenues for the three months ended June 30, 2008 as compared to the same period in 2007, which is consistent across the industry due to increased cell phone usage.

Management Fee—Related Parties. Management fee — related parties decreased by 9.2% to $4.6 million for the three months ended June 30, 2008 as compared to $5.0 million for the three months ended June 30, 2007. This decrease is primarily due to a decrease in management fees earned in managing the Hard Rock during the three months ended June 30, 2008, as compared to the same period in 2007 due to decreased revenue at the Hard Rock. The Hard Rock’s revenues declined during 2008 as a result of disruptions due to the property currently undergoing renovation and expansion and the softening Las Vegas market.

Operating Costs and Expenses

Rooms expense decreased 3.7% to $11.9 million for the three months ended June 30, 2008 as compared to $12.4 million for the three months ended June 30, 2007. This decrease was primarily due to decreased rooms expense, consistent with decreased rooms revenues noted above at Mondrian Los Angeles and Morgans. Slightly offsetting these decreased rooms expenses was an increase in rooms expenses at Royalton for the three months ended June 30, 2008 as compared to the same period in 2007 which was directly related to the increase in rooms revenues noted above.

Food and beverage expense increased 6.4% to $18.4 million for the three months ended June 30, 2008 as compared to $17.3 million for the three months ended June 30, 2007. Increases in food and beverage expenses were experienced at Delano Miami and Royalton. Delano Miami’s expenses increased as a result of the increase in revenues noted above related to The Florida Room nightclub and lounge which opened in December 2007. The increase in expenses at Royalton is due primarily to the new restaurant, Brasserie 44 and the recently renovated bar, both of which opened in October 2007 when the newly renovated hotel reopened. Offsetting these increases, food and beverage expenses at Mondrian Los Angeles decreased, in line with the decrease in revenues noted above.

Other departmental expense decreased 1.0% to $1.9 million for the three months ended June 30, 2008 as compared to $1.9 million for the three months ended June 30, 2007. This decrease was consistent with the decrease in other hotel revenues, noted above.

Hotel selling, general and administrative expense decreased 1.0% to $14.6 million for the three months ended June 30, 2008 as compared to $14.7 million for the three months ended June 30, 2007. The closing of Morgans for renovation reduced hotel, selling, general and administrative expenses for the three months ended June 30, 2008 as compared to the same period in 2007. Slightly offsetting this decrease was an increase in expenses at Royalton as a result of being closed for renovation for a period during the three months ended June 30, 2007.

Property taxes, insurance and other expense decreased 12.4% to $3.7 million for the three months ended June 30, 2008 as compared to $4.3 million for the three months ended June 30, 2007. The decrease is primarily related to preopening expenses incurred during the first six months of 2007 after the repositioning and opening of Mondrian Scottsdale.

Corporate expense increased by 28.8% to $12.3 million for the three months ended June 30, 2008 as compared to $9.6 million for the three months ended June 30, 2007. This increase is primarily due to a $1.3 million increase in stock compensation expense during the three months ended June 30, 2008 as compared to the same period in 2007 due to additional grants in 2008. Further, this increase is due to increased payroll and payroll related costs incurred as a result of the hiring of additional employees due to the expansion of the Company’s hotel portfolio and development efforts.

Depreciation and amortization increased 23.4% to $6.0 million for the three months ended June 30, 2008 as compared to $4.9 million for the three months ended June 30, 2007. This increase is a result of the renovations at Delano Miami and Royalton, which both took place during 2007.

Interest Expense, net. Interest expense, net decreased 7.9% to $10.3 million for the three months ended June 30, 2008 as compared to $11.2 million for the three months ended June 30, 2007, primarily due to lower interest expense incurred during the three months ended June 30, 2008 on the Company’s convertible notes issued in October 2007 rather than the interest expense incurred on outstanding amounts under the Company’s revolving credit facility during the three months ended June 30, 2007.

Equity in loss of unconsolidated joint ventures decreased 62.1% to $0.9 million for the three months ended June 30, 2008 as compared to $2.3 million for the three months ended June 30, 2007. This decrease was primarily the result of income recognized from the London joint venture relating to the change in fair value of interest rate hedging instruments not qualifying for hedge accounting under SFAS No. 133.

The components of RevPAR from the Joint Venture Hotels for the three months ended June 30, 2008 and 2007 are summarized as follows:


	Three Months Ended
	June 30,			June 30,
	2008			2007			Change ($)			Change (%)
Occupancy		83.0	%		82.5	%		—			0.6	%
ADR	$	318		$	327		$	(9	)		(2.8	)%
RevPAR	$	264		$	269		$	(5	)		(2.1	)%

As is customary for companies in the gaming industry, the Hard Rock average occupancy rate and average daily rate includes rooms provided on a complimentary basis. Like most operators of hotels in the non-gaming lodging industry, we do not follow this practice at our other hotels, where we present average occupancy rate and average daily rate net of rooms provided on a complimentary basis.

Other non-operating expense decreased 12.5% to $1.4 million for the three months ended June 30, 2008 as compared to $1.6 million for the three months ended June 30, 2007. The expense recognized in the three months ended June 30, 2008 primarily relates to the Shore Club litigation which was settled in April 2008 and costs incurred related to development projects which were not capitalizable. The expense recognized in the three months ended June 30, 2007 relates to Shore Club litigation expenses and the write-off of furniture and fixtures at Royalton.

Income tax (benefit) expense was a benefit of $0.6 million for the three months ended June 30, 2008 compared to expense of $0.7 million for the three months ended June 30, 2007. This change was primarily due to the loss recognized by the Company in the three months ended June 30, 2008 as compared to income recognized in the three months ended June 30, 2007.

Comparison of Six Months Ended June 30, 2008 to June 30, 2007

The following table presents our operating results for the six months ended June 30, 2008 and the six months ended June 30, 2007, including the amount and percentage change in these results between the two periods. The consolidated operating results for the six months ended June 30, 2008 is comparable to the consolidated operating results for the six months ended June 30, 2007, with the exception of the renovation of Mondrian Los Angeles and closure for renovation of Morgans in New York during a portion of the six months ended June 30, 2008, the closure for renovation of Royalton during a portion of the six months ended June 30, 2007, and the investment in the Hard Rock in February 2007 and renovation and expansion work at the Hard Rock during the six months ended June 30, 2008. The consolidated operating results are as follows:


	Six Months Ended
	June 30,			June 30,
	2008			2007			Change ($)			Change (%)
	(in thousands, except percentages)
Revenues
Rooms	$	93,021		$	92,528		$	493			0.5	%
Food and beverage		53,123			52,350			773			1.5	%
Other hotel		6,823			7,243			(420	)		(5.8	)%

Total hotel revenues		152,976			152,121			855			0.6	%
Management fee—related parties		9,088			8,971			117			1.3	%

Total revenues		162,055		$	161,092			963			0.6	%

Operating Costs and Expenses
Rooms		25,065			24,983			82			0.3	%
Food and beverage		37,722			34,792			2,930			8.4	%
Other departmental		4,009			3,970			39			1.0	%
Hotel selling, general and administrative		30,372			30,103			269			0.9	%
Property taxes, insurance and other		7,782			9,956			(2,174	)		(21.8	)%

Total hotel operating expenses		104,950			103,804			1,146			1.1	%
Corporate expense		22,647			18,614			4,033			21.7	%
Depreciation and amortization		12,109			9,684			2,425			25.0	%

Total operating costs and expenses		139,706			132,102			7,604			5.8	%

Operating income		22,349			28,990			(6,641	)		(22.9	)%
Interest expense, net		20,831			21,814			(983	)		(4.5	)%
Equity in loss of unconsolidated joint ventures		8,910			6,936			1,974			28.5	%
Minority interest in joint ventures		2,599			2,122			477			22.5	%
Other non-operating expense (income)		2,468			(4,117	)		6,585				⁽¹⁾

(Loss) income before income tax expense and minority interest		(12,459	)		2,235			(14,784	)			⁽¹⁾
Income tax (benefit) expense		(4,512	)		917			(5,757	)			⁽¹⁾

(Loss) income before minority interest		(7,947	)		1,318			(9,265	)			⁽¹⁾
Minority interest		(236	)		40			(276	)			⁽¹⁾

Net (loss) income		(7,711	)		1,278			(8,989	)			⁽¹⁾
Other comprehensive (loss) income:
Unrealized gain on interest rate swap, net of tax		1,136			3,484			(2,348	)		(67.4	)%
Foreign currency translation gain		35			66			(31	)		(47.0	)%

Comprehensive (loss) income	$	(6,540	)	$	4,828		$	(11,368	)			⁽¹⁾


⁽¹⁾		Not meaningful.

Total Hotel Revenues. Total hotel revenues increased 0.6% to $153.0 million for the six months ended June 30, 2008 compared to $152.1 million for the six months ended June 30, 2007. RevPAR from our comparable Owned Hotels, which excludes Mondrian Los Angeles and Morgans which were both under renovation during the six months ended June 30, 2008 and Royalton, which was under renovation during the six months ended June 30, 2007, increased by 4.7% to $252 for the six months ended June 30, 2008 compared to $240 for the same period in 2007. The components of RevPAR from our comparable Owned Hotels for the six months ended June 30, 2008 and 2007 are summarized as follows:


	Six Months Ended
	June 30,			June 30,
	2008			2007			Change ($)		Change (%)
Occupancy		81.4	%		80.8	%		—		0.8	%
ADR	$	309		$	298		$	11		3.8	%
RevPAR	$	252		$	240		$	12		4.7	%

Rooms revenue increased 0.5%, remaining relatively flat for the six months ended June 30, 2008 compared to the six months ended June 30, 2007. The overall increase was primarily attributable to an increase in room revenues at Royalton, which was closed for renovation during part of the comparable period in 2007, offset by disruptions due to renovations at Mondrian Los Angeles and Morgans during the six months ended June 30, 2008. The increase in rooms revenue at Royalton was primarily due to a 14.9% RevPAR increase for the six months ended June 30, 2008 as compared to the same period in 2007.

Food and beverage revenue increased 1.5% to $53.1 million for the six months ended June 30, 2008 as compared to $52.4 million for the six months ended June 30, 2007. Increases in food and beverage revenues of 20.0% and 51.2% were experienced at Delano Miami and Royalton, respectively. Delano Miami benefitted from The Florida Room nightclub and lounge which opened in December 2007. The increase in revenues at Royalton is due primarily to the new restaurant, Brasserie 44 and the recently renovated bar, both of which opened in October 2007 when the newly renovated hotel reopened. Offsetting these increases, the food and beverage revenues at Mondrian Los Angeles decreased the six months ended June 30, 2008 as compared to the same period in 2007 due to the renovations currently underway.

Other hotel revenue decreased by 5.8% to $6.8 million for the six months ended June 30, 2008 as compared to $7.2 million for the six months ended June 30, 2007, primarily due to a 14.1% decline in telephone revenues over the six months ended June 30, 2008 as compared to the same period in 2007 which is consistent across the industry due to increased use of cell phones by our guests.

Management Fee—Related Parties. Management fees — related parties increased 1.3% to $9.1 million for the six months ended June 30, 2008, remaining relatively flat as compared to the six months ended June 30, 2007.

Operating Costs and Expenses

Rooms expense increased 0.3%, remaining relatively flat for the six months ended June 30, 2008 as compared to the six months ended June 30, 2007. This increase was consistent with the increased rooms revenues noted above and primarily due to an increase in rooms expense at Royalton for the six months ended June 30, 2008 as compared to the same period in 2007, which was related to the renovation at Royalton during 2007. Offsetting this increase were decreases in rooms expense at Mondrian Los Angeles and Morgans which were both under renovation during the six months ended June 30, 2008.

Food and beverage expense increased 8.4% to $37.7 million for the six months ended June 30, 2008 as compared to $34.8 million for the six months ended June 30, 2007. Increases in food and beverage expenses were experienced at Delano Miami and Royalton. Delano Miami’s expenses increased as a result of the increase in revenues noted above related to The Florida Room nightclub and lounge which opened in December 2007. The increase in expenses at Royalton is due primarily to the new restaurant, Brasserie 44 and the recently renovated bar, both of which opened in October 2007 when the hotel reopened. Offsetting these increases, the food and beverage expenses at Mondrian Los Angeles decreased, in line with the decrease in revenues noted above, for the six months ended June 30, 2008 as compared to the same period in 2007.

Other departmental expense remained relatively flat for the six months ended June 30, 2008 as compared to the six months ended June 30, 2007.

Hotel selling, general and administrative expense remained relatively flat for the six months ended June 30, 2008 as compared to the six months ended June 30, 2007.

Property taxes, insurance and other expense decreased 21.8% to $7.8 million for the six months ended June 30, 2008 as compared to $10.0 million for the six months ended June 30, 2007. The decrease is primarily related to preopening expenses incurred during the first six months of 2007 after the repositioning and opening of Mondrian Scottsdale.

Corporate expense increased by 21.7% to $22.6 million for the six months ended June 30, 2008 as compared to $18.6 million for the six months ended June 30, 2007. This increase is primarily due to a $1.9 million increase in stock compensation expense due to additional grants in November 2007 and the first six months of 2008. Further, this increase is due to increased payroll and payroll related costs incurred as a result of the hiring of additional employees due to the expansion of the Company’s hotel portfolio and development efforts.

Depreciation and amortization increased 25.0% to $12.1 million for the six months ended June 30, 2008 as compared to $9.7 million for the six months ended June 30, 2007. This increase is a result of the renovations at Delano Miami and Royalton, which both took place during 2007.

Interest Expense, net. Interest expense, net decreased 4.5% to $20.8 million for the six months ended June 30, 2008 as compared to $21.8 million for the six months ended June 30, 2007. The decrease in interest expense, net was primarily due to lower interest expense incurred during the six months ended June 30, 2008 on the Company’s convertible notes issued in October 2007 rather than the interest expense incurred on outstanding amounts under the Company’s revolving credit facility during the six months ended June 30, 2007.

Equity in loss of unconsolidated joint ventures increased by 28.5% to $8.9 million for the six months ended June 30, 2008 as compared to $6.9 million for the six months ended June 30, 2007. This loss was primarily driven by increased losses at the Hard Rock for the six months ended June 30, 2008 as compared to the same period in 2007, which is primarily due to disruptions as a result of the current renovation and expansion underway at the Hard Rock. The loss was slightly offset by income recognized from the London joint venture relating to the change in fair value of interest rate hedging instruments not qualifying for hedge accounting under SFAS No. 133.

The components of RevPAR from the comparable Joint Venture Hotels (which excludes the Hard Rock, as the Company invested in this hotel in February 2007 and it is currently under renovation and expansion), for the six months ended June 30, 2008 and 2007 are summarized as follows:


	Six Months Ended
	June 30,			June 30,
	2008			2007			Change ($)			Change (%)
Occupancy		73.0	%		72.8	%		—			0.3	%
ADR	$	457		$	473		$	(16	)		(3.3	)%
RevPAR	$	334		$	344		$	(10	)		(3.1	)%

The components of RevPAR from the Hard Rock for the six months ended June 30, 2008 and 2007 are summarized as follows:


	Six Months Ended
	June 30,			June 30,
	2008			2007			Change ($)			Change (%)
Occupancy		94.2	%		95.0	%		—			(0.8	)%
ADR	$	201		$	216		$	(15	)		(7.1	)%
RevPAR	$	189		$	205		$	(16	)		(7.9	)%

As is customary for companies in the gaming industry, the Hard Rock presents average occupancy rate and average daily rate including rooms provided on a complimentary basis. Like most operators of hotels in the non-gaming lodging industry, we do not follow this practice at our other hotels, where we present average occupancy rate and average daily rate net of rooms provided on a complimentary basis.

Other non-operating expense (income) reflected expense of $2.5 million for the six months ended June 30, 2008 compared to income of $4.1 million in the six months ended June 30, 2007. Other non-operating expense recognized in the six months ended June 30, 2008 relates primarily to legal costs incurred related to the Shore Club litigation and costs related to development projects which were not capitalizable. The income recognized during the six months ended June 30, 2007 relates to consideration of $6.1 million in cash received from the transfer of our joint venture partners’ 50% share of the London hotels to an unrelated third party, offset by legal expenses incurred related to the Shore Club litigation and the write-off of furniture and fixtures at Royalton.

Income tax (benefit) expense was a benefit of $4.5 million for the six months ended June 30, 2008 as compared to expense of $0.9 million for the six months ended June 30, 2007. This change was primarily due to the loss recognized by the Company in the six months ended June 30, 2008 as compared to income recognized in the six months ended June 30, 2007.

Liquidity and Capital Resources

As of June 30, 2008, we had approximately $72.9 million in cash and cash equivalents. The Company’s liquidity, as measured by cash and cash equivalents and availability under its revolving credit facility was $206.2 million as of June 30, 2008. The Company has both short-term and long-term liquidity requirements as described in more detail below.

Liquidity Requirements

Short-Term Liquidity Requirements. We generally consider our short-term liquidity requirements to consist of those items that are expected to be incurred within the next 12 months and believe those requirements consist primarily of funds necessary to pay operating expenses and other expenditures directly associated with our properties, including the funding of our reserve accounts. Our reserve accounts consist of restricted cash that is swept by our lenders beginning on the ninth day of each month to fund monthly debt service payments, property, sales and occupancy taxes and insurance premiums of our hotels. After funding these reserve accounts, we fund operating expenses and our furniture, fixtures and equipment reserve (generally, approximately 4% of total revenues at each hotel). We expect to meet our short-term liquidity needs through existing cash balances and cash provided by our operations and, if necessary, from borrowings under our line of credit.

Long-Term Liquidity Requirements. We generally consider our long-term liquidity requirements to consist of those items that are expected to be incurred beyond the next 12 months and believe these requirements consist primarily of funds necessary to pay scheduled debt maturities, renovations and other non-recurring capital expenditures that need to be made periodically to our properties and the costs associated with acquisitions and development of properties under contract and new acquisitions and development projects that we may pursue. Our long-term liquidity requirements are also affected by a potential liability to a designer for which we have accrued $12.8 million. Historically, we have satisfied our long-term liquidity requirements through various sources of capital, including our existing working capital, cash provided by operations, equity and debt offerings, borrowings under our line of credit, and long-term mortgages on our properties.

We believe that these sources of capital will continue to be available to us in the future to fund our long-term liquidity requirements. However, our ability to incur additional debt is dependent upon a number of factors, including our degree of leverage, the value of our unencumbered assets, borrowing restrictions imposed by existing lenders and general market conditions. In addition, our ability to raise funds through the issuance of equity securities is dependent upon, among other things, general market conditions and market perceptions about us. We will continue to analyze which source of capital is most advantageous to us at any particular point in time, but the equity markets may not be consistently available on terms that are attractive or at all.

We may require additional borrowings, including borrowings under our line of credit, to satisfy our long-term liquidity requirements. Other sources may be sales of common or preferred stock and/or cash generated through property dispositions and joint venture transactions.

Anticipated Capital Expenditures and Liquidity Requirements

Stock Repurchase. On July 1, 2008, the Company’s board of directors authorized the repurchase of up to $30.0 million of the Company’s common stock, or approximately 9% of its outstanding shares based on the then current market price. We will repurchase our stock through the open market or in privately negotiated transactions. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. As of July 31, 2008, we had repurchased 1,099,900 shares for approximately $12.2 million under this plan.

Property Renovations. Including amounts spent to date, we anticipate spending a total of approximately $45.0 million to $50.0 million during 2008 on renovations of existing owned hotels, such as Mondrian Los Angeles and Morgans, and expansion opportunities at owned hotels, such as the conversion of single room occupancy rental units at Hudson into guestrooms. We anticipate utilizing a significant portion of the 2008 amount on Mondrian Los Angeles. The majority of our capital expenditures are expected to be funded from existing cash balances.

Including amounts spent to date, we anticipate spending a total of approximately $25.0 million to $35.0 million during 2008 to fund investments in unconsolidated joint ventures. This includes funding for joint venture hotels under construction, such as Mondrian SoHo and Ames Boston, as well as additional equity at Mondrian South Beach should the closing of condominium sales not occur as planned due to the recent changes in the mortgage market. As of June 30, 2008, we had funded $4.1 million of additional equity at Mondrian South Beach during 2008. In June 2008, we contributed approximately $5.6 million for a 35% economic interest in a joint venture to develop Ames Boston. We anticipate increasing our investment to approximately $10.0 million which may be reduced by approximately $3.0 million through the sale of historic tax credits by the joint venture.

Hard Rock. On June 6, 2008, the joint venture closed on the construction financing for the expansion of the Hard Rock. The construction financing consists of a construction loan of up to $620.0 million under the Hard Rock’s existing loan facility. The Morgans Parties and DLJMB Parties also amended their joint venture agreement to reflect DLJMB’s commitment to make additional capital contributions to the Hard Rock of up to $144.0 million for the expansion project and up to $110.0 million to satisfy the minimum sales price or amortization payment requirements under the loan facility relating to the approximately 15.0 acres of excess land held for sale by the Hard Rock.

As of June 30, 2008, we have issued approximately $11.1 million of letters of credit toward the expansion. Except for funding these letters of credit, we do not currently intend to fund any portion of future expansion costs.

The DLJMB Parties contributed an aggregate of approximately $74.0 million to the Hard Rock joint venture to fund the remaining portion of the $110.0 million of proceeds necessary to complete the intercompany land purchase and to pay for all costs and expenses in connection with its closing and related financing. The proceeds from the financing, together with the equity contribution from the DLJMB Parties were used to fully satisfy the $110.0 million amortization payment under the joint venture’s commercial mortgage backed securities loan facility.

As a result of the contributions by the DLJMB Parties, the Company holds approximately a 20.6% ownership interest in the joint venture as of August 1, 2008.

Echelon Las Vegas. In January 2006, we entered into a 50/50 joint venture with a subsidiary of Boyd, through which the joint venture planned to develop Delano Las Vegas and Mondrian Las Vegas as part of Boyd’s Echelon project. On June 30, 2008, the Company and Boyd amended this joint venture agreement to, among other things, extend from June 30, 2008 to September 15, 2008 the deadline by which the joint venture must obtain construction financing for the development of Delano Las Vegas and Mondrian Las Vegas.

On August 1, 2008, Boyd announced that it will delay the entire Echelon project due to the difficult environment surrounding today’s capital markets and current economic conditions. Given Boyd’s announcement and the difficulties in the credit markets, we believe that the joint venture will be unable to secure financing at favorable rates and conditions by September 15, 2008. We do not intend to further extend the joint venture agreement on its current terms but expect to evaluate future proposals relating to the project with Boyd. As a result, the $30.0 million deposit we made toward the project upon consummation of the Hard Rock transaction is expected to be refunded to us and we do not anticipate having to contribute the remaining approximately $46.1 million capital contribution to the venture.

Other Estimated Uses of Capital. We have a number of owned projects under consideration including the Gale in South Beach and the development of the lower level at Hudson. We also have a number of joint venture projects including a potential Mondrian Chicago and Mondrian Palm Springs which may require equity investments. The Mondrian Chicago and Mondrian Palm Spring projects do not currently have debt financing. Given the current state of the credit markets, the joint ventures may not be able to obtain adequate project financing in a timely manner or at all. If adequate project financing is not obtained, the joint ventures may seek additional investors to raise capital, limit the scope of the project, defer the project or cancel the project altogether.

Comparison of Cash Flows for the Six Months Ended June 30, 2008 to June 30, 2007

Operating Activities. Net cash provided by operating activities was $18.6 million for the six months ended June 30, 2008 compared to $18.1 million for the six months ended June 30, 2007. The increase in cash is primarily due to changes in working capital.

Investing Activities. Net cash used in investing activities amounted to $46.8 million for the six months ended June 30, 2008 as compared to $50.3 million for the six months ended June 30, 2007. The decrease in cash used in investing activities primarily relates to the $30.0 million deposit the Company made in February 2007 related to its investment in Echelon Las Vegas for which there was no comparable investment in 2008. This decrease was offset by increases in our capital expenditures relating to ongoing renovations at Mondrian Los Angeles and Morgans.

Financing Activities. Net cash used in financing activities amounted to $21.6 million for the six months ended June 30, 2008 as compared to net cash provided by financing activities of $17.2 million for the six months ended June 30, 2007. The decrease is primarily due to borrowings on our credit facility during the six months ended June 30, 2007, which was used to fund the Echelon Las Vegas deposit discussed above.

Debt

Revolving Credit Agreement. On October 6, 2006, we and certain of our subsidiaries entered into a revolving credit facility in the initial amount of $225.0 million, which includes a $50.0 million letter of credit sub-facility and a $25.0 million swingline sub-facility (collectively, the “Revolving Credit Agreement”), with Wachovia Capital Markets, LLC and Citigroup Global Markets Inc.

The amount available from time to time under the Revolving Credit Agreement is contingent upon the amount of an available borrowing base calculated by reference to collateral described below. The available borrowing base is currently approximately $64.0 million, but that amount may be increased up to $225.0 million at the Borrower’s (defined below) option by increasing the amount of the borrowing capacity on Delano Miami granted by the Delano Miami mortgage lender (discussed below) and upon payment of the related additional recording tax, assuming financial ratios are maintained, as discussed below. Had the Borrower exercised this option, the available borrowing base as of June 30, 2008 (assuming an increase in the Delano Miami mortgage and payment of the related additional recording tax) would have been approximately $133.3 million, based on current covenant calculations. That availability may also be increased through procedures specified in the Revolving Credit Agreement for adding property to the borrowing base and for revaluation of the property that constitutes the borrowing base.

The commitments under the Revolving Credit Agreement terminate on October 5, 2011, at which time all outstanding amounts under the Revolving Credit Agreement will be due and payable. The borrower may, at its option, with the prior consent of the lender and subject to customary conditions, request an increase in the aggregate commitment under the Revolving Credit Agreement to up to $350.0 million.

The interest rate per annum applicable to loans under the Revolving Credit Agreement is at a fluctuating rate of interest measured by reference to, at our election, either LIBOR or a base rate, plus a borrowing margin. LIBOR loans have a borrowing margin of 1.35% to 1.90% determined based on the borrower’s total leverage ratio (with an initial borrowing margin of 1.35%) and base rate loans have a borrowing margin of 0.35% to 0.90% determined based on the borrower’s total leverage ratio (with an initial borrowing margin of 0.35%). The Revolving Credit Agreement also provides for the payment of a quarterly unused facility fee equal to the average daily unused amount for each quarter multiplied by 0.25%.

The Revolving Credit Agreement requires the borrower to maintain for each four-quarter period a total leverage ratio (total indebtedness, which does not include indebtedness related to the Trust Notes (defined below) or the Notes, to consolidated EBITDA) of no more than 7.0 to 1.0 at any time during 2008 and 6.0 to 1.0 at any time after December 31, 2008, and a fixed charge coverage ratio (consolidated EBITDA to fixed charges) of no less than 1.75 to 1.00 at all times. The Revolving Credit Agreement contains negative covenants, subject in each case to certain exceptions, restricting incurrence of indebtedness, incurrence of liens, fundamental changes, acquisitions and investments, asset sales, transactions with affiliates and restricted payments, including, among others, a covenant prohibiting us from paying cash dividends on our common stock.

The Revolving Credit Agreement provides for customary events of default, including failure to pay principal or interest when due, failure to comply with covenants, any representation proving to be incorrect, defaults relating to other indebtedness of at least $10.0 million in the aggregate, certain insolvency and receivership events affecting us, judgments in excess of $5.0 million in the aggregate being rendered against us, the acquisition by any person of 40% or more of any outstanding class of capital stock having ordinary voting power in the election of our directors, and the incurrence of certain ERISA liabilities in excess of $5.0 million in the aggregate.

As of June 30, 2008, we were in compliance with the covenants of the Revolving Credit Agreement.

Obligations under the Revolving Credit Agreement are secured by, among other collateral, a mortgage on Delano Miami and the pledge of equity interests in the borrower and certain subsidiaries of the borrower, including the owners of Delano Miami, Morgans and Royalton, as well as a security interest in other significant personal property (including trademarks and other intellectual property, reserves and deposits) relating to those hotels.

The Revolving Credit Agreement is available on a revolving basis for general corporate purposes, including acquisitions.

Mortgage Agreement. Also on October 6, 2006, our subsidiaries entered into mortgage financings with Wachovia Bank, National Association, as lender, consisting of two separate mortgage loans and a mezzanine loan. These loans, a $217.0 million first mortgage note secured by Hudson, a $32.5 million mezzanine loan secured by a pledge of the equity interests in our subsidiary owning Hudson, and a $120.5 million first mortgage note secured by Mondrian Los Angeles, which we refer to collectively as the Mortgages, all mature on July 15, 2010.

The Mortgages bear interest at a blended rate of 30-day LIBOR plus 125 basis points. We have the option of extending the maturity date of the Mortgages to October 15, 2011. We maintain swaps that will effectively fix the LIBOR rate on the debt under the Mortgages at approximately 5.0% through the maturity date.

The prepayment clause in the Mortgages permits us to prepay the Mortgages in whole or in part on any business day, along with a spread maintenance premium (equal to the amount of the prepayment multiplied by the applicable LIBOR margin multiplied by the ratio of the number of months between the prepayment date and October 31, 2007 divided by 12).

The Mortgages require our subsidiary borrowers to fund reserve accounts to cover monthly debt service payments. Those subsidiary borrowers are also required to fund reserves for property, sales and occupancy taxes, insurance premiums, capital expenditures and the operation and maintenance of those hotels. Reserves are deposited into restricted cash accounts and are released as certain conditions are met. Our subsidiary borrowers are not permitted to have any liabilities other than certain ordinary trade payables, purchase money indebtedness, capital lease obligations and certain other liabilities.

The Mortgages prohibit the incurrence of additional debt on Hudson and Mondrian Los Angeles. Furthermore, the subsidiary borrowers are not permitted to incur additional mortgage debt or partnership interest debt. In addition, the Mortgages do not permit (i) transfers of more than 49% of the interests in the subsidiary borrowers, Morgans Group LLC or the Company or (ii) a change in control of the subsidiary borrowers or in respect of Morgans Group LLC or the Company itself without, in each case, complying with various conditions or obtaining the prior written consent of the lender.

As of June 30, 2008, we were in compliance with the covenants of the Mortgages.

Notes to a Subsidiary Trust Issuing Preferred Securities. In August 2006, we formed a trust, MHG Capital Trust I, or the Trust, to issue $50.0 million of trust preferred securities in a private placement. The sole assets of the Trust consist of the Trust Notes due October 30, 2036 issued by Morgans Group LLC and guaranteed by us. The proceeds of the issuance of the Trust Notes were used to repay our then-existing credit agreement and to fund the equity contribution on Mondrian South Beach with the remainder available for general corporate purposes. The Trust Notes have a 30-year term, ending October 30, 2036, and bear interest at a fixed rate of 8.68% for the first 10 years, ending October 2016, and thereafter will bear interest at a floating rate based on the three-month LIBOR plus 3.25%. These securities are redeemable by the Trust at par beginning on October 30, 2011.

The Trust Note agreement requires that we maintain a fixed charge coverage ratio of 1.4 to 1.0. As of June 30, 2008, we were in compliance with the covenants of the Trust Note agreement.

Clift. We lease Clift under a 99-year non-recourse lease agreement expiring in 2103. The lease is accounted for as a financing with a balance of $80.5 million at March 31, 2008. The lease payments are $6.0 million per year through October 2014 with inflationary increases at five-year intervals thereafter beginning in October 2014.

Hudson. We lease two condominium units at Hudson which are reflected as capital leases with balances of $6.1 million at March 31, 2008. Currently, annual lease payments total approximately $800,000 and are subject to increases in line with inflation. The leases expire in 2096 and 2098.

Promissory Note. The purchase of the Gale, the property across from the Delano Miami, was partially financed with the issuance of a $10.0 million three-year interest only promissory note by us to the seller, which matures on January 24, 2009. At June 30, 2008, the note bore interest at 10.0%, effective January 2008 through maturity.

Mondrian Scottsdale Debt. In May 2006, we obtained mortgage financing on Mondrian Scottsdale. The $40.0 million loan, which accrues interest at LIBOR plus 2.30%, had a maturity date in May 2008 subject to three one-year extensions. We have exercised our option to extend the maturity date until May 2009. We have purchased an interest rate caps which limit the interest rate exposure to 6.0% through June 1, 2009.

Convertible Debt. On October 17, 2007, we completed an offering of $172.5 million aggregate principal amount of 2.375% Senior Subordinated Convertible Notes, or the Notes, in a private offering, which included an additional issuance of $22.5 million in aggregate principal amount of Notes as a result of the initial purchasers’ exercise in full of their overallotment option. The Notes are the senior subordinated unsecured obligations of the Company and are guaranteed on a senior subordinated basis by our operating company, Morgans Group LLC. The Notes are convertible into shares of our common stock under certain circumstances and upon the occurrence of specified events.

In connection with the private offering, the Company entered into certain convertible note hedge and warrant transactions. These transactions are intended to reduce the potential dilution to the holders of our common stock upon conversion of the Notes and will generally have the effect of increasing the conversion price of the Notes to approximately $40.00 per share, representing a 82.23% premium based on the sale price of our common stock of $21.95 per share on October 11, 2007. The net proceeds to us from the sale of the Notes was approximately $166.8 million (of which approximately $24.1 million was used to fund the note call options and warrant transactions).

Seasonality

The hospitality business is seasonal in nature. Our Miami hotels are strongest in the first quarter, whereas our New York hotels are strongest in the fourth quarter. Quarterly revenues also may be adversely affected by events beyond our control, such as extreme weather conditions, terrorist attacks or alerts, natural disasters, airline strikes, economic factors and other considerations affecting travel.

To the extent that cash flows from operations are insufficient during any quarter, due to temporary or seasonal fluctuations in revenues, we may have to enter into additional short-term borrowings or draw on our line of credit to meet cash requirements.

Capital Expenditures and Reserve Funds

We are obligated to maintain reserve funds for capital expenditures at our hotels as determined pursuant to our debt and lease agreements. These capital expenditures relate primarily to the periodic replacement or refurbishment of furniture, fixtures and equipment. Our debt and lease agreements require us to reserve funds at amounts equal to 4% of the hotel’s revenues and require the funds to be set aside in restricted cash. In addition, the restaurant joint ventures require the ventures to set aside restricted cash of between 2% to 4% of gross revenues of the restaurant. As of June 30, 2008, $8.6 million was available in restricted cash reserves for future capital expenditures.

The lenders under the Revolving Credit Agreement and Mortgages require the Company’s subsidiary borrowers to fund reserve accounts to cover monthly debt service payments. Those subsidiary borrowers are also required to fund reserves for property, sales and occupancy taxes, insurance premiums, capital expenditures and the operation and maintenance of those hotels. Reserves are deposited into restricted cash accounts and are released as certain conditions are met. The Company’s subsidiary borrowers are not permitted to have any liabilities other than certain ordinary trade payables, purchase money indebtedness, capital lease obligations, and certain other liabilities.

Including amounts spent to date, we anticipate spending a total of approximately $45.0 million to $50.0 million during 2008 on renovations of existing owned hotels, such as Mondrian Los Angeles and Morgans, and expansion opportunities at owned hotels, such as the conversion of single room occupancy rental units at Hudson into guestrooms. We anticipate utilizing a significant portion of the 2008 amount on Mondrian Los Angeles. The majority of our capital expenditures are expected to be funded from existing cash balances. Our capital expenditures could increase if we decide to acquire, renovate or develop hotels or additional space at existing hotels.

Derivative Financial Instruments

We use derivative financial instruments to manage our exposure to the interest rate risks related to our variable rate debt. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based on their credit rating and other factors. We determine the fair value of our derivative financial instruments using models which incorporate standard market conventions and techniques such as discounted cash flow and option pricing models to determine fair value. We believe these methods of estimating fair value result in general approximation of value, and such value may or may not be realized.

On February 22, 2006, we entered into an interest rate forward starting swap that effectively fixes the interest rate on $285.0 million of debt from June 2007 through June 2010. This derivative qualifies for hedge accounting treatment per SFAS No. 133 and accordingly, the change in fair value of this instrument is recognized in other comprehensive income.

In connection with the Mortgages (defined and discussed above), the Company entered into an $85.0 million interest rate swap that effectively fixes the LIBOR rate on the $85.0 million of debt at approximately 5.0% with an effective date of July 9, 2007 and a maturity date of July 15, 2010. This derivative qualifies for hedge accounting treatment per SFAS No. 133 and accordingly, the change in fair value of this instrument is recognized in other comprehensive income.

In May 2006, we entered into an interest rate cap agreement with a notional amount of $40.0 million, the expected full amount of debt secured by Mondrian Scottsdale, with a LIBOR cap of 6.00% through June 1, 2008, which has since been extended through June 1, 2009. This derivative qualifies for hedge accounting treatment and accordingly, the change in fair value of this instrument is recognized in other comprehensive income.

In connection with the sale of the Notes (discussed above) the Company entered into call options which are exercisable solely in connection with any conversion of the Notes and provide for the Company to receive shares of the Company’s common stock from counterparties equal to the number of shares issuable to the holders of the Notes upon conversion of all shares of common stock, or other property, deliverable by the Company upon conversion of the Notes, in excess of an amount of shares or other property with a value, at then current prices, equal to the principal amount of the converted Notes. Simultaneously, the Company also entered into warrant transactions, whereby the Company sold warrants to purchase in the aggregate 6,415,327 shares of common stock, subject to customary anti-dilution adjustments, at an exercise price of approximately $40.00 per share of common stock. The warrants may be exercised over a 90-day trading period commencing January 15, 2015. The call options and the warrants are separate contracts and are not part of the terms of the Notes and will not affect the holders’ rights under the Notes. The call options are intended to offset potential dilution upon conversion of the Notes in the event that the market value per share of the common stock at the time of exercise is greater than the exercise price of the call options, which is equal to the initial conversion price of the Notes and is subject to certain customary adjustments.

Off-Balance Sheet Arrangements

Morgans Europe. We own interests in two hotels through a 50/50 joint venture known as Morgans Europe. Morgans Europe owns two hotels located in London, England, St Martins Lane, a 204-room hotel, and Sanderson, a 150-room hotel. Under a management agreement with Morgans Europe, we earn management fees and a reimbursement for allocable chain service and technical service expenses.

Morgans Europe’s net income or loss and cash distributions or contributions are allocated to the partners in accordance with ownership interests. At June 30, 2008, our investment in Morgans Europe was $17.2 million. We account for this investment under the equity method of accounting. Our equity in income of the joint venture amounted to $3.4 million and $3.3 million for the six months ended June 30, 2008 and 2007, respectively.

South Beach Venture. We own a 50% interest in a building on Biscayne Bay in South Beach Miami through the South Beach Venture. The South Beach Venture is in the process of renovating and converting the building into a condominium and hotel to be operated under our Mondrian brand. We will operate Mondrian South Beach under a long-term incentive management contract.

We account for this investment under the equity method of accounting. At June 30, 2008, our investment in the South Beach Venture was $16.4 million. Our equity in loss of the South Beach Venture amounted to $0.7 million and $2.0 million for the six months ended June 30, 2008 and 2007, respectively.

Hard Rock. As of June 30, 2008, we owned a 27.4% interest in the Hard Rock, based on cash contributions, through a joint venture with DLJMB. We also manage the Hard Rock under a management agreement, for which we receive a management fee and a chain service expense reimbursement of all non-gaming revenue including casino rents and all other rental income. The Company can also earn an incentive management fee based on EBITDA, as defined, above certain levels. We account for this investment under the equity method of accounting. At June 30, 2008, our investment in the Hard Rock venture was $26.6 million. Our equity in loss of this venture was $11.3 million and $7.7 million for the six months ended June 30, 2008 and 2007, respectively. Subsequent to the land sale, discussed in Note 4 to the Consolidated Financial Statements, and as of August 1, 2008, our ownership interest in the Hard Rock joint venture was approximately 20.6%.

Echelon Las Vegas. In January 2006, we entered into a limited liability company agreement with a subsidiary of Boyd through which it will develop, as 50/50 owners, Delano Las Vegas and Mondrian Las Vegas. We account for this investment under the equity method of accounting. At June 30, 2008, our investment in the Echelon Las Vegas venture was $44.1 million, including a $30.0 million deposit made to Boyd upon consummation of the Hard Rock transaction. As noted above, we expect this deposit to be refunded to us as a result of Boyd’s announcement on August 1, 2008 that it will delay the entire Echelon project. Our equity in loss of the Echelon Las Vegas venture was $0.6 million and $0 for the six months ended June 30, 2008 and 2007, respectively.

Mondrian SoHo. In June 2007, we contributed $5.0 million for a 20% equity interest in a joint venture with Cape Advisors Inc. to acquire and develop a Mondrian hotel in the SoHo neighborhood of New York City. Upon completion, we are expected to operate the hotel under a 10-year management contract with two 10-year extension options. As of June 30, 2008, our investment in the Mondrian SoHo venture was $5.1 million.

Mondrian Chicago. In June 2007, we formed a joint venture with M Development to lease and develop a Mondrian hotel in Chicago. We will have a 49% equity interest in the joint venture and expect to contribute approximately $15.0 million to the project, of which approximately $2.3 million was contributed as of June 30, 2008. Upon completion, we are expected to operate the hotel under a 20-year management contract with two 5-year extension options. As of June 30, 2008, our investment in the Mondrian Chicago venture was $2.5 million.

Ames Boston. On June 17, 2008 the Company, Normandy Real Estate Partners, and local partner Ames Hotel Partners entered into a new joint venture to develop the Ames Boston hotel in Boston, Massachusetts. Upon completion, we expect to operate Ames Boston under a long-term management contract. Ames Boston is expected to open in the third quarter of 2009. We expect to commit approximately $10.0 million for a 35% economic interest in the joint venture. As of June 30, 2008, our investment in the Ames Boston joint venture was $5.6 million. The project is expected to qualify for federal and state historic rehabilitation tax credits, which would reduce the equity investment.

For further information regarding our off balance sheet arrangements, see Note 4 to the Consolidated Financial Statements.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

We evaluate our estimates on an ongoing basis. We base our estimates on historical experience, information that is currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. No material changes to our critical accounting policies have occurred since December 31, 2007.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Quantitative and Qualitative Disclosures About Market Risk

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. Some of our outstanding debt has a variable interest rate. As described in “Management’s Discussion and Analysis of Financial Results of Operations — Derivative Financial Instruments” above, we use some derivative financial instruments, primarily interest rate caps, to manage our exposure to interest rate risks related to our floating rate debt. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based on their credit rating and other factors. As of June 30, 2008, our total outstanding debt, including capitalized lease obligations, was approximately $729.8 million, of which approximately $410.0 million, or 56.2%, was variable rate debt.

We entered into hedging arrangements on $285.0 million of debt which became effective on July 9, 2007 and cap LIBOR at approximately 5.0%. At June 30, 2008, the LIBOR rate was 3.3%. If market rates of interest on this variable rate debt increases by 1.0%, or 100 basis points, the increase in interest expense would reduce future pre-tax earnings and cash flows by approximately $2.9 million annually. The maximum annual amount the interest expense would increase on this variable rate debt is $4.9 million due to our interest rate cap agreement. If market rates of interest on this variable rate debt decrease by 1.0%, or 100 basis points, the decrease in interest expense would increase pre-tax earnings and cash flows by approximately $2.9 million annually.

We also entered into hedging arrangements on $40.0 million of debt secured by Mondrian Scottsdale, with a LIBOR cap of 6.0% through June 1, 2009. If market rates of interest on this variable rate debt increases by 1.0%, or 100 basis points, the increase in interest expense would reduce future pre-tax earnings and cash flows by approximately $0.4 million annually. The maximum annual amount the interest expense would increase on this variable rate debt is $1.1 million due to our interest rate cap agreement. If market rates of interest on this variable rate debt decrease by 1.0%, or 100 basis points, the decrease in interest expense would increase pre-tax earnings and cash flows by approximately $0.4 million annually.

If market rates of interest increase by 1.0%, or approximately 100 basis points, the fair value of our fixed rate debt would decrease by approximately $41.1 million. If market rates of interest decrease by 1.0%, or approximately 100 basis points, the fair value of our fixed rate debt would increase by $170.3 million.

Interest risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments and future cash flows. These analyses do not consider the effect of a reduced level of overall economic activity. If overall economic activity is significantly reduced, we may take actions to further mitigate our exposure. However, because we cannot determine the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.

Currency Exchange Risk

As we have international operations with our two London hotels, currency exchange risk between the U.S. dollar and the British pound arises as a normal part of our business. We reduce this risk by transacting this business in British pounds. We have not repatriated earnings from our London hotels because of our historical net losses in our United Kingdom operations and our joint venture agreement. As a result, any funds repatriated from the United Kingdom are considered a return of capital and require court approval. We may consider repatriating certain funds in 2008. A change in prevailing rates would have, however, an impact on the value of our equity in Morgans Europe. The U.S. dollar/British pound currency exchange is currently the only currency exchange rate to which we are directly exposed. Generally, we do not enter into forward or option contracts to manage our exposure applicable to net operating cash flows. We do not foresee any significant changes in either our exposure to fluctuations in foreign exchange rates or how such exposure is managed in the future.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

Litigation

In 2002, we, through a wholly-owned subsidiary, Shore Club Holdings, LLC, invested in Shore Club, and our management company, MHG Management Company, took over management of the property. The management agreement expires in 2022.

On April 4, 2008, the Company and certain of its subsidiaries entered into a global settlement agreement with Philips South Beach, LLC, Century Operating Associates, Philip Pilevsky and certain of his affiliates, Residual Hotel Interest LLC and certain of its affiliates, Becker-Paramount LLC, W. Edward Scheetz, David T. Hamamoto, RSA Associates, L.P., NorthStar and certain of its subsidiaries, Clark SB II LLC, Clark SB LLC, The Clark Foundation, The Scriven Foundation, Jane Clark and Kevin Moore, pursuant to which the Shore Club litigation, regarding the management of the Shore Club hotel, and the Century Litigation, regarding the structuring transactions that were part of the company’s IPO and the IPO itself, along with related litigations and an additional litigation in which we are not involved, have been settled (the “Settlement”).

We were not required to make any cash payments as part of the Settlement. Under the relevant terms of the Settlement, the management agreement pursuant to which MHG Management Company manages Shore Club was amended to provide for, among other things, a reduction beginning in 2009 in the management and chain services fees, a reduction beginning in 2012 in the termination payment to be made by the owner of Shore Club to MHG Management Company upon termination of the management agreement, and certain changes to operating procedures at Shore Club.

The Litigations have been submitted for coverage by NorthStar under certain primary and excess insurance policies, or Insurance Policies, issued to NorthStar under which certain subsidiaries of the company and certain individual defendants in the Litigations, including Mr. Hamamoto, are also insured. The insurers have paid certain amounts to NorthStar in connection with the Litigations under the Insurance Policies.

The Company and NorthStar entered into an Insurance Proceeds Sharing Agreement on January 18, 2008, pursuant to which NorthStar paid us one-half of the aggregate insurance proceeds received by NorthStar in connection with the Litigations under the Insurance Policies as of the date of the Insurance Proceeds Sharing Agreement. The parties have also agreed that all future insurance proceeds received from the Insurance Policies in connection with the Litigations shall be allocated equally among the parties.

David Hamamoto, the Chairman of the Board, and Marc Gordon, the company’s Chief Investment Officer and Executive Vice President, Capital Markets, are beneficial owners of equity interests in NorthStar and Mr. Hamamoto is the Co-Chairman of the Board of Directors and Co-Chief Executive Officer of NorthStar. In addition, NorthStar, through its status as an affiliate of NorthStar Partnership, L.P., has certain rights to request, subject to certain limitations, that the Company register shares of the Company’s common stock owned by NorthStar pursuant to a registration rights agreement.”

Hard Rock Financial Advisory Agreement

In July 2008, the Company received an invoice from Credit Suisse Securities (USA) LLC (“Credit Suisse”) for $9.4 million related to the Financial Advisory Agreement the Company entered into with Credit Suisse in July 2006. Under the terms of the Financial Advisory Agreement, Credit Suisse received a transaction fee (the “Transaction Fee”) for placing DLJMB, an affiliate of Credit Suisse, in the Hard Rock joint venture. The Transaction Fee which was paid by the Hard Rock joint venture at the closing of the Transactions, as defined above in Note 4, and was based upon an agreed upon percentage of the initial equity contribution made by DLJMB in entering into the joint venture. The invoice received in July 2008 alleges that as a result of events subsequent to the closing of the Transactions, Credit Suisse is due additional transaction fees. The Company believes this invoice is invalid, and would otherwise be a Hard Rock joint venture liability.

Other Litigation

We are involved in various lawsuits and administrative actions in the normal course of business. In management’s opinion, disposition of these lawsuits is not expected to have a material adverse effect on our financial position, results of operations or liquidity.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows, projected results and future prospects. We believe that the following risk factor no longer applies to the Company: “We are currently involved in litigation regarding our management of Shore Club. This litigation may harm our business or reputation and defense of this litigation may divert management resources from the operations of our business.” Otherwise, we do not believe that there have been any material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

At the Company’s Annual Meeting of Stockholders held on May 20, 2008, three proposals were submitted to a vote of our stockholders.

1. Election of Directors—Seven directors were elected to serve on our Board of Directors for a term that ends at the 2009 Annual Meeting of Stockholders. The number of votes cast in favor and withheld for each nominee were as follows:


Nominee	In Favor		Withheld
David T. Hamamoto		25,456,969		3,511,100
Fred J. Kleisner		24,519,231		4,448,838
Robert Friedman		23,674,505		5,293,564
Jeffrey M. Gault		23,911,272		5,056,797
Thomas L. Harrison		23,912,622		5,055,447
Edwin L. Knetzger, III		17,983,697		10,984,372
Michael D. Malone		24,526,889		4,441,180

Exhibit Index


Exhibit No.		Description of Exhibit
	2.1	Agreement and Plan of Merger, dated May 11, 2006, by and among Morgans Hotel Group Co., MHG HR Acquisition Corp., Hard Rock Hotel, Inc. and Peter Morton (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on May 17, 2006)

	2.2	First Amendment to Agreement and Plan of Merger, dated as of January 31, 2007, by and between Morgans Hotel Group Co., MHG HR Acquisition Corp., Hard Rock Hotel, Inc., (solely with respect to Section 1.6 and Section 1.8 thereof) 510 Development Corporation and (solely with respect to Section 1.7 thereof) Peter A. Morton (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on February 6, 2007)

	3.1	Amended and Restated Certificate of Incorporation of Morgans Hotel Group Co. (incorporated by reference to Exhibit 3.1 to Amendment No. 6 to the Company’s Registration Statement on Form S-1 (File No. 333-129277) filed on February 9, 2006)

	3.2	By-laws of Morgans Hotel Group Co. (incorporated by reference to Exhibit 3.2 to Amendment No. 6 to the Company’s Registration Statement on Form S-1 (File No. 333-129277) filed on February 9, 2006)

	4.1	Specimen Certificate of Common Stock of Morgans Hotel Group Co. (incorporated by reference to Exhibit 4.1 to Amendment No. 3 to the Company’s Registration Statement on Form S-1 (File No. 333-129277) filed on January 17, 2006)

	4.2	Junior Subordinated Indenture, dated as of August 4, 2006, between Morgans Hotel Group Co., Morgans Group LLC and JPMorgan Chase Bank, National Association (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 11, 2006)

	4.3	Amended and Restated Trust Agreement of MHG Capital Trust I, dated as of August 4, 2006, among Morgans Group LLC, JPMorgan Chase Bank, National Association, Chase Bank USA, National Association, and the Administrative Trustees Named Therein (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 11, 2006)

	4.4	Stockholder Protection Rights Agreement, dated as of October 9, 2007, between Morgans Hotel Group Co. and Mellon Investor Services LLC, as Rights Agent (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on October 10, 2007)

	4.5	Indenture related to the Senior Subordinated Convertible Notes due 2014, dated as of October 17, 2007, by and among Morgans Hotel Group Co., Morgans Group LLC and The Bank of New York, as trustee (including form of 2.375% Senior Subordinated Convertible Note due 2014) (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on October 17, 2007)

	4.6	Registration Rights Agreement, dated as of October 17, 2007, between Morgans Hotel Group Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on October 17, 2007)

	4.7	Amendment to the Stockholder Protection Rights Agreement, dated July 25, 2008, between the Company and Mellon Investor Services LLC, as Rights Agent (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on July 30, 2008)

	10.1	Morgans Hotel Group Co. Amended and Restated 2007 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on May 20, 2008)

	10.2	Second Amendment to Morgans Las Vegas, LLC Limited Liability Company Agreement, dated June 30, 2008, by and between Morgans/LV Investment LLC and Echelon Resorts Corporation (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on July 1, 2008)

	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

Exhibit 31.1

CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO
17 CFR 240.13a-14(a)/15(d)-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Fred J. Kleisner, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Morgans Hotel Group Co. for the fiscal quarter ended June 30, 2008;

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

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

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

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

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

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

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

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

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

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


	/s/ Fred J. Kleisner
	Fred J. Kleisner
	President and Chief Executive Officer

Date: August 8, 2008

Exhibit 31.2

CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO
17 CFR 240.13a-14(a)/15(d)-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Richard Szymanski, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Morgans Hotel Group Co. for the fiscal quarter ended June 30, 2008;

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


	/s/ Richard Szymanski
	Richard Szymanski
	Chief Financial Officer

Date: August 8, 2008

Exhibit 32.1

CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO
RULE 13a-14(b) UNDER THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Morgans Hotel Group Co. (the “Company”) for the fiscal quarter ended June 30, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Fred J. Kleisner, as Chief Executive Officer of the Company hereby certifies, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.


	/s/ Fred J. Kleisner
	Fred J. Kleisner
	Chief Executive Officer

Date: August 8, 2008

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO
RULE 13a-14(b) UNDER THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Morgans Hotel Group Co. (the “Company”) for the fiscal quarter ended June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Richard Szymanski, as Chief Financial Officer of the Company hereby certifies, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.


	/s/ Richard Szymanski
	Richard Szymanski
	Chief Financial Officer

Date: August 8, 2008

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