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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Year Ended December 31, 2002

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-16728

COURTYARD BY MARRIOTT II

LIMITED PARTNERSHIP

(Exact Name of Registrant as Specified in its Charter)

(240) 744-1000

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(g) of the Act:

Units of Limited Partnership Interest

(Title of Class)

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ¨    No x

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 and (2) has been subject to such filing requirements for the past 90 days. Yes x    No ¨

Documents Incorporated by Reference

None

Courtyard by Marriott II Limited Partnership

TABLE OF CONTENTS

PART I

FORWARD LOOKING STATEMENTS

This annual report on Form 10-K and the information incorporated by reference herein include forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. We identify forward-looking statements in this annual report and the information incorporated by reference herein by using words or phrases such as “anticipate”, “believe”, “estimate”, “expect”, “intend”, “may be”, “objective”, “plan”, “predict”, “project” and “will be” and similar words or phrases, or the negative thereof.

These forward-looking statements are subject to numerous assumptions, risks and uncertainties. Factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by us in those statements include, among others, the following:

Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, we can give no assurance that we will attain these expectations or that any deviations will not be material. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this annual report on Form 10-K and the information incorporated by reference herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

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Items 1 & 2.    Business and Properties

Introduction

We are a Delaware limited partnership, formed on August 31, 1987 to acquire and own 70 Courtyard by Marriott hotels and the respective fee or leasehold interests in the land on which our hotels are located. Our hotels are located in 29 states and contain a total of approximately 10,300 guest rooms as of December 31, 2002. The hotels are operated as part of the Courtyard by Marriott system and are managed by Courtyard Management Corporation (the “manager”), a wholly owned subsidiary of Marriott International, Inc., under long-term management agreements.

Our primary business objective is to provide superior total returns to our partners through a combination of distributions and appreciation in net asset value per unit by focusing on aggressive asset management, disciplined capital allocation and sound financial management.

Any security holder who desires additional copies of this Form 10-K may obtain one (excluding exhibits), without charge, by addressing a request to Courtyard by Marriott II Limited Partnership, 6903 Rockledge Drive, Suite 1500, Bethesda, Maryland 20817. We will charge an amount equal to the reproduction cost if the exhibits are requested.

The Lodging Industry

The lodging industry in the United States consists of both private and public entities that operate in an extremely diversified market under a variety of brand names. Competition in the industry is based primarily on the level of service, quality of accommodations, convenience of locations and room rates. To cater to a wide variety of tastes and needs, the lodging industry is broadly categorized into six segments: luxury, upper-upscale, upscale, midscale with food and beverage service, midscale without food and beverage service and economy. Our properties, which are positioned in the upscale segment of the industry, compete with both full-service and limited-service hotels in their respective markets by providing streamlined services and amenities at prices that typically are lower than those available at full-service hotels. Our competitors in the upscale segment include such brands as Amerisuites, Delta, Hilton Garden Inn, Hawthorne Suites, Homewood Suites, Radisson, Red Lion, Residence Inn, and Spring Hill Suites. Although the competitive position of each of our hotel properties varies by market, we believe that our properties compare favorably to the hotels with which they compete in their respective markets.

A common measure used by the industry to evaluate the operations of a hotel is “room revenue per available room,” or “RevPAR,” which is defined as the product of the average daily room rate charged and the average occupancy achieved. RevPAR does not include food and beverage or other ancillary revenues such as parking, telephone or other guest services generated by the property.

The operating environment for the lodging industry has been, and continues to be, difficult primarily due to a weak economy. As a result, for the past two years the lodging industry has experienced RevPAR declines. We believe that the upscale category of the lodging industry will continue to experience RevPAR declines at least through the first half of 2003.

According to Smith Travel Research, RevPAR for hotels operating in the upscale category decreased 4.7% for the year ended December 31, 2002 when compared to the prior year. This decrease resulted from a slight decrease in occupancy combined with a 4.2% decrease in average daily rate for the year. Our portfolio experienced significantly greater declines in RevPAR in 2002 with a 9.8% decline, although we continue to maintain a slight RevPAR premium of 1.2% over the upscale segment as a whole. We believe that our hotel operations will continue to decline until the economy shows steady improvement and business travel increases. We also believe our hotels will experience a decline in RevPAR in the first quarter of 2003, with full year RevPAR comparable to 2002 levels or down modestly.

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Supply and demand growth in the lodging industry and the segment in which we operate may be influenced by a number of factors, including growth of the economy, interest rates and unique local considerations. In 2001 and 2002, demand decreased substantially, primarily due to concern over further terrorist acts and the economic downturn, which more recently has been exacerbated by the continuing concern over the war in Iraq. We expect the rate of supply growth to continue to decrease for the next two years due to the limited availability of development financing for new construction. Additionally, we believe that demand will remain below historical levels during the first half of 2003, but may begin to grow during the second half of 2003 if the war with Iraq is resolved and if the economy strengthens.

Our Portfolio

As of December 31, 2002, our portfolio consisted of 70 Courtyard by Marriott hotels that contained approximately 10,300 rooms. The properties are geographically diversified among 29 states and most are located in suburban areas near office parks or other business districts. Our hotels average 148 rooms and are approximately 15 years old. Our hotels are designed around a courtyard area containing a swimming pool, walkways and landscaped areas. Each hotel typically contains a small lobby, a restaurant with seating for approximately 50 guests, a lounge, a guest laundry, an exercise room and two small meeting rooms.

Courtyard hotels are designed for business and vacation travelers who desire quality accommodations at moderate prices. We provide large, high-quality guest rooms that generally contain a work desk, a television entertainment package, in-room coffee service and other amenities. Approximately 65% of the guest rooms contain king-size beds.

To maintain the overall quality of our lodging properties, we annually assess the need for refurbishments and capital improvements. Typically, refurbishments occur at intervals of approximately seven years, based on an annual review of the condition of each property. Our management agreements require us to escrow 6.5% of hotel sales and, on average, we spend approximately $17 million annually on these refurbishments and capital improvements. Our capital expenditures have been focused on property maintenance and improvements designed to maintain appropriate levels of quality.

During 2002, we implemented a strategy to reposition our properties to compete with newer properties in certain of our markets. We have undertaken these repositionings in response to changing consumer tastes and trends in the industry. These steps include:

We completed the repositioning of three properties in 2002 at a cost of approximately $6.8 million and have budgeted approximately $22 million to $32 million to upgrade up to 16 additional hotels in 2003 (or approximately $14,700 per room). We have sufficient funds in furniture, fixtures and equipment escrow accounts to complete the proposed repositionings. However, the pace at which we reposition additional properties in future years will depend upon the results of operations.

Portfolio Performance.    During 2002, RevPAR for our hotels decreased approximately 9.8% compared to 2001 results as a result of a decrease in average occupancy of 2.7 percentage points and a decline in average daily

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rate of 6.4%. The changes in RevPAR reflect a decline in operations in every region for the year; however, the decreases in RevPAR varied across the country. Despite this decline in operations our hotels continue to maintain a RevPAR premium. On average, our RevPAR premium was 29% in 2002 when compared to other hotels that compete directly against them in their respective markets, as calculated by data obtained from Smith Travel Research. Still, we anticipate that in the short-term there will be continued pressure on room rates and occupancy levels until economic growth increases lodging demand, particularly among individual business travelers.

We began working with our manager early in 2001 to control operating costs through the elimination of management positions and the implementation of other cost-control measures. Joint efforts during 2002 to protect the long-term efficiencies gained by these measures have kept our year-over-year decrease in hotel operating margins to 3.2 percentage points, despite the decrease in RevPAR of 9.8%. We expect 2003 RevPAR to be comparable to 2002 levels or down modestly. At the same time, we expect an increase in the operating expenses as some costs such as wages, benefits and insurance likely will increase at a rate greater than inflation in 2003. Accordingly, operating profits and margins for 2003 likely will be below 2002 levels, especially if economic conditions do not improve. Our ability to predict these future operating results remains limited, however, and is affected by increased concerns over terrorism and the war in Iraq.

The following table sets forth performance information for all our properties by geographic region as of December 31, 2002 and 2001:

Competition.    Competition is often specific to individual markets and includes hotels operated under brands in the upscale segment. In addition, because our management contracts do not restrict our manager’s ability to convert, franchise or develop other hotel properties in our markets, we often compete with our manager’s other hotels in certain of our markets.

We believe, however, that our properties enjoy competitive advantages associated with their operations under the Courtyard by Marriott brand system. The national marketing programs and reservation systems of this brand, combined with the strong management systems and expertise they provide, should enable our properties to continue to perform favorably in terms of both occupancy and average daily rate. Our manager maintains a national reservation system with reservation agents that have the current status of the rooms available and rates from the properties. In addition, repeat guest business is enhanced by participation in the Marriott Rewards program.

Seasonality.    Our hotel sales traditionally have experienced moderate seasonality, which varies based on individual hotel property and region. Additionally, hotel revenues in the fourth quarter reflect sixteen weeks of

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results compared to twelve weeks for each of the first three quarters of the fiscal year. Hotel sales by quarter for the years 2000 through 2002 for our lodging properties are as follows:

The following table sets forth as of March 1, 2003, the location and number of rooms for each of our properties. Except as noted, each of the properties is subject to a ground lease:

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Material Contracts

Our hotels are subject to long-term management agreements for the operation of the properties, the primary provisions of which are discussed in Note 8 to the financial statements. The agreements expire in 2013 with renewals at the option of the manager for one or more of the hotels for up to 35 years thereafter. In October 2000, in connection with the acquisition of the partnership by Courtyard JV (described below), the partnership agreed to certain proposed amendments to the management agreements that would take effect at such time as all required consents of the partnership’s lenders have been obtained. Those proposed amendments primarily related to the computation of owner’s priority distribution and future subordination requirements. The partnership and the manager also agreed to increase the annual contributions to the partnership’s furniture, fixtures and equipment reserve from 5.0% to 6.5% of gross revenues and such increase became effective in the fourth quarter of 2000.

The consent of the partnership’s lenders may be required in order for the various proposed amendments to become effective. To date, the partnership has obtained the consent of the servicer on its mortgage debt to the October 2000 proposed amendments. The partnership has not sought, and does not currently contemplate seeking, consents, to the extent necessary, from the holders of its senior notes for the amendments.

The land on which 61 of the hotels is located is subject to ground leases. Of these 53 are leased from Marriott International and its affiliates. The primary provisions of these leases are discussed in Note 7 to the financial statements.

Related Parties

CBM Joint Venture LLC, or Courtyard JV, a joint venture between Host Marriott, L.P., also referred to as Host LP, Rockledge Hotel Properties, Inc., a wholly-owned subsidiary of Host LP, and a subsidiary of Marriott International, Inc., also referred to as Marriott International is the holder indirectly of all of our limited and general partner interests. Host LP owns and Marriott International operates (and in a few cases owns) hotels other than our hotels. Additionally, Marriott International and its affiliates license others to operate other hotels under various brand names, including the Courtyard by Marriott brand name and therefore potential conflicts of interest exist. With respect to these potential conflicts of interest, Host LP, Marriott International and their affiliates retain the right to compete with our hotels, including the right to develop, own, and operate competing hotels now and in the future in markets in which our hotels are located, in addition to those existing hotels which may currently compete directly or indirectly with our hotels.

Employees

We have no employees. Host LP provides the services of certain employees (including the general partner’s executive officers) to us and the general partner. The partnership and the general partner anticipate that each of the executive officers of the general partner will generally devote a sufficient portion of his or her time to our business. However, each of such executive officers also will devote a significant portion of his or her time to the business of Host LP and its other affiliates. No officer of the general partner of Host LP devotes a significant percentage of time to our business. To the extent that any officer does devote time to the partnership, the general partner or Host LP, as applicable, is entitled to reimbursement for the cost of providing such services.

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RISK FACTORS

Financial Risks

Our cash flows are seasonal and as such we may face short-term funding shortfalls from time to time. Because the months of November, December and January represent the lowest monthly levels of cash from operations, we utilized a portion of a debt service reserve and certain subordination provisions available to us under our management agreement and ground leases with Marriott International and their affiliates with regard to the payment of our debt service due on or about February 1, 2003 on our mortgage debt and our senior notes to fund the shortfall that primarily resulted from the seasonality of our operations. We deferred payments of approximately $1.4 million of current ground rent and subordinated management fees relating to 2002 operations, deferred $0.3 million of subordinated management fees relating to 2003 operations and required repayment of approximately $1.2 million of previously paid ground rent and subordinated management fees from 2002 operations in accordance with the terms of the applicable subordination agreements. In addition, we applied approximately $5.7 million of the debt service reserve maintained under the senior notes indenture. As a result, the balance in the senior notes debt service reserve was approximately $1.1 million following the February 2003 senior notes interest payment. Deferred amounts generally must be repaid from excess cash flow, but in priority to distributions to equity. Based on forecasted operating results for 2003, we expect to be able to meet our remaining debt service obligations for 2003 from operating cash flow. However, there can be no assurance that our forecasted operating results will be attained, nor can there be any assurance that to the extent operating cash flow is insufficient to cover our debt service obligations, we will be able to fully fund the shortfall by virtue of these various liquidity-enhancing provisions.

We must use excess cash flow from operations to fund debt service reserves and pay deferred subordinated ground rent and management fees.    In light of our use of a portion of the funds in our senior notes debt service reserve in February 2003 and the decline in our debt service coverage ratio, our senior notes indenture requires us to use specified excess cash flow from operations to replenish our senior notes debt service reserve and to fund a supplemental senior notes debt service reserve. In addition, our management agreements require us to repay deferred amounts of subordinated ground rent and subordinated management fees out of our excess cash flow from operations. As a result of these obligations, we do not expect to be able to add to our unrestricted cash for 2003, and will thus be limited in our ability to fund both the costs of additional capital expenditures at our hotels (beyond funds required by our management agreements to be deposited into our furniture, fixture and equipment reserve) and the replenishment of our historical levels of working capital.

We do not have adequate cash reserves to renovate our hotels on the desired schedule.    We and our manager have determined that many of our properties need renovations to enable them to compete more effectively in their respective markets. To complete all of the required renovations would require more funds than are currently available in our existing furniture, fixtures and equipment reserves as well as the amounts expected to be deposited in the near term, which are funded from annual contributions from operating cash flow. We currently do not have excess cash flow after debt service to supplementarily fund these renovations in the near term and our equity owner does not have additional funds to invest. Our general and limited partners have no obligation to invest additional funds for such purposes. As such, there can be no assurance that we will be able to complete these renovations in a desired time frame.

The level and terms of our indebtedness reduce our financial and business flexibility.    The level and terms of our indebtedness could have important consequences. We are required to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, which reduces the availability of our cash flow to fund working capital, capital expenditures and other general business purposes. Additionally, the level and terms of our indebtedness put limitations on the following activities:

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If our cash flow and working capital, together with our debt service reserves and deferral of ground rent and certain management fees, were not sufficient to fund our expenditures or service our indebtedness, we would have to attempt to raise additional funds through:

We cannot assure you that any of these sources of funds would be available to us or, if available, would be on terms that we would find acceptable or in amounts sufficient for us to meet our obligations or fulfill our business plan.

Rating Agency downgrades may increase our cost of capital.    Certain of our corporate debt, including our mortgage debt and our senior notes, is rated by independent rating agencies such as Moody’s and Standard & Poor’s. As a result of the reduced operating levels at our hotels due, in part, to the continuing effect of the weak economy, the war in Iraq and the potential for additional terrorist acts, the credit rating assigned to our senior notes was downgraded by Moody’s on March 26, 2003. Further, the credit rating assigned to the senior notes by Standard & Poor’s remains on negative watch. Accordingly, there is a risk that Standard & Poor’s may downgrade the senior notes in the near future. To the extent operating conditions do not improve, there is risk that the rating agencies will take further ratings actions, and as a result, to the extent we seek to refinance our mortgage debt or our senior notes, our cost of capital may be adversely affected.

Holding Company Structure.    Our only assets are our 100% ownership interest in the entities that own our hotels, Courtyard II Associates, L.P. (“Associates”) and Courtyard II Associates LLC. We conduct no business and are dependent on distributions from our subsidiaries to service our obligations under the senior notes.

Our hotels collateralized approximately $302 million of mortgage debt as of December 31, 2002. The terms of the mortgage debt require that available cash flow from our hotels be applied first to service the mortgage debt. In addition, the mortgage debt imposes restrictions on the ability of Associates to loan, advance or distribute money to us, and upon an event of default under the mortgage debt, distributions from Associates may be prohibited. Our rights and the rights of our creditors to participate in the assets of Associates upon any liquidation or recapitalization of Associates will be subject to the prior claims of Associates’ creditors, including the holders of the mortgage debt. Further, if the mortgages on our hotels that secure the mortgage debt are foreclosed, there can be no assurance that there will be sufficient net proceeds following repayment of the mortgage debt to fund our obligations, including our obligations under the senior notes.

Distributions of Available Cash to Courtyard JV.    Under the terms of our partnership agreement, we are required to distribute to Courtyard JV, each month, all of our available cash after debt service payments, payment of other contractual obligations, capital expenditures, and establishment of reserves, subject to compliance with restrictions in our debt instruments. Accordingly, we do not expect to accumulate significant amounts of cash, except for funding of reserves required under the terms of our senior notes indenture. The amount of such distributions could significantly reduce the cash available to us in subsequent periods to service our debt. Currently, the terms of our senior notes indenture do not permit us to make any distributions to Courtyard JV until we replenish our debt service reserve and satisfy certain debt service coverage requirements.

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Management of the Company.    We have no directors, officers or employees; however, Host LP through our general partner, provide the services of certain of its employees to us. Our business and policy making functions are carried out through the officers and directors of our general partner. We anticipate that each of such officers will devote a sufficient portion of his or her time to our business. However, there can be no assurance that conflicts of interest with Host LP will not arise in connection with the performance by such officers of their duties for us.

Risks of Operation

Our revenues and the value of our properties are subject to conditions affecting the lodging industry. The lodging industry has experienced a difficult period where operations generally have been declining for the past two years, as a result, both RevPAR and operating margins have declined. The decline is due to a number of factors including weak economic growth and apprehension over potential terrorist activity and the war in Iraq, all of which have changed the travel patterns of both business and leisure travelers. It is not clear whether these changes are permanent, or whether they will continue to evolve creating new opportunities or difficulties for the industry. Based on the uncertain state of the economy, we have forecasted that RevPAR will be comparable to 2002 levels or down modestly. Our forecast is affected by, and can change based on, the following items:

There can be no assurance that the current weak economic conditions will not continue for an extended period of time, or that if such conditions do continue they will not further affect our operations. To the extent such conditions were to persist, our assets may not generate income sufficient to pay our expenses, and we may be unable to service our debt and maintain our properties.

Our expenses may remain constant or increase even if our revenue drops.    Certain expenses associated with owning and operating hotels are fixed and do not necessarily decrease when circumstances such as market factors and competition cause a reduction in revenues at the property. Because of the current weak economic condition, we have been working with our manager to reduce the operating costs of our hotels. While we have achieved reductions in operating costs as a result of these efforts, further cost reductions could be difficult to achieve if operating levels continue to decline, and some of the cost reduction efforts undertaken may eventually need to be reversed even if operations remain at reduced levels. Regardless of these efforts to reduce costs, our expenses will be affected by inflationary increases and, in the case of certain costs such as wages, benefits and insurance, may exceed the rate of inflation in 2003, which our manager may be unable to offset with increased room rates.

If we are unable to further reduce our expenses to reflect current reductions in our revenue, our business will be adversely affected. Additionally, our efforts to reduce operating costs or our failure to make scheduled capital expenditures could adversely affect the cash flow of our business and the value of our hotel properties.

Our revenues may be affected by increased use of reservation systems based on the Internet.    Although the majority of the rooms sold on the Internet are sold through a website maintained by our manager or its affiliates, a growing number of rooms are sold through independent Internet sites. Typically, these

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independent Internet sites purchase rooms at a negotiated discount from participating properties, which could result in lower average room rates. While we do not believe that price is the only factor considered when choosing our properties, if the discount or the amount of rooms sold using the Internet were to increase significantly our results of operations could be adversely affected.

Our ground lease payments may increase faster than the revenues we receive on our leased hotels.    As of March 1, 2003, 61 of our hotels are subject to ground leases with several ground lessors, including Marriott International and its affiliates. These ground leases generally require increases in ground rent payments approximately every three years.

We do not control our hotel operations and we are dependent on the manager of our hotels.    We do not manage our hotels. Instead, the manager, a wholly owned subsidiary of Marriott International, manages our hotels pursuant to two separate management agreements. Our income from the hotels may be adversely affected if our manager fails to provide quality services and amenities or if it fails to maintain a quality brand name. We have limited specific recourse under our management agreements if we believe that the hotel manager is not performing adequately. In addition, from time to time, we have had, and continue to have, differences with our manager over interpretation of or its performance under our management agreements. We generally resolve issues with our manager through discussions and negotiations. Failure by our hotel manager to fully perform the duties agreed to in our management agreements could adversely affect our results of operations.

Our manager collects our room revenues in its bank accounts.    So long as the long-term unsecured debt of Marriott International is rated at least BBB+ by Standard & Poor’s Rating Services and our hotel manager remains a subsidiary of Marriott International, all revenues from the operation of our hotels will be deposited initially into bank accounts maintained by the manager or Marriott International. The manager makes disbursements on our behalf from the funds in such accounts to pay all operating expenses of our hotels and periodically is required to remit the net revenues to us or the servicer of our mortgage debt. In the event that Marriott International is rated less than BBB+, then we may be obligated to provide additional working capital to our manager for the operation of our hotels. In the event of a bankruptcy or other insolvency proceeding involving the manager or Marriott International, there is a risk that our ability to receive payment of revenues previously collected by the manager may be delayed or otherwise impaired.

Our relationship with Marriott International and Host LP may result in conflicts of interest.    A wholly owned subsidiary of Marriott International manages our hotels. In addition, Marriott International manages, and in some cases may own or be invested in, hotels that compete with our hotels. As a result, Marriott International has in the past made, and may in the future make, decisions regarding the competing lodging facilities it manages that are or would not be in our best interests. Further, Host LP owns certain hotels, and may acquire others, that may compete with our hotels and accordingly has in the past and may in the future make decisions regarding such competing facilities that are or would not be in our best interests. In addition to our management agreements, Marriott International and its affiliates are parties to several agreements with us and our affiliates, including various ground leases and the subordinated debt of our equity owner, Courtyard JV. With respect to these various contractual arrangements, the potential exists for disagreement as to contract compliance and interpretation.

Our management agreements could impair the sale or financing of our hotels.    Under the terms of the management agreements, we generally may not sell, lease or otherwise transfer the hotels unless the transferee is not a competitor of the manager and the transferee assumes the related management agreement and meets specified other conditions. Our ability to finance or sell any of the properties may, depending upon the structure of such transactions, require the manager’s consent. If the manager does not consent, we would be prohibited from taking actions in our best interest such as financing, refinancing or selling the property, without breaching the management agreement.

We may be unable to sell properties to the extent we desire to do so because real estate investments are illiquid.    Real estate investments generally cannot be sold quickly. Even if we were able to obtain consents

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for sales of assets under our debt agreements, we may not be able to vary our portfolio promptly in response to economic or other conditions. The inability to respond promptly to changes in the performance of our investments could adversely affect our financial condition and ability to service debt.

Environmental problems are possible and can be costly.    We believe that our properties are in compliance in all material respects with applicable environmental laws. We have identified one property with environmental contamination; however, no determination has been made regarding the need for remediation or our potential responsibility as the contamination relates to a prior owner of the site. Additionally, unidentified environmental liabilities could arise and could have a material adverse effect on our financial condition and performance. Federal, state and local laws and regulations relating to the protection of the environment may require a current or previous owner or operator of real estate to investigate and clean up hazardous or toxic substances or petroleum product releases at the property. The owner or operator may have to pay a governmental entity or third parties for property damage and for investigation and clean-up costs incurred by the parties in connection with the contamination. These laws typically impose clean-up responsibility and liability without regard to whether the owner or operator knew of or caused the presence of the contaminants. Even if more than one person may have been responsible for the contamination, each person covered by the environmental laws may be held responsible for all of the clean-up costs incurred. In addition, third parties may sue the owner or operator of a site for damages and costs resulting from environmental contamination emanating from that site. Environmental laws also govern the presence, maintenance and removal of asbestos. These laws require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, that they notify and train those who may come into contact with asbestos and that they undertake special precautions, including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a building. These laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers.

Compliance with other government regulations can be costly.    Our hotels are subject to various other forms of regulation, including Title III of the Americans with Disabilities Act, building codes and regulations pertaining to fire safety. Compliance with those laws and regulations could require substantial capital expenditures. These regulations may be changed from time to time, or new regulations adopted, resulting in additional or unexpected costs of compliance. Any increased costs could have a material adverse effect on our business, financial condition or results of operations.

Future terrorist attacks could adversely affect us.    Previous terrorist attacks have adversely affected the travel and hospitality industries, including the upscale segment of the hotel industry. The impact which these terrorist attacks have had, or could have, on our business, in particular, and the United States economy, the global economy and global financial markets, in general, is indeterminable. It is possible that these factors could have a material adverse effect on our business, our ability to finance our business, our ability to insure our properties (see “Risk Factor—Some potential losses are not covered by insurance”) and on our financial condition and results of operations as a whole.

Some potential losses are not covered by insurance.    We carry comprehensive insurance coverage for general liability, property, business interruption and other risks with respect to all of our hotels and other properties. These policies offer coverage features and insured limits that we believe are customary for similar type properties. Generally, our “all-risk” policies provide that coverage is available on a per occurrence basis and that for each occurrence, there is an overall limit as well as various sub-limits on the amount of insurance proceeds we can receive. Sub-limits exist for certain types of claims such as service interruption, abatement, expediting costs or landscaping replacement, and the dollar amounts of these sub-limits are significantly lower than the dollar amounts of the overall coverage limit. Our policies also provide that all of the claims from each of our properties resulting from a particular insurable event, must be combined together for purposes of evaluating whether the aggregate limits and sub-limits contained in our policies have been exceeded and any such claims will also be combined with the claims of other owners of Marriott-managed hotels for the same purpose. That means that if

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an insurable event occurs that affects more than one of our hotels, or affects Marriott-managed hotels owned by others, the claims from each affected hotel will be added together to determine whether the aggregate limit or sub-limits, depending on the type of claim, have been reached and each affected hotel will only receive a proportional share of the amount of insurance proceeds provided for under the policy. We may incur losses in excess of insured limits and, as a result, we may be even less likely to receive sufficient coverage for risks that affect multiple properties such as earthquakes or certain types of terrorism.

In addition, there are other risks such as war, certain forms of terrorism such as nuclear, biological or chemical terrorism and some environmental hazards that may be deemed to fall completely outside the general coverage limits of our policies, may be uninsurable or may be too expensive to justify insuring against. If any such risk were to materialize and materially adversely affect one or more of our properties, we would not be able to recover our losses.

We may also encounter challenges with an insurance provider regarding whether it will pay a particular claim that we believe to be covered under our policy. Should a loss in excess of insured limits or an uninsured loss occur or should we be unsuccessful in obtaining coverage from an insurance carrier, we could lose all, or a portion of, the capital we have invested in a property, as well as the anticipated future revenue from the hotel. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property.

Item 3.    Legal Proceedings

The partnership and our hotels are involved in routine litigation and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and which collectively are not expected to have a material adverse effect on the business, financial condition or results of operations of the partnership.

Item 4.    Submission Of Matters to a Vote of Unit Holders

None.

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PART II

Item 5.    Market for the Partnership’s Limited Partnership Units and Related Security Holder Matters

There currently is no established public trading market for the limited partner units of the partnership and it is not anticipated that a public market for the units will develop. As of December 31, 2002, Courtyard JV was the indirect holder of record of all of the partnership’s 1,470 units pursuant to a settlement agreement with the previous limited partners effective November 28, 2000.

Subject to meeting cash flow thresholds in our senior notes indenture, cash available for distribution for any year, if any, will be distributed at least annually to the partners of record at the end of each accounting period. During 2002 and 2001, we distributed $10.6 million (or $7,182 per limited partner unit) and $17.0 million (or $11,534 per limited partner unit) to the limited partners, respectively. As of the third quarter of 2002, we did not meet certain cash flow thresholds as required by the senior notes indenture. No distributions to the partners may be made until these thresholds are met. For a further discussion of the senior note cash flow thresholds see Note 6 to the financial statements.

Item 6.     Selected Financial Data

The following selected financial data presents our historical operating information for each of the five years in the period ended December 31, 2002 presented in accordance with accounting principles generally accepted in the United States of America.

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The operating environment for 2002 presented many challenges including significantly reduced airline travel, slower growth in the economy and general international unrest due to the threat of further terrorist activity. As a result, the lodging industry in general, as well as our hotels, experienced significant declines in revenues and operating profits. We expect some of these conditions to persist into 2003. We expect that RevPAR for full year 2003 will be comparable to 2002 or down modestly, and that there will be continued pressure on operating expenses as a result of rising wages, benefits and insurance costs and general inflation.

Recent Events

Cash from operations during 2002 was sufficient to meet our debt service obligations. However, because of the seasonality of cash flows inherent in the operations of our hotels, we accessed a debt service reserve account and made use of certain subordination features of our ground leases with Marriott International and their affiliates and our management agreements with Courtyard Management Company to meet our debt service obligations that were due on or about February 1, 2003. None of these actions represent defaults under any of our agreements, nor are they in breach of any covenants under any of our agreements.

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Specifically, we used approximately $5.7 million of a $6.8 million debt service reserve that is maintained in accordance with our senior notes indenture towards the payment of the semi-annual coupon amount which was due under the senior notes on February 3, 2003. We are obligated to refund these amounts in the future to the extent we have Consolidated Excess Cash Flow, as defined in the senior notes indenture. Additionally, we invoked a provision available to us under our ground leases which required our ground lessor to return approximately $1.2 million of ground rent paid in 2002. These proceeds were applied to our debt service payments under our senior notes and under our mortgage notes. Finally, we exercised subordination provisions which subordinated approximately $1.4 million of ground rent and management fees due various affiliates of Marriott International to assist in making the debt service payment due on our mortgage notes on January 29, 2003, and an additional $0.3 million to make the payment due on our mortgage notes on February 26, 2003.

Results Of Operations

2002 Compared to 2001

Revenues.    Revenues decreased $24.1 million, or 8.7%, to $254.4 million in 2002 from $278.5 million in 2001 as a result of the continued weakness in demand at our hotels which was exacerbated in some markets by increased competition in the upscale category. RevPAR decreased as a result of the 2.7 percentage point decrease in average occupancy to 68.8% and a 6.4% decrease in the average room rate to $88.78.

Property-level costs and expenses.    Property-level costs and expenses declined $7.2 million, or 5.2%, to $132.5 million during 2002 compared to 2001. These expenses declined due to both the decline in occupancy at the hotels and the broad-based cost-cutting efforts undertaken at our hotels that began in 2001. As a percentage of revenues, property-level costs and expenses represented approximately 52.1% and 50.2% during 2002 and 2001, respectively.

Management Fees.    Management fees represent base, Courtyard and incentive fees. Base and Courtyard management fees, which are calculated as a percentage of total hotel revenues, decreased by 8.7%, or $1.4 million, in 2002 when compared to 2001. The decrease is consistent with the decline in hotel revenues. Incentive management fees are calculated as a percentage of operating profit, as defined in the management agreements. These fees declined $2.2 million, or 18.5%, to $9.7 million in 2002 when compared to 2001. The decrease in these fees for 2002 is due to the 23.2% decline in operating profit at the hotels. The entire $9.7 million incentive management fee earned by the manager during 2002 has been accrued and is included in “Management fees due to Courtyard Management Corporation” on the balance sheet. In accordance with the management agreements, deferred incentive management fees are paid only to the extent that cash flows exceed debt service, a priority return to equity and current incentive management fees.

Operating Profit.     Operating profit for 2002 declined by $12.8 million compared to 2001. Operating profit represented 16.6% of total revenues for 2002 and 19.8% for 2001.

Net Income.    Net income decreased by $12.3 million in 2002 to $3.0 million from $15.3 million in 2001 as a result of the items discussed above.

2001 Compared to 2000

Revenues.    Revenues decreased $25.0 million, or 8.2%, to $278.5 million in 2001 from $303.5 million in 2000 as a result of the September 11, 2001 terrorist attacks and the continued overall weakness in the economy. RevPAR decreased as the result of a 6.8 percentage point decrease in the average occupancy to 71.5%, which was offset by a 1% increase in the average daily room rate to $94.80.

Property-level costs and expenses.    Property-level costs and expenses declined $12.6 million, or 8.3%, to $139.7 million during 2001 compared to 2000. The decrease is primarily due to a $5.0 million, or 8.1%, decrease

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in rooms costs and expenses as well as a $5.8 million, or 7.8%, decrease in selling, administrative and other costs. These declines are due to a decrease in controllable expenses such as wages, reservation costs and supplies as a result of the manager’s cost-cutting efforts and decreased occupancy at our hotels.

Management Fees.    Base and Courtyard management fees decreased by 8.3%, or $1.5 million in 2001 when compared to 2000. The decrease in management fees is consistent with the decline in hotel revenues. Incentive management fees declined $1.9 million, or 13.8%, to $11.9 million in 2001 when compared to 2000. The decrease in these fees for 2001 is the result of the decline in operating profit at the hotels.

Operating Profit.    Operating profit for 2001 declined by $6.3 million compared to 2000. Operating profit represented 19.8% and 20.2% of total revenues for 2001 and 2000, respectively.

Net Income.    Net income decreased by $5.7 million in 2001 to $15.3 million from $21.0 million in 2000 primarily due to the changes in revenues and expenses discussed above.

Liquidity and Capital Resources

As of December 31, 2002, we have $8.1 million of unrestricted cash. Our principal source of cash is from operations. Our principal uses of cash are to make debt service payments, fund capital expenditures for property-improvements and to make distributions to the partners.

While there was sufficient cash from operations to make the required debt service payments during 2002, as a result of the weak economy and the decline in travel patterns, operating results at our properties decreased significantly in comparison to prior-year levels. Under the terms of our management agreements and our ground leases with Marriott International and their affiliates, a portion of the base management fee and all of the ground rent and incentive management fees due Marriott International and their affiliates are subordinate to debt service payments on our senior notes and multi-class commercial mortgage pass-through certificates, or Certificates. During 2002, we were able to make the required debt service payments without the use of these subordination provisions. Based on our current forecasts for 2003, we expect that our hotels will generate sufficient cash flow from operations to fund our remaining debt service obligations. However, because of seasonality issues arising from the fact that the months of November, December and January represent the lowest monthly levels of cash flow from operations for our hotels, we utilized a debt service reserve and certain subordination provisions available to us, as described above under “Recent Events”. As of the end of 2003, we expect to have repaid some, but not all, of the approximate $5.7 million drawn on the senior notes debt service reserve. Because we are not in compliance with certain cash flow coverage covenants under our senior notes indenture, we are currently restricted from repaying the amounts subordinated on or about February 1, 2003 under our ground leases and under our management agreements until we again satisfy the cash flow covenants and have fully replenished the debt service reserve.

We will be required to replenish the debt service reserve and repay deferred ground rent and management fee amounts prior to making equity distributions and establishing reserves for future operating capital needs and maintenance capital expenditures.

In accordance with our management agreements, to maintain and upgrade our hotels we place in a property improvement fund an amount equal to 6.5% of revenue or (approximately $16.5 million in 2002). As of December 31, 2002, the balance in the property improvement fund was $39.4 million, which includes the impact of expenditures funded from the account of approximately $8.7 million during 2002. The manager has proposed capital improvements over the next several years that include design and technological improvements to modernize and enhance the functionality and appeal of our hotels. The total proposed capital expenditure budget exceeds the amount expected to be in the property improvement fund. Generally, the partners are not obligated to fund improvements to the extent that they exceed the amounts reserved for in the property improvement fund under the management agreements.

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Cash provided by operations.    The decrease in cash provided by operations during 2002 is primarily due to the decrease in operations from the prior year, partially offset by the deferral of management fees. The increase in cash provided by operations in 2001 is primarily due to the deferral of $11.9 million of management fees.

Cash used in investing activities.    Investing activities consist primarily of contributions to the property improvement fund and capital expenditures for improvements to the hotels. Contributions to the property improvement fund were 6.5% of total hotel revenues as of October 24, 2000 and 5% of total hotel revenues prior to October 24, 2000. Property improvement fund expenditures and other activity includes expenditures for the replacement of furniture, fixtures and equipment offset by interest income earned by the fund.

Cash used in financing activities.    Financing activities primarily include the repayment of principal on our commercial mortgage-backed securities and distributions to general and limited partners. Distributions for 2001 include $0.5 million that was owed to the former partners who held partnership units prior to the acquisition of the partnership by Courtyard JV. Cash used in financing in 2002 also includes the funding and utilization of the debt service reserves required under our debt agreements.

Senior Notes.    Our senior notes are rated by Moody’s and Standard & Poor’s. As a result of the reduced operating levels at our hotels due, in part, to the weak economy, the credit rating assigned to these senior notes was downgraded by Moody’s on March 26, 2003, and there is risk that the rating agencies may take further action, which could negatively impact the value of the notes. Standard & Poor’s continues to have a negative outlook in conjunction with credit ratings assigned to the senior notes and the lodging industry in general. Further, under the terms of the senior notes indenture, our ability to make certain distributions and payments is dependent on our maintaining certain levels of excess cash flow. For the third and fourth quarters of 2002, the levels were not maintained. As a result, we suspended distributions to our partners and restricted other payments. Additionally, we are required to fund a separate supplemental debt-service reserve account in an amount equal to the amount of Consolidated Excess Cash Flow, as defined in the senior note indenture, for each quarter until excess cash flow meets specific levels. Consolidated Excess Cash Flow of approximately $1.4 million was deposited into the supplemental debt service reserve during 2002. Prior to funding additional amounts to the supplemental debt service reserve, we must first fully replenish the funds drawn from the regular debt service reserve up to an amount equal to one six-month interest payment ($5.7 million was drawn from the reserve in February 2003). As a result, we do not expect to have sufficient Consolidated Excess Cash Flow to fund additional amounts into the supplemental debt service reserve in 2003. To the extent that the escrow exceeds two semi-annual interest payments (approximately $13.7 million), we are required to offer to purchase the senior notes at par in an amount equal to the greater of (i) the amount by which the escrow exceeds two semi-annual interest payments and (ii) $5 million. Based on our current estimates of operating results, we do not believe we will be required to make purchases under this provision in 2003.

Contractual Obligations

The table below summarizes our obligations for principal payments on our debt and future minimum lease payments on our operating and capital leases (in millions):

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Inflation

Our properties have been impacted by inflation through its effect on increasing costs. Over the past three years, inflation has grown an average of 2.6% based on Consumer Price Index statistics provided by the U. S. Department of Labor. Unlike other real estate, hotels have the ability to change room rates on a daily basis, so the impact of higher inflation can often be passed on to customers. However, the current weak economic environment has resulted in a decline in demand and has restricted our manager’s ability to raise room rates to offset rising costs.

Critical Accounting Policies

Our consolidated financial statements include accounts of the partnership and all majority-owned subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements, and the reported amounts of revenues and expenses during the reporting period. While we do not believe the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. All of our significant accounting policies are disclosed in Note 2 to the financial statements. The following critical accounting policies require the use of business judgment or significant estimates to be made.

New Accounting Standards.    In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The standard requires the recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This statement is effective for exit or disposal activities initiated after December 31, 2002. We do not expect the statement to have a significant impact on our financial position or operating results.

In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” The provisions of this standard, which primarily relate to the rescission of Statement 4, eliminate the requirement that gains and losses from the extinguishment of debt be classified as extraordinary items unless it can be considered

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unusual in nature and infrequent in occurrence. These provisions are effective in fiscal years beginning after May 15, 2002. We will implement the provisions of SFAS No. 145 beginning in fiscal year 2003. We do not expect the statement to have a significant impact on our financial position or operating results.

In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” which replaces SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” The standard provides guidance beyond that previously specified in Statement 121 to determine when a long-lived asset should be classified as held for sale and further guidance on the determination of impairment on long-lived assets, among other things. This Statement is effective for fiscal years beginning after December 15, 2001. We adopted the statement on January 1, 2002.

Item 7a.    Quantitative and Qualitative Disclosures about Market Risk

We do not have a significant market risk with respect to interest rates, foreign currency exchanges or other market rate or price risks, and we do not hold any financial instruments for trading purposes. As of December 31, 2002, all of our debt has a fixed interest rate. The table below provides information about our debt obligations.

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Item 8.    Financial Statements And Supplementary Data

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Independent Auditors’ Report

To the Partners of

Courtyard by Marriott II Limited Partnership:

We have audited the accompanying consolidated balance sheet of Courtyard by Marriott II Limited Partnership (a Delaware limited partnership) and subsidiaries as of December 31, 2002, and the related consolidated statements of operations, changes in partners’ capital (deficit) and cash flows for the year then ended. In connection with our audit of the 2002 consolidated financial statements, we have also audited the related financial statement Schedules I and III as listed in the index as Item 15(a)(2). These consolidated financial statements and financial statement schedules are the responsibility of the general partner’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audit. The 2001 and 2000 consolidated financial statements and financial statement schedules of the partnership were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements and financial statement schedules in their report dated March 18, 2001.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Courtyard by Marriott II Limited Partnership and subsidiaries as of December 31, 2002, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in Note 2, the partnership adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” in 2002.

KPMG LLP

McLean, Virginia

March 14, 2003

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LEGEND

For the years ended December 31, 2001 and 2000, Arthur Andersen LLP was our auditor. The auditor report shown below is a copy of the previously issued report from Arthur Andersen LLP. Arthur Andersen has not reissued the report.

Report of Independent Public Accountants

To the Partners of

Courtyard by Marriott II Limited Partnership:

We have audited the accompanying consolidated balance sheets of Courtyard by Marriott II Limited Partnership (a Delaware limited partnership) and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in partners’ capital (deficit) and cash flows for the three years ended December 31, 2001. These financial statements and the schedules referred to below are the responsibility of the general partner’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Courtyard by Marriott II Limited Partnership and Subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the three years ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index at Item 14(a)(2) are presented for purposes of complying with the Securities and Exchange Commission’s rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Vienna, Virginia

March 18, 2002

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COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2002 and 2001

(in thousands)

See notes to consolidated financial statements.

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COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2002, 2001 and 2000

(in thousands, except per unit amounts)

See notes to consolidated financial statements.

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COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL (DEFICIT)

For the Years Ended December 31, 2002, 2001 and 2000

(in thousands)

See notes to consolidated financial statements.

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COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2002, 2001 and 2000

(in thousands)