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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

OR

SECURITIES EXCHANGE ACT OF 1934

Commission File No. 001-13125

EXTENDED STAY AMERICA, INC.

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code: (864) 573-1600

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

Securities registered pursuant to Section 12(g) of the Act: None

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 x    No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

The aggregate market value of the voting stock of the registrant held by stockholders who were not affiliates (as defined by regulations of the Securities and Exchange Commission) of the registrant was approximately $848,005,365 at February 26, 2003 (based on the closing sale price on the New York Stock Exchange, Inc. (“NYSE” on February 26, 2003). At February 26, 2003 the registrant had issued and outstanding an aggregate of 93,972,019 shares of common stock.

Documents Incorporated by Reference

Those sections or portions of the registrant’s proxy statement for the Annual Meeting of Stockholders to be held on May 27, 2003, described in Part III hereof, are incorporated by reference in this report.

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PART I

ITEM 1.    BUSINESS

Our Company

We develop, own, and operate extended stay lodging facilities that provide an affordable and attractive lodging alternative at a variety of price points for value-conscious guests. Our facilities are designed to offer a superior product at lower rates than most other lodging providers within their respective price segments. Our facilities feature fully furnished rooms that are generally rented on a weekly basis to guests such as business travelers, professionals on temporary work assignment, persons between domestic situations, and persons relocating or purchasing a home. We had revenue of $547.9 million in 2002, an increase of 1% from $541.5 million in 2001.

We believe that extended stay properties generally have higher operating margins, lower occupancy break-even thresholds, and higher returns on capital than traditional hotels, primarily as a result of the typically longer length of stay, lower guest turnover, and lower operating expenses. In addition, we believe the extended stay market is one of the fastest growing and under-served segments of the U.S. lodging industry, with demand for extended stay lodging significantly exceeding the current and anticipated near-term supply of dedicated extended stay rooms. Of the 4.3 million rooms available in the lodging industry at December 31, 2002, extended stay hotel chains had only approximately 219,000 rooms. Of these 219,000 total extended stay rooms, approximately 133,000 rooms operated in the lower tier segment of the extended stay market, a segment defined by weekly room rates generally below $500 and the segment in which we operate. We had approximately 48,000 rooms (or about 36% of the lower tier segment) at the end of 2002. We believe that strong growth opportunities exist in the lower tier segment of the extended stay market.

As of December 31, 2002, we owned and operated 455 extended stay lodging facilities and had 20 facilities under construction in a total of 42 states. We currently plan to complete construction on 19 of these sites in 2003 and one in 2004. Due to continued weakness in the U.S. economy, declines in occupancy at our properties, and the increasing prospect of a further reduction in travel as a result of geo-political events, we decided in late November 2002 to defer the commencement of new construction projects. At this time, we believe we will be successful in obtaining extensions on a majority of the 48 sites we had under option at December 31, 2002, if needed. We will continue to seek the necessary approvals and permits for these sites and for additional sites. Construction will commence as soon as possible within the constraints of our amended credit agreement and contingent upon a number of factors, including improvements in the overall U.S. economy, improvements in demand for lodging products in the overall lodging industry, and improvements in demand for our extended stay lodging products. We plan to resume an active development program at that time. We also may make opportunistic acquisitions of other lodging companies or facilities.

Our Brands

We own and operate three brands in the extended stay lodging market — StudioPLUS Deluxe Studios^®, EXTENDED STAYAMERICA Efficiency Studios^®, and Crossland Economy Studios^®. Each brand is designed to appeal to different price points generally below $500 per week. All three brands offer the same core components: a living/sleeping area; a fully-equipped kitchen or kitchenette; and a bathroom. StudioPLUS facilities serve the mid-price category and generally feature guest rooms that are larger than those of our other brands, an exercise facility, and a swimming pool. EXTENDED STAY rooms are designed to compete in the economy category. Crossland rooms are typically smaller than EXTENDED STAY rooms and are targeted for the budget category.

Our Strategy

Our objective is to be the leading national provider of extended stay lodging. Our goal is to maximize value to customers by providing a superior and well-maintained product at each price point while maintaining high operating margins. We attempt to achieve this goal through the following strategies:

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Build Brand Awareness.    We believe that guests value a recognizable brand when selecting lodging accommodations. We believe our increasing national presence, high customer satisfaction, and selective advertising and promotion have established our brands with distinct advantages over their local and regional competitors. We plan to allocate our capital primarily to the EXTENDED STAYAMERICA brand, but we may include additional StudioPLUS and Crossland properties on an opportunistic basis.

Provide a Superior Product at a Lower Price.    We have designed our facilities to offer a superior product at lower rates than most other lodging providers within their respective price segments. Each of our brands is targeted to a different price point: StudioPLUS—median rate $299 per week (daily equivalent—$43); EXTENDED STAY—median rate $279 per week (daily equivalent—$40); and Crossland—median rate $189 per week (daily equivalent—$27). Room rates at our facilities vary significantly depending upon market factors affecting their locations. These rates contrast with average daily rates in 2002 of $68, $54, and $42 for the mid-price, economy, and budget segments, respectively, of the general lodging industry.

Achieve Operating Efficiencies.    We believe that the design and price level of our facilities attract guest stays of several weeks. This creates a more stable revenue stream which, together with low cost amenities, should lead to reduced administrative and operational costs and higher operating margins. We also use sophisticated control and information systems to manage individual facility-specific factors such as pricing, payroll, and occupancy levels, on a company-wide basis.

Optimize Low Cost Amenities.    We seek to provide the level of amenities needed to offer quality accommodations while maintaining high operating margins. Our facilities contain a variety of non-labor intensive features that are attractive to extended stay guests. These features include a fully-equipped kitchen or kitchenette, weekly housekeeping, color television with cable or satellite hook-up, coin-operated laundromat, and telephone service with voice mail messaging. Many StudioPLUS facilities also include an exercise room and swimming pool. To help maintain affordability of room rates, labor-intensive services such as daily cleaning, room service, and restaurants are not provided.

Employ a Standardized Concept.    We have developed standardized plans and specifications for our facilities. This provides for lower construction and purchasing costs and establishes uniform quality and operational standards. We believe the uniformity of our facilities is advantageous when consumers are faced with a variety of lodging options.

Targeted Expansion.    We will continue to expand nationally into regions of the country that contain the demographic factors we think are necessary to support one or more of our facilities. We target sites that generally have a large and/or growing population in the surrounding area with a large employment base. These sites also generally have good visibility from a major traffic artery and are in close proximity to convenience stores, restaurants, and shopping centers.

Industry Overview

Traditional Lodging Industry

The U.S. lodging industry is estimated to have generated approximately $77.5 billion in annual room revenues in 2002 and had approximately 4.3 million rooms at the end of 2002. The U.S. lodging industry’s performance has historically been strongly correlated to economic activity. Room supply and demand historically have been sensitive to shifts in economic growth, which has resulted in cyclical changes in average daily room and occupancy rates.

The following table indicates the annual growth in revenue per available room (“REVPAR”) and available room nights for 1995 through 2002 for the lodging industry based on data provided by Smith Travel Research.

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Overbuilding in the lodging industry in the mid and late 1980s, when approximately 500,000 rooms were added, resulted in an oversupply of rooms. We believe this oversupply and the general downturn in the economy led to depressed industry performance and a lack of capital available to the industry in the late 1980s and early 1990s. From the early 1990s through 2000, we believe that the lodging industry benefited from an improved supply and demand balance, as evidenced by the compound annual growth rate of 4.9% in REVPAR from 1994 through 2000. REVPARs declined in 2001 by (6.9%) and by (2.5%) in 2002. During 2001 and 2002, REVPAR was negatively impacted by a recession in the U.S. economy and the negative impact on travel of the events of September 11, 2001 and subsequent terrorism alerts. As a result of continuing concerns about the U.S. economy, the prospects of war, the impact of further terrorist events on the travel and leisure industries, and the sustained tightening of credit standards by many financial institutions, we expect the rate of growth of new rooms to continue to moderate for the next few years.

The lodging industry generally can be segmented by the level of service provided and the pricing of the rooms. Level of service can be divided into the following categories:

The lodging industry may also be segmented by price level and is generally divided into categories based on average daily room rates, which in 2002 were $42 for budget, $54 for economy, $68 for mid-price, $91 for upscale, and $138 for luxury.

The all-suite segment of the lodging industry is a relatively new segment. It is principally oriented toward business travelers in the mid-price to upscale price levels. All-suite hotels were developed partially in response to the increasing number of corporate relocations, transfers, and temporary assignments and the need of business travelers for more than just a room. To address those needs, all-suite hotels began to offer suites with additional space and, in some cases, an efficiency kitchen. In addition, guests staying for extended periods of time were offered discounts to daily rates when they paid on a weekly or monthly basis. We believe the extended stay market in which we participate is a distinct and emerging segment of the traditional lodging industry similar to the all-suite segment.

Extended Stay Market

We believe that extended stay hotels generally have higher operating margins, lower occupancy break-even thresholds, and higher returns on capital than traditional hotels. This is primarily a result of the typically longer length of stay, lower guest turnover, and lower operating expenses. In addition, we believe the extended stay market is one of the fastest growing and under-served segments of the U.S. lodging industry, with demand for extended stay lodging significantly exceeding the current and anticipated near-term supply of dedicated extended stay rooms. Of the 3.7 million rooms available in the lodging industry in 1996, extended stay hotel chains had approximately 60,000 rooms. For 2002, there were 4.3 million rooms available in the lodging industry, of which approximately 219,000 rooms were at extended stay hotel chains. Of these extended stay rooms, approximately 133,000 rooms operated in the lower tier (less than $500 per week) segment of the extended stay market.

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As of December 31, 2002, the inventory of dedicated extended stay rooms, based on data provided by Smith Travel Research, for the following extended stay hotel chains totaled approximately 219,000 rooms.

We believe that these chains represent the majority of dedicated extended stay rooms available in the U.S. lodging industry.

An upscale extended stay room generally has a weekly rate of $500 or more, while a lower tier room generally has a weekly rate of less than $500. Our weekly room rates are generally less than $500. Approximately 61% of the supply of extended stay rooms were in the lower tier segment and we owned approximately 36% of the rooms operated in this segment. The following table indicates the approximate number of total rooms for the extended stay chains listed above, the total rooms for the upscale chains, the total rooms for the lower tier chains, and the total rooms owned by us at the end of each of the last five years.

As a segment of the total U.S. lodging industry, extended stay hotel chains experienced a significant contraction in the availability of capital that began during 1998 and has continued through 2002. As a result, we expect the growth in available dedicated extended stay rooms to continue to moderate for the next few years.

We believe the continuing significant demand/supply imbalance and the longer average length of stay have caused occupancy rates for extended stay hotels to significantly exceed occupancy rates in the overall U.S. lodging industry. The table below shows that average occupancy rates for extended stay hotel chains have exceeded the average occupancy rates in the overall U.S. lodging industry for each of the previous five years, based on data provided by Smith Travel Research.

We believe the increase in occupancy rates for extended stay hotel chains in 2000 reflects the moderation of additional supply during the year as well as the stabilization of existing supply. We believe that the overall decline in occupancies in 2001 and 2002 reflect the impact of the recession in the U.S. economy and the impact of terrorist events.

Property Development

Our goal is to be the leading provider of extended stay facilities in the United States. We expect that our primary means of expansion will be the construction and development of new extended stay lodging facilities. We

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have also acquired, and we may make additional acquisitions of, existing extended stay lodging facilities or other properties that we can convert to the extended stay concept.

Our strategy is to continue to expand nationally into regions of the country that contain the demographic factors we think are necessary to support one or more of our facilities. We target sites that generally have a large and/or growing population in the surrounding area with a large employment base. These sites also generally have good visibility from a major traffic artery and are in close proximity to convenience stores, restaurants, and shopping centers.

We have approximately 15 real estate professionals and approximately 24 construction professionals who perform site selection, entitlement, and construction activities according to our established criteria and procedures from offices throughout the United States. It generally takes us at least twenty-four months to identify a site and complete construction of a facility, but this process may be substantially longer in certain markets. We try to minimize our capital outlays incurred in this process until after the commencement of construction.

The site selection process includes assessing the characteristics of a market area based on our development standards, identifying sites for development within a qualified market area, and negotiating an option to purchase qualified sites. Although the time required to complete the selection process in a market varies significantly based on local market conditions, we typically need approximately six to eight months to assess a market and obtain an option to purchase a site in a qualified market.

After we obtain an option to purchase a site, our legal, environmental, and business due diligence begins. During this period, our real estate, construction, and legal professionals evaluate whether the site is financially suitable for development, obtain necessary approvals and permits, and negotiate construction contracts with third party general contractors. It generally takes us eight to ten months to complete this process; however, the time needed can vary significantly by market area due to local regulations and restrictions.

The site selection and due diligence processes are reviewed periodically by our senior management and our approval to begin construction is based on a detailed review of the demographic, physical, and financial qualifications of each site. Once our senior management approves the development of a site, it is purchased, the construction contract is executed, and construction generally begins immediately. We use a number of general contractors. The selection of a contractor for a specific site depends upon the geographic area, the negotiated construction costs, and the financial and physical capacities of the contractors. Our construction professionals regularly inspect the construction process to monitor both the quality and timeliness of completion of construction. Although the construction period varies significantly based on local construction requirements and weather conditions, it generally takes us eight to ten months to complete construction once it has begun.

Our development status as of December 31, 2002 was as follows:

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The design plans for our lodging facilities typically call for a newly-constructed apartment style complex. They generally consist of two- to four-story buildings with laundromat and office areas and primarily use interior corridor building designs, depending primarily on local zoning and weather factors. All three of our brands offer the same core components: a living/sleeping area; a fully-equipped kitchen or kitchenette with a refrigerator, stovetop, microwave, and sink; and a bathroom. The typical building design criteria for each of our brands is shown in the table below:

The actual number of rooms and living space per room may vary significantly depending on location and date of construction. In addition, each facility may include certain non-standard room types.

Property Operations

Each of our facilities employs a property manager who is responsible for the operations of that particular property. The property manager shares duties with and oversees a staff typically consisting of an assistant manager, desk clerks, maintenance personnel, and a housekeeping/laundry staff of approximately 2-10 persons (many of whom are part-time employees). The office at each of our facilities is generally open daily as follows: Crossland—from 7:00 a.m. to 8:00 p.m.; EXTENDED STAY—from 7:00 a.m. to 11:00 p.m.; and StudioPLUS—from 7:00 a.m. to 11:00 p.m., although an employee normally is on duty at all facilities twenty-four hours a day to respond to guests’ needs.

Our property managers make the majority of daily operational decisions. Each property manager is under the supervision of one of our district managers, who typically are responsible for four to seven facilities, depending on geographic location. Our district managers oversee the performance of our property managers in such areas as guest service, property maintenance, payroll, and cost control. The district managers report to a regional director who is responsible for the supervision of 5 to 8 district managers. Each facility is evaluated against a detailed revenue and expense budget, as well as against the performance of our other facilities. Our corporate offices use sophisticated information systems to support the district managers and regional directors.

Our facilities are kept up to date through a program of continued renovation. We do not plan to renovate an entire facility at one time, but rather renovate individual parts of each facility on an as needed and ongoing basis. We believe this most effectively ensures that our facilities remain modern and in good operating condition.

Marketing Strategy

We believe that guests value a recognizable brand when selecting lodging accommodations. To date, we have created brand awareness primarily by increasing the number of our hotels through a rapid national development program, with sites that typically are in highly-visible locations. We have established a toll free reservation number (1-800-EXT-STAY) and a web site (www.extendedstay.com) to provide information about our locations and to reserve rooms. In addition, our website contains a “Road Warrior” rapid reservation utility for the convenience of our frequent guests. We think that we can increase demand for our facilities by building awareness for both the extended stay concept as well as our various brands. From 1999 through 2002, we conducted a national consumer advertising campaign in USA Today and a national direct mail campaign. Due to reduced occupancies experienced by the overall lodging industry and by our extended stay lodging products in recent quarters as a result of the impact of terrorist events and the recession in the U.S. economy, we have suspended both campaigns thus far in 2003. We may resume these or other advertising initiatives in the future.

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Lodging Facilities

As of December 31, 2002, we had 455 extended stay lodging facilities in operation (95 StudioPLUS, 321 EXTENDED STAY, and 39 Crossland) and 20 EXTENDED STAY facilities under construction in a total of 42 states. The average age of our properties at December 31, 2002 was four years and seven months. The following table shows certain information regarding those facilities.

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Competition

The lodging industry is highly competitive. This competition is based on a number of factors including room rates, quality of accommodations, service levels, convenience of location, reputation, reservation systems, name recognition, and supply and availability of alternative lodging in local markets, including short-term lease apartments and limited service hotels. All of our facilities are located in developed areas and compete with budget, economy, and mid-price segment hotels and other companies focusing on the extended stay market. The greater the number of competitive lodging facilities in a particular area, the more likely it is that those competitors may have a material adverse effect on the occupancy levels and average weekly room rates of our facilities.

We expect that competition within the budget, economy, and mid-price segments of the extended stay lodging market will continue to increase. Although we expect the contraction of capital available to the lodging industry that began during 1998 and continued through 2002 to slow the rate of growth of new lodging products in general, we expect our existing competitors to continue to develop extended stay facilities to the extent that their capital permits and we expect them to increase their development in the event that additional capital should become available in the future. Competitors may include new participants in the lodging industry generally and participants in other segments of the lodging industry that may enter the extended stay market. They may also include existing participants in the extended stay market that may increase their product offerings to include facilities in the budget, economy, or mid-price segments. Competition is for both quality locations to build new facilities and for guests to fill and pay for those facilities. A number of our competitors have greater financial resources than we do and better relationships with lenders and sellers, and may therefore be able to find and develop the best sites before we can. Also, we cannot assure you that our competitors will not reduce their rates, offer greater convenience, services, or amenities, or build new hotels in direct competition with our existing facilities, all of which could have a material adverse effect on our operations.

Environmental Matters

Under various federal, state, and local laws and regulations, an owner or operator of real estate may be liable for the costs of removal or remediation of hazardous or toxic substances on that property. These laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence of those hazardous or toxic substances. Furthermore, a person who arranges for the disposal or transports for disposal or treatment of a hazardous substance at a property owned by another may be liable for the costs of removal or remediation of hazardous substances released into the environment at that property. These costs may be substantial, and the presence of hazardous substances, or the failure to properly remediate hazardous substances, may adversely affect the owner’s ability to sell the real estate or to borrow using that real estate as collateral. We may be liable for any of these costs that occur in connection with our properties.

We have obtained Phase I environmental site assessments (“Phase I Surveys”) on our existing properties and we intend to obtain Phase I Surveys before we purchase any future properties. Phase I Surveys are intended to identify potential environmental contamination. A Phase I Survey generally includes an historical review of the relevant property, a review of certain public records, a preliminary investigation of the site and surrounding properties, and the preparation of a written report. A Phase I Survey generally does not include invasive procedures, such as soil sampling or ground water analysis.

We have also obtained Phase II environmental site assessments (“Phase II Surveys”) on a limited number of our existing properties. Phase II Surveys are intended to provide additional information on potential environmental contamination identified in a Phase I Survey. A Phase II Survey generally involves soil sampling and/or groundwater analysis.

None of our Phase I or Phase II Surveys have revealed any environmental liability that we believe would have a material adverse effect on our business, assets, results of operations, or liquidity, and we are not aware of any such liability. With respect to environmental conditions existing at some of our properties, we have obtained a determination from the appropriate federal, state, or local agency that we will not be held liable for those conditions by that agency. This determination, however, does not preclude other agencies or private parties from bringing actions against us based upon those environmental conditions. In certain circumstances, we also have received an indemnification agreement from the previous owner of the property. Despite our customary precautionary and due

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diligence measures, it is possible that our Phase I and/or Phase II Surveys did not reveal all environmental liabilities or that there are material environmental liabilities or compliance problems of which we will not be aware. Moreover, new or changed laws, ordinances, or regulations may impose material environmental liabilities. In addition, the environmental condition of our properties may also be affected by the condition of neighboring properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to us.

Governmental Regulation

A number of states regulate the licensing of hotels by requiring registration, disclosure statements, and compliance with specific standards of conduct. We believe that each of our facilities has the necessary permits and approvals to operate its respective business and we intend to continue to obtain these permits and approvals for our new facilities. We are also subject to laws governing our relationship with our employees, including minimum wage requirements, overtime, working conditions, and work permit requirements. An increase in the minimum wage rate, employee benefit costs, or other costs associated with employees could adversely affect our business. There are frequently proposals under consideration, at the federal and state level, to increase the minimum wage.

Under the Americans With Disabilities Act (“ADA”), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. We attempt to satisfy ADA requirements in the designs for our facilities, but we cannot assure you that we will not be subjected to a material ADA claim. If that were to happen, we could be ordered to spend substantial sums to achieve compliance, fines could be imposed against us, and we could be required to pay damage awards to private litigants. The ADA and other regulatory initiatives could adversely affect our business as well as the lodging industry in general.

Insurance

We currently have the types and amounts of insurance coverage that we consider appropriate for a company in our business. While we believe that our insurance coverage is adequate, our business, results of operations, and financial condition could be materially and adversely affected if we were held liable for amounts exceeding the limits of our insurance coverage or for claims outside of the scope of our insurance coverage.

Employees

At December 31, 2002, we employed approximately 7,250 persons, of which approximately 4,700 were part-time employees. We expect that we will significantly increase the number of our employees as our business expands. Our employees are not subject to any collective bargaining agreements and we believe that our relationship with our employees is good.

ITEM 2.    PROPERTIES

In addition to our lodging facilities described in “Item 1.    Business—Lodging Facilities” above, we maintain regional offices throughout the United States and our corporate headquarters in Spartanburg, SC. We generally rent our office space on a short-term basis. In the spring of 2003, we expect to complete construction of our new corporate headquarters and executive offices, totaling approximately 118,000 square feet, located in Spartanburg, SC. Our offices are sufficient to meet our present needs, and we do not anticipate any difficulty in securing additional office space, as needed, on terms acceptable to us.

On August 5, 2002, one of our subsidiaries was served with a complaint against us and several of our subsidiaries in the Superior Court of California, County of Alameda. This action alleges violations of certain of California’s wage and hour laws. In particular, the action alleges that we misclassified former and existing managers, assistant managers, and manager trainees for our properties in California as exempt from California’s laws regarding overtime pay. The plaintiffs are seeking to certify a class representing all such property managers in California, an injunction, and damages for back pay, penalties, interest, and attorneys’ fees. The case is captioned Rachelle Reid, et al vs. Extended Stay America, Inc., etc., et al. We are in the beginning stages of this litigation, but

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we believe we have meritorious defenses against this claim and intend to defend this case vigorously. The financial impact, if any, of this case cannot yet be predicted.

In addition to the litigation noted above, we are from time to time subject to various other claims and lawsuits incidental to our business. In the opinion of management, these claims and suits, in the aggregate, will not have a material adverse effect on our consolidated financial statements.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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PART II

Our common stock is traded on the New York Stock Exchange, Inc. (the “NYSE”) under the symbol “ESA.” On December 31, 2002, the last reported sale price of our common stock on the NYSE was $14.75 per share. At December 31, 2002, there were approximately 280 record holders of our common stock. The table below sets forth the high and low sales prices of shares of our common stock on the NYSE for the periods indicated.

Market Information

We have not paid any dividends on our common stock. We intend to continue to retain our earnings to finance our growth and for general corporate purposes. We do not anticipate paying any dividends in the foreseeable future. In addition, our credit facility and senior subordinated notes contain, and future financing agreements may contain, financial covenants and limitations on payment of any cash dividends or other distributions of assets.

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The following selected financial data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

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General

Extended Stay America, Inc. was organized on January 9, 1995 as a Delaware corporation. We own and operate three brands in the extended stay lodging market—StudioPLUS Deluxe Studios^®, EXTENDED STAYAMERICA Efficiency Studios^®, and Crossland Economy Studios^®. Each brand is designed to appeal to different price points generally below $500 per week. All three brands offer the same core components: a living/sleeping area; a fully-equipped kitchen or kitchenette; and a bathroom. StudioPLUS facilities serve the mid-price category and generally feature guest rooms that are larger than those in our other brands, an exercise facility, and a swimming pool. EXTENDED STAY rooms are designed to compete in the economy category. Crossland rooms are typically smaller than EXTENDED STAY rooms and are targeted for the budget category.

The table below provides a summary of our selected development and operational results for 2000, 2001, and 2002.

Average occupancy rates are determined by dividing the number of rooms occupied on a daily basis by the total number of rooms. Average weekly room rates are determined by dividing room revenue by the number of rooms occupied on a daily basis for the applicable period and multiplying by seven. The average weekly room rates generally will be greater than standard room rates because of (1) stays of less than one week, which are charged at a higher nightly rate, (2) higher weekly rates for rooms that are larger than the standard rooms, and (3) additional charges for more than one person per room. We expect that our future occupancy and room rates will be impacted by a number of factors, including the impact of the U.S. economy on demand for lodging products, the amount of competing lodging products in markets where we operate, the number and geographic location of our new facilities, and the season in which we open those facilities. We also cannot assure you that we can maintain our occupancy and room rates.

At December 31, 2002, we had 455 operating facilities (39 Crossland, 321 EXTENDED STAY, and 95 StudioPLUS) and had 20 EXTENDED STAY facilities under construction. We expect to complete the construction of the facilities currently under construction generally within the next twelve months; however, we cannot assure you that we will complete construction within the time periods we have historically experienced. Our ability to complete construction may be materially impacted by various factors including final permitting, obtaining certificates of occupancy, and weather-related construction delays.

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Results of Operations

2002 Compared to 2001

Property Operations

Operating results for the year ended December 31, 2002 include the impact of one-time rental contracts during the 2002 Winter Olympics at three EXTENDED STAY properties located in Salt Lake City, Utah (the “Olympic Properties”). We estimate that these contracts generated additional non-recurring net income of approximately $1.2 million, or $0.01 per diluted share, for the year ended December 31, 2002.

Including the Olympic Properties, we realized average occupancies of 68% and average weekly room rates of $321 for the year ended December 31, 2002, and we realized average occupancies of 74% and average weekly room rates of $320 for the year ended December 31, 2001, resulting in a decrease of 7.5% in overall REVPAR for 2002 when compared to 2001.

Excluding the Olympic Properties, the following is a summary of the number of properties in operation at the end of each year along with the related average occupancy rates and average weekly room rates during each year:

Excluding the Olympic Properties, we realized an overall decrease of 7.8% in REVPAR for 2002 when compared to 2001. Excluding the Olympic Properties, our overall REVPAR decreased 16.7%, 10.0%, 4.0%, and 0.1% in the first, second, third, and fourth quarters of 2002, respectively, when compared to the same periods in the prior year. The decrease in overall average occupancy rates for 2002 compared to 2001 reflects, primarily, the impact of a general decline in demand for lodging products as a result of the weakened U.S. economy and the continued impact on travel of the events of September 11, 2001 and subsequent terrorism alerts. Although overall average weekly room rates for 2002 compared to 2001 did not change, we generally experienced decreases in rates charged in previously opened properties. Particularly for the EXTENDED STAY brand, this decrease in rates was offset by the geographic dispersion of properties opened since December 31, 2001 and the higher standard weekly room rates in certain of those markets.

Comparable hotels, consisting of the 359 properties opened for at least one year at the beginning of the first quarter of 2001 (excluding the Olympic Properties), realized the following percentage changes in the components of REVPAR for 2002 when compared with 2001:

We believe that the percentage changes in the components of REVPAR for our brands differ primarily as a result of the number and geographic dispersion of the comparable hotels.

The percentage change in the components of REVPAR for our comparable hotels experienced in 2002 reflects a decrease in REVPAR of 17.2%, 11.0%, 5.9% and 2.6% in the first, second, third, and fourth quarters of 2002, respectively, when compared to the same periods in the prior year. While we believe that improvements in

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the U.S. economy will result in increased demand for our products, it is difficult to estimate the timing and magnitude of these improvements.

We recognized total revenue of $547.9 million in 2002 and $541.5 million in 2001. This is an increase of $6.4 million, or 1%. The 392 properties that we owned and operated throughout both periods experienced an aggregate decrease in revenue of approximately $49.0 million, net of incremental revenue at the Olympic Properties of approximately $2.0 million.

Property operating expenses, consisting of all expenses directly allocable to the operation of the facilities but excluding any allocation of corporate operating and property management expenses, depreciation, and interest were $252.4 million (46% of total revenue) for 2002, as compared to $230.2 million (43% of total revenue) for 2001. We did not incur significant incremental property operating expenses at the Olympic Properties during 2002. We expect the ratio of property operating expenses to total revenue to generally fluctuate inversely relative to REVPAR increases or decreases because the majority of these expenses do not vary based on REVPAR. We realized an overall decrease of 7.5% in REVPAR for 2002 as compared to 2001, and our property operating margins were 54% for 2002 and 57% for 2001.

The provisions for depreciation and amortization for our lodging facilities were $78.1 million for 2002 and $71.1 million for 2001. These provisions were computed using the straight-line method over the estimated useful lives of the assets. These provisions reflect a pro rata allocation of the annual depreciation and amortization charge for the periods for which the facilities were in operation. Depreciation and amortization for 2002 increased compared to 2001 because we operated 24 additional facilities in 2002 and because we operated for a full year the 39 properties that were opened in 2001.

From time to time, we may incur expenses due to defects in materials, construction, or systems installed in our properties. Most significant products or systems contain manufacturers’ warranties. In addition, contractual agreements with our general contractors typically require general contractors and subcontractors to maintain insurance designed to cover the faulty installation of significant systems.

Testing has revealed that certain of our properties have sustained damage arising from defective materials and/or faulty installation of the Exterior Insulation Finish System (“EIFS”). At this time, the full extent of damage cannot reasonably be estimated, although currently we do not believe the cost of repairs will be material to us overall. We have 23 active lawsuits that we filed against the EIFS manufacturers, certain applicators, certain general contractors, and others, seeking necessary repairs and recovery rights against expected and incurred expenses. At this time, the extent of recovery, if any, on these suits cannot reasonably be determined.

Corporate Operations

Corporate operating and property management expenses include all expenses not directly related to the development or operation of lodging facilities. These expenses consist primarily of personnel and certain marketing costs, as well as development costs that are not directly related to a site that we will develop. We incurred corporate operating and property management expenses of $48.8 million (9% of total revenue) in 2002 and $47.5 million (9% of total revenue) in 2001. The increase in the amount of these expenses for 2002 as compared to 2001 reflects the impact of additional personnel and related expenses in connection with the increased number of facilities we operated. We expect these expenses will continue to increase as we develop and operate additional facilities in the future.

Depreciation and amortization was $742,000 for 2002 and $1.0 million for 2001. These provisions were computed using the straight-line method over the estimated useful lives of the assets, for assets not directly related to the operation of our facilities. These assets were primarily office furniture and equipment.

We realized $721,000 of interest income during 2002 and $509,000 of interest income during 2001. This interest income was primarily attributable to the temporary investment of funds drawn under our credit facilities. We incurred interest charges of $85.4 million during 2002 and $86.9 million during 2001. Of these amounts, $5.5 million during 2002 and $10.4 million during 2001 was capitalized and included in the cost of buildings and improvements.

Our effective income tax rate for 2002 decreased from 40.0% to 39.0%, reflecting a reduction in estimated state income taxes resulting from state tax planning and credits. Accordingly, the provision for income taxes in the first quarter of 2002 reflected a reduction in expense of approximately $3.0 million associated with adjusting our deferred tax assets and liabilities to reflect the lower rate. The $3.0 million reduction in tax expense and the decrease in our effective rate during 2002 resulted in the recognition of income tax expense of $31.6 million and $42.7 million (35.6% and 40.0%, respectively, of income before income taxes, extraordinary item, and cumulative effect of an accounting change) for 2002 and 2001, respectively. Excluding the impact of our effective income tax rate decrease, our income tax expense differs from the federal income tax rate of 35% primarily due to state and local income taxes and the impact of our effective tax rate.

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2001 Compared to 2000

Property Operations

The following is a summary of the number of properties in operation at the end of each year along with the related average occupancy rates and average weekly room rates during each year:

We realized an overall decrease of 2.5% in REVPAR for 2001 when compared to 2000. Our overall REVPAR increased 11.0% and 0.5% in the first and second quarters of 2001, respectively, and decreased 4.5% and 15.2% in the third and fourth quarters of 2001, respectively, when compared to the same periods in the prior year. The decrease in overall average occupancy rates for 2001 compared to 2000 reflects, primarily, the impact of a general decline in demand for lodging products as a result of the slowing U.S. economy and the impact of the terrorist attacks on September 11, 2001. The increase in overall average weekly room rates for 2001 compared to 2000 is due to increases in rates charged in previously opened properties and, particularly for the EXTENDED STAY brand, the geographic dispersion of properties opened since December 31, 2000 and the higher standard weekly room rates in certain of those markets.

Comparable hotels, consisting of the 305 properties opened for at least one year at the beginning of the first quarter of 2000, realized the following percentage changes in the components of REVPAR for 2001 when compared with 2000:

We believe that the percentage changes in the components of REVPAR for our brands differ primarily as a result of the number and geographic dispersion of the comparable hotels.

REVPAR for our comparable hotels increased 5.7% in the first quarter of 2001, then decreased 3.1%, 6.9%, and 16.5% in the second, third, and fourth quarters of 2001, respectively, when compared to the same periods in the prior year. We believe that the declines in REVPAR experienced in 2001 are less than those experienced in the overall lodging industry and are a result of the slowing U.S. economy and a reaction to the terrorist attacks of September 11, 2001.

We recognized total revenue of $541.5 million in 2001 and $518.0 million in 2000. This is an increase of $23.5 million, or 5%. The 362 properties that we owned and operated throughout both periods experienced an aggregate decrease in revenue of approximately $25.5 million.

Property operating expenses, consisting of all expenses directly allocable to the operation of the facilities but excluding any allocation of corporate operating and property management expenses, depreciation, and interest were $230.2 million (43% of total revenue) for 2001, as compared to $214.5 million (41% of total revenue) for 2000. We expect the ratio of property operating expenses to total revenue to generally fluctuate inversely relative to REVPAR increases or decreases because the majority of these expenses do not vary based on REVPAR. We realized an overall decrease of 2.5% in REVPAR for 2001 when compared to 2000, and our property operating margins were 57% for 2001 and 59% for 2000.

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The provisions for depreciation and amortization for our lodging facilities were $71.1 million for 2001 and $65.0 million for 2000. Depreciation and amortization for 2001 increased compared to 2000 because we operated 39 additional facilities in 2001 and because we operated for a full year the 30 properties that were opened in 2000.

Corporate Operations

We incurred corporate operating and property management expenses of $47.5 million (9% of total revenue) in 2001 and $44.4 million (9% of total revenue) in 2000. The increase in the amount of these expenses for 2001 as compared to 2000 reflects the impact of additional personnel and related expenses in connection with the increased number of facilities we operated.

In May 2001, we announced the relocation of our corporate headquarters from Ft. Lauderdale, Florida to Spartanburg, South Carolina. We completed the relocation in the third quarter of 2001. As a result, we incurred non-recurring charges of approximately $9.0 million during 2001 in connection with the move, including approximately $2.1 million in non-cash charges related to the abandonment of unamortized leasehold improvements and charges associated with the valuation of stock options for employees terminated as a result of the relocation.

Depreciation and amortization for assets not directly related to the operation of facilities was $1.0 million for 2001 and $1.3 million for 2000.

We realized $509,000 of interest income during 2001 and $668,000 during 2000. This interest income was primarily attributable to the temporary investment of funds drawn under our credit facilities. We incurred interest charges of $86.9 million during 2001 and $87.7 million during 2000. Of these amounts, $10.4 million during 2001 and $10.9 million during 2000 were capitalized and included in the cost of buildings and improvements.

We recognized income tax expense of $42.7 million and $46.7 million (40.0% of income before income taxes, extraordinary item, and the cumulative effect of an accounting change, in both periods) for 2001 and 2000, respectively. Our income tax expense differs from the federal income tax rate of 35% primarily due to state and local income taxes.

Extraordinary Charge and Cumulative Effect of a Change in Accounting

In connection with the termination of our previously existing credit facility in July 2001, we incurred an extraordinary charge of $5.9 million, net of income taxes of $3.9 million, associated with the write-off of unamortized deferred debt costs.

SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities,” as amended, requires all derivatives to be carried on the balance sheet at fair value. SFAS No. 133, as amended, is effective for financial statements issued for periods beginning after December 15, 2000. At December 31, 2000, the carrying value of our interest rate cap contracts was $1,115,000 and their fair value was zero. We adopted SFAS No. 133 on January 1, 2001 and designated our interest rate cap contracts as cash-flow hedges of our variable rate debt. SFAS No. 133, as interpreted by the Derivatives Implementation Group, required the transition adjustment to be allocated between the cumulative-effect-type adjustment of earnings and the cumulative-effect-type adjustment of other comprehensive income based on our pre-SFAS No.133 accounting policy for the contracts. Because the fair value of the interest rate cap contracts at adoption was zero, the entire transition adjustment of $669,000, net of income tax benefit of $446,000, was recognized in earnings as a cumulative effect adjustment on January 1, 2001.

Liquidity and Capital Resources

We had net cash and cash equivalents of $6.6 million as of December 31, 2002 and $11.0 million as of December 31, 2001. At December 31, 2002, we had approximately $5.6 million invested in short-term money market depository accounts. We had no such investments at December 31, 2001. Deposits in excess of $100,000 are not insured by the Federal Deposit Insurance Corporation. At December 31, 2001, we had approximately $13.0 million invested in short-term demand notes of companies having credit ratings of A1/Pl or equivalent using domestic commercial banks and other financial institutions. We had no such investments at December 31, 2002. We also invested excess funds during these periods in an overnight sweep account with a commercial bank, which in

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turn invested these funds in short-term, interest-bearing reverse repurchase agreements. Due to the short-term nature of these investments, we did not take possession of the securities, which were instead held by the financial institutions. The market value of the securities held pursuant to these arrangements approximates the carrying amount.

Our operating activities generated cash of $164.0 million during 2002, $176.9 million during 2001, and $170.0 million during 2000.

We used $193.3 million to acquire land, develop, or furnish 44 sites opened or under construction in 2002, $311.9 million for 59 sites in 2001, and $248.5 million for 49 sites in 2000.

Our cost to develop a property varies significantly by brand and by geographic location due to differences in land and labor costs. Similarly, the average weekly rate charged and the resultant cash flow from these properties will vary significantly but generally are expected to be in proportion to the development costs. For the 422 properties we opened from January 1, 1996 through December 31, 2002, the average development cost was approximately $5.9 million with an average of 107 rooms. However, since 1999, we have opened a number of properties in the Northeast and West, where average development costs are higher. Accordingly, the average development cost per property for the 93 properties we opened from January 1, 2000 through December 31, 2002 was $8.1 million. We plan to continue to develop properties in the Northeast and West and expect overall average development costs to be approximately $8.2 million per property in 2003.

We made open market repurchases of 4,189,100 shares of Common Stock for approximately $58.4 million in 2001, and 1,242,900 shares of Common Stock for approximately $10.2 million in 2000. We made no such repurchases during 2002. We received net proceeds from the exercise of options to purchase Common Stock totaling $6.6 million in 2002, $19.8 million in 2001, and $5.8 million in 2000.

In July 2001, we entered into an agreement with various banks establishing $900 million in credit facilities (the “Credit Facility”) that provide for revolving loans and term loans on a senior collateralized basis. The proceeds of the Credit Facility are to be used for general corporate purposes and to retire existing indebtedness under our previously existing credit agreement. The Credit Facility also provides for up to an additional $700 million in uncommitted facilities.

In connection with the termination of our previously existing credit facility, we incurred an extraordinary charge of $5.9 million, net of income tax benefits of $3.9 million, associated with the write-off of unamortized debt issue costs during 2001.

Loans under the Credit Facility bear interest, at our option, at either a prime-based rate or a LIBOR-based rate plus an applicable margin. In addition, the commitment fee on the unused revolving facility is 0.5% per annum. The following table illustrates the amounts committed under the Credit Facility, their final maturities, and the interest on loans made under the Credit Facility, subject to the terms of the amendments discussed below:

The Credit Facility was amended in December 2001 and October 2002 to provide additional flexibility in managing the development of new hotels. The amendments modified certain definitions and increased the total leverage covenant (defined as the ratio of our consolidated debt to our consolidated EBITDA, each as defined in the Credit Facility documents) from 4.75 to 5.25 for the period from January 1, 2003 to March 31, 2003, from 4.50 to 5.00 for the period from April 1, 2003 to March 31, 2004, and from 4.50 to 4.75 for the period from April 1, 2004 to June 30, 2004. Beginning July 1, 2004, the leverage covenant will return to the previously scheduled level of 4.50.

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The amendments instituted a pricing grid which increased the interest rate on outstanding loans under the Credit Facility by 0.25% if total leverage is greater than or equal to 4.25 or by 0.75% if total leverage is greater than or equal to 4.75. At December 31, 2002, our total leverage ratio was 4.66.

At December 31, 2002, we had outstanding loans of $12 million under the $200 million revolving facility and $653.3 million, net of principal repayments, outstanding under the term loans, leaving $188 million available and committed under the Credit Facility. In January 2002, we borrowed $100 million pursuant to the delayed draw A-3 term loan. The proceeds of this borrowing were used to repay amounts outstanding under the revolving facility and for working capital purposes. In order to minimize interest rates charged under the Credit Facility, we prepaid $25 million in March 2002.

The loans under the Credit Facility will mature on the dates set forth in the table above. The A-1, A-2, and A-3 term loans will be amortized in quarterly installments of varying amounts through July 24, 2007, and the B term loan will be subject to principal payments of 1% of the initial loan amounts in each of the first six years following the closing date with the remaining principal balance to be repaid during the seventh year. Availability of the revolving facility is dependent, however, upon us satisfying certain financial ratios of debt and interest compared to earnings before interest, taxes, depreciation, and amortization, with these amounts being calculated pursuant to definitions contained in the Credit Facility documents, as amended.

As of December 31, 2002, we had $1.5 million in outstanding letters of credit. These letters of credit are being maintained as security for construction related performance and will expire between February 2003 and October 2006. If required, use of the letters of credit would draw against the revolving facility.

We are required to repay indebtedness outstanding under the Credit Facility with the net cash proceeds from certain sales of our, and our subsidiaries’, assets, from issuances of debt by us or our subsidiaries, and from insurance recovery events (subject to certain reinvestment rights). We are also required to repay indebtedness outstanding under the Credit Facility annually in an amount equal to 50% of our excess cash flow, as calculated pursuant to the Credit Facility.

Our obligations under the Credit Facility are guaranteed by each of our subsidiaries. The Credit Facility is also collateralized by a first priority lien on all stock of our subsidiaries and all other current and future assets owned by us and our subsidiaries (other than mortgages on real property).

The Credit Facility contains a number of negative covenants, including, among others, covenants that limit our ability under certain circumstances to incur debt, make investments, pay dividends, prepay other indebtedness, engage in transactions with affiliates, enter into sale-leaseback transactions, create liens, make capital expenditures, acquire or dispose of assets, or engage in mergers or acquisitions. In addition, the Credit Facility contains affirmative covenants, including, among others, covenants that require us to maintain our corporate existence, comply with laws, maintain our properties and insurance, and deliver financial and other information to the lenders. The Credit Facility also requires us to comply with certain financial tests on a consolidated basis, including a maximum total leverage ratio, a maximum senior leverage ratio, and a minimum interest coverage ratio.