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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the Fiscal Year Ended December 31, 2002

OR

For the transition period from                          to                         .

Commission file number 1-14045

    LASALLE HOTEL PROPERTIES        

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code 301/941-1500

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 or Regulation S-K is not contained herein, and will not be contained, to the best of the 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.  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act rule 12b-2).

Yes  x No  ¨

As of February 14, 2003, there were 18,711,581 shares of the Registrant’s common shares of beneficial interest issued and outstanding. The aggregate market value of the Registrant’s 18,016,697 and 17,985,548 common shares of beneficial interest held by non-affiliates of the Registrant at February 14, 2003 and June 30, 2002, respectively was approximately $211.7 million and  $283.3 million, respectively. The aggregate market value was calculated by using the closing price of the stock as of the respective dates on the New York Stock Exchange.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for its 2003 Annual Meeting of Shareholders to be held on or about April 24, 2003 are incorporated by reference in Part III of this report.

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LASALLE HOTEL PROPERTIES

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This report, together with other statements and information publicly disseminated by the Company, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Company’s future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the Company’s control and which could materially affect actual results, performances or achievements. Factors that may cause actual results to differ materially from current expectations include, but are not limited to the risk factors discussed in this Annual Report on Form 10-K. Accordingly, there is no assurance that the Company’s expectations will be realized. Except as otherwise required by the federal securities laws, the Company disclaims any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

The “Company” means LaSalle Hotel Properties, a Maryland real estate investment trust, and one or more of its subsidiaries (including LaSalle Hotel Operating Partnership, L.P. and LaSalle Hotel Lessee, Inc.) and the predecessor thereof or, as the context may require, LaSalle Hotel Properties only or LaSalle Hotel Operating Partnership, L.P. only.

PART I

Item 1. Business

General

The Company was organized as a Maryland real estate investment trust on January 15, 1998 to buy, own and lease primarily upscale and luxury full-service hotels located in convention, resort and major urban business markets. As of December 31, 2002, the Company owned interests in 17 hotels with approximately 5,800 rooms/suites located in eleven states and the District of Columbia. Independent hotel operators manage the hotels. The Company is a self-managed and self-administered real estate investment trust (“REIT”) as defined in the Internal Revenue Code of 1986, as amended (the “Code”). A REIT is a legal entity that holds real estate interests and, through payments of dividends to shareholders, is permitted to reduce or avoid federal income taxes at the corporate level.

Substantially all of the Company’s assets are held by, and all of its operations are conducted through, LaSalle Hotel Operating Partnership, L.P. The Company is the sole general partner of the partnership with an approximate 97.7% ownership at December 31, 2002. The remaining 2.3% is held by other investors in the form of 424,686 units of limited partnership interest. Partnership units are redeemable for cash or, at the option of the Company, for a like number of common shares of beneficial interest, par value $0.01 per share, of the Company. The hotels are leased under participating leases that provide for rental payments equal to the greater of base rent or participating rent based on fixed percentages of gross hotel revenues.

The Company’s principal offices are located at 4800 Montgomery Lane, Suite M25, Bethesda, MD 20814. The Company’s website is www.lasallehotels.com. The Company makes available on its website free of charge its filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports.

Strategies and Objectives

The Company’s primary objectives are to provide a stable stream of income to its shareholders through increases in distributable cash flow and to increase long-term total returns to shareholders through appreciation in the value of its common shares of beneficial interest. To achieve these objectives, the Company seeks to:

The Company seeks to achieve revenue growth principally through:

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The Company intends to acquire additional hotels in targeted markets, consistent with the growth strategies outlined above and which may:

The Company seeks to grow through strategic relationships with premier, internationally recognized hotel operating companies including: Starwood Hotels & Resorts Worldwide, Inc., Marriott International, Inc., Radisson Hotels International, Inc., Interstate Hotels & Resorts, Inc., Crestline Hotels & Resorts, Inc., Outrigger Lodging Services, Noble House Hotels and Resorts, Hyatt Corporation and the Kimpton Hotel & Restaurant Group, L.L.C. The Company believes that having multiple independent operators creates a network that will generate acquisition opportunities. In addition, the Company believes its acquisition capabilities are enhanced by its considerable experience, resources and relationships in the hotel industry specifically and the real estate industry generally.

Hotel Acquisitions

The Company acquired ten upscale and luxury full-service hotels in connection with its initial public offering, and sold the Holiday Inn Plaza Park, in August, 2000 and the Radisson Hotel Tampa in August, 2001. Neither hotel was considered consistent with the Company’s long-term portfolio strategy.

Subsequent to the Company’s initial public offering, the Company acquired the following hotel interests:

Recent Developments

The nature of the operations of the hotels exposes them to the risk of claims and litigation in the normal course of their business. Although the outcome of these matters cannot be determined, management does not expect the ultimate resolution of these matters to have a material adverse effect on the financial position, operations or liquidity of the hotels.

        The Company currently expects to engage Starwood Hotels & Resorts Worldwide, Inc. to manage and operate its hotels in Dallas and New Orleans, if the pending sale is not consummated, under the Westin brand affiliation. The Dallas hotel is currently operated by Meridien Hotels, Inc. (“Meridien”). On December 20, 2002, Meridien abandoned the New Orleans

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property. The Company entered into a lease with a wholly owned subsidiary of LaSalle Hotel Lessee, Inc. and an interim management agreement with Interstate Hotels & Resorts, Inc., and re-named the hotel the New Orleans Grande Hotel. The New Orleans property is currently classified as held-for-sale, and as such, the property could be sold prior to consummation of engaging Starwood Hotels & Resorts Worldwide, Inc. and the anticipated brand affiliation change.

In connection with the re-branding of these hotels, the Company is currently in litigation with Meridien Hotels, Inc. and related affiliates. See Item 3. Legal Proceedings for information related to this litigation.

Hotel Renovations

The Company believes that its regular program of capital improvements at the hotels, including replacement and refurbishment of furniture, fixtures and equipment, helps maintain and enhance its competitiveness and maximizes revenue growth under the participating leases. During the year ended December 31, 2002, the Company invested approximately $33.9 million on renovations and additional capital improvements at the hotels. The Company plans to invest approximately $28.0 million on renovations and additional capital improvements at its hotel properties during 2003. As of December 31, 2002, purchase orders and letters of commitment totaling approximately $14.1 million have been issued for renovations at the hotels. The Company has committed to these projects and anticipates making similar arrangements with the existing hotels or any future hotels that it may acquire. Any unexpended amount will remain the property of the Company upon termination of the participating leases.

Tax Status

The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Code. As a result, the Company generally will not be subject to corporate income tax on that portion of its net income that is currently distributed to shareholders. A REIT is subject to a number of highly technical and complex organizational and operational requirements, including requirements with respect to the nature of its gross income and assets and a requirement that it currently distribute at least 90% of its taxable income. The Company may, however, be subject to certain state and local taxes on its income and property.

Effective January 1, 2001, the Company elected to operate its wholly owned subsidiary, LaSalle Hotel Lessee, Inc. (“LHL”), as provided for under the REIT Modernization Act as a taxable-REIT subsidiary. Accordingly, LHL is required to pay income taxes at the applicable rates.

Seasonality

The hotels’ operations historically have been seasonal. Fifteen of the hotels maintain higher occupancy rates during the second and third quarters, including the Marriott Seaview Resort, which generates a significant portion of its revenues from golf-related business and, as a result, its revenues also fluctuate according to the season and the weather. The Holiday Inn Beachside Resort and New Orleans Grande Hotel generally experience their highest occupancies in the first and second quarters. These seasonality patterns can be expected to cause fluctuations in the Company’s quarterly lease revenue under the participating lease with third-party lessees and hotel operating revenue from LHL.

Competition

The hotel industry is highly competitive. Each of the hotels is located in a developed area that includes other hotel properties. The number of competitive hotel properties in a particular area could have a material adverse effect on occupancy, average daily rate and room revenue per available room of the hotels or at hotel properties acquired in the future. The Company may be competing for investment opportunities with entities that have substantially greater financial resources than the Company. These entities may generally be able to accept more risk than the Company can prudently manage, including risks with respect to the creditworthiness of a hotel operator or the geographic proximity of its investments. Competition may generally reduce the number of suitable investment opportunities offered to the Company and increase the bargaining power of property owners seeking to sell.

Environmental Matters

In connection with the ownership and operation of the hotels, the Company is subject to various federal, state and local laws, ordinances and regulations relating to environmental protection. Under these laws, a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on, under, or in such property. Such laws often impose liability without regard to whether the owner or operator knew of, or was

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responsible for, the presence of hazardous or toxic substances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to remediate such contaminated property properly, may adversely affect the owner’s ability to borrow using such property as collateral. Furthermore, a person who arranges for the disposal or treatment of a hazardous or toxic substance at a property owned by another, or who transports such substance to or from such property, may be liable for the costs of removal or remediation of such substance released into the environment at the disposal or treatment facility. The costs of remediation or removal of such substances may be substantial, and the presence of such substances may adversely affect the owner’s ability to sell such real estate or to borrow using such real estate as collateral. In connection with the ownership and operation of the hotels, the Company may be potentially liable for such costs.

The Company believes that its hotels are in compliance, in all material respects, with all federal, state and local environmental ordinances and regulations regarding hazardous or toxic substances and other environmental matters, the violation of which would have a material adverse effect on the Company. The Company has not received written notice from any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of its present properties.

Employees

The Company had 22 employees as of February 18, 2003. All persons employed in the day-to-day operations of the hotels are employees of the management companies engaged by the lessees to operate such hotels.

Risk Factors

Additional Factors that May Affect Future Results

The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones the Company faces. Additional risks and uncertainties not presently known to the Company or that it currently deems immaterial also may impair its business operations. If any of the following risks occur, the Company’s business, financial condition, operating results and cash flows could be materially adversely affected.

The Company’s return on its hotels depends upon the ability of the lessees and the hotel operators to operate and manage the hotels

To maintain its status as a REIT, the Company is unable to operate any of its hotels. As a result, the Company is unable to directly implement strategic business decisions with respect to the operation and marketing of its hotels, such as decisions with respect to the setting of room rates, repositioning of a hotel, food and beverage prices and certain similar matters. Although it consults with the lessees and hotel operators with respect to strategic business plans, the lessees and hotel operators are under no obligation to implement any of the Company’s recommendations with respect to such matters.

The Company’s performance and its ability to make distributions on its capital shares are subject to risks associated with the hotel industry

Competition for Guests, Increases in Operating Costs, Dependence on Travel and Economic Conditions Could Affect the Company’s Cash Flow. The hotels are subject to all operating risks common to the hotel industry. These risks include:

These factors could adversely affect the ability of the lessees to generate revenues and to make rental payments to the Company.

Effects of Terrorist Attacks and Military Actions. The terrorist attacks of September 11, 2001 caused disruption in the lodging industry and other travel-related businesses, and adversely affected the Company’s operations. While there have been modest improvements in occupancy and average daily rates during the year, they remain below prior year levels. The

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Company is unable to determine whether this adverse impact is temporary or of a more lasting duration. Military actions against Iraq or other countries, terrorists, new terrorist attacks (actual or threatened) terrorist alerts and warnings, and other political events have and may continue to cause lengthy periods of uncertainty that have caused increased customer reluctance to travel, which may continue to increase. Under these circumstances, the Company’s cash flow would be further impacted.

Unexpected Capital Expenditures Could Adversely Affect the Company’s Cash Flow. Hotels require ongoing renovations and other capital improvements, including periodic replacement or refurbishment of furniture, fixtures and equipment. Under the terms of its leases, the Company is obligated to pay the cost of certain capital expenditures at the hotels and to pay for periodic replacement or refurbishment of furniture, fixtures and equipment. If capital expenditures exceed expectations, there can be no assurance that sufficient sources of financing will be available to fund such expenditures. In addition, the Company may acquire hotels in the future that require significant renovation. Renovation of hotels involves numerous risks, including the possibility of environmental problems, construction cost overruns and delays, impact on current demand, uncertainties as to market demand or deterioration in market demand after commencement of renovation and the emergence of unanticipated competition from other hotels.

The Company’s obligation to comply with financial covenants in its senior unsecured credit facility and mortgages on some of its hotel properties could restrict its range of operating activities

The Company has obtained a senior unsecured credit facility from a syndicate of banks, which provides for a maximum borrowing amount of up to $210.0 million and matures on December 31, 2003. Management intends to renew the senior unsecured credit facility; however, there can be no assurance that the Company will be able to renew the credit facility upon maturity, or that if renewed, the terms will be as favorable. The senior unsecured credit facility contains certain financial covenants relating to debt service coverage, minimum tangible net worth and total funded indebtedness.

         The Company’s credit facility contains financial covenants that could restrict its ability to incur additional indebtedness or make distributions on the common shares. The senior unsecured credit facility contains financial covenants that, assuming no continuing defaults, allow the Company to make shareholder distributions which, when combined with the distributions to shareholders in the three immediately preceding fiscal quarters, do not exceed the greater of (i) the lesser of (a) 90% of funds from operations from the four-quarter rolling period or (b) 100% of free cash flow during the four-quarter rolling period and (ii) the greater of (a) the amount of distributions required for the Company to maintain its status as a REIT or (b) the amount required to ensure the Company will avoid imposition of an excise tax for failure to make certain minimum distributions on a calendar year basis. Some of these covenants become more restrictive over time. Availability under the credit facility may be reduced by hotel financing which the Company obtains outside the credit facility. Pursuant to the credit facility, the amount of outside financing is limited to specified levels. If the Company is unable to borrow under the credit facility, it could adversely affect the Company’s financial condition.

The Holiday Inn Beachside Resort, Le Meridien Dallas, New Orleans Grande Hotel, Le Montrose Suite Hotel and Radisson Convention Hotel are mortgaged to secure payment of indebtedness aggregating approximately $117.0 million as of December 31, 2002. The Harborside Hyatt Conference Center & Hotel is mortgaged to secure payment of principal and interest on bonds with an aggregate par value of approximately $42.5 million. If the Company is unable to meet mortgage payments, the mortgage securing the property could be foreclosed upon by, or the property could be otherwise transferred to, the mortgagee with a consequent loss of income and asset value to the Company. From time to time, the Company may mortgage additional hotels to secure payment of additional indebtedness.

The Company’s performance is subject to real estate industry conditions and the terms of our leases

Because Real Estate Investments Are Illiquid the Company May Not Be Able to Sell Hotels When Appropriate. Real estate investments generally cannot be sold quickly. The Company may not be able to vary its portfolio promptly in response to economic or other conditions. In addition, provisions of the Code limit a REIT’s ability to sell properties in some situations when it may be economically advantageous to do so.

Liability for Environmental Matters Could Adversely Affect the Company’s Financial Condition. As an owner of real property, the Company is subject to various federal, state and local laws and regulations relating to the protection of the environment that may require a current or previous owner of real estate to investigate and clean-up hazardous or toxic substances at a property. These laws often impose such liability without regard to whether the owner knew of or caused the presence of the contaminants, and are not limited under the enactments and could exceed the value of the property and/or the aggregate assets of the owner. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the clean-up costs of the substances at a disposal or treatment facility, whether or not such facility is owned or operated by the person. Even if more than one person was responsible for the contamination,

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each person covered by the environmental laws may be held responsible for the entire amount of clean-up costs incurred.

Environmental laws also govern the presence, maintenance and removal of asbestos-containing materials. These laws impose liability for release of asbestos-containing materials into the air and third parties may seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials. In connection with the ownership (direct or indirect) the Company may be considered an owner or operator of properties containing asbestos-containing materials. Having arranged for the disposal or treatment of contaminants, the Company may be potentially liable for removal, remediation and other costs, including governmental fines and injuries to persons and property.

The Costs of Compliance with the Americans with Disabilities Act Could Adversely Affect the Company’s Cash Flow. Under the Americans with Disabilities Act of 1990, all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. A determination that the Company is not in compliance with the Americans with Disabilities Act of 1990 could result in imposition of fines or an award of damages to private litigants.

Certain Leases and Management Agreements May Constrain the Company from Acting in the Best Interests of Shareholders or Require it to Make Certain Payments. The Harborside Hyatt Conference Center & Hotel, the New Orleans Grande Hotel and the San Diego Paradise Point Resort are each subject to a ground lease with a third-party lessor. In order for the Company to sell any of these hotels or to assign its leasehold interest in any of these ground leases, it must first obtain the consent of the relevant third-party lessor. The Radisson Convention Hotel is also subject to a ground lease with a third-party lessor; third-party lessor consent is required to assign leasehold interest unless the assignment is in conjunction with the sale of the hotel. Accordingly, if the Company determines that the sale of any of these hotels or the assignment of its leasehold interest in any of these ground leases is in the best interest of its shareholders, the Company may be prevented from completing such transaction if it is unable to obtain the required consent from the relevant lessor.

The balconies of the New Orleans Grande Hotel are subject to an air space lease with the city of New Orleans. As a result, the Company may be prevented from selling, assigning, transferring or conveying its interest in the hotel without first obtaining the consent of the city of New Orleans.

In some instances, the Company may be required to obtain the consent of the hotel operator prior to selling the hotel. Typically, such consent is only required in connection with certain proposed sales, such as if the proposed purchaser is engaged in the operation of a competing hotel or does not meet certain minimum financial requirements. Hotels where operator approval of certain sales may be required include: Chicago Marriott Downtown and Harborside Hyatt Conference Center & Hotel.

Le Meridien Dallas is a unit of a commercial condominium complex and is subject to a right of first refusal in favor of the owner of the remaining condominium units. In addition, the Company is subject to certain rights of first refusal or similar rights with respect to the following hotels: Hotel Viking, LaGuardia Airport Marriott, Marriott Seaview Resort and Radisson Convention Hotel. Similarly, the hotel operator of the D.C. Boutique Collection hotels has a right of first offer and a right of first refusal if any of the hotels are sold other than through a public bidding process.

If the Company determines to terminate a lease with a third-party lessee (other than in connection with a default by such lessee), it may be required to pay a termination fee calculated based upon the value of the lease.

Increases in interest rates may increase our interest expense

        As of December 31, 2002, approximately $123.8 million of aggregate indebtedness (45.7% of total indebtedness) was subject to variable interest rates. The aggregate indebtedness balance includes the Company’s $11.9 million pro rata portion of indebtedness relating to the Company’s joint venture investment in the Chicago Marriott Downtown hotel. An increase in interest rates could increase the Company’s interest expense and reduce its cash flow and its ability to service its indebtedness.

On April 6, 2001, the Company entered into a two-year, nine-month fixed interest rate swap at 4.87% for $30.0 million of the balance outstanding on its senior unsecured credit facility, which currently fixes the interest rate at 7.12% including the Company’s current spread, which varies with its leverage ratio.

Failure to qualify as a REIT would be costly

The Company has operated (and intends to so operate in the future) so as to qualify as a REIT under the Code beginning with its taxable year ended December 31, 1998. Although management believes that the Company is organized

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and operated in a manner to so qualify, no assurance can be given that the Company will qualify or remain qualified as a REIT.

If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Moreover, unless entitled to relief under certain statutory provisions, the Company also will be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. This treatment would cause the Company to incur additional tax liabilities and would significantly impair the Company’s ability to service indebtedness, and reduce the amount of cash available to make new investments or to make distributions on its common shares of beneficial interest and preferred shares.

Property ownership through partnerships and joint ventures could limit the Company’s control of those investments

Partnership or joint venture investments may involve risks not otherwise present for investments made solely by the Company, including the possibility that its co-investors might become bankrupt, that its co-investors might at any time have different interests or goals than the Company does, and that its co-investors may take action contrary to its instructions, requests, policies or objectives, including its policy with respect to maintaining its qualification as a REIT. Other risks of joint venture investments include an impasse on decisions, such as a sale, because neither the Company’s co-investors nor the Company would have full control over the partnership or joint venture. There is no limitation under the Company’s organizational documents as to the amount of funds that may be invested in partnerships or joint ventures.

Tax consequences upon a sale or refinancing of properties may result in conflicts of interest

Holders of units of limited partnership interest in LaSalle Hotel Operating Partnership, L.P. or co-investors in properties not owned entirely by the Company may suffer different and more adverse tax consequences than the Company upon the sale or refinancing of properties. The Company may have different objectives from these co-investors and unitholders regarding the appropriate pricing and timing of any sale or refinancing of these properties. While the Company, as the sole general partner of LaSalle Hotel Operating Partnership, L.P., has the exclusive authority as to whether and on what terms to sell or refinance each property owned solely by LaSalle Hotel Operating Partnership, L.P., some of its trustees who have interests in units of limited partnership may seek to influence the Company not to sell or refinance the properties, even though such a sale might otherwise be financially advantageous to it, or may seek to influence the Company to refinance a property with a higher level of debt.

The Company may not have enough insurance

The Company carries comprehensive liability, fire, flood, earthquake, extended coverage and business interruption policies that insure it against losses with policy specifications and insurance limits that the Company believes are reasonable. There are certain types of losses that management may decide not to insure against since the cost of insuring is not economical. The Company may suffer losses that exceed its insurance coverage. Further, market conditions, changes in building codes and ordinances or other factors such as environmental laws may make it too expensive to repair or replace a property that has been damaged or destroyed, even if covered by insurance.

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Item 2. Properties

Hotel Properties

At December 31, 2002, the Company owned interests in the following 17 hotel properties:

Radisson Convention Hotel. Radisson Convention Hotel is an upscale full-service convention hotel located at the intersection of Interstate 494 and Highway 100, approximately 15 minutes from the Minneapolis/St. Paul International Airport, and five miles from the Mall of America. The hotel is currently leased to LHL and operated by an affiliate of the Radisson Group, Inc.

New Orleans Grande Hotel. New Orleans Grande Hotel (formerly Le Meridien New Orleans) is a luxury full-service convention oriented hotel located in downtown New Orleans, a major convention city. The hotel is centrally located across the street from the French Quarter and near the central business district, the Ernest N. Morial Convention Center and the New Orleans Superdome. The hotel has received the AAA Four Diamond award for 17 consecutive years. The hotel is subject to a 99-year ground lease, which expires in May 2081. On December 19, 2002 the Company terminated the operating lease with affiliates of Le Meridien Hotels and Resorts and entered into a lease with LHL on essentially the same terms. Interstate Hotels & Resorts, Inc. replaced Le Meridien Hotels and Resorts as interim operator effective December 20, 2002.

Le Meridien Dallas. Le Meridien Dallas is an upscale full-service convention oriented hotel located in downtown Dallas, approximately 25 minutes from the Dallas/Fort Worth International Airport, in the heart of the city’s arts and financial districts. The hotel is conveniently located near the Dallas Convention Center, four stops away on the Dallas light rail system, with a DART station adjacent to the hotel. The hotel is currently operated by Le Meridien Hotels and Resorts.

The Company currently expects to engage Starwood Hotels & Resorts Worldwide, Inc. to manage and operate the New Orleans hotel, if the pending sale is not consummated and the Dallas hotel. The Company anticipates that Starwood Hotels & Resorts Worldwide, Inc. will operate the hotels under the Westin brand affiliation. The New Orleans property is currently held-for-sale, and as such, the property could be sold prior to consummation of engaging Starwood Hotels & Resorts Worldwide, Inc. In connection with the re-branding of the hotels, the Company anticipates spending approximately $6.0 million to enhance the guest experience at the hotels. The Company may be obligated to pay a fee to Le Meridien Hotels and Resorts. In conjunction with the termination of the New Orleans lease with Meridien, the Company recognized a net $2.5 million contingent lease termination expense and reversed previously deferred

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assets and liabilities related to the termination of both the New Orleans property and Dallas property leases, and recorded a corresponding contingent liability. The Company does not believe any amounts it may be required to pay will be materially different. The Company does not believe that the amount of any other fees that it may be required to pay will have a material adverse effect on its financial condition, taken as a whole. Contemporaneously with the rebranding of the Dallas hotel, the Company expects to lease the Dallas hotel to LHL.

Marriott Seaview Resort. Marriott Seaview Resort is a luxury golf resort and conference center located on Reeds Bay, approximately nine miles north of Atlantic City, New Jersey. The hotel is leased to LHL and operated by Marriott International, Inc. pursuant to a long-term incentive-based operating agreement. The resort received the AAA Four Diamond award for each of the last three years.

Holiday Inn Beachside Resort. Holiday Inn Beachside Resort is a full-service resort comprised of several one, two and three-story buildings located on approximately 7.8 acres on the beach facing the Gulf of Mexico. The resort is located on the island of Key West, which is considered to have the most consistent weather in Florida, and benefits from the island’s reputation as a popular tourist destination. The hotel is currently leased to LHL and operated by Interstate Hotels & Resorts, Inc.

Omaha Marriott Hotel. Omaha Marriott Hotel is an upscale full-service major business hotel located in the western suburbs of Omaha at one of the city’s busiest intersections (I-680 and West Dodge Road). The hotel is located in the Regency Office Park, a mixed-use development containing over 865,000 square feet of office and retail space, and directly across West Dodge Road from Westroads Shopping Center, one of the largest shopping malls in Omaha. The hotel is leased to LHL and operated by Marriott International, Inc. pursuant to a long-term incentive-based operating agreement.

Le Montrose Suite Hotel. Le Montrose Suite Hotel is a five-story, luxury full-service hotel located in West Hollywood, California, two blocks east of Beverly Hills and one block south of the “Sunset Strip.” The hotel is within walking distance of many of the area’s finest restaurants, retail shops and nightclubs. The hotel attracts short and long-term guests and small groups primarily from the recording, film and design industries. The hotel is leased to and operated by Outrigger Lodging Services.

LaGuardia Airport Marriott. LaGuardia Airport Marriott is an upscale full-service urban/major business hotel located directly across from New York’s LaGuardia Airport. The hotel is five minutes from Shea Stadium and the USTA National Tennis Center and 20 minutes from Manhattan. The hotel is leased to LHL and operated by Marriott International, Inc. pursuant to a long-term incentive-based operating agreement.

San Diego Paradise Point Resort. San Diego Paradise Point Resort is a luxury resort that lies on 44 acres and has nearly one mile of beachfront. The hotel is located in the heart of Mission Bay on Vacation Island, a 4,600-acre aquatic park in southwest San Diego County. The resort is 15 minutes away from the San Diego International Airport and convenient to many major San Diego tourist attractions including Sea World, Old Town, downtown San Diego, the San Diego Convention Center, Qualcomm Stadium and the San Diego Zoo. The hotel is subject to a 50-year ground lease with the city of San Diego which expires in June 2049. The hotel is leased to and operated by WestGroup San Diego Associates, Ltd., an affiliate of Noble House Hotels and Resorts.

Harborside Hyatt Conference Center & Hotel. Harborside Hyatt Conference Center & Hotel is a full-service luxury conference and airport hotel located adjacent to Boston’s Logan International Airport along the Boston waterfront. The property features 19,000 square feet of meeting space and is directly across the Boston Harbor from Boston’s central business district. The hotel is located next to the Ted Williams Tunnel, providing convenient access to downtown Boston. The property is subject to a long-term ground lease from the Massachusetts Port Authority, Logan International Airport’s owner and operating authority. The hotel is leased to LHL and operated by Hyatt Corporation.

Hotel Viking. Hotel Viking is a full-service upscale resort located on Bellevue Avenue in Newport, Rhode Island. The hotel offers 29,000 square feet of meeting space, a restaurant, a lounge and a rooftop bar. The property also includes the Trinity Parish House and the fully restored Kay Chapel, both adjacent to the hotel. The hotel is leased to LHL and is operated by Noble House Hotels and Resorts.

Chicago Marriott Downtown. Chicago Marriott Downtown is a full-service, upscale convention hotel located at the intersection of North Michigan Avenue and Ohio Street on downtown Chicago’s world-famous “Magnificent Mile.” The property has over 60,000 square feet of meeting space, five food and beverage outlets, a health club and sports center, a business center and a gift shop. The Chicago Marriott Downtown has superb visibility and allows guests convenient access to a variety of attractions. A world-renowned shopping destination, the “Magnificent Mile” is home to such retailers as Neiman

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Marcus, Saks Fifth Avenue, Marshall Fields and Niketown. The Company, through LaSalle Hotel Operating Partnership, L.P., owns a non-controlling 9.9% equity interest in the Chicago Marriott Downtown. The hotel is leased to Chicago 540 Lessee, Inc. in which the Company also owns a non-controlling 9.9% equity interest. The hotel is operated and managed by Marriott International, Inc. pursuant to a long-term incentive-based operating agreement.

D.C. Boutique Collection. The D.C. Boutique Collection comprises four full-service hotels located in Washington, D.C. with a total of 496 guestrooms. Each of the four hotels was originally constructed as an apartment building and, as a result, features large guestrooms or suites. The Company renovated and repositioned the hotels as full-service, upscale, unique, independent boutique hotels. The Company leases each of the hotels to wholly owned subsidiaries of LHL. The San Francisco, California-based Kimpton Hotel & Restaurant Group, L.L.C., operates all four of these hotels.

Topaz Hotel. The Topaz Hotel is a full-service boutique hotel with an exotic “East-meets-West” theme. The hotel is conveniently located on Embassy Row in downtown Washington, D.C. It is within walking distance of the Central Business District, minutes from the monuments and museums, and less than two blocks from Dupont Circle and the Metro. The hotel features a bar/restaurant.

Hotel Rouge. Hotel Rouge is a full-service boutique hotel with a “playful, interactive, glamorous” theme. Located on Scott Circle in Washington, D.C., the hotel is five blocks from the White House and just minutes from the business district. The hotel features a bar/restaurant.

Hotel Madera. Hotel Madera is a full-service boutique hotel with a “cosmopolitan comfort” theme. The Hotel Madera, formerly the Clarion Hampshire House Hotel, was the third of the D.C. Boutique Collection to be renovated and repositioned. It re-opened on September 23, 2002. The hotel is located on the eastern edge of the Georgetown section of Washington, D.C., and near many of the area’s attractions. The hotel features a restaurant, Firefly, a modern American bistro.

Hotel Helix. Hotel Helix is a full-service boutique hotel with a “pop-art” theme. The Hotel Helix, formerly the Howard Johnson Plaza Hotel & Suites, was the fourth of the D.C. Boutique Collection to be renovated and repositioned. It re-opened on November 6, 2002. The hotel is located just a few blocks from the new D.C. Convention Center which is currently under construction and is expected to open in the spring of 2003. The hotel is located four blocks from Dupont Circle in close proximity to most of the major downtown tourist attractions. The hotel features a bar/restaurant.

Holiday Inn on the Hill. Holiday Inn on the Hill is a full-service hotel strategically located on Capitol Hill in Washington, D.C. The property is the closest hotel to the United States Capitol. The hotel offers a first class amenity package, including 10,000 square feet of newly renovated meeting space, a full-service restaurant and bar and a rooftop swimming pool. The hotel is minutes away from the site of the new 2.3 million square-foot D.C. Convention Center, which is expected to open in the spring of 2003. The hotel is leased by a wholly owned subsidiary of LHL, and Crestline Hotels & Resorts, Inc. has been the operator of the property since 1997.

Participating Leases and Management Agreements

The Company is subject to participating leases with third-party lessees and, through LHL, management agreements. For hotels leased to third-party lessees, the Company earns the greater of base rent or participating rent based on hotel revenue thresholds pursuant to the respective participating lease. For hotels leased to third-party lessees, the Company is responsible for the payment of real estate taxes, ground rent, if any, certain insurance, maintaining a reserve for future capital expenditures and payment of agreed upon capital expenditures. The terms of the participating leases have expirations between 2008 and 2009. For hotels leased by LHL, the Company, through LHL, earns all hotel revenues and is responsible for all hotel expenses, including base management fees and incentive management fees, if any, pursuant to the terms of the respective management agreement. The terms of the leases with LHL have expirations between 2007 and 2011.

Item 3. Legal Proceedings

The Company currently expects to engage Starwood Hotels & Resorts Worldwide, Inc. to manage and operate its hotels in New Orleans, if the pending sale of the New Orleans property is not consummated, and Dallas under the Westin brand affiliation. The Dallas hotel is currently operated by Meridien Hotels, Inc. (“Meridien”). On December 20, 2002, Meridien abandoned the New Orleans property. The Company entered into a lease with a wholly owned subsidiary of LHL and an interim management agreement with Interstate Hotels & Resorts, Inc., and re-named the hotel the New Orleans Grande Hotel. The New Orleans property is currently classified as held-for-sale, and as such, the

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property could be sold prior to consummation of engaging Starwood Hotels & Resorts Worldwide, Inc. and the anticipated brand affiliation change.

In connection with the re-branding of these hotels, the Company is currently in litigation with Meridien Hotels, Inc. and related affiliates. The Company served notice of lease termination to Meridien for both the Dallas and New Orleans properties on January 14, 2002 and December 28, 2001, respectively. The Company has an order in the District Court of Dallas County, State of Texas stating that Meridien committed an event of default as defined in the participating lease and has no lawful right of possession. The Company has initiated eviction proceedings in Dallas. In New Orleans, the District Court for the Parish of Orleans, State of Louisiana enjoined the transition, which injunction was overturned on appeal and Meridien was ordered to vacate the New Orleans property on December 20, 2002. Arbitration of the fair market value of the New Orleans lease commenced in October 2002. On December 19, 2002, the arbitration panel awarded to Meridien in connection with the New Orleans property a net unconfirmed award of approximately $5.4 million, subject to adjustment (reduction) by the courts to account for Meridien’s holdover rent due under the lease. The Company is disputing the award, as well as whether Meridien is entitled to fair market value.

Additionally, Meridien is disputing a provision of the lease and therefore the calculation of participating rent for the twelve months ended December 31, 2001 and the Company expects Meridien will dispute the calculation of participating rent for the partial year ending December 19, 2002 for the New Orleans property; however, Meridien has paid the participating rent due for 2001 and 2002 in full. The total amount of rent that Meridien is disputing is approximately $2.0 million. The Company continues to believe the calculation is correct, consistent with the lease terms, and has recognized the revenue in the appropriate periods. Meridien has not yet paid $0.4 million base rent due for December 2002.

The Company believes its sole potential obligation in connection with the termination of the leases is to pay fair market value of the leases, if any. Additionally, the Company believes it is owed holdover rent per the lease terms due to Meridien’s failure to vacate the properties as required under the leases. Previously, the Company could not estimate settlement amounts and therefore deferred recognition of any income or expense related to holdover and legal fees and included the deferrals in its consolidated financial statements. However, after receiving additional favorable court rulings in Dallas and the unconfirmed arbitration award in New Orleans, the Company recognized a net $2.5 million contingent lease termination expense and reversed previously deferred assets and liabilities related to the termination of both the New Orleans property and Dallas property leases, and recorded a corresponding contingent liability. The contingent lease termination expense is net of the holdover rent the Company believes it is entitled to for both properties. Based on the claims the Company has against Meridien, the Company is and will continue to seek reimbursement of legal fees and damages, and will challenge the arbitration award, which may reduce any amounts owed Meridien, and therefore ultimately any contingent lease termination expense. Additionally, the Company cannot provide any assurances that the amount will not be greater than the recorded contingent lease termination expense; however, it does not believe that the amount of any fees or damages it may be required to pay in any of the litigation related to Meridien will have a material adverse effect on the Company’s financial condition or results of operations, taken as a whole.

In addition to the reimbursement of legal fees and holdover rent, as defined, as of December 31, 2002, notes receivable due from Meridien were approximately $0.8 million, which consist of working capital notes. As of December 31, 2002, the Company maintains a lien on Meridien’s security deposit on both disputed properties with an aggregate value of approximately $3.3 million, in accordance with the lease agreements.

Meridien also has sued the Company and certain of the Company’s officers alleging that certain actions taken in anticipation of rebranding the Dallas and New Orleans hotels under the Westin brand affiliation constituted unfair trade practices, false advertising, trademark infringement, trademark dilution and tortious interference. On August 19, 2002, the Company received an order from the court denying all of Meridien’s motions. Meridien has amended the petition and is continuing with the lawsuit. The Company believes the claims are without merit and intends to continue to defend itself vigorously. The Company does not believe that the amount of any fees or damages it may be required to pay on any of the litigation related to Meridien will have a material adverse effect on the Company’s financial condition or results of operations, taken as a whole. The Company’s management has discussed this contingency and the related accounting treatment with its audit committee of its board of trustees.

The Company is not presently subject to any other material litigation nor, to the Company’s knowledge, is any other litigation threatened against the Company, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on the liquidity, results of operations or business or financial condition of the Company.

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

There were no matters submitted to a vote of the Company’s shareholders during the fourth quarter of the year covered by this Annual Report on Form 10-K.

Part II

Item 5. Market for Registrant’s Common Shares of Beneficial Interest and Related Shareholder Matters

Market Information

The common shares of the Company began trading on the New York Stock Exchange on April 24, 1998 under the symbol “LHO.” The following table sets forth for the indicated periods the high and low sale prices for the common shares of beneficial interest and the cash distributions declared per share:

The closing price for the Company’s common shares as reported by the New York Stock Exchange on December 31, 2002 was $14.00 per share.

Shareholder Information

As of February 14, 2002, there were 180 record holders of the Company’s common shares of beneficial interest, including shares held in “street name” by nominees who are record holders, and approximately 4,000 beneficial holders.

In order to comply with certain requirements related to qualification of the Company as a REIT, the Company’s Amended and Restated Declaration of Trust limits the number of common shares of beneficial interest and preferred shares that may be owned by any single person or affiliated group to 9.8% of the outstanding common shares of beneficial interest and preferred shares, except for T. Rowe Price Associates, Inc. which was granted a waiver and may own up to 13.0% of the Company’s outstanding common shares of beneficial interest and preferred shares.

Distribution Information

In 2002, the Company paid $0.44 per common share in distributions, 100.0% of which represented ordinary income for tax purposes.

The declaration of distributions by the Company is in the sole discretion of the Company’s board of trustees and depends on the actual cash flow of the Company, its financial condition, capital expenditure requirements for the Company’s hotels, the annual distribution requirements under the REIT provisions of the Code and such other factors as the board of trustees deems relevant.

The Company currently plans to pay monthly distributions in lieu of quarterly distributions to its common shareholders and unitholders beginning in 2003. The Company paid the first monthly distribution for the month of January 2003 on February 14, 2003 at a level of $.07 per common share of beneficial interest and limited partnership unit, and the Company has declared a similar distribution for the months of February and March, 2003, to be paid in March and April, 2003, respectively.

Operating Partnership Units

LaSalle Hotel Operating Partnership, L.P. issued 3,181,723 units of limited partnership interest on April 29, 1998 (inception), in conjunction with the initial public offering. The following is a summary of unit activity since inception:

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Holders of units of limited partnership interest receive distributions per unit in the same manner as distributions on a per common share basis to the common shareholders of beneficial interest.

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Item 6. Selected Financial Data

Selected Financial Data

The following tables set forth selected historical operating and financial data for the Company and selected historical operating and financial data for LRP Bloomington Limited Partnership, which is the predecessor of the Company. The selected historical operating and financial data for the Company for the years ended December 31, 2002, 2001, 2000 and 1999 and for the period from April 29, 1998 (inception) through December 31, 1998, and the selected historical operating and financial data for the predecessor of the Company for the period from January 1, 1998 through April 28, 1998 have been derived from the historical financial statements of the Company and the predecessor of the Company, respectively. The following selected financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and all of the financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

LASALLE HOTEL PROPERTIES

Selected Historical Operating and Financial Data

(Unaudited, Dollars in thousands, except share data)

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LRP BLOOMINGTON LIMITED PARTNERSHIP (3)

Selected Predecessor Historical Operating and Financial Data

(Unaudited, Dollars in thousands)

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

Forward-Looking Statements

        This report, together with other statements and information publicly disseminated by the Company, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995

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and includes this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Company’s future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the Company’s control and which could materially affect actual results, performances or achievements. Factors that may cause actual results to differ materially from current expectations include, but are not limited to the risk factors discussed in this Annual Report on Form 10-K. Accordingly, there is no assurance that the Company’s expectations will be realized. Except as otherwise required by the federal securities laws, the Company disclaims any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Critical Accounting Policies

The consolidated financial statements include the accounts of the Company, LaSalle Hotel Operating Partnership, L.P., LHL and its consolidated subsidiaries and partnerships. All significant intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of the 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 amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In preparing these financial statements, management has utilized the information available including its past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. Included in the accompanying consolidated financial statements is an estimated contingent lease termination expense of $2.5 million related to the Company’s litigation with Meridien Hotels, Inc. (see Item 3. Legal Proceedings).

It is possible that the ultimate outcome as anticipated by management in formulating its estimates inherent in these financial statements might not materialize. However, application of the critical accounting policies below involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from those estimates. In addition, other companies may utilize different estimates, which may impact comparability of the Company’s results of operations to those of companies in similar businesses.

Revenue Recognition

For properties not leased by LHL, the Company recognizes lease revenue on an accrual basis pursuant to the terms of the respective participating leases. Base rent and participating rent are recognized based on quarterly thresholds, pursuant to the lease agreements. For properties leased by LHL, the Company recognizes hotel operating revenue on an accrual basis consistent with the hotel operations.

Investment in Hotel Properties

The Company’s investments in hotel properties are carried at cost and are depreciated using the straight-line method over estimated useful lives ranging from 27.5 to 30 years for buildings and improvements and three to five years for furniture, fixtures and equipment. Renovations and/or replacements that improve or extend the life of the asset are capitalized and depreciated over their estimated useful lives.

The Company is required to make subjective assessments as to the useful lives of its properties for purposes of determining the amount of depreciation expense to reflect each year with respect to those properties. These assessments have a direct impact on the Company’s net income. Should the Company lengthen the expected useful life of particular assets, it would be depreciated over more years, and result in less depreciation expense and higher annual net income.

The Company periodically reviews the carrying value of each hotel to determine if circumstances exist indicating impairment in the carrying value of the investment in the hotel or that depreciation periods should be modified. If facts or circumstances support the possibility of impairment, the Company will prepare an estimate of the undiscounted future cash flows, without interest charges, of the specific hotel and determine if the investment in such hotel is recoverable based on the undiscounted future cash flows. If impairment is indicated, an adjustment will be made to the carrying value

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of the hotel to reflect the hotel at fair value. These assessments have a direct impact on the Company’s net income, because making an impairment adjustment results in an immediate negative adjustment to net income. The Company does not believe that there are any factors or circumstances indicating impairment of any of its investments in its 17 hotels.

In accordance with the provisions of Financial Accounting Standards Board Statement No. 144, a hotel is considered held-for-sale when a contract for sale is entered into or when management has committed to a plan to sell an asset, the asset is actively marketed and sale is expected to occur within one year.

Stock-Based Compensation

The Company has applied Accounting Principles Board Opinion No. 25 and related interpretations in accounting for the 1998 stock incentive and option plan. Accordingly, no compensation costs have been recognized for stock options granted to the Company’s employees. Under Accounting Principles Board Opinion No. 25, no compensation expense is recognized upon the granting of stock options when the exercise price of such options equals the market price of the underlying stock on the date of grant. The Company recognizes compensation cost for restricted shares issued based upon the fair market value of the common stock at the grant date. Compensation cost is recognized on a straight-line basis over the vesting period. The Company provides additional pro forma disclosures as required under Statement of Financial Accounting Standards No. 148 in the notes to its consolidated financial statements.

General Background

The following discusses: (i) the Company’s actual results of operations for the year ended December 31, 2002 compared to the Company’s actual results of operations for the year ended December 31, 2001, and (ii) the Company’s actual results of operations for the year ended December 31, 2001 compared to the Company’s actual results of operations for the year ended December 31, 2000. This discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. The Company has not included a discussion of the predecessor of the Company, as its financial information is not comparable to the Company.

Results of Operations

The impact of the economic slowdown and the terrorist attacks of September 11, 2001 caused disruption in the lodging industry and other travel-related businesses and adversely affected the Company’s operations. The Company initiated a corporate action plan following the events of September 11, 2001, and actively worked with its hotel operators to substantially reduce operating costs at the hotels. These initiatives included reducing labor costs, streamlining staffing levels, reducing hours of operations at hotel restaurants, reducing amenities and services where appropriate, reducing capacity and assorted expenses by closing unused floors, wings or buildings at the hotels and modifying marketing, sales and advertising initiatives. In addition, non-essential capital expenditure projects were reduced, suspended or postponed and quarterly distributions were reduced. With these initiatives in place, together with a gradual return of the economy to pre-September 11, 2001 levels, there have been modest improvements in occupancy and average daily room rate, although they remain below prior year levels. The Company has also re-instituted some of the capital projects postponed immediately after September 11, 2001. During 2002, the Company completed the renovation and repositioning of the Hotel Madera and the Hotel Helix, two boutique hotels located in Washington, D.C. Previously the Company had renovated and repositioned two other boutique hotels located in Washington, D.C., the Topaz Hotel and the Hotel Rouge.

Although hotel occupancy levels improved on a steady and gradual basis during 2002, management anticipates continued pressures on revenues over the next twelve months due to:

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Comparison of the Year Ended December 31, 2002 to the Year Ended December 31, 2001

For the year ended December 31, 2002, total revenues increased by approximately $22.9 million from $155.3 million to $178.2 million. Hotel operating revenues increased by approximately $37.8 million from $118.2 million to $156.0 million. Participating lease revenue from unaffiliated lessees decreased by approximately $13.2 million from $35.1 million to $21.9 million.

The increase in hotel operating revenues was due to:

Partly offsetting the increase in hotel operating revenues were decreases of:

The decrease in participating lease revenue was due to:

Hotel operating expenses increased by approximately $29.5 million from $83.4 million to $112.9 million. The increase in hotel operating expenses was due to:

Partly offsetting the increase in hotel operating expenses were decreases of:

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early-November 2002;

Depreciation and other amortization expense increased by approximately $3.7 million from $27.5 million to $31.2 million due to increases of:

Real estate taxes, personal property taxes, insurance and ground rent expenses remained the same at $12.1 million for the years ended December 31, 2002 and 2001. Changes in the components include:

General and administrative expense remained unchanged at approximately $6.4 million. Changes in the components include:

Interest expense decreased $5.6 million from $17.1 million to $11.5 million due to:

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Writedown of property held for sale decreased from $1.9 million to zero. Writedown of property held for sale of $1.9 million for the year ended December 31, 2001 represents the writedown of the Radisson Hotel Tampa. The asset was written down in the second quarter of 2001 and sold on August 15, 2001. Currently, similar expenses, if incurred, are reported in discontinued operations; however, there were no similar writedowns of assets during the year ended December 31, 2002.

Lease termination, advisory transaction, subsidiary purchase and contingent lease termination expense increased $0.6 million from $1.9 million for the year ended December 31, 2001, which included $0.5 million of LHL acquisition costs, $0.6 million of one-time expenses associated with becoming a self-managed REIT, and a $0.8 million cost of terminating the Hotel Viking lease, to $2.5 million for the year ended December 31, 2002, which consists of contingent expenses relating to terminating the Le Meridien New Orleans and Dallas leases.

Writedown of notes receivable of $0.2 million in 2002 represents the adjustment to net realizable value of the furniture, fixtures and equipment notes receivable from Le Meridien Dallas based on the Company’s valuation estimate of furniture, fixtures and equipment that secure the loan. Writedown of notes receivable of $1.2 million in 2001 represents the adjustment to net realizable value of the furniture, fixtures and equipment notes receivable from the Radisson Convention Hotel and Le Meridien Dallas based on the Company’s valuation estimate of furniture, fixtures and equipment that secure the loans.

Income tax benefit increased by approximately $1.4 million from $1.5 million to $2.9 million due to:

Net income from discontinued operations is a result of the New Orleans property being held-for-sale, resulting in an increase of approximately $1.2 million from $0.8 million to $2.0 million due to:

Net extraordinary loss decreased from $0.9 million to zero. The net extraordinary loss of $0.9 million for the year ended December 31, 2001 represents the costs related to the March 1, 2001 redemption of the Massachusetts Port Authority special project revenue bonds relating to the Harborside Hyatt Conference Center & Hotel. There were no similar costs incurred during the year ended December 31, 2002.

Distributions to preferred shareholders increased $8.4 million from zero. Preferred shares were issued in March 2002, therefore there were no distributions to preferred shareholders prior to the payment of the first preferred share dividend in April 2002.

As a result of the foregoing items, net income applicable to common shareholders decreased by approximately $7.7 million from a $3.8 million net income to a $3.9 million net loss for the years ended December 31, 2001 and 2002, respectively.

Comparison of the Year Ended December 31, 2001 to the Year Ended December 31, 2000

For the year ended December 31, 2001, total revenues increased by approximately $81.7 million from $73.6 million to $155.3 million. Approximately $87.4 million of this increase is due to the impact of consolidating LHL’s operations as a result of becoming a wholly owned subsidiary of the Company on January 1, 2001. Participating lease revenue from unaffiliated lessees decreased by approximately $6.2 million from $41.3 million to $35.1 million. This decrease was due to:

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Partly offsetting this decrease were increased revenues at San Diego Paradise Point Resort, which continued to benefit from renovations that were completed in 2001, and strong transient leisure demand for resort hotels in the San Diego market.

Hotel operating expenses increased from zero for the year ended December 31, 2000 to approximately $83.4 million for the year ended December 31, 2001. This is due to the impact of consolidating LHL’s operations as a result of becoming a wholly owned subsidiary of the Company on January 1, 2001. LHL operations were not consolidated for 2000.

Depreciation and other amortization expense increased by approximately $2.3 million from $25.2 million to $27.5 million due to:

Partly offsetting the increase in depreciation is a reduction in depreciation expense for Radisson Hotel Tampa, sold on August 15, 2001, which was classified as held-for-sale on December 6, 2000 and accordingly was no longer depreciated in 2001.

Real estate taxes, personal property taxes, insurance and ground rent increased by approximately $1.9 million from $10.2 million to $12.1 million due to:

General and administrative expense increased by approximately $5.5 million from $0.9 million to $6.4 million due primarily to incurring corporate expenses as a self-managed REIT effective January 1, 2001. These expenses were not incurred in 2000, as the external advisor incurred general and administrative expenses in 2000. In addition, $0.4 million of executive compensation expense relating to the grant of restricted shares in 2001 was incurred.

Interest expense decreased approximately $2.3 million from $19.4 million to $17.1 million despite an increase in weighted average debt outstanding from $273.0 million for 2000 to $332.5 million for 2001. The increase in weighted average debt outstanding is a result of:

Moderating interest expense was a decrease in the weighted average interest rate to 6.3% for 2001 from 7.9% for 2000. This included a decrease in weighted average interest rate for the bonds outstanding to 3.1% for 2001 from 6.9% for 2000. In addition, interest expense for 2001 was partly offset by $0.8 million of capitalized interest, as a result of renovations at the Topaz Hotel and the Hotel Rouge during the second, third and fourth quarters of 2001. For 2000, interest expense was partly offset by $0.7 million of capitalized interest, which was primarily a result of the renovation and expansion of the Hotel Viking and the continuing renovations at San Diego Paradise Point Resort during the first nine months of 2000.

There were no advisory fees for 2001 compared to $3.8 million for 2000. This was due to the Company becoming self-managed effective January 1, 2001 and terminating the advisory relationship with the external advisor.

Writedown of property held for sale decreased $10.4 million from $12.3 million to $1.9 million. Writedown of property held for sale of $1.9 million in 2001 represents the additional writedown to net book value of the Radisson Hotel Tampa in July 2001. The asset was sold on August 15, 2001. The writedown of property held for sale of $12.3 million for 2000 represents the writedowns of $1.3 million and $11.0 million for the Holiday Inn Plaza Park and Radisson Hotel Tampa, respectively. The Holiday Inn Plaza Park was sold on August 16, 2000 and the Radisson Hotel Tampa was classified as held-

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for-sale on December 6, 2000.

Lease termination, advisory transaction, subsidiary purchase and contingent lease termination expense increased $1.9 million from zero. Lease termination, advisory transaction, subsidiary purchase and contingent lease termination expense of $1.9 million for 2001 includes $0.5 million of LHL acquisition costs, $0.6 million of one-time expenses associated with becoming a self-managed REIT, and $0.8 million cost of terminating the Hotel Viking lease. Similar costs were not incurred in 2000.

Writedown of notes receivable of $1.2 million in 2001 represents the adjustment to net realizable value of the furniture, fixtures and equipment notes receivable from the Radisson Convention Hotel and Le Meridien Dallas based on the Company’s valuation estimate of furniture, fixtures and equipment that secure the loans. Similar costs were not incurred in 2000.

Income tax benefit increased by approximately $1.5 million from zero due to:

Equity in earnings of unconsolidated entities decreased approximately $0.6 million from $1.2 million to $0.6 million due to:

Net income from discontinued operations decreased by approximately $3.0 million from $3.8 million to $0.8 million due to:

Net extraordinary loss increased $0.9 million from zero. Net extraordinary loss of $0.9 million for 2001 represents the costs related to the redemption of the Massachusetts Port Authority special project revenue bonds on March 1, 2001.

As a result of the foregoing items, net income applicable to common shareholders decreased approximately $1.6 million from $5.4 million for 2000 to $3.8 million for 2001.

Comparable Funds From Operations and Comparable EBITDA

The Company considers comparable funds from operations, which the Company refers to as Comparable FFO, and comparable earnings before interest, taxes, depreciation and amortization, which the company refers to as Comparable EBITDA, to be key measures of the Company’s performance and should be considered along with, but not as an alternative to, net income and cash flow as a measure of the Company’s operating performance and liquidity.

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The Company believes that Funds From Operations, or FFO, and EBITDA are helpful to investors as a measure of the performance of an equity REIT because, along with cash flow from operating activities, financing activities and investing activities, they provide investors with an indication of the ability of an equity REIT to incur and service debt, to make capital expenditures and to fund other cash needs. The White Paper on FFO approved by the National Association of Real Estate Investment Trusts (“NAREIT”) in April 2002 defines FFO as net income (loss) (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring, sales of properties and items classified by generally accepted accounting principles as extraordinary, plus real estate-related depreciation and amortization (excluding amortization of deferred finance costs) and after comparable adjustments for the Company’s portion of these items related to unconsolidated entities and joint ventures. The Company computes FFO in accordance with standards established by NAREIT, which may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than the Company. FFO and EBITDA do not represent cash generated from operating activities determined by generally accepted accounting principles and should not be considered as an alternative to net income (determined in accordance with generally accepted accounting principles) as an indication of the Company’s financial performance or to cash flow from operating activities (determined in accordance with generally accepted accounting principles) as a measure of the Company’s liquidity, nor are they indicative of funds available to fund the Company’s cash needs, including its ability to make cash distributions. FFO and EBITDA may include funds that may not be available for management’s discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions, and other commitments and uncertainties.

Comparable FFO is defined by the Company as FFO before one-time items including the transition expenses associated with becoming a self-managed REIT, the costs associated with terminating the Hotel Viking lease and the Holiday Inn Beachside Resort lease, one-time charges related to the purchase of LHL, the writedown of furniture, fixtures and equipment notes receivable, income associated with terminating the Holiday Inn Beachside Resort lease and contingent expenses related to the New Orleans and Dallas lease terminations. Comparable EBITDA is defined by the Company as earnings before interest, taxes, depreciation, amortized expenses, the writedown of properties held for sale, minority interest expense, distributions to preferred shareholders, transition expenses associated with becoming a self-managed REIT, the costs associated with terminating the Hotel Viking lease and the Holiday Inn Beachside Resort lease, one-time charges related to the purchase of LHL, the writedown of furniture, fixtures and equipment notes receivable, income associated with terminating the Holiday Inn Beachside Resort lease and contingent expenses related to the New Orleans and Dallas lease terminations.

The following is a reconciliation between net income applicable to common shareholders and Comparable FFO for the years ended December 31, 2002, 2001 and 2000 (in thousands, except share data).