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UNITED STATES

DELAWARE

1010 WISCONSIN AVENUE, N.W.

Registrants’ telephone number, including area code: (202) 295-1000

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

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 þ     No o

      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.  o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).  Yes þ     No o

DOCUMENTS INCORPORATED BY REFERENCE:

      Part III incorporates information from certain portions of MeriStar Hospitality Corporation’s (Commission file number 1-11903) definitive proxy statement for the 2003 annual meeting of stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year of the registrants.

      As of June 28, 2002, the aggregate market value of the voting and non-voting common equity of MeriStar Hospitality Operating Partnership, L.P. held by nonaffiliates, computed by reference to the market price of shares of the common stock of MeriStar Hospitality Corporation as of such date, was $750,600,128. Each common operating partnership unit of MeriStar Hospitality Operating Partnership, L.P. is redeemable for one share of MeriStar Hospitality Corporation common stock. All of the shares of common stock of MeriStar Hospitality Finance Corp., MeriStar Hospitality Finance Corp. II and MeriStar Hospitality Finance Corp. III are held by MeriStar Hospitality Operating Partnership, L.P.

EXPLANATORY NOTE

      This Annual Report on Form 10-K is being filed jointly by MeriStar Hospitality Operating Partnership, L.P., or MHOP; MeriStar Hospitality Finance Corp, or MeriStar Finance; MeriStar Hospitality Finance Corp II, or MeriStar Finance II; and MeriStar Hospitality Finance Corp III, or MeriStar Finance III. No separate financial or other information of MeriStar Finance, MeriStar Finance II or MeriStar Finance III is material to holders of the securities of MHOP, MeriStar Finance, MeriStar Finance II or MeriStar Finance III since as of December 31, 2002, they had no operations, no employees, only nominal assets and no liabilities other than their obligations as corporate co-issuers under the indentures governing the senior unsecured notes issued in January 2001, December 2001 and February 2002.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

      Information both included and incorporated by reference in this Annual Report on Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and as such may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identified by our use of words such as “intend,” “plan,” “may,” “should,” “will,” “project,” “estimate,” “anticipate,” “believe,” “expect,” “continue,” “potential,” “opportunity,” and similar expressions, whether in the negative or affirmative. All statements regarding our expected financial position, business and financing plans are forward-looking statements.

      Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:

	•	the current slowdown of the national economy;
	•	economic conditions generally and the real estate market specifically;
	•	the impact of the September 11, 2001 terrorist attacks or actual or threatened future terrorist incidents;
	•	the threatened or actual outbreak of hostilities, including the conflict with Iraq;
	•	governmental actions;
	•	legislative/regulatory changes, including changes to laws governing the taxation of real estate investment trusts;
	•	availability of capital;
	•	rising interest rates;
	•	rising insurance premiums;
	•	competition;
	•	supply and demand for hotel rooms in our current and proposed market areas, including the existing and continuing weakness in business travel and lower-than-expected daily room rates; and
	•	generally accepted accounting principles, policies and guidelines applicable to real estate investment trusts.

      These risks and uncertainties, along with the risk factors discussed under “Risk Factors” in this Annual Report on Form 10-K, should be considered in evaluating any forward-looking statements contained in this report or incorporated by reference herein. All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are qualified by the cautionary statements in this section. We undertake no obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report.

PART I

ITEM 1.          BUSINESS

Business Overview

      MeriStar Hospitality Operating Partnership, L.P. is the subsidiary operating partnership of MeriStar Hospitality Corporation, Commission file number 1-11903, (“MeriStar Hospitality,” which is a real estate investment trust, or REIT) and owns a portfolio of upscale, full-service hotels and resorts. Our portfolio is diversified geographically as well as by franchise and brand affiliations. As of December 31, 2002, we owned 107 hotels with 27,581 rooms. Our hotels are located in major metropolitan areas or rapidly growing secondary markets in the United States and Canada. A majority of our hotels are operated under nationally recognized brand names such as Hilton®, Sheraton®, Westin®, Marriott®, Radisson®, Doubletree® and Embassy Suites®.

      We believe the upscale, full-service segment of the lodging industry offers attractive potential operating results and investment opportunities in the long term. The real estate market has recently experienced a significant slowdown in the construction of upscale, full-service hotels. Also, upscale, full-service hotels have particular appeal to both business executives and upscale leisure travelers. We believe the combination of these factors offers good long-term potential ownership opportunities for us in this sector of the lodging industry.

      We were created on August 3, 1998, when American General Hospitality Corporation, a corporation operating as a real estate investment trust, merged with CapStar Hotel Company. In connection with this merger, we created MeriStar Hotels & Resorts Inc. (“MeriStar Hotels”) to be the lessee and manager of nearly all of our hotels. On July 31, 2002, MeriStar Hotels merged with Interstate Hotels Corporation to form Interstate Hotels & Resorts, Inc. (“Interstate Hotels”). As of December 31, 2002, Interstate Hotels managed all of our hotels. We share our Chief Executive Officer and Chairman of the Board, Paul W. Whetsell, and two other board members, described in greater detail below, with Interstate Hotels. In addition, we and Interstate Hotels have entered into an intercompany agreement that governs a number of aspects of our relationship. See “The Intercompany Agreement.”

      As of December 31, 2002, our general partner, MeriStar Hospitality, in the form of our Common units, directly owned a one percent general partnership interest in us and also indirectly owned an approximately 90% interest in us. Several third parties owned the remaining approximately 9% of our equity interests, in the form of various classes of our partnership units.

Business Strategy

      Given the challenging operating environment that has resulted from a slowing economy coupled with the current geopolitical situation, disruptions caused by the events of September 11, 2001, and the threat of further terrorist attacks, we intend to focus on maximizing the profitability of our existing hotels by actively overseeing their operation by Interstate Hotels. We have formed a new Asset Maximization® Group in which senior level operators concentrate on maximizing all potential profitability options of our hotels. In addition, we have taken steps to strengthen our balance sheet and to maintain financial flexibility and liquidity to enhance our capacity to address the uncertain operating environment that currently exists. We continue to focus on a deleveraging strategy, including the expansion of our program of selling non-core assets. We consider “non-core” assets generally to be those that are located in markets that are currently underperforming, have limited future growth potential, have higher than average capital expenditure requirements, are of a secondary brand affiliation, or are in markets where our portfolio is over-weighted. Many of these assets were acquired as part of a portfolio. To the extent we complete additional asset dispositions, and we believe that our liquidity levels are appropriate, we will consider applying proceeds from asset sales to repurchase debt and reinvest in our core assets. We sold five hotels in 2002 and one hotel in January 2003. As of February 12, 2003, we were actively marketing eight additional assets as part of our non-core asset disposition plan. Subsequently, based on our decision to raise additional cash to reduce our overall leverage and provide additional capital for reinvestment in our core holdings, we changed our expectation about our holding period for certain other hotels. We plan to market another eight hotels, which will increase the number of marketed assets to sixteen.

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      In addition, we are frequently approached by potential buyers interested in other assets that we might consider selling and have recently engaged in discussions with some of those potential buyers of hotel assets, both on an individual and a portfolio basis. Any such portfolio may include both core and non-core assets, if the disposition arrangement would be beneficial to shareholder value. However, there can be no assurance that any such transactions will be concluded. Any additional sales of assets under these scenarios may result in additional impairment charges in future periods, if and when the assets are actively marketed. While we always consider any opportunities that may improve our financial condition or results of operations, we have not committed to the disposition of any of these other assets at this time. As such, we are not able at this time to estimate the timing or the amount of any impairment charges that might result. We are aided in our disposition program by the fact that we can terminate any management agreement of any hotel we sell, in some cases, subject to the payment of a fee, as described under the section “The Management Agreements — Term and Termination” below, as well as the fact that 83 of our current 106 assets are unencumbered and only 13 of those assets are subject to ground leases.

Recent Developments

      We have historically shared certain key executive officers and board members with Interstate Hotels. Due to the merger of MeriStar Hotels and Interstate Hotels Corporation and the resulting increased scale and size of Interstate Hotels, we and Interstate Hotels decided to separate more completely the executive management teams of the two companies. We have made significant progress in this regard and now both companies have fully dedicated management teams. Paul W. Whetsell remains Chairman of the Board and Chief Executive Officer of each company. In December 2002, Donald D. Olinger joined our company as Chief Financial Officer. Mr. Olinger also serves as our Chief Accounting Officer. John Emery previously performed the duties of Chief Financial Officer for us. In November 2002, we announced that John Emery, our president and Chief Operating Officer, would resign from these positions, effective November 1, 2002. Mr. Emery continues to serve as president and Chief Operating Officer of Interstate Hotels. Bruce Wiles, who was previously Chief Investment Officer of both companies, is our new Chief Operating Officer. In February 2003, Jerome Kraisinger joined our company as General Counsel, and Brooks Martin joined as Vice President of Tax. Mr. Kraisinger also serves as our Corporate Secretary. All of the members of our senior management team have substantial hospitality real estate experience.

      In early January 2003, we received payment on our outstanding note receivable from Interstate Hotels, which was due in 2007. Under the terms of the agreement, we received $42.1 million, plus accrued interest, in settlement of the $56.1 million note. Proceeds from the transaction have been added to our cash reserves to enhance our liquidity and financial flexibility.

      On October 29, 2002, we entered into a new three-year $100 million senior revolving credit facility, secured by the equity interests in most of our subsidiaries, and terminated our previous credit facility. The initial rate is the London Interbank Offered Rate, or LIBOR, plus 388 basis points, slightly lower than the rate under the previous credit facility. We currently have, and as of December 31, 2002 had, no outstanding borrowings on this facility. This facility contains customary compliance measures we must meet in order to borrow on the facility, which became more stringent on a quarterly basis beginning in the first quarter of 2003. The sale of two hotels during the fourth quarter of 2002 and one in January 2003, as well as the settlement of our note receivable with Interstate Hotels, impacted our leverage covenant due to the loss of trailing 12-month EBITDA (as defined in the credit agreement) on a pro forma basis. While we cannot currently borrow under the facility, we have obtained a waiver of compliance with this leverage covenant from our lending group

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      In 1999, we completed a $330 million 10-year non-recourse financing secured by a portfolio of 19 hotels. The loan bears a fixed interest rate of 8.01% and matures in 2009. We used the majority of the net proceeds to repay amounts outstanding under our prior credit facilities.

      This facility contains standard provisions that require the servicer to maintain in escrow cash balances for certain items such as property taxes and funding of capital expenditures. In addition, the facility contains a provision that requires our mortgage servicer to retain in escrow the excess cash from the encumbered hotels after payment of debt service (“Excess Cash”), if net hotel operating income after payment of furniture, fixtures and equipment (“FF&E”) reserves and franchise fees (“NOI”) for the trailing twelve months declines below $57 million. This provision was triggered in October 2002 and will be effective until the hotels generate the minimum cash flow required for two consecutive quarters, at which time the cash being held in escrow will be released to us. Approximately $4.5 million of cash was held in escrow under this provision as of December 31, 2002. Additional amounts continue to be held in escrow. The security agreement permits us to substitute unleveraged properties into the portfolio in place of existing properties in order to increase the NOI to a level at which the portfolio will meet this requirement. We have begun discussions with the servicer regarding this substitution and expect to be able to do so, thus resulting in the release of any Excess Cash held in escrow. Implementation of this solution is subject to rating agency approval and qualification for Real Estate Mortgage Investment Conduit purposes. There can be no assurance that the hotels will reach the minimum cash flow in the future. The security agreement also permits us to withdraw the cash held in escrow for funding of capital expenditures on the 19 encumbered properties.

The Partnership Agreement

      The following summary information is qualified in its entirety by the provisions of the Agreement of Limited Partnership of MeriStar Hospitality Operating Partnership, L.P., as amended, a copy of which is incorporated by reference as Exhibit 10.1 to this Form 10-K.

      Our partnership agreement gives MeriStar Hospitality full control over our business and affairs. The agreement also gives MeriStar Hospitality the right, in connection with the contribution of property to us or otherwise, to issue additional partnership interests in us in one or more classes or series. These issuances may have such designations, preferences and participating or other special rights and powers (including rights and powers senior to those of the existing partners) as MeriStar Hospitality determines appropriate.

      Our partnership agreement currently provides for five classes of partnership interests: Common OP Units, Class B OP Units, Class C OP Units, Class D OP Units and Profits-Only OP Units. As of March 10, 2003, MeriStar Hospitality and our wholly-owned subsidiaries owned a number of Common OP Units equal to the number of issued and outstanding shares of MeriStar Hospitality’s common stock (45,287,627 shares), par value $0.01. Other ownership interests were as follows:

	•	Independent third parties owned 3,700,517 OP Units (consisting of 1,896,713 Common OP Units, 495,343 Class B OP Units, 916,304 Class C OP Units and 392,157 Class D OP Units), and
	•	Certain of our executive officers and executive officers of Interstate Hotels owned an aggregate of 687,500 Profits-Only OP Units and 5,758 Common OP Units.

      Holders of Common OP Units and Class B OP Units receive distributions for each Common or Class B OP Unit equivalent to the dividend paid on each of MeriStar Hospitality’s common shares. Holders of Class C OP Units receive a non-cumulative, quarterly distribution equal to $0.5575 per Class C OP Unit so long as the Common OP Units and Class B OP Units receive a distribution for such quarter and the dividend rate on MeriStar Hospitality’s common stock has not exceeded $0.5575. Class C OP Units automatically convert into

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      Each Common OP Unit, Class B OP Unit and Class C OP Unit held by third-parties is redeemable by the holder for cash in an amount equal to the market value of a share of MeriStar Hospitality’s common stock or, at our option, for one share of MeriStar Hospitality’s common stock, determined in accordance with the terms of our partnership agreement. We have the option to redeem the Class D OP Units at any time after April 1, 2000, at a price of $22.16 per share for cash or, at our option, for shares of MeriStar Hospitality’s common stock having a value equal to the redemption price. The holders have the option to redeem the Class D OP Units at any time after April 1, 2004 for cash or, at the option of the holders, for shares of MeriStar Hospitality’s common stock having a value equal to $22.16 per share.

      Profits-Only OP Units are issued pursuant to our Profits-Only Operating Partnership Units Plan, a copy of which is incorporated by reference in Exhibit 10.9 to this Form 10-K. Holders of Profits-Only OP Units receive compensation equivalent to the dividend paid on MeriStar Hospitality’s common stock in accordance with our amended Incentive Plan, a copy of which is incorporated by reference in Exhibit 10.7.1 to this Form 10-K.

REIT Modernization Act

      Until January 1, 2001, in order for MeriStar Hospitality to maintain its tax status as a REIT, we were not permitted to engage in the operations of our hotel properties. To comply with this requirement, we leased all of our real property to third parties, including Interstate Hotels and Prime Hospitality Corporation. On January 1, 2001, changes to the U.S. federal tax laws governing REITs, commonly known as the REIT Modernization Act, or RMA, became effective. As permitted by the RMA, we formed a number of wholly-owned taxable subsidiaries, which are subject to taxation similar to subchapter C-corporations, to lease our real property. In 2000, a subcommittee of independent members of our Board of Directors ratified the transfer of our leases with subsidiaries of Interstate Hotels to our taxable subsidiaries. Accordingly, effective January 1, 2001, our taxable subsidiaries executed agreements with subsidiaries of Interstate Hotels. These agreements assigned our existing leases to our taxable subsidiaries. In connection with the assignment, the taxable subsidiaries executed new management agreements with a subsidiary of Interstate Hotels for each property they previously leased. The management agreements were structured to substantially mirror the economics of the former lease agreements. We believe this structure provides us with the ability to capture the economic interests of property ownership, as well as more efficiently aligning such interests.

      Although a taxable subsidiary may lease our real property, it is restricted from being involved in certain activities prohibited by the RMA. First, a taxable subsidiary is not permitted to manage the property itself; it must enter into an “arm’s-length” management agreement with an independent third-party manager that is actively involved in the trade or business of hotel management and manages properties on behalf of other owners. Second, the taxable subsidiary is not permitted to lease a property that contains gambling operations. Third, the taxable subsidiary is restricted from owning a brand or franchise.

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The Management Agreements

      Each of our taxable subsidiaries pays Interstate Hotels a hotel management fee equal to a specified percentage of aggregate hotel operating revenues, increased or reduced, as the case may be, by 20% of the positive or negative difference between:

	•	The actual excess of total operating revenues over total operating expenses; and
	•	A projected excess of total operating revenues over total operating expenses.

      The total management fee for a hotel in any fiscal year will not be less than 2.5% or greater than 4.0% of aggregate hotel operating revenues.

      The management agreements with Interstate Hotels generally have initial terms of 10 years with three renewal periods of five years each, except for three management agreements which have initial terms of one year which renew annually thereafter. A renewal will not go into effect if a change in the federal tax laws permits us or one of our subsidiaries to operate the hotel directly without adversely affecting MeriStar Hospitality’s ability to qualify as a REIT, or if Interstate Hotels elects not to renew the agreement. We may elect not to renew the management agreements only as provided below.

      Our taxable subsidiaries have the right to terminate a management agreement for a hotel upon the sale of the hotel to a third party or if the hotel is not restored after a significant casualty loss. Upon that termination, the relevant taxable subsidiary will be required to pay Interstate Hotels the fair market value of the management agreement. That fair market value will be equal to the present value of the remaining payments (discounted using a 10% rate) of the existing term under the agreement, based on the operating results for the 12 months preceding the termination. Our taxable subsidiaries will be able to credit against any termination payments, the present value of projected fees (discounted using a 10% rate) under any management agreements or leases entered into between Interstate Hotels and us (or our subsidiaries) after August 3, 1998.

      If a hotel’s gross operating profit is less than 85% of the amount projected in the hotel’s budget in any fiscal year and gross operating profit from that hotel is less than 90% of the projected amount in the next fiscal year, our taxable subsidiaries will have the right to terminate the management agreement for the hotel, unless:

	•	We did not materially comply with the capital expenditures contemplated by the budget for either or both of the applicable fiscal years; or
	•	Interstate Hotels cures the shortfall by agreeing to reduce its management fee for the next fiscal year by the amount of the shortfall between the actual operating profit for the second fiscal year and 90% of the projected gross operating profit for that year.

      Interstate Hotels can only use the cure right once during the term of each management agreement.

      Interstate Hotels does not have the right to assign a management agreement without the prior written consent of the relevant taxable subsidiary. A change in control of Interstate Hotels will require the consent of the relevant taxable subsidiary, and that subsidiary may grant or withhold its consent in its sole discretion.

The Intercompany Agreement

      We and MeriStar Hospitality are party to an intercompany agreement with Interstate Hotels. So long as the intercompany agreement remains in effect, Interstate Hotels is prohibited from making real property

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	•	We and MeriStar Hospitality are first given the opportunity, but elect not to pursue the investment;
	•	The investment is on land already owned or leased by Interstate Hotels or is subject to a lease or purchase option in favor of Interstate Hotels;
	•	Interstate Hotels will operate the property under an owned trade name; or
	•	The investment is a minority interest made as part of a lease or management agreement.

      We and MeriStar Hospitality have a right of first refusal with respect to any real property investment to be sold by Interstate Hotels.

      The intercompany agreement generally grants Interstate Hotels the right of first refusal with respect to any management opportunity at any of our properties we do not elect to have managed by a hotel brand owner. We must make such an opportunity available to Interstate Hotels only if we determine that:

	•	We are not required to enter into a management agreement with an unaffiliated third party with respect to the property in order to maintain MeriStar Hospitality’s status as a REIT;
	•	Interstate Hotels is qualified to be the manager of that property;
	•	We decide not to have the property operated by the owner of a hospitality trade name under that trade name;
	•	The property is unencumbered by a management agreement, or if a management agreement exists, it can be freely terminated or terminated by the payment of a fee, which Interstate Hotels agrees to pay; and
	•	The property is not subject to a leasehold estate held by an unaffiliated third party.

      Because of the provisions of the intercompany agreement, we and MeriStar Hospitality are restricted in the nature of our business and the opportunities we may pursue.

      We may exchange services with Interstate Hotels as may be reasonably requested from time to time. These may include administrative, renovation supervision, corporate, accounting, financial, risk management, legal, tax, information technology, human resources, acquisition identification and due diligence, and operational services. We believe we compensate each other in an amount that would be charged by an unaffiliated third party for comparable services. The arrangements relating to the provision of these services were not subject to arm’s-length negotiation.

      If we, MeriStar Hospitality, or Interstate Hotels plan to engage in a securities issuance, the issuing party must give notice to the other parties of its desire to engage in a securities issuance as promptly as practicable. The notice will include the proposed material terms of such issuance, to the extent determined by the issuing party, including whether the issuance is proposed to be pursuant to a public or private offering, the amount of securities proposed to be issued and the manner of determining the offering price, and other terms of the securities. The non-issuing parties will cooperate with the issuing party to effect any securities issuance of the issuing party by assisting in the preparation of any registration statement or other document required in connection with the issuance and, in connection with that issuance, providing the issuing party with such information as may be required to be included in the registration statement or other document.

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      The intercompany agreement will terminate upon the earlier of August 3, 2008, or the date of a change in ownership or control of Interstate Hotels unless we approve, in our sole discretion, such change in ownership or control. We consented to the merger between Interstate Hotels Corporation and MeriStar Hotels.

      We were obligated to lend Interstate Hotels up to $50 million for general corporate purposes under a revolving credit agreement. The interest rate on the revolving credit facility equaled 650 basis points over the 30-day LIBOR. The facility matured the 91st day following the maturity of Interstate Hotels’ senior bank credit facility. We amended our revolving credit agreement with Interstate Hotels to include covenants similar to those in its senior bank credit facility.

      Interstate Hotels also issued to us a $13.1 million term note effective January 1, 2002, which refinanced outstanding accounts payable owed to us. Both the interest rate and the maturity were the same as that of the revolving credit agreement.

      In connection with the merger that created Interstate Hotels on July 31, 2002, Interstate Hotels paid $3 million to reduce its borrowings outstanding on the revolving credit agreement. Also, the credit agreement and term note were amended and combined into a term loan agreement with a principal balance of $56.1 million and a maturity date of July 31, 2007. The interest rate remained at 650 basis points over the 30-day LIBOR. This term loan was subordinate to Interstate Hotels’ new bank credit agreement, and did not allow for any further borrowings by Interstate Hotels.

      In late December 2002, we reached an agreement to settle the term loan with Interstate Hotels for $42.1 million, plus accrued interest. We incurred a $14.5 million charge in 2002, including expenses of the transaction, related to this settlement. Cash payment was received in early January 2003.

Acquisition Strategy

      While the terms of our senior note indenture do not currently permit us to execute this strategy (as we are below the required fixed charge coverage ratio of 2 to 1), we continue to maintain the acquisition of hotel properties as a long-term strategy. In execution of this strategy, we will focus our attention on investments in hotels located in markets with economic, demographic and supply dynamics favorable to hotel owners. Through an extensive due diligence process, we will select those acquisition targets where we believe selective capital improvements and well-selected third-party management will increase the hotel’s ability to attract key demand segments, enhance hotel operations and increase long-term value. In order to evaluate the relative merits of each investment opportunity, our senior management and Interstate Hotels will create detailed plans covering all areas of renovation and operation. These plans will serve as the basis for our acquisition decisions and guide subsequent renovation and operating plans. We rely heavily on our ability to raise new capital through debt and equity offerings in order to complete acquisitions. That ability will be dependent on the then-current status of the capital markets generally, as well as our own ability to access those markets on acceptable terms.

Franchises

      We employ a flexible strategy in selecting brand names based on each particular hotel’s market environment and other unique characteristics. Accordingly, we use various national trade names under licensing arrangements with national franchisors. We have included a listing of all of our properties, along with the affiliated brand names, under Item 2 of this Form 10-K.

Competition

      We compete primarily in the upper upscale sector of the full-service segment of the lodging industry. Each geographic market where we own hotels has other full- and limited-service hotels that compete with our hotels. Competition in the U.S. lodging industry is based on a number of factors, most notably convenience of

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Seasonality

      Demand in the lodging industry is affected by recurring seasonal patterns. For non-resort properties, demand is lower in the winter months due to decreased travel and higher in the spring and summer months during the peak travel season. For resort properties, demand is generally higher in winter and early spring. Since the majority of our hotels are non-resort properties, our operations generally reflect non-resort seasonality patterns. We typically have lower revenue, operating income and cash flow in the first and fourth quarters and higher revenue, operating income and cash flow in the second and third quarters. These general trends are, however, greatly influenced by overall economic cycles.

Employees

      As of December 31, 2002, we employed 30 persons, all of whom work at our corporate headquarters in Washington D.C.

Governmental Regulation

      Under the Americans with Disabilities Act, or ADA, all public accommodations must meet certain requirements related to access and use by disabled persons. These requirements became effective in 1992. Although significant amounts have been and continue to be invested in ADA-required upgrades to our hotels, a determination that we are not in compliance with the ADA could result in a judicial order requiring compliance, imposition of fines or an award of damages to private litigants. We are likely to incur additional costs in complying with the ADA; however, such costs are not expected to have a material adverse effect on our results of operations or financial condition.

      Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in property. Laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to properly remediate contaminated property, may adversely affect the owner’s ability to sell or rent real property or to borrow funds using real property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of these substances at the disposal or treatment facility, whether or not the facility is or ever was owned or operated by those persons.

      Federal and state laws also regulate the operation and removal of underground storage tanks. In connection with the ownership and operation of our hotels, we could be held liable for the costs of remedial action with respect to the regulated substances and storage tanks and claims related thereto. Activities have been undertaken to close or remove storage tanks located on the property of several of our hotels.

      All of our hotels have undergone Phase I environmental site assessments, which generally provide a nonintrusive physical inspection and database search, but not soil or groundwater analyses, by a qualified independent environmental engineer. The purpose of a Phase I assessment is to identify potential sources of contamination for which the hotels may be responsible and to assess the status of environmental regulatory compliance. The Phase I assessments have not revealed any environmental liability or compliance concerns that we believe would have a material adverse effect on our results of operations or financial condition, nor are we aware of any material environmental liability or concerns. Nevertheless, it is possible that these environmental site assessments did not reveal all environmental liabilities or compliance concerns or that material environmental liabilities or compliance concerns exist of which we are currently unaware.

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      In addition, our hotels have been inspected to determine the presence of asbestos. Federal, state and local environmental laws, ordinances and regulations also require abatement or removal of asbestos-containing materials and govern emissions of and exposure to asbestos fibers in the air. Asbestos-containing materials are present in various building materials such as sprayed-on ceiling treatments, roofing materials or floor tiles at some of our hotels. Operations and maintenance programs for maintaining asbestos-containing materials have been or are in the process of being designed and implemented, or the asbestos-containing materials have been scheduled to be or have been abated, at these hotels. Any liability resulting from non-compliance or other claims relating to environmental matters are not expected to have a material adverse effect on our results of operations or financial condition.

      In recent years there has been a widely-publicized proliferation of mold-related claims by tenants, employees and other occupants of buildings against the owners of those buildings. To date, a few such claims have been filed against us by employees of hotels where mold has been detected. Mold-related claims are not covered by our insurance programs. These claims have not been material to our consolidated results of operations, financial position or liquidity. In every hotel where we have identified a measurable presence of mold, whether or not a claim has been made, we have undertaken remediation we believe to be appropriate for the circumstances encountered. Unfortunately, there is little in the way of government standards, insurance industry specifications or otherwise generally accepted guidelines dealing with mold propagation. Although considerable research into mold toxicity and exposure levels is underway, it may be several years before definitive standards are available to property owners against which to evaluate risk and design remediation practices. We cannot predict the outcome of any future regulatory requirements to deal with mold-related matters. We also do not believe that, currently, any potential mold-related liabilities, either individually or in the aggregate, will have a material adverse effect on our results of operations or financial condition.

Access to Our Filings

      You may request a copy, at no cost, of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission, by contacting us in writing or by telephone at our principal executive offices: MeriStar Hospitality Operating Partnership, L.P., 1010 Wisconsin Avenue, N.W., Washington, D.C. 20007, telephone (202) 295-1000. We also make available all of these filings on MeriStar Hospitality’s website at www.meristar.com.

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RISK FACTORS

Financing Risks

      We are highly leveraged; our significant amount of debt could limit our operational flexibility or otherwise adversely affect our financial condition.

      As of December 31, 2002, we had $1.7 billion of total debt outstanding, or 65% of our total capitalization. We are subject to the risks normally associated with significant amounts of debt, including the risks that:

	•	our vulnerability to downturns in our business, such as the one we are currently experiencing, is increased, requiring us to reduce our capital expenditures as described further in “Operating Risks” (the potential adverse impact of our failure to meet the requirements contained in our franchise and licensing agreements), and restricting our ability to make acquisitions;
	•	our cash flow from operations may be insufficient to make required payments of principal and interest;
	•	we may be unable to refinance existing indebtedness, including secured indebtedness;
	•	the terms of any refinancing may not be as favorable as the terms of existing indebtedness; and
	•	we currently are, and may in the future be, unable to make distributions on any of our OP Units, except as required to maintain MeriStar Hospitality’s qualification as a REIT.

We may be required to refinance our indebtedness, and the failure to refinance our indebtedness may have a material, adverse effect on us.

      As of December 31, 2002, we had $154.3 million payable to MeriStar Hospitality (represents their subordinated notes maturing in 2004); $205 million payable to MeriStar Hospitality (represents their senior subordinated notes maturing in 2007); $300 million of senior unsecured notes maturing in 2008 and $250 million maturing in 2009; $314.6 million of collateralized mortgage-backed securities maturing in 2009; $400 million of senior unsecured notes maturing in 2011; and $38 million of mortgage debt maturing between 2003 and 2012. If we do not have sufficient funds to repay our indebtedness at maturity, we will have to refinance the indebtedness through additional debt financing. This additional financing might include private or public offerings of debt securities and additional non-recourse or other collateralized indebtedness. If we are unable to refinance our indebtedness on acceptable terms, we might be forced to dispose of hotels or other assets on disadvantageous terms. This could potentially result in losses and adverse effects on cash flow from operating activities. If we are unable to make required payments of principal and interest on our indebtedness, our outstanding indebtedness could be accelerated, and our properties could be foreclosed upon by the secured lenders with a consequent loss of income and asset value.

Our senior secured revolving credit facility and other debt instruments have restrictive covenants that could affect our financial condition.

      We currently have, and as of December 31, 2002 had, no outstanding borrowings under our senior secured revolving credit facility. Our ability to borrow under this facility is subject to financial covenants, including leverage and interest rate coverage ratios and minimum net worth requirements. Our compliance with these covenants in future periods will depend substantially upon the financial results of our hotels. If we fail to meet a future compliance measure, the availability of funds under our credit facility might be restricted. The credit agreement limits our ability to effect mergers, asset sales and change of control events, and limits dividends. The credit agreement also contains a cross-default provision, which would be triggered by a default or acceleration of $50 million or more of indebtedness secured by our assets or $5 million or more of any other indebtedness. Because we were not in compliance with the leverage covenant under the credit agreement as of March 10, 2003, we could not borrow under the credit agreement and do not expect to be able to do so in the future unless we amend or replace our credit facility, or use the proceeds from any future asset sales to reduce our leverage. See “Recent Developments — New Senior Revolving Credit Facility.”

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      As of December 31, 2002, we had the following outstanding borrowings:

	•	$154.3 million payable to MeriStar Hospitality (represents their convertible subordinated notes due 2004 bearing interest at 4.75%);
	•	$205 million payable to MeriStar Hospitality (represents their senior subordinated notes due 2007 bearing interest at a weighted-average annual rate of 8.69%);
	•	$300 million of senior unsecured notes due 2008 bearing interest at 9%;
	•	$250 million of senior unsecured notes due 2009 bearing interest at 10.50%;
	•	$314.6 million of collateralized mortgage-backed securities due 2009 bearing interest at a rate of 8.01%;
	•	$400 million of senior unsecured notes due 2011 bearing interest at 9.125%; and
	•	$38 million of mortgage debt maturing between 2003 and 2012 at interest rates ranging from 8.5% to 10.5%.

      The indentures relating to some of our outstanding debt contain limitations on our ability to effect mergers and change of control events, as well as other limitations, including limitations on:

	•	Incurring additional indebtedness;
	•	Selling our assets;
	•	Conducting transactions with our affiliates; and
	•	Incurring liens.

      In this respect, the indentures relating to our senior unsecured notes and MeriStar Hospitality’s senior subordinated notes significantly restrict our ability to incur indebtedness and MeriStar Hospitality from paying dividends, and our ability to acquire or prepay certain of our debt if our fixed charge coverage ratio (as defined in these indentures) is less than 2 to 1 for our most recently ended four fiscal quarters. Such ratio has been less than 2 to 1 since March 2002, and was at 1.6 to 1 as of December 31, 2002.

      Debt instruments we issue in future offerings will likely contain similar restrictive covenants. These restrictions could limit our ability to finance our future operations or capital needs, make acquisitions or pursue available business opportunities. In addition, they may require us to maintain specific financial ratios and to satisfy various financial covenants. We may be required to take action to reduce our debt or act in a manner contrary to our business objectives to meet these ratios and satisfy these covenants.

      Our secured facility is secured by a portfolio of 19 hotels and contains standard provisions that require the servicer to maintain in escrow cash balances for certain items such as property taxes and funding of capital expenditures. In addition, the facility contains a provision that requires our mortgage servicer to retain in escrow the excess cash from the encumbered hotels after payment of debt service (“Excess Cash”), if net hotel operating income after payment of FF&E reserves and franchise fees (“NOI”) for the trailing twelve months declines below $57 million. This provision was triggered in October 2002 and will be effective until the hotels generate the minimum cash flow required for two consecutive quarters, at which time the cash being held in escrow will be released to us. Approximately $4.5 million of cash was held in escrow under this provision as of December 31, 2002. Additional amounts continue to be held in escrow. The security agreement permits us to substitute unleveraged properties into the portfolio in place of existing properties in order to increase the NOI to a level at which the portfolio will meet this requirement. We have begun discussions with the servicer regarding this substitution.

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We may be able to incur substantially more debt, which would increase the risks associated with our substantial leverage.

      Although the terms of our debt instruments restrict our ability to incur additional indebtedness, our organizational documents do not limit the amount of indebtedness we may incur. If we add new debt to our current debt, the related risks we now face could intensify and increase the risk of default on our indebtedness.

Rising interest rates could have an adverse effect on our cash flow and interest expense.

      Any borrowings we make under our senior secured revolving credit facility will bear interest at a variable rate. In addition, in the future we may incur indebtedness bearing interest at a variable rate, or we may be required to refinance our existing indebtedness at higher interest rates. Accordingly, to the extent we borrow under our senior secured revolving credit facility, increases in interest rates could increase our interest expense and adversely affect our cash flow, reducing the amounts available to make payments on our other indebtedness, make acquisitions, or pursue other business opportunities.

Operating Risks

Acts of terrorism, the threat of terrorism, the war with Iraq and the potential conflicts with other countries, and the ongoing war against terrorism have had a negative impact on and will continue to have a negative effect on our industry and our results of operations.

      The terrorist attacks of September 11, 2001 have had a negative impact on our hotel operations from the third quarter of 2001 to the present, causing lower than expected performance in an already slowing economy. The events of September 11 have caused a significant decrease in our hotels’ occupancy and average daily rate due to disruptions in business and leisure travel patterns, and concerns about travel safety. Major metropolitan area and airport hotels have been adversely affected by concerns about air travel safety and a significant overall decrease in the amount of air travel.

      The September 11 terrorist attacks were unprecedented in scope, and in their immediate, dramatic impact on travel patterns. We have not previously experienced such events, and it is currently not possible to accurately predict if and when travel patterns will be restored to pre-September 11 levels. While we have had improvements in our operating levels from the period immediately following the attacks, we believe the uncertainty associated with subsequent incidents, the war with Iraq and the possibility with other countries, threats and the possibility of future attacks will continue to hamper business and leisure travel patterns for the next several quarters.

The recent economic slowdown, the threat of further terrorist attacks, and the uncertainty of a conflict with Iraq and other countries have materially affected, and may continue to adversely affect, our revenue per available room, or RevPAR, performance and operating cash flows, and if they worsen or continue, these effects could become materially more adverse.

      We have experienced the following declines in RevPAR:

	•	18.0% decline during the first quarter of 2002, as compared to the same period of 2001;
	•	11.3% decline during the second quarter of 2002, as compared to the same period of 2001;
	•	5.3% decline during the third quarter of 2002, as compared to the same period of 2001; and
	•	8.6% decline during the full year 2002, as compared to full year 2001.

      After generating $224 million of cash from operations during 2000, we generated $150.1 million during 2001 and $56.7 million of cash from operations during 2002. The decreases from 2000 are due to the economic slowdown that began in 2001, as well as the terrorist attacks of September 11, 2001, the continuing threat of further terrorist attacks and the uncertainty of potential conflicts with Iraq and other countries. A sharper-than-anticipated decline in business and leisure travel was the primary cause of the declines, which were principally reflected in decreased occupancies. If the current economic slowdown worsens significantly or

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      We expect to fund our continuing operations, which primarily include our interest expense and capital expenditures, through cash generated by our hotels and to the extent necessary from the proceeds of sales of non-core hotel assets. In response to the decline in our cash flows since September 11, 2001, we have significantly curtailed our capital expenditure programs, which may adversely affect the competitive position of our hotels in their markets. We expect capital expenditures of $40 million to $50 million in 2003. If the current economic conditions worsen, we may have to curtail our capital expenditures even further. We have also sold non-core assets to generate cash. Since the fourth quarter in 2001, we have sold eight hotels for aggregate cash proceeds of $83 million and are currently actively marketing or expect to bring to market in the near future a total of 16 non-core assets.

If our revenues are negatively affected by one or more particular risks, our operating margins could suffer.

      Until January 1, 2001, we leased all but eight of our hotels to Interstate Hotels. Under each of those leases, Interstate Hotels was required to pay us a fixed base rent plus participating rent based on a percentage of revenues at the hotel. As a result of changes to the federal tax laws governing REITs, which became effective on January 1, 2001, Interstate Hotels assigned those leases to our taxable REIT subsidiaries and those subsidiaries have entered into management agreements with Interstate Hotels to manage our hotels. As a result of this new lease structure, we report operating revenues and expenses from the hotels rather than rental payments under the prior lease structure. Therefore, we have greater sensitivity to changes in operating revenues and are subject to the risk of fluctuating hotel operating margins at those hotels. Hotel operating expenses include, but are not limited to, wage and benefit costs, supplies, repair and maintenance expenses, utilities, insurance and other operating expenses. These operating expenses are more difficult to predict and control than percentage lease revenue, resulting in increased unpredictability in our operating margins. Also, due to the level of fixed costs required to operate full-service hotels, we generally cannot reduce significant expenditures necessary for the operation of hotels when circumstances cause a reduction in revenue.

      Various factors could adversely affect our operating margins, which are subject to all of the operating risks inherent in the lodging industry. These risks include the following:

	•	dependence on business and commercial travelers and tourism, which have been affected by the events of September 11, 2001 and threats of further terrorism, or other outbreaks of hostilities, and may otherwise fluctuate and be seasonal;
	•	changes in general and local economic conditions;
	•	cyclical overbuilding in the lodging industry;
	•	varying levels of demand for rooms and related services;
	•	competition from other hotels, motels and recreational properties, some of which may be owned or operated by companies having greater marketing and financial resources than we do;
	•	decreases in air travel;
	•	fluctuations in operating costs;
	•	the recurring costs of necessary renovations, refurbishments and improvements of hotel properties;
	•	changes in governmental regulations that influence or determine wages, prices and construction and maintenance costs; and
	•	changes in interest rates and the availability of credit.

      In addition, demographic, geographic or other changes in one or more of the markets of our hotels could impact the convenience or desirability of the sites of some hotels, which would in turn affect their operations.

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Recent events have adversely affected the insurance market.

      The September 11, 2001 terrorist attacks have had a dramatic effect on the insurance and reinsurance industries. Companies in all industry segments are experiencing increases in premiums and reductions in coverage upon renewal of their insurance policies. Some entities have experienced an inability to obtain insurance. If we are unable to maintain insurance that meets our debt covenant and franchise agreement requirements, and if we are unable to amend or waive those requirements, it could have a material adverse effect on our liquidity and our business. Our total annual property and casualty insurance premiums are approximately $31 million under our renewed policies.

We have significant operational relationships with Interstate Hotels, and Interstate Hotels’ operating or financial difficulties could adversely affect our hotels’ operations or our financial position.

      Interstate Hotels manages all of our hotels (107 hotels as of December 31, 2002). As a result, we depend heavily on Interstate Hotels’ ability to provide efficient, effective management services to our hotels. Although we monitor the performance of our properties on an ongoing basis, Interstate Hotels is responsible for the day-to-day management of our properties. According to Interstate Hotels’ public statements, Interstate Hotels has incurred, on a pro forma basis giving effect to the merger that formed Interstate Hotels, net losses of $9.7 million and $20.5 million for the years ended December 31, 2002 and 2001, respectively. If Interstate Hotels were unable to continue in business as a hotel operator, we would have to find a new manager for our hotels. This transition could significantly disrupt the operations of our hotels and lead to lower operating results from our properties.

      Interstate Hotels is the general partner in MeriStar Investment Partners, LP (“MIP”), a joint venture established to acquire upscale, full-service hotels. We have a 16% preferred partnership interest in MIP, (equal to an initial investment of $40 million). We also have a receivable for approximately $10.8 million in cumulative preferred returns outstanding as of December 31, 2002. If Interstate Hotels is unable to continue as the general partner of MIP, a liquidation of MIP may occur. This liquidation could result in an impairment of our investment and cumulative preferred return receivable.

We invest in a single industry.

      Our current strategy is to acquire interests only in hospitality and lodging. As a result, we are subject to the risks inherent in investing in a single industry. The effects on cash available for distribution resulting from a downturn in the hotel industry may be more pronounced than if we had diversified our investments.

We have a high concentration of hotels in the upscale, full-service segment, which may increase our susceptibility to an economic downturn.

      As of December 31, 2002, 85% of our hotels were in the upscale, full-service segment. This hotel segment generally demands higher room rates. In an economic downturn, hotels in this segment may be more susceptible to a decrease in revenues, as compared to hotels in other segments that have lower room rates. This characteristic results from hotels in this segment generally targeting business and high-end leisure travelers. In periods of economic difficulties or political instability, business and leisure travelers may seek to reduce travel costs by limiting trips or seeking to reduce costs on their trips. This characteristic has had, and could continue to have, a material adverse effect on our revenues and results of operations.

The lodging business is seasonal.

      Generally, hotel revenues are greater in the second and third calendar quarters than in the first and fourth calendar quarters. This may not be true, however, for hotels in major tourist destinations. Revenues for hotels in tourist areas generally are substantially greater during tourist season than other times of the year. Seasonal variations in revenue at our hotels will cause quarterly fluctuations in our revenues. Events beyond our control, such as extreme weather conditions, economic and political factors and other considerations affecting travel, may also adversely affect our earnings.

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We may be adversely affected by the requirements contained in our franchise and licensing agreements.

      As of December 31, 2002, approximately 89% of our hotels were operated pursuant to existing franchise or licensing agreements with nationally recognized hotel brands. The franchise agreements generally contain specific standards for, and restrictions and limitations on, the operation and maintenance of a hotel in order to maintain uniformity within the franchisor system. Those limitations may conflict with our philosophy, shared with Interstate Hotels, of creating specific business plans tailored to each hotel and to each market. Standards are often subject to change over time, in some cases at the discretion of the franchisor, and may restrict a franchisee’s ability to make improvements or modifications to a hotel without the consent of the franchisor. In addition, compliance with standards could require a franchisee to incur significant expenses or capital expenditures. Action or inaction on our part or by our third-party operator could result in a breach of standards or other terms and conditions of the franchise agreements, and could result in the loss or cancellation of a franchise license. Although we have from time to time received default notices from franchisors due to service or physical plant deficiencies, none of our franchise agreements have been terminated for such deficiencies, and we believe that we can avoid future terminations by cooperating with our franchisors. Loss of franchise licenses without replacement would likely have an adverse effect on our hotel revenues.

      In connection with terminating or changing the franchise affiliation of a currently-owned hotel or a subsequently-acquired hotel, we may be required to incur significant expenses or capital expenditures. Moreover, the loss of a franchise license could have a material adverse effect upon the operations or the underlying value of the hotel covered by the franchise due to the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor. The franchise agreements covering the hotels expire or terminate, without specified renewal rights, at various times and have differing remaining terms. As a condition to renewal, the franchise agreements frequently contemplate a renewal application process, which may require substantial capital improvements to be made to the hotel. Unexpected capital expenditures could adversely affect our results of operations and our ability to make payments on our indebtedness.

The lodging industry is highly competitive.

      We have no single competitor or small number of competitors that are considered to be dominant in the industry. We operate in areas that contain numerous competitors, some of which may have substantially greater resources than us. Competition in the lodging industry is based generally on location, availability, room rates, or accommodations, price, range and quality of services and guest amenities offered. New or existing competitors could significantly lower rates, offer greater conveniences, services or amenities; or significantly expand, improve or introduce new facilities in markets in which we compete. All of these factors could adversely affect our operations and the number of suitable business opportunities.

We rely on the knowledge and experience of some key personnel, and the loss of these personnel may have a material adverse effect on our operations.

      We place substantial reliance on the lodging industry knowledge and experience and the continued services of our senior management, led by Paul W. Whetsell. While we believe that, if necessary, we could find replacements for these key personnel, the loss of their services could have a material adverse effect on our operations. In addition, Mr. Whetsell is currently engaged, and in the future will continue to engage, in the management of Interstate Hotels. Mr. Whetsell may experience conflicts of interest in allocating management time, services and functions between Interstate Hotels and us.

We have lost some of our key personnel to Interstate Hotels.

      Historically, many of our senior executives have held similar positions at our company and at Interstate Hotels. Several of these senior executives, including our Chief Operating Officer, Chief Financial Officer and Chief Accounting Officer, and General Counsel, have left our company and work exclusively for Interstate Hotels. As a result, several members of our senior management are new or have changed positions. Our Chief Financial Officer and General Counsel are new to our company, and our Chief Operating Officer has been

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Costs of compliance with environmental laws could adversely affect our operating results.

      See “Governmental Regulation — Environmental Laws” for a further discussion of risks related to environmental compliance.

Aspects of our operations are subject to government regulation, and changes in that regulation may have significant effects on our business.

      A number of states regulate the licensing of hotels and restaurants, including liquor license grants, by requiring registration, disclosure statements and compliance with specific standards of conduct. Interstate Hotels believes our hotels are substantially in compliance with these requirements or, in the case of liquor licenses that they have or will promptly obtain the appropriate licenses. Compliance with, or changes in, these laws could reduce the revenue and profitability of our hotels and could otherwise adversely affect our revenues, results of operations and financial condition.

      Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. These requirements became effective in 1992. Although significant amounts have been and continue to be invested in ADA required upgrades to our hotels, a determination that our hotels are not in compliance with the ADA could result in a judicial order requiring compliance, imposition of fines or an award of damages to private litigants.

Corporate Structure Risks

We have overlapping directors and an overlapping senior executive officer with Interstate Hotels.

      We share three directors, among our ten directors, with Interstate Hotels. Our Chairman and Chief Executive Officer, Paul W. Whetsell, is also the Chairman and Chief Executive Officer of Interstate Hotels. Our relationship with Interstate Hotels is governed by an intercompany agreement and by management agreements for each managed hotel. The intercompany agreement restricts each party from taking advantage of certain business opportunities without first presenting those opportunities to the other party. We may have conflicting views with Interstate Hotels on operation and management of our hotels and with respect to lease arrangements, acquisitions and dispositions. Inherent potential conflicts of interest will be present in all of the numerous transactions among Interstate Hotels and us.

We have restrictions on our business and on our future opportunities that could affect our business.

      The intercompany agreement with Interstate Hotels generally grants Interstate Hotels the right of first refusal with respect to any management opportunity at any of our properties we do not elect to have managed by a hotel brand owner. We must make such an opportunity available to Interstate Hotels only if we determine that:

	•	We are not required to enter into a management agreement with an unaffiliated third party with respect to the property in order to maintain MeriStar Hospitality’s status as a REIT;
	•	Interstate Hotels is qualified to be the manager of that property;
	•	We decide not to have the property operated by the owner of a hospitality trade name under that trade name;
	•	The property is unencumbered by a management agreement, or if a management agreement exists, it can be freely terminated or terminated by the payment of a fee, which Interstate Hotels agrees to pay; and
	•	The property is not subject to a leasehold estate held by an unaffiliated third party.

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      Because of the provisions of the intercompany agreement, we and MeriStar Hospitality are restricted in the nature of our business and the opportunities we may pursue.

We may have conflicts relating to the sale of hotels subject to management agreements.

      Our management agreements with Interstate Hotels may require us to pay a termination fee to Interstate Hotels if we elect to sell a hotel or if we elect not to restore a hotel after a casualty. We must pay this fee if we do not replace the hotel with another hotel subject to a management agreement with a fair market value equal to the fair market value of Interstate Hotels’ remaining management fee due under the management agreement to be terminated. Where applicable, the termination fee is equal to the present value of the remaining payments (discounted using a 10% rate) of the existing term under the agreement, based on the operating results of the hotel for the 12 months preceding termination. Our decision to sell a hotel may, therefore, have significantly different consequences for Interstate Hotels and us. The requirement to pay a termination fee may make a disposition transaction less desirable economically.

We lack control over management and operations of our hotels.

      We depend on the ability of Interstate Hotels to operate and manage our hotels. In order for MeriStar Hospitality to maintain its REIT status, we cannot operate our hotels. As a result, we are unable to directly implement strategic business decisions for the operation and marketing of our hotels, such as decisions with respect to the setting of room rates, food and beverage operations and similar matters.

Our relationship with Interstate Hotels could limit our acquisition opportunities in the future.

      Our relationship with Interstate Hotels could negatively impact our ability to acquire additional hotels because hotel management companies, franchisees and others who would have approached us with acquisition opportunities in hopes of establishing lessee or management relationships may not do so believing that we may rely primarily on Interstate Hotels to manage the acquired properties, or that Interstate Hotels might have a right of first refusal to manage some or all of the acquired properties under the terms of the intercompany agreement. These persons may instead provide acquisition opportunities to companies free to choose their managers or to hotel management companies who choose to own and manage the properties following the sale. This could limit our acquisition opportunities in the future.

There are potential conflicts of interest relating to our relationship with Interstate Hotels.

      The terms of the intercompany agreement and our management agreements with Interstate Hotels were not negotiated on an arm’s-length basis. Because MeriStar Hospitality and Interstate Hotels share Paul Whetsell, who is Chairman and Chief Executive Officer of both companies, and two other board members, there is a potential conflict of interest with respect to the enforcement and termination of these agreements to our benefit and to the detriment of Interstate Hotels, or to the benefit of Interstate Hotels and to our detriment. Furthermore, because of the independent trading of MeriStar Hospitality and Interstate Hotels, stockholders in MeriStar Hospitality or Interstate Hotels may develop divergent interests which could lead to conflicts of interest. The divergence of interests could also reduce the anticipated benefits of our agreements with Interstate Hotels.

U.S. Federal Income Tax Risks

Requirements imposed on us relating to MeriStar Hospitality’s REIT status could cause us to operate in a manner that might be disadvantageous to noteholders.

      We have operated and intend to continue to operate in a manner designed to permit MeriStar Hospitality to qualify as a REIT for federal income tax purposes.

      To obtain the favorable tax treatment accorded to REITs under the Internal Revenue Code, MeriStar Hospitality will normally be required each year to distribute to its stockholders at least 90% of its real estate investment trust taxable income, determined without regard to the deduction for dividends paid and by

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	•	85% of its ordinary income for the calendar year;
	•	95% of its capital gain net income for that year unless it elects to retain and pay income tax on those gains; and
	•	100% of its undistributed income from prior years.

      MeriStar Hospitality intends to make distributions to its stockholders to comply with the 90% distribution requirements described above and generally to avoid federal income taxes and the nondeductible 4% excise tax. Its income will consist primarily of its share of our income and its cash flow will consist primarily of its share of distributions made by us. In addition, these provisions of our partnership agreement could in the future cause us to distribute amounts that otherwise would be spent on future acquisitions, unanticipated capital expenditures or debt, which would require us to borrow funds or sell assets to fund the cost of these items.

      Our partnership agreement provides that unless such action or inaction has been specifically consented to by MeriStar Hospitality in writing, we will not take, or refrain from taking, any action which, in the judgment of MeriStar Hospitality, as our general partner:

	•	could adversely affect the ability of MeriStar Hospitality to continue to qualify as a REIT, unless MeriStar Hospitality otherwise ceases to qualify as a REIT, or
	•	could subject MeriStar Hospitality to additional income or excise taxes applicable to REITs under the Internal Revenue Code.

      Our partnership agreement also provides that MeriStar Hospitality, as our general partner, shall use its best efforts to cause us to make sufficient distributions to enable MeriStar Hospitality to meet the distribution requirements described above and to avoid any federal income or excise tax liability, except to the extent that such distributions would contravene the terms of any notes or other debt obligations to which we are subject in conjunction with borrowed funds. Finally, our partnership agreement generally requires us to make pro rata distributions to all holders of Common OP units, not just distributions to MeriStar Hospitality. Thus, whenever distributions are made to MeriStar Hospitality in order to satisfy the foregoing requirements, equivalent distributions must be made to other partners holding Common OP units.

      It is possible, however, that differences in timing between the receipt of income and the payment of expenses in arriving at our taxable income or the taxable income of MeriStar Hospitality and the effect of nondeductible capital expenditures, the creation of reserves or required debt amortization payments could in the future require us to borrow funds on a short- or long-term basis to enable MeriStar Hospitality to continue to qualify as a REIT and avoid federal income taxes and the 4% nondeductible excise tax. In these circumstances, we might need to borrow funds in order to avoid adverse tax consequences even if we believe that the then prevailing market conditions generally are not favorable for those borrowings or that those borrowings are not advisable in the absence of these tax considerations.

      MeriStar Hospitality, as our general partner, will determine our distributions. The amount of these distributions is dependent on a number of factors including:

	•	the amount of cash available for distribution;
	•	our financial condition;
	•	our decision to reinvest funds rather than to distribute the funds;

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	•	restrictions in our debt agreements;
	•	our capital expenditure requirements;
	•	the annual distribution requirements under the real estate investment trust provisions of the Internal Revenue Code; and
	•	other factors as MeriStar Hospitality deems relevant.

      Although we intend to continue to make distributions so that MeriStar Hospitality satisfies the annual distribution requirement to avoid corporate income taxation on the earnings that it in turn distributes, we may not be able to do so.

If we were subject to federal income taxation as a corporation, our ability to make payments on our borrowings or distributions to holders of interest in us could be substantially reduced.

      We currently are classified as a partnership for federal income tax purposes. Although we are organized and operated with a view to maintaining that status, if the Internal Revenue Service were successfully to determine that we should be treated for federal income tax purposes as a corporation rather than as a partnership, we would be required to pay federal income tax at corporate tax rates on our taxable income. As described above, we generally expect to make distributions to our partners each year at least equal to the amount of our taxable income so that MeriStar Hospitality can make distributions to its stockholders sufficient to avoid federal income and excise taxes. To the extent we had made such distributions to our partners, we might be required to borrow funds or to liquidate assets to pay the applicable corporate income tax. In addition to the direct impact on us, our treatment as a corporation for federal income tax purposes would also cause MeriStar Hospitality to cease to qualify as a REIT under the Code, which would have the possible results described below.

If MeriStar Hospitality fails to qualify as a REIT, it will be subject to federal income tax at corporate rates which could adversely affect our operations and MeriStar Hospitality’s ability to satisfy its obligations as a guarantor of our borrowings.

      Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code for which there are only limited judicial and administrative interpretations. In addition, there are presently only very limited judicial and administrative interpretations of the federal tax legislation enacted in 1999 with respect to taxable REIT subsidiaries. The determination of various factual matters and circumstances not entirely within our or MeriStar Hospitality’s control may affect MeriStar Hospitality’s ability to continue to qualify as a REIT. The complexity of these provisions and of the applicable income tax regulations that have been promulgated under the Internal Revenue Code is greater in the case of a REIT that holds its assets through a partnership, such as MeriStar Hospitality does. Moreover, legislation, new regulations, administrative interpretations or court decisions might change the tax laws with respect to qualification as a REIT or the federal income tax consequences of that qualification.

      If MeriStar Hospitality fails to qualify as a REIT in any taxable year, it will not be allowed a deduction for distributions to its stockholders in computing its taxable income and it will be subject to federal income tax, including any applicable alternative minimum tax, on its taxable income at the applicable corporate rate. In addition, unless it was entitled to relief under statutory provisions, it would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost. This disqualification might reduce the funds available to MeriStar Hospitality to satisfy any obligations it might have as a guarantor of our borrowings because of the additional tax liability for the year or years involved. In addition, to the extent that distributions to its stockholders would have been made in anticipation of its qualifying as a REIT, MeriStar Hospitality might be required to borrow funds or to liquidate assets to pay the applicable corporate income tax, including assets held by us.

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Item 2.          PROPERTIES

      We maintain our corporate headquarters in Washington, D.C. and own hotel properties throughout the United States and Canada. As of December 31, 2002, we owned 107 hotels. All of our hotels are currently leased to our taxable subsidiaries. No one hotel property is material to our operations. A typical hotel has meeting and banquet facilities, food and beverage facilities, and guest rooms and suites. Our hotels generally feature comfortable, modern guest rooms, extensive meeting and convention facilities and full-service restaurant and catering facilities. Our hotels are designed to attract meeting, convention, and banquet/reception functions from groups and associations, upscale business and vacation travelers, and the local community.

      The following table sets forth certain information with respect to our 107 hotels owned as of December 31, 2002:

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21

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(1)	We lease part of the land on which this hotel was built under one or more long-term lease agreements.
(2)	We lease the land on which this hotel was built under one or more long-term lease agreements.
(3)	We sold this property in January 2003.

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Item 3.          LEGAL PROCEEDINGS

      In the course of our normal business activities, various lawsuits, claims and proceedings have been or may be instituted or asserted against us. Based on currently available facts, we believe that the disposition of matters pending or asserted will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

      We did not submit any matters to a vote of security holders during the fourth quarter of 2002.

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PART II

      There is not an established public trading market for our OP units. The OP units, however, are redeemable at the option of the holder for a like number of shares of common stock of MeriStar Hospitality, or, at the option of MeriStar Hospitality for the cash equivalent. The following information is provided regarding the common stock of MeriStar Hospitality. MeriStar Hospitality’s common stock is listed on the New York Stock Exchange (NYSE) under the symbol “MHX.” The following table sets forth for the periods indicated the high and low sales prices for MeriStar Hospitality’s common stock and the cash dividends declared with respect thereto.

(1)	MeriStar Hospitality suspended its quarterly dividend payment in the fourth quarter of 2002. At current operating levels, MeriStar Hospitality does not anticipate paying a dividend in 2003.

    The last reported sales price of MeriStar Hospitality’s common stock on the NYSE on March 10, 2003 was $2.23. As of March 10, 2003, there were approximately 669 holders of record of MeriStar Hospitality’s common stock.

      Based on our current operating levels, MeriStar Hospitality does not expect to pay a dividend in 2003. Any future distributions will be at the discretion of MeriStar Hospitality’s Board of Directors and will be determined by factors including our operating results, capital expenditure requirements, the economic outlook, the Internal Revenue Service dividend payout requirements for REITs and such other factors as MeriStar Hospitality’s Board of Directors deems relevant. The indentures related to our senior notes and MeriStar Hospitality’s indentures related to its senior unsubordinated unsecured notes and convertible notes contain limitations on MeriStar Hospitality’s ability to declare and pay dividends. Therefore, we cannot provide assurance that any such distributions will be made in the future.

      Until January 1, 2001, in order for MeriStar Hospitality to maintain its qualification as a REIT, it was required to make annual distributions to stockholders of at least 95% of its REIT taxable income, determined without regard to the deduction for dividends paid and by excluding net capital gains. After January 1, 2001, pursuant to the REIT Modernization Act, the percentage of required annual distributions was reduced to 90%. Under certain circumstances, we may be required to make distributions in excess of available cash in order to meet these distribution requirements. In that event, we would seek to borrow additional funds or sell additional non-core assets, or both, to the extent necessary to obtain cash sufficient to make the dividends required to retain MeriStar Hospitality’s qualification as a REIT.

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Recent Sales of Unregistered Securities

      We have granted the following Profits-Only Operating Partnership Units, or POPs, to certain of our employees pursuant to our POPs Plan, which is incorporated by reference in Exhibit 10.9 of this Annual Report on Form 10-K. There is no established public trading market for our Common OP Units or POPs.

      The POPs were generally granted as fixed awards, and vest ratably over periods ranging from three to five years.

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ITEM 6.          SELECTED FINANCIAL DATA

      The following table sets forth summary selected historical financial data derived from our audited consolidated financial statements and other information for each of the five years presented. The following information should be read in conjunction with our audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Annual Report on Form 10-K.

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(A)	During 2001, we sold two hotels for a loss. During 2000, we sold three limited-service hotels for a gain.

(B)	We adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” on January 1, 2002. SFAS 144 requires that current and prior period operating results of any asset that has been classified as held for sale or has been disposed of on or after January 1, 2002, including any gain or loss recognized, to be recorded as discontinued operations. We sold three hotels during the third quarter and two hotels during the fourth quarter of 2002. In January 2003, we sold one hotel classified as held for sale at December 31, 2002. We sold the five hotels in 2002 for $60,650, which resulted in a loss on sale of assets of $21,197 ($20,773, net of tax). We sold the one hotel in January 2003 for $12,650. All operating results, including the loss on disposal, have been recorded as discontinued operations. We have reclassified prior periods to reflect operations of the six hotels as discontinued operations.
(C)	In accordance with accounting principles generally accepted in the United States, or GAAP, we recorded the following extraordinary transactions:

	•	During 2001, we repaid term loans under our previous credit facility. The write-off of deferred financing costs associated with this facility was recorded as extraordinary.
	•	During 2000, we repurchased some of our convertible notes due to MeriStar Hospitality at a discount. The gain on the repurchase was recorded as extraordinary.
	•	During 1999 and 1998, we refinanced some loan facilities. The write-offs of deferred financing costs associated with these facilities were recorded as extraordinary.

We will adopt the provisions of SFAS No. 145 beginning on January 1, 2003. Certain rescission provisions require that all gains and losses from extinguishments of debt be classified as extraordinary only if the gains and losses are from unusual or infrequent transactions. Prior period amounts that do not meet this definition are required to be reclassified as an operational expense. Our prior period extraordinary items will be reclassified as operational expenses during 2003, and in the future we expect any gains and losses from the extinguishment of our debt to be classified as operational.

(D)	We did not declare any distributions prior to our formation date, August 3, 1998.
(E)	Total number of rooms occupied by hotel guests on a paid basis, divided by total available rooms.

(F)	Average Daily Rate, or ADR: total room revenue divided by total number of rooms occupied by hotel guests on a paid basis.

(G)	Revenue Per Available Room, or RevPAR: total room revenue divided by total available rooms.

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BUSINESS SUMMARY

      MeriStar Hospitality Operating Partnership, L.P. is the subsidiary operating partnership of MeriStar Hospitality which is a real estate investment trust, or REIT. We own a portfolio of upscale, full-service hotels and resorts in the United States and Canada. Our portfolio is diversified by franchise and brand affiliations. As of December 31, 2002, we owned 107 hotels, with 27,581 rooms, all of which were leased by our taxable subsidiaries and managed by Interstate Hotels & Resorts (“Interstate Hotels”), which was created on July 31, 2002 through the merger of MeriStar Hotels & Resorts, Inc. and Interstate Hotels Corporation. We share our Chief Executive Officer and Chairman of the Board, Paul W. Whetsell, and two other board members with Interstate Hotels. In addition, we are party to an intercompany agreement with Interstate Hotels that governs a number of aspects of our relationship.

      Our taxable subsidiaries pay a base management fee to Interstate Hotels for each property managed equal to 2.5% of total hotel revenue, plus incentive payments based on meeting performance thresholds that could total up to an additional 1.5% of total hotel revenue. The management agreements generally have initial terms of 10 years with three renewal periods of five years each, except for three management agreements which have initial terms of one year each and renew annually thereafter.

RESULTS OVERVIEW

      Revenues declined to $983.5 million in 2002 compared to $1,057.3 million in 2001. Our results continue to reflect a slowed economy, which has caused substantial declines in business and leisure travel demand nationwide. Both business and leisure travel continue to be negatively affected by the aftermath of the September 11, 2001 terrorist attacks and threats of international hostilities and instability. Business transient travelers have not yet returned in prior volumes to our properties and in their absence, we have focused our efforts on our group and contract business. Our achieved average daily rate is under continued pressure as a result of the decrease in demand and general lack of pricing power. Hotel operating expenses decreased to $387.7 million in 2002 from $405.2 million in 2001 as a result of decreased occupancy and cost control measures implemented during late 2001. We will continue to work with Interstate Hotels to focus on identifying revenue enhancement opportunities as well as cost reduction and control measures at our hotels. Other operating expenses increased to $597.1 million in 2002 from $566.0 million in 2001 primarily resulting from an asset impairment charge of $63.4 million in 2002 versus an asset impairment charge in 2001 of $32.3 million. Both are more fully described in the “Results of Operations” section below.

      Since January 1, 2001, our revenues have been derived from the operations of our hospitality properties, including room, food and beverage revenues, as well as from our leases of office, retail and parking rentals. Operating costs include direct costs to run our hotels, management fees to Interstate Hotels to manage our properties, depreciation of our properties, as well as sales, marketing and general and administrative costs. Our expenses also include interest on our debt and minority interest allocations, which represents the allocation of income to outside investors for properties that are not wholly-owned. Prior to January 1, 2001, we earned lease revenue from the lease of our hotel operating properties. Our expenses included depreciation of our properties, and related property tax expense, general and administrative costs, as well as interest on our debt and minority interest allocations.

RESULTS OF OPERATIONS

      The provisions of Statement of Financial Accounting Standards (SFAS) No. 144 require that current and prior period operating results of any asset that has been classified as held for sale or has been disposed of on or after January 1, 2002, including any gain or loss recognized on the sale, be recorded as discontinued operations. Accordingly, we have reclassified all prior periods presented to conform to this provision. See Footnote 13, “Dispositions and Acquisitions,” included in Item 8 of this Annual Report on Form 10-K for further information regarding the amounts reclassified.

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Year ended December 31, 2002 compared with the year ended December 31, 2001

      The following table provides our hotels’ operating statistics on a comparable hotel basis for the years ended December 31 (comparable hotels are those that were owned for substantially all of both years):

      The slowing United States economy has had a significant negative effect on our hotel operations, evidenced by a sharp reduction in transient business travel. This is reflected in the 5.9% reduction in average daily rate and the 2.9% reduction in occupancy in 2002 compared to 2001. We have shifted our marketing efforts towards lower-rated group and contract business in most markets in order to maintain a base level of occupancy in our properties. Due to the short booking window for most business, including our group and contract customers, we anticipate being able to shift our mix of business toward more business transient customers when the economy and corporate profits strengthen, bringing renewed strength to this vital customer segment.

      Revenues. Total revenue from continuing operations decreased $73.9 million to $983.4 million in 2002 from $1,057.3 million in 2001, primarily due to a $54.3 million decrease in room revenue attributable to a decrease in average daily rate and occupancy. The decrease in occupancy also contributed to an $8.8 million decrease in food and beverage revenue and a $6.6 million decrease in other operating departments, including telephone and conference services. We also had a $5.1 million decrease in lease revenue following the termination of our hotel leases with Prime Hospitality Corporation in 2001. We replaced these leases with management contracts with Interstate Hotels.

      Operating expenses. Total operating expenses increased a net $13.6 million to $984.8 million in 2002 compared to $971.2 million in 2001. An increase in other operating expenses of $31.1 million was partially offset by a $17.5 million reduction in hotel operating expenses. Hotel operating expenses decreased from $405.2 million in 2001 to $387.7 million in 2002 due primarily to reductions in room expense of $10.5 million and food and beverage costs of $6.9 million. These decreases resulted directly from the decrease in occupancy previously discussed. Other operating expenses increased to $597.1 million in 2002 from $566.0 million in 2001, described in greater detail, as follows:

      Administrative and general expenses. Administrative and general expenses increased $3.7 million during the year, due primarily to an increase in our total marketing costs. This increase can be mainly attributed to the addition of marketing personnel to focus our efforts on the group and contract business during the year.

      Property operating costs. Our property operating costs consist primarily of repairs and maintenance, energy, franchise and management costs. Our property operating costs decreased $6.4 million during the year. This is primarily due to a $3.4 million decrease in franchise fees and a $1.7 million decrease in management fees directly resulting from our decrease in revenues. Our energy costs also decreased $1.6 million primarily due to reduced occupancy. We have begun to see increases in our energy costs in 2003 due to the civil disruptions in Venezuela and concerns regarding the Persian Gulf war, as well as an unusually cold winter in the northeastern United States. We expect this cost trend to continue until such time as concerns over a potential gulf war subside.

      Property taxes, insurance and other. These costs decreased $5.7 million due primarily to a $7.6 million reduction in property taxes, partially offset by a $3.5 million increase in property and terrorism insurance premiums in 2002. Property taxes decreased due to favorable resolution of certain appeals, as well as a reduction in tax-assessed values of certain properties. Our total annual property and casualty insurance premiums are approximately $31 million. Our insurance programs renew in July 2003, and we anticipate a substantial increase although pricing will be dictated by market conditions at that time, which have not completely stabilized since the September 11, 2001 terrorist attacks. Companies in a number of industry

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      Depreciation and amortization expense. Depreciation and amortization expense increased by $6.8 million. Depreciation expense increased $3.9 million due to the purchase of replacement corporate office computer equipment. Amortization expense increased $2.9 million due to the amortization of deferred financing fees related to the December 2001 and February 2002 issuance of our senior secured notes.

      Significant charges. We incurred the following significant charges in 2002:

	•	a $63.4 million loss on asset impairments;
	•	a $14.5 million write-down of our note receivable with Interstate Hotels due to the settlement agreement related to their early repayment of the note;
	•	a $4.7 million loss on fair value of non-hedging derivatives due to the repayment of debt that was originally hedged;
	•	a $4.4 million expense for non-hedging derivatives due to our swap agreements being converted to non-hedging derivatives;
	•	$3.2 million of costs related to the formal separation of management functions from Interstate Hotels; and
	•	a $3.1 million write-off of deferred costs due to the reduction in our borrowing capacity on our revolving credit agreement in March 2002 and the termination of our credit facility in October 2002.

      We also incurred several significant charges in 2001, as follows:

	•	a $32.3 million loss on asset impairments;
	•	$9.3 million in swap termination fees;
	•	a $6.7 million expense for non-hedging derivatives due to our swap agreements being converted to non-hedging derivatives;
	•	$5.8 million of transaction costs, expensed immediately when MeriStar Hospitality’s proposed merger with FelCor Lodging Trust Inc. was terminated by both parties;
	•	a $2.1 million write-down of our investment in STS Hotel Net;
	•	$1.3 million of costs to terminate our leases with Prime Hospitality Corporation; and
	•	a $1.1 million charge related to a restructuring at our corporate headquarters.

      Interest expense. Interest expense increased $14 million to $136.4 million in 2002 compared to $122.4 million in 2001 due primarily to higher interest rates. We issued $250 million of senior unsecured notes in December 2001 and $200 million in February 2002 at fixed rates of interest greater than the variable rate on the debt that was repaid from the proceeds of the issuance. As of December 31, 2002, all of our debt carried fixed rates of interest.

      Discontinued operations and loss on sale of assets. During 2002, we sold five hotels in separate transactions and received $60.7 million in cash. This resulted in a combined loss of $20.8 million, net of tax. In January 2003, we completed the sale of one hotel, classified as held for sale at December 31, 2002. We recognized an impairment loss on this asset of $15.1 million, net of tax, which is included in discontinued operations. We classified $1.6 million, net of tax, of income from these six hotels’ operations as discontinued in 2002, and $4.3 million, net of tax, of losses from their operations as discontinued in 2001. Losses in 2001 included an impairment charge of $10.9 million, net of tax.

      In 2001 we sold two hotels in separate transactions and received $9.7 million in cash. This resulted in losses on the sales of $2.2 million. These losses, as well as the operating results of these hotels, were included

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      Extraordinary items. In 2001, we repaid $550 million of term loans under our revolving credit facility, resulting in an extraordinary loss of $2.7 million, net of tax, from the write-off of deferred financing costs related to those term loans. We will adopt the provisions of SFAS No. 145 beginning on January 1, 2003 (see “New Accounting Pronouncements” discussion below for further details). Certain rescission provisions require that all gains and losses from extinguishments of debt be classified as extraordinary only if the gains and losses are from unusual or infrequent transactions. Prior period amounts that do not meet this definition are required to be reclassified as an operational expense. Our prior period extraordinary items will be reclassified as operational expenses during 2003, and in the future we expect any gains and losses from the extinguishment of our debt to be classified as operational.

Year ended December 31, 2001 compared with the year ended December 31, 2000

      Until January 1, 2001, Interstate Hotels leased substantially all of our hotels from us. Under the leases, Interstate Hotels assumed all of the operating risks and rewards of these hotels and paid us a percentage of each hotel’s revenue under the lease agreements. Therefore, for financial statement purposes through December 31, 2000, Interstate Hotels recorded all of the operating revenues and expenses of the hotels in its statements of operations, and we recorded lease revenue earned under the lease agreements in our statement of operations. Effective January 1, 2001, Interstate Hotels assigned the hotel leases to our wholly-owned, taxable REIT subsidiaries, and our taxable REIT subsidiaries entered into management agreements with Interstate Hotels to manage the hotels. For consolidated financial statement purposes, beginning January 1, 2001, we recorded all of the revenues and expenses of the hotels in our statements of operations, including the management fee paid to Interstate Hotels.

      Our total revenues and total operating expenses increased $671.3 million and $807.0 million, respectively, for the year ended December 31, 2001 as compared to the same period in 2000. As described in the preceding paragraph, the significant increases resulted from recording our hotels’ operating revenue and expenses in our consolidated financial statements effective January 1, 2001, while we only recorded lease revenue in 2000. As a result, our operating results for the year ended December 31, 2001 are not directly comparable to the same period in 2000. We therefore compare our 2001 historical results of operations with our 2000 pro forma results of operations, assuming that the REIT Modernization Act had been enacted on January 1, 2000. The REIT Modernization Act is discussed in greater detail in “Item 1. Business” contained elsewhere in this Annual Report on Form 10-K.

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      For comparative purposes, the following shows the results for the year ended December 31, 2000 on a pro forma basis assuming the leases with Interstate Hotels were converted to management contracts on January 1, 2000.

      The following table provides our hotels’ operating statistics on a comparable hotel basis for the years ended December 31:

      Overall, disruptions in business and leisure travel patterns and travel safety concerns due to the terrorist attacks on September 11, 2001, coupled with the slowing United States economy, had a significant negative effect on our hotels during the second half of 2001. The events were marked by sharp reductions in business and leisure travel. This contributed to the 10.4% reduction in revenue per available room and the 8.2% reduction in occupancy for 2001 compared to 2000. These reductions became more pronounced during the third and fourth quarters of 2001.

      Revenues. Total revenue decreased $114.0 million to $1,057.3 million in 2001 from $1,171.3 million in 2000, primarily due to a $79.9 million decrease in room revenue attributable to a decrease in average daily rate and occupancy. The decrease in occupancy also contributed to a $22.0 million decrease in food and beverage revenue. We also had a $13.8 million decrease in lease revenue due to a lesser number of hotels leased to Prime Hospitality Corporation in 2001 as compared to 2000.

      Operating expenses. Total operating expenses increased $20.6 million to $971.2 million for the year ended December 31, 2001 compared to $950.6 million in 2000. This is mainly attributable to a $55.3 million increase in other operating expenses from $510.7 million in 2000 to $566.0 million in 2001. This increase resulted primarily from the following significant charges taken during 2001:

	•	a $32.3 million loss on asset impairments;
	•	$9.3 million in swap termination fees;
	•	a $6.7 million expense for non-hedging derivatives due to our swap agreements being converted to non-hedging derivatives;

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	•	$5.8 million of transaction costs, expensed immediately when MeriStar Hospitality’s proposed merger with FelCor Lodging Trust Inc. was terminated by both parties;
	•	a $2.1 million write-down of our investment in STS Hotel Net;
	•	$1.3 million of costs to terminate our leases with Prime Hospitality Corporation; and
	•	a $1.1 million charge related to a restructuring at our corporate headquarters.

      The increase noted above was partially offset by a $34.6 million decrease in hotel operating expenses from $439.8 million in 2000 to $405.2 million in 2001, attributable mainly to a reduction in room expenses of $14.5 million, and food and beverage costs of $15.9 million. These decreases stemmed directly from the decrease in occupancy previously noted.

      Interest expense. Interest expense increased $4.9 million to $122.5 million for the year ended December 31, 2001 compared to $117.6 million for the same period in 2000 due primarily to the issuance of $500 million of senior unsecured notes in January 2001.

      Discontinued operations and loss on sale of assets. During 2002, we sold five hotels and in January 2003, we sold a hotel classified as held for sale at December 31, 2002. As required by SFAS No. 144, we classified 2001 losses on the hotels’ operations of $4.3 million, net of tax, as discontinued, and $9.5 million, net of tax, of income from their operations in 2000 as discontinued. Losses in 2001 included an impairment charge of $10.9 million, net of tax.

      In 2001, we sold two hotels in separate transactions and received $9.7 million in cash. This resulted in a loss on the sales of $2.2 million. In 2000, we sold three hotels in separate transactions and received $24.1 million in cash, resulting in a gain on the sales of $3.5 million. The gain or loss recognized on these sales, as well as the operating results of these hotels, were included in continuing operations, as the provisions of SFAS No. 144 requiring the presentation of such results as discontinued operations applies to only those assets classified as held for sale or disposed of on or after January 1, 2002.

      Extraordinary items. In 2001, we repaid $550 million of term loans under our revolving credit facility, resulting in an extraordinary loss of $2.7 million, net of tax, from the write-off of deferred financing costs related to those term loans. In 2000, we repurchased $18.2 million of our notes due to MeriStar Hospitality at a discount (their convertible notes), resulting in an extraordinary gain of $3.4 million, net of tax.

FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES

      Our principal sources of liquidity are cash generated from operations, funds from borrowings, funds from the sales of non-core assets and existing cash on hand. Our principal uses of cash include the funding of working capital obligations, debt service, and investments in hotels (primarily capital projects currently), and may include in the future the repurchase of our debt in the open market.

      Factors that may influence our liquidity include:

	•	Factors that affect our results of operations, including general economic conditions, demand for business and leisure travel, public concerns about travel safety related primarily to terrorism and the war with Iraq and related concerns, and other operating risks described under the caption, “Risk Factors — Operating Risks” in Item 1 of this Annual Report on Form 10-K;
	•	Factors that affect our access to bank financing and the capital markets, including operational risks, high leverage, interest rate fluctuations, and other risks described under the caption “Risk Factors — Financing Risks” in Item 1 of this Annual Report on Form 10-K; and
	•	Other factors described under the caption, “Cautionary Statement Regarding Forward-Looking Statements” in this Annual Report on Form 10-K.

      We believe we have sufficient free cash flow currently, and we expect to have adequate cash flow during the next twelve months in order to fund our operations, capital commitments and debt service obligations. Our current and future liquidity is, however, greatly dependent upon our operating results, which are driven largely by overall economic conditions, and since September 11, 2001 have been heavily impacted by geopolitical

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      We are also currently actively marketing, or expect to bring to market in the near future, a total of 16 non-core assets, for expected proceeds of approximately $100 million to $110 million. Our ability to realize these estimated proceeds is, however, dependent upon finding qualified buyers willing to pay a purchase price that we consider reasonable. Subject to the limits and restrictions imposed on us by our borrowing arrangements, we are currently able to utilize any proceeds from the sale of assets to fund our ongoing operations, invest in capital expenditures and repay our debt as it comes due. See “Long-Term Debt” section below for a discussion of such restrictions.

      To reduce the overall amount and cost of our debt, we will consider opportunities to repurchase some of our current outstanding debt. Any such transactions, however, are subject to the limits and restrictions imposed by our borrowing arrangements. See “Long-Term Debt” section below for a discussion of such restrictions.

Sources and Uses of Cash

      Our operating results and the amount of cash generated by our hotel operations have been negatively impacted by the events of September 11, 2001, the continuing sluggish economy, and the threat of further terrorist attacks. We generated $56.7 million of cash from operations during 2002 compared to $150.1 million in 2001 and $224 million in 2000.

      Included in our operating results is the 16% preferred return on our preferred investment in MeriStar Investment Partners (or “MIP”). As of December 31, 2002, approximately $10.8 million of cumulative preferred returns remained unpaid due to restrictions placed on MIP by its existing bank covenants, which require excess cash flow to be applied to principal amortization rather than being distributed to equity holders. We evaluate the collectibility of our preferred return based on the underlying value of the hotel properties and our preference to distributions. On March 27, 2003, MIP completed a refinancing of its long-term debt, which allows the release of excess cash flow to pay our preferred return currently. We expect to begin receiving distributions representing payments of our current return during the second quarter of 2003. In the future, we expect that our cumulative unpaid preferred returns will be paid from excess cash flow above our current return and from potential disposition proceeds in excess of debt allocated to individual assets. Given the current economic environment, we do not expect the partnership’s operations to provide adequate cash flow in the near term for significant repayments of our cumulative unpaid preferred returns.

      Our investing activities provided a net $6.7 million of cash during 2002, resulting primarily from:

	•	$60.7 million of proceeds from the sale of five hotels; partially offset by
	•	$47.3 million of hotel capital expenditures (including $4 million of capitalized interest), and
	•	$7.5 million of advances to Interstate Hotels.

      We used $53.2 million of cash in financing activities during 2002, primarily for the net repayment of $46 million of our long-term debt obligations and $4.8 million in additional deferred financing costs related to our new debt facilities.

      MeriStar Hospitality must distribute to stockholders at least 90% of its REIT taxable income, excluding net capital gains, to preserve the favorable tax treatment accorded to REITs under the Internal Revenue Code. MeriStar Hospitality, as our general partner, must use its best efforts to ensure our partnership

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Long-Term Debt

      Notes payable to MeriStar Hospitality. As of December 31, 2002, we had outstanding $154.3 million aggregate principal amount of 4.75% convertible subordinated notes due in 2004. In respect of these notes, MeriStar Hospitality holds a subordinated note issued by us, with the same principal amount, interest rate and maturity. MeriStar Hospitality is currently actively exploring a variety of sources to repay the convertible subordinated notes. Under the indentures related to our $950 million of senior unsecured notes and our $205 million of senior subordinated unsecured notes, prepayment of our convertible subordinated notes prior to maturity is prohibited as long as our fixed charge coverage ratio, as defined, is less than 2 to 1. At the end of 2002, such ratio was 1.6 to 1 and, therefore, under these circumstances, MeriStar Hospitality can only repay these securities at maturity (our indentures permit such repayment at maturity). We do not currently expect this ratio to improve to a level which would permit repayment of the convertible notes prior to their maturity. Among the sources of repayment of these securities which are currently under active consideration, all of which are permitted under our indentures, are:

	•	Our available cash flow;
	•	The proceeds of borrowings on a non-recourse basis, with such borrowings secured by certain of our hotel properties;
	•	Borrowings under our $50 million general debt “basket” under our indentures;
	•	CMBS or other secured borrowings through a special purpose, “unrestricted” subsidiary; our indentures permit us to fund such a subsidiary with assets equal to up to 5% or our Consolidated Net Tangible Assets (approximately $135 million at December 31, 2002);
	•	The proceeds of a pari passu refinancing of our convertible subordinated notes; or
	•	A combination of the above.

      Our ability to issue secured debt is enhanced by the fact that our hotel portfolio contains 83 unencumbered properties out of our total current portfolio of 106 hotels, and only 13 of these assets are subject to ground leases. Our ability to incur secured debt is generally limited by tests in our senior note indentures requiring us to maintain certain levels of unencumbered assets. However, we do not believe that these requirements will prevent us from accessing any of the above sources of secured financing at the convertible notes’ maturity in October 2004.

      MeriStar Hospitality completed in 1997 the offering of $150 million aggregate principal amount of 8.75% senior subordinated notes due 2007. The related indenture contains various restrictive covenants, which are similar to those governing MeriStar Hospitality’s senior unsecured notes. In conjunction with this transaction, we borrowed $150 million from MeriStar Hospitality under terms matching those of the subordinated notes. In 1999, MeriStar Hospitality issued $55 million aggregate principal amount of 8.75% senior subordinated notes due 2007 under an indenture substantially similar to that governing the 1997 MeriStar Hospitality notes.

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      New credit facility. On October 29, 2002, we entered into a new three-year $100 million senior revolving credit facility, secured by our equity interests in most of our subsidiaries. The initial interest rate is LIBOR plus 388 basis points. As of December 31, 2002, there were no outstanding borrowings on this facility.

      This facility contains customary compliance measures we must meet in order to borrow on the facility, which became more stringent on a quarterly basis beginning in the first quarter of 2003. The sale of two hotels during the fourth quarter of 2002 and one in January 2003, as well as the settlement of our note receivable with Interstate Hotels, impacted our leverage covenant due to the loss of trailing 12-month EBITDA (as defined in the credit agreement) on a pro forma basis. While we cannot currently borrow under the facility, we have obtained a waiver of compliance with this leverage covenant from our lending group through May 20, 2003. We do not expect this compliance measurement to have a material impact on our operations as we do not anticipate the need to draw on this facility during 2003. We intend to either negotiate an amendment to this facility to maintain our future compliance until such time as we apply our unrestricted cash to reduce our leverage, or we may terminate the facility.

      Senior unsecured notes. In February 2002, we issued an additional $200 million ($196.2 million, net of discount and related fees) aggregate principal amount of 9.13% senior unsecured notes due 2011. We used the proceeds from the issuance of these notes to repay approximately $195 million of the outstanding balance under our previous credit facility.

      As of December 31, 2002, we had $950 million of aggregate principal of these notes outstanding. These notes contain various restrictive incurrence covenants, limiting our ability to transact certain business activities, including additional borrowings, if specific financial thresholds are not achieved. One of those thresholds is maintaining a 2 to 1 fixed charge coverage ratio (as defined in the indentures, fixed charges only include interest on debt obligations and preferred equity). As of December 31, 2002, our fixed charge coverage ratio was 1.6 to 1, and therefore we were not able to enter into certain transactions. These limitations include the repurchase of our stock, the issuance of any preferred stock, the payment of dividends (unless required to maintain our status as a REIT), the incurrence of any additional debt, or the repayment of outstanding debt before it comes due. There are certain exceptions, or “carve-out,” features with respect to the incurrence of additional debt and early repayment of debt features in the indentures.

      Secured facility. We completed this $330 million, 10-year non-recourse financing during 1999. The facility is secured by a portfolio of 19 hotels and contains standard provisions that require the servicer to maintain in escrow cash balances for certain items such as property taxes and funding of capital expenditures. In addition, the facility contains a provision that requires our mortgage servicer to retain in escrow the excess cash from the encumbered hotels after payment of debt service (“Excess Cash”), if net hotel operating income after payment of FF&E reserves and franchise fees (“NOI”) for the trailing twelve months declines below $57 million. This provision was triggered in October 2002 and will be effective until the hotels generate the minimum cash flow required for two consecutive quarters, at which time the cash being held in escrow will be released to us. Approximately $4.5 million of cash was held in escrow under this provision as of December 31, 2002. Additional amounts continue to be held in escrow. The security agreement permits us to substitute unleveraged properties into the portfolio in place of existing properties in order to increase the NOI to a level at which the portfolio will meet this requirement. We have begun discussions with the servicer regarding this substitution and expect to be able to do so, thus resulting in the release of any Excess Cash held in escrow. Implementation of this solution is subject to rating agency approval and qualification for Real Estate Mortgage Investment Conduit purposes. There can be no assurance that the hotels will reach the minimum cash flow in the future. The security agreement also permits us to withdraw the cash held in escrow

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Use of Asset Sales Proceeds

      As discussed elsewhere, one of our key short-term strategies is to sell selected non-core assets, many of which were acquired as part of a portfolio. These “non-core assets” generally posses one or more of the following characteristics:

	•	limited future growth potential;
	•	secondary market location;
	•	secondary brand affiliation;
	•	higher than average capital expenditure requirements; or
	•	our portfolio is over-weighted in the market.

      We believe that these asset sale transactions will have the following benefits:

	•	improve the overall quality of the hotel assets remaining in our portfolio;
	•	enhance the ability of our portfolio to perform well in all cycles of the economy;
	•	enhance future growth prospects when strength returns to the economy;
	•	reduce future capital requirements on a relative basis; and
	•	reduce our leverage and requirements on our liquidity resources.

      Our plan is to monitor our operations and developments in the economic and geopolitical environment. To the extent we complete additional asset dispositions, and we believe that our liquidity levels are appropriate, we will consider applying proceeds from those dispositions to repurchase debt and reinvest in our core assets.

Assets Currently Being Marketed

      We continue to focus on a deleveraging strategy, including the expansion of our program of selling non-core assets. Initially, we intend to retain the proceeds from any asset sales for additional liquidity. To the extent we complete additional asset dispositions, and we believe that our liquidity levels are appropriate, we will consider applying proceeds from asset sales to repurchase debt and reinvest in our core assets. We sold five hotels in 2002 and one hotel in January 2003. As of February 12, 2003, we were actively marketing eight additional assets as part of our non-core asset disposition plan. Subsequently, based on our decision to raise additional cash to reduce our overall leverage and provide additional capital for reinvestment in our core holdings, we changed our expectation about our holding period for certain other hotels. We plan to market another eight hotels, which will increase the number of marketed assets to sixteen. Based on our expected proceeds of approximately $100 million to $110 million, we will record an impairment charge in the first quarter of 2003 in an expected range of $50 million to $55 million. Our ability to realize these estimated proceeds is, however, dependent upon finding qualified buyers willing to pay a purchase price that we consider reasonable.

      In addition, we are frequently approached by potential buyers interested in other assets that we might consider selling and have recently engaged in discussions with some of those potential buyers of hotel assets, both on an individual and a portfolio basis. Any such portfolio may include both core and non-core assets, if the disposition arrangement would be beneficial to shareholder value. However, there can be no assurance that any such transactions will be concluded. Any additional sales of assets under these scenarios may result in additional impairment charges in future periods, if and when the assets are actively marketed. While we always consider any opportunities that may improve our financial condition or results of operations, we have not committed to the disposition of any of these other assets at this time. As such, we are not able at this time to estimate the timing or the amount of any impairment charges that might result. We are aided in our

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