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UNITED STATES

FORM 10-K

DELAWARE

4501 NORTH FAIRFAX DRIVE, SUITE 500

Registrants’ telephone number, including area code: (703) 812-7200

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 Act).  Yes þ     No o

      As of June 30, 2003, the aggregate market value of the voting and non-voting common equity of MeriStar Hospitality Operating Partnership, L.P. held by non-affiliates, computed by reference to the market price of shares of the common stock of MeriStar Hospitality Corporation as of such date, was $226,993,250. 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.

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 2004 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.

TABLE OF CONTENTS

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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, 2003, 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 various 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. We cannot guarantee that we actually will achieve these plans, intentions or expectations. 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 continuing sluggishness of the national economy;
	•	economic conditions generally and the real estate market specifically;
	•	the effect of threats of terrorism and increased security precautions on travel patterns and demand for hotels;
	•	the threatened or actual outbreak of hostilities and international political instability;
	•	governmental actions;
	•	legislative/regulatory changes, including changes to laws governing the taxation of real estate investment trusts;
	•	level of proceeds from asset sales;
	•	cash available for capital expenditures;
	•	availability of capital;
	•	ability to refinance debt;
	•	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;
	•	other factors that may influence the travel industry, including health, safety and economic factors; 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

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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 primarily upscale, full-service hotels and resorts. Our portfolio is diversified geographically as well as by franchise and brand affiliations. As of December 31, 2003, we owned 92 hotels with 24,733 rooms. We have sold nine hotels with 2,197 rooms since January 1, 2004. Ten of the remaining 83 hotels are currently planned for disposition. Our hotels are located in major metropolitan areas, rapidly growing secondary markets or resort locations in the United States and one in Canada. Substantially all of our hotels are operated under internationally recognized brand names such as Hilton®, Sheraton®, Marriott®, Westin®, Doubletree®, Holiday Inn®, Embassy Suites® and Radisson®.

      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 experienced a significant slowdown in the construction of upscale, full-service hotels. However, 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”). Interstate Hotels currently manages all of our hotels. We and Interstate Hotels have entered into an intercompany agreement that governs a number of aspects of our relationship (see “The Intercompany Agreement”). In addition, our Chief Executive Officer and Chairman of the Board, Paul W. Whetsell, is the Chairman of the Board of Interstate Hotels.

      As of December 31, 2003, 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 94% interest in us. Several third parties owned the remaining approximately 5% of our equity interests, in the form of various classes of our partnership units.

Portfolio Strategy

      Given the challenging operating environment that has resulted from a sluggish economy coupled with the current geopolitical situation, and disruptions caused by the threat of further terrorist attacks, we continue to focus on maximizing the profitability of our existing hotels by actively overseeing their operation by Interstate Hotels. Our Asset Management Group, which consists of senior level hotel operators, and construction and engineering experts, concentrates on maximizing all potential revenue management profitability options at our hotels. One of the initiatives we have undertaken to focus on the performance of our assets is the implementation of a strategic energy program. This program began in late 2003 and is designed to help us stabilize the increasingly volatile energy costs at our hotels. Through this program, we are able to achieve competitive pricing for our electric and natural gas purchases throughout the country. During 2003, we also took steps to strengthen our balance sheet and to maintain financial flexibility and liquidity in order to enhance our capacity to address the uncertain operating environment that currently exists. We initiated an aggressive capital expenditure reinvestment program for our core assets. We feel this program is necessary to maintain asset values and to properly position our hotels for any industry recovery. We expect to spend approximately $225 million pursuant to our renovation program over the next two years, with approximately $125 million to be spent in 2004. The emphasis will be on completing these projects on budget with minimal disruptions to operations. We will focus on complete room and facility renovations, eliminating to the degree possible,

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      During 2003, we began executing one of our key short-term strategies, which is to sell selected non-core assets in order to begin repositioning our portfolio into one generally consisting of larger assets with significant meeting space in urban or high-end resort locations. Many of these non-core assets were acquired as part of portfolios of assets. We have focused on the disposition of non-core assets that generally possess one or more of the following characteristics:

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

      As permitted under the indentures governing our various outstanding debt securities, we intend to use a majority of the proceeds from any asset sales, within a specified period of time, to repurchase our senior debt, to reinvest in our core assets and to fund acquisitions. Since January 1, 2003, we have sold 24 hotels with 5,045 rooms for total gross proceeds of $190.8 million in cash. We currently have 10 hotels planned for disposition, from which we expect to generate proceeds of approximately $75 million to $85 million. Contract negotiations are in progress with potential purchasers for most of the remaining hotels designated for sale. We expect to complete the majority of these sales during the first quarter of 2004. We withdrew eight assets from our planned disposition program because our liquidity has greatly improved, and we expect to realize greater value by holding these assets as we move into an expected economic recovery. We may reintroduce some or all of these assets to the market at a later date if we believe that adequate pricing levels can be achieved by doing so. We recognized impairment losses totaling $295 million ($131.6 is included in discontinued operations) related to our asset disposition program during the year ended December 31, 2003, which included an additional impairment charge in the fourth quarter of $9.4 million. These impairment charges were based on our estimates of the fair value of the properties included in our disposition program during the year. These estimates require us to make assumptions about the sales prices that we expect to realize for each property as well as the timing of a potential sale. In making these estimates, we consider the operating results of the assets, the market for comparable properties, and quotes from brokers, among other information. Our ability to realize the estimated proceeds from the 10 remaining hotels we seek to sell is, however, dependent upon finding qualified buyers willing to pay a purchase price that we consider reasonable and other factors that could cause the actual proceeds we realize to be different from our estimates, including those discussed under “Risk Factors” and “Cautionary Statement Regarding Forward Looking Statements.”

      In addition, we may from time to time receive offers on other assets that we might consider selling. While we always consider any opportunities that may improve our financial condition or results of operations, we are not actively marketing any assets other than the properties previously discussed.

      We are aided in our disposition program by the fact that we can terminate the management agreement of any hotel we sell, in most cases subject to the payment of a fee as discussed below and in the section “The Management Agreements — Term and Termination,” as well as the fact that 55 of our current 83 assets (including all 10 of the assets remaining in our disposition program) are unencumbered and only 10 of those assets are subject to ground leases. Excluding the 10 assets included in our disposition program, we would have 43 unencumbered assets and nine subject to ground leases.

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      As we dispose of the 10 remaining assets in our disposition program, we may incur termination obligations due to Interstate Hotels of up to a maximum of approximately $5.5 million, assuming the disposition of all 10 of the properties in 2004 and assuming buyers of our hotel properties elect to have the properties managed by parties other than Interstate Hotels or do not assume the obligation as part of the sale transaction. In addition, we may be obligated to pay Interstate Hotels termination fees of up to a maximum of approximately $9.8 million with respect to the 24 properties we have already sold.

      One of our key strategies includes the acquisition of high quality, upscale full-service hotels strategically located in major urban markets or destination resorts. Our target hotels would generally be branded, larger hotels with significant meeting space and may involve management contracts with hotel brand owners where our long-term investment focus makes us a preferred owner. We intend to acquire assets with strong existing cash flow and use little or no leverage in the near term to finance these potential acquisitions, thereby enabling us to improve our overall leverage and interest coverage levels. In pursuing this strategy, we may be somewhat limited by the terms of our senior note indentures, which limit our ability to obtain financing beyond certain limited exceptions (including up to $250 million of mortgage indebtedness and $50 million of general indebtedness) to acquire assets (as we are below the required fixed charge coverage ratio of 2 to 1, at which level we would be permitted to generally incur debt without restriction).

Recent Developments

      On December 23, 2003, we entered into a new $50 million senior credit facility, secured by six of our hotels. The three-year facility carries an annual interest rate of the London Interbank Offered Rate, or LIBOR, plus 450 basis points. We expect to use the facility for working capital purposes, although we currently have no plans to draw on the facility in the short term. Concurrent with entering into our new facility, we terminated an existing $50 million senior unsecured credit facility, which had no outstanding borrowings and no availability, and wrote off approximately $0.5 million of unamortized deferred financing costs.

      Our new $50 million senior credit facility contains financial and other restrictive covenants. Our ability to borrow under this facility is subject to financial covenants, including leverage, fixed charge coverage and interest 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. The agreement governing our new senior credit facility limits our ability to effect mergers, asset sales and change of control events and limits the payments of dividends other than those required for MeriStar Hospitality to maintain its status as a REIT and our ability to incur additional secured and total indebtedness.

      During the fourth quarter of 2003 and early 2004, we issued an aggregate of approximately 6.2 million Common OP units in exchange for the redemption of $34.7 million aggregate principal amount of our 8.75% notes payable to MeriStar Hospitality due 2007. The notes were acquired on average at par.

      In addition, during the fourth quarter of 2003, we repurchased $59.8 million in aggregate principal amount of these notes using the proceeds of an issuance of our Common OP units.

      During early 2004, we used available cash to repurchase $61.5 million of our senior unsecured notes, including $16.5 million of the 9% notes due 2008, $30.8 million of the 9.125% notes due 2011 and $14.2 million of the 10.5% notes due 2009.

      Following these exchanges and the repurchases, we had as of March 8, 2004, approximately $69.3 million of outstanding 8.75% notes payable to MeriStar Hospitality due 2007 and $884.0 million of outstanding senior unsecured notes. We expect to retire the remaining 8.75% notes payable to MeriStar Hospitality due 2007 in 2004.

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      Since the July 2002 merger that formed Interstate Hotels, we and Interstate Hotels have separated the senior management teams of the two companies in order to allow each senior management team to devote more attention to its respective company’s matters. In October 2003, Paul W. Whetsell, who was the Chief Executive Officer and Chairman of the Board of Directors of both Interstate Hotels and our company, resigned as Chief Executive Officer of Interstate Hotels. Also in October 2003, Steven D. Jorns, who was the Vice Chairman of our Board of Directors, resigned from that position and subsequently became Chief Executive Officer of Interstate Hotels, and J. Taylor Crandall, one of our directors who was also a director of Interstate Hotels, resigned as a director of Interstate Hotels. In December 2003, our Board of Directors and that of Interstate Hotels each formed a special committee of independent directors to explore further changes to the relationship between our company and Interstate Hotels, including possible changes to the terms, or complete elimination, of the intercompany agreement. Discussions also include possible changes to the provisions of the various management agreements relating to our hotels, including the method of calculation for the incentive fee and termination fees. Because discussions are ongoing, there can be no assurance that any such changes will occur. See “The Management Agreements” and “The Intercompany Agreement.”

      In 1999, we invested $40 million in MeriStar Investment Partners, L.P. (“MIP”), a joint venture established to acquire upscale, full-service hotels. Our cost-basis investment is in the form of a partnership interest, in which we earn a 16% cumulative preferred return. While the return on this investment is preferred and cumulative, the underlying investment ranks equally with the investments of the other investors in MIP. We recognize the return quarterly as it becomes due to us. As of December 31, 2003, cumulative preferred returns of $19.6 million were due from MIP. We expect that any cumulative unpaid preferred returns will be paid in the future from excess cash flow above our current return and from potential partnership hotel disposition proceeds in excess of debt allocated to individual assets. Given the current economic environment, we do not expect MIP’s operations to provide adequate cash flow in the near term for significant payment of our current returns or repayments of our cumulative unpaid preferred returns. While we believe that our current and cumulative returns continue to be fully collectible, the current value of our underlying investment has declined due to the continued decline in MIP’s cash flow, particularly driven by results in four of its hotel markets. While we believe that the cash flow, and thus the value of our investment in MIP, will be recoverable over time, we expect that any such recovery will take a number of years to achieve. The accounting rules for cost basis investments require that declines in value that are other than temporary be recognized currently. Since the decline in the value of our underlying investment in MIP is other than temporary, we recognized an impairment loss of $25 million during the fourth quarter of 2003.

The Partnership Agreement

The following summary information is qualified in its entirety by the provisions of the Second Amended and Restated Agreement of Limited Partnership of MeriStar Hospitality Operating Partnership, L.P., a copy of which is incorporated by reference as Exhibit 3.2 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 8, 2004, MeriStar Hospitality and our wholly-owned subsidiaries owned a number of Common OP Units equal to the

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	•	Independent third parties owned 2,816,141 OP Units (consisting of 1,012,337 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 Common OP Units once that dividend rate is exceeded. Holders of Class D OP Units receive a 6.5% cumulative annual preferred return based on an assumed price per MeriStar Hospitality’s common share of $22.16; the return is compounded quarterly to the extent not paid on a current basis, and holders are entitled to a liquidation preference of $22.16 per Class D OP Unit. All net income and capital received by us (after payment of the annual preferred return and, if applicable, the liquidation preference) will be shared by the holders of the Common OP Units in proportion to the number of Common OP Units owned by each such holder.

      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 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 10.6 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 10.4.1 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 affiliates of 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

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The Management Agreements

      As previously described, in December 2003, our Board of Directors and that of Interstate Hotels each formed a special committee of independent directors to explore further changes to the relationship between our company and Interstate Hotels, including possible changes to the provisions of the various management agreements relating to our hotels, including the method of calculation for the incentive fee and termination fees. Negotiations are ongoing and we expect to complete any modifications to these agreements in the first half of 2004.

      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. 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 our 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 total 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.

      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.

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      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. As previously described, in December 2003, our Board of Directors and that of Interstate Hotels each formed a special committee of independent directors to explore further changes to the relationship between our company and Interstate Hotels, including possible changes to the terms, or elimination, of the intercompany agreement. Negotiations are ongoing and we expect to complete any modifications to this agreement in the first half of 2004.

      So long as the existing intercompany agreement remains in effect, Interstate Hotels is prohibited from making real property investments, which we could make while still remaining a REIT under the Internal Revenue Code of 1986, as amended, unless:

	•	We 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 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 required to enter into a management agreement with an unaffiliated third party with respect to the property in order to maintain our 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 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.

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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.

      In connection with the merger that created Interstate Hotels on July 31, 2002, we amended the terms of certain loans outstanding to Interstate Hotels, combining them into a term loan agreement with a principal balance of $56.1 million and a maturity date of July 31, 2007. The interest rate was 650 basis points over the 30-day LIBOR. This term loan was subordinate to Interstate Hotels’ new bank credit agreement.

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

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 well-known trade names under licensing arrangements with prominent franchisors. From time to time, we have conducted negotiations with franchisors to rebrand certain hotels to improve their competitiveness and profitability in light of changing circumstances in the lodging market. We make ongoing capital expenditures in order to keep our hotels competitive and to comply with franchise obligations, as described further in “Risk Factors— Operating Risks— We may be adversely affected by the requirements contained in our franchise and licensing agreements” in Item 1 of this Annual Report on Form 10-K. 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

      Competition in the U.S. lodging industry is based on a number of factors, most notably convenience of location, brand affiliation, price, range of services and guest amenities offered, and quality of customer service and the overall condition of the property. Our operations compete primarily in the 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. In addition, we compete with other lodging industry companies for the acquisition of properties with the qualities that fit our target product.

Seasonality

      Demand in the lodging industry is affected by recurring seasonal patterns. For most non-resort properties, demand is lower in the winter months due to decreased business travel and higher in the spring and fall months during the peak business travel season. For our 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. These general trends are, however, greatly influenced by overall economic cycles.

      Total revenue by quarter for 2003 and 2002 were as follows:

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Employees

      As of December 31, 2003, we employed 41 persons, all of whom work at our corporate headquarters in Arlington, Virginia. Employees at our hotel properties are employees of Interstate Hotels.

Governmental Regulation

      Under the Americans with Disabilities Act, or 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. 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 a 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 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. The use of underground storage tanks at our hotels has been minimized. Activities have been undertaken to remove underground storage tanks to the extent possible. Underground storage tanks that could not be modified to be brought into full compliance have been replaced or are operated under temporary permits and scheduled for removal. All existing underground storage tanks have been identified and proper permits obtained.

      All of our hotels have undergone Phase I environmental site assessments, which generally provide a non-intrusive 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.

      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 the 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 could have a material adverse effect on our results of operations or financial condition.

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      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., 4501 North Fairfax Drive, Suite 500, Arlington, Virginia 22203, telephone (703) 812-7200. We also make available all of these filings on our 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, 2003, we had approximately $1.6 billion of total debt outstanding, or 71% of our total capitalization, and approximately $230.9 million of unrestricted cash and cash equivalents. The following details our debt outstanding as of December 31, 2003:

(a)	As of March 8, 2004, we had redeemed $13.5 million of 8.75% notes payable to MeriStar Hospitality due 2007, $16.5 million of 9% senior unsecured notes due 2008, $30.8 million of 9.125% senior unsecured notes due 2011, and $14.2 million of 10.5% senior unsecured notes due 2009.

     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” and restrict 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
	•	MeriStar Hospitality currently is, and may in the future be, unable to pay dividends on its common stock.

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

      As of December 31, 2003, we had approximately $1.6 billion of total debt outstanding with an average maturity of 5.79 years. In addition, we may borrow up to $50 million under our new revolving senior secured credit facility that matures in 2006. If we do not have sufficient funds to repay our indebtedness at maturity, we may 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

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Some of our debt instruments have restrictive covenants that could affect our financial condition.

      All of our senior unsecured notes and MeriStar Hospitality’s senior subordinated notes, but none of MeriStar Hospitality’s convertible subordinated notes, have either been co-issued or guaranteed by us, and have also been guaranteed by most of MeriStar Hospitality’s other subsidiaries. The CMBS and mortgage debt and our new senior secured credit facility have been secured by specific properties.

      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 and issuing capital stock;
	•	declaring and paying dividends;
	•	selling our assets and using the proceeds from sales of assets;
	•	conducting transactions with our affiliates; and
	•	incurring liens.

      We currently have no outstanding borrowings under our new senior credit facility. Our ability to borrow under this facility is subject to financial covenants, including leverage, fixed charge coverage and interest 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. The agreement governing our new senior credit facility limits our ability to effect mergers, asset sales and change of control events and limits the payments of dividends other than those required to maintain MeriStar Hospitality’s status as a REIT, and our ability to incur additional secured and total indebtedness. The agreement also contains customary events of default, including the loss of MeriStar Hospitality’s REIT status and a cross-default provision, which would be triggered by a non-payment, a default or an acceleration of, $50 million or more of non-recourse indebtedness secured by our assets or $5 million or more of any other indebtedness.

      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. This ratio has been less than 2 to 1 since March 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.

      One of our secured facilities is secured by a portfolio of 19 hotels and contains standard provisions that require the mortgage 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 if certain financial tests relating to the operation of the hotels are not met. 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 $27.2 million of cash was held in escrow under this provision as of December 31, 2003. In July 2003, we signed an amendment to the loan

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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, neither our organizational documents nor those debt instruments prohibit the incurrence of additional indebtedness. If we add new debt to our current debt, including CMBS or other debt that we may issue, 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.

      We may consider opportunities to convert fixed rate debt to floating rate debt in order to take advantage of current low rates for floating rate debt. In the future we may also incur indebtedness, including that under our new senior secured credit facility, bearing interest at a variable rate, or we may be required to refinance our existing indebtedness at higher interest rates. Accordingly, increases in interest rates could increase our interest expense and adversely affect our cash flow, reducing the amounts available to make payments on our indebtedness, make acquisitions or pursue other business opportunities.

Operating Risks

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

      The terrorist attacks of September 11, 2001 and the threat of additional similar events and the weak economy have had a negative effect 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 or preferences 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 possibility of conflicts with other countries in addition to Iraq, threats and the possibility of future attacks will continue to hamper business and leisure travel patterns.

The economic slowdown, the threat of further terrorist attacks, the conflict in Iraq and the uncertainties of conflicts with 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 (calculated on a comparable hotel basis period over period):

	•	7.9% decline during the full year 2002, as compared to the full year 2001; and
	•	3.6% decline during the full year 2003, as compared to the full year 2002.

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      We used cash in our operations of $17.1 million during the year ended December 31, 2003, compared to generating cash from operations of $57.9 million in 2002. We generated $147.2 million of cash from operations during 2001. The decreases from 2001 are due to the economic slowdown that began in 2001, as well as the effects on travel of the terrorist attacks of September 11, 2001, the continuing threat of further terrorist attacks and the uncertainty of international conflicts. The effects of the attacks, the condition of the economy and continued uncertainty with respect to the international geopolitical situation have resulted in levels of business and leisure travel that remain significantly lower than the levels we experienced prior to September 2001. If the economy takes longer to recover than expected or the economy begins to worsen again, further declines in occupancy could also lead to declines in average daily room rates and could have a further material adverse effect on our financial results.

      In response to the decline in our cash flows since September 11, 2001, we significantly curtailed our capital expenditure program, which may have adversely affected the competitive position of our hotels in their markets. At the end of 2003, we initiated an aggressive capital expenditure reinvestment program for our core assets. We feel this program is necessary to maintain and improve asset values and to properly position our hotels for any industry recovery. We expect to spend approximately $225 million pursuant to our renovation program over the next two years, with approximately $125 million to be spent in 2004. However, if current economic conditions worsen, we may again have to curtail our capital expenditures. There is no guarantee that our capital expenditure reinvestment program will lead to improved results. We have also sold non-core assets to generate cash. Since January 1, 2003, we have sold 24 hotels for aggregate gross proceeds of approximately $190.8 million in cash, and currently plan to dispose of, in the near future, a total of 10 additional non-core assets, from which we expect to generate gross proceeds of approximately $75 million to $85 million.

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

      We report operating revenues and expenses from our hotels; therefore, we have 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 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;
	•	other factors that may influence travel, including health and safety concerns;
	•	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;

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	•	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 affect the convenience or desirability of the sites of some hotels, which would in turn affect their operations.

The insurance market has been adversely affected.

      Since the September 11, 2001 terrorist attacks, the insurance and reinsurance industries have been dramatically affected. Companies in all industry segments experienced increases in premiums and reductions in coverage upon renewal of their insurance policies immediately following the terrorist attacks. Some entities experienced an inability to obtain insurance. If we are unable to maintain insurance that meets the requirements of our lenders and franchisors, and if we are unable to amend or waive those requirements, it could have a material adverse effect on our business. Our total annual property and casualty insurance premiums are approximately $9.3 million under our current 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 currently manages all of our hotels. 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 a net loss of $4.5 million for the year ended December 31, 2003, and 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 managing general partner in MeriStar Investment Partners, LP, which we refer to as 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 $19.6 million in cumulative preferred returns outstanding as of December 31, 2003 which MIP has been unable to remit to us because of limited free cash flow and the effect of restrictive covenants in certain of its debt instruments. If Interstate Hotels is unable to continue as the managing general partner of MIP, a liquidation of MIP could occur. This liquidation could result in an additional impairment of our investment. See “Business — Recent Developments — Impairment Charge Relating to MeriStar Investment Partners, L.P.”

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, 2003, 86% 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 decreases 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.

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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 factors and other considerations affecting travel, may also adversely affect our earnings.

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

      As of December 31, 2003, 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 us 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. 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. We frequently engage in discussions with franchisors regarding both necessary capital as well as service improvements as a condition of maintaining our franchise licenses. Generally, the resolution of these issues requires us to commit to achieve or maintain specified improvement milestones over time, which often require additional capital expenditures. Unexpected capital expenditures resulting from these discussions 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. Customers may use the Internet to make bookings for some of our brands. However, the Internet sales channel, which historically has been a discount sales channel, could be used to wage a price war in a particular market. 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

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

      See “Governmental Regulation — Environmental Laws” for a discussion of the 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 Americans with Disabilities Act, or 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 some potential conflicts of interest with Interstate Hotels.

      Our Chief Executive Officer and Chairman of the Board of Directors, Paul W. Whetsell, is also Chairman of the Board of Directors of Interstate Hotels. Our relationship with Interstate Hotels is governed by an intercompany agreement and 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 the operation and management of our hotels and with respect to lease arrangements, acquisitions and sales. Inherent potential conflicts of interest will be present in all of the numerous transactions among Interstate Hotels and us.

      The terms of the intercompany agreement and our management agreements with Interstate Hotels were not negotiated on an arm’s-length basis. Furthermore, because of the independent trading of the two companies, stockholders in each company 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.

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

      We are a party to an intercompany agreement with 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 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;

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	•	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 are restricted in the nature of our business and the opportunities we may pursue. Each of our Board of Directors and the Board of Directors of Interstate Hotels has formed a special committee of independent directors to explore further changes to the relationship between our company and Interstate Hotels, including possible changes to the terms, or complete elimination, of the intercompany agreement. Discussions also include possible changes to the provisions of the various management agreements relating to our hotels, including the method of calculation for the incentive fee and termination fees. See “Business — Recent Developments — Relationship with Interstate Hotels.”

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. If we dispose of the 10 remaining assets in our disposition program, we may incur termination obligations due to Interstate Hotels of up to a maximum of approximately $5.5 million, assuming the disposition of all 10 of the properties in 2004 and assuming buyers of our hotel properties elect to have the properties managed by parties other than Interstate Hotels or do not assume the obligation as part of the sale transaction. In addition, we may be obligated to pay Interstate Hotels termination fees of up to a maximum of approximately $9.8 million with respect to the 24 properties we have already sold. Therefore, the requirement to pay a termination fee may make a sale 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.

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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 real estate investment trust, or REIT, for federal income tax purposes.

      To obtain the favorable tax treatment accorded to REITs under the Internal Revenue Code, MeriStar Hospitality normally will be required each year to distribute to our stockholders at least 90% of our real estate investment trust taxable income, determined without regard to the deduction for dividends paid and by excluding net capital gain. MeriStar Hospitality will be subject to income tax on undistributed real estate investment trust taxable income and net capital gain, and to a 4% nondeductible excise tax on the amount, if any, by which distributions we pay with respect to any calendar year are less than the sum of:

	•	85% of its ordinary income for the calendar year;
	•	95% of its capital gain net income for that year, unless MeriStar Hospitality 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 our distributions. It is possible that differences in timing between the receipt of income and the payment of expenses in arriving at its taxable income and the effect of nondeductible capital expenditures, the creation of reserves or required debt amortization payments could in the future require it to borrow funds on a short- or long-term basis to enable it to continue to qualify as a REIT and avoid federal income taxes and the 4% nondeductible excise tax. In these circumstances, MeriStar Hospitality might need to borrow funds in order to avoid adverse tax consequences even if it believes 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;
	•	restrictions in its debt agreements;
	•	our capital expenditure requirements;
	•	the annual distribution requirements under the Internal Revenue Code as described above; and
	•	other factors as MeriStar Hospitality deems relevant.

      Although we intend 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 MeriStar Hospitality fails to qualify as a REIT, we 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. The determination of various factual matters and circumstances not entirely within our control may affect

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      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 it to satisfy its obligations or make distributions to its stockholders because of the additional tax liability for the year or years involved.

      MeriStar Hospitality would cease to qualify as a REIT if the Internal Revenue Service were successfully to determine that we should properly be treated as a corporation for federal income tax purposes and it also might cease to qualify as a REIT if the Internal Revenue Service were successfully to determine that any of the other partnerships or the joint ventures or limited liability companies in which it or we hold an interest is properly treated as a corporation for federal income tax purposes.

      The imposition of a corporate tax on any of these entities, and any accompanying loss of MeriStar Hospitality’s real estate investment trust status, could substantially reduce the amount of cash available for payment on our indebtedness.

      If MeriStar Hospitality were to fail to qualify as a REIT, it no longer would be subject to the distribution requirements of the Internal Revenue Code. To the extent that distributions to stockholders would have been made in anticipation of its qualifying as a REIT, it might be required to borrow funds or to liquidate assets to pay the applicable corporate income tax. Although it currently operates in a manner designed to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause it to decide to revoke the REIT election.

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ITEM 2.          PROPERTIES

      Our principal executive offices are located in Arlington, Virginia. All of our hotels are currently leased to our taxable subsidiaries and are owned directly by our operating partnership or its 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 92 hotels owned as of December 31, 2003. We have sold nine hotels with 2,197 rooms since January 1, 2004. Ten of the remaining 83 hotels are currently planned for disposition.

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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)	This property was classified as held for sale as of December 31, 2003.
(4)	We have sold these properties since January 1, 2004.

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.

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

      We did not submit any matters to a vote of security holders during the fourth quarter of 2003.

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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 2004.

    The last reported sales price of MeriStar Hospitality’s common stock on the NYSE on March 8, 2004 was $6.81. As of March 8, 2004, there were 523 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 2004. 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 distribution requirements for REITs under the Internal Revenue Code and such other factors as MeriStar Hospitality’s Board of Directors deems relevant. Also, our new $50 million credit facility and the indentures related to Meristar Hospitality’s senior unsecured notes and senior subordinated notes contain limitations on the ability to declare and pay dividends. Therefore, Meristar Hospitality can give no assurance that it will make any such distributions in the future.

      To obtain the favorable tax treatment accorded to REITs under the Internal Revenue code, MeriStar Hospitality normally is required each year to distribute to its stockholders at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and by excluding net capital gains. Under certain circumstances, MeriStar Hospitality may be required to make distributions in excess of available cash in order to meet these distribution requirements. In that event, MeriStar Hospitality 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 its qualification as a REIT. The restricted payments

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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.

      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 consolidated financial data derived from our audited consolidated financial statements and other information as of and 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)

Until January 1, 2001, Interstate Hotels leased substantially all of our hotels from us, and we received participating lease revenue from Interstate Hotels, which represented a specified percentage of each hotel’s revenue. Under the leases, 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, in connection with changes permitted by the REIT Modernization Act, Interstate Hotels assigned the hotel leases to our newly created, wholly-owned, taxable REIT subsidiaries, and our taxable REIT subsidiaries entered into management arrangements with Interstate Hotels to manage the hotels. As a result of this change, our wholly-owned taxable REIT subsidiaries have assumed the operating risks and rewards of the hotels and now pay Interstate Hotels a management fee to manage the hotels for us. Effective January 1, 2001, we began recording all of the revenues and expenses of the hotels in our statements of operations, including the management fee paid to Interstate Hotels. As a result, our operating results for the years ended after December 31, 2000 are not directly comparable to those for the years ended prior to December 31, 2001.

(B)	During 2001, we sold two hotels for a loss. During 2000, we sold three limited-service hotels for a gain.
(C)	Continuing operations included losses on asset impairments related to our hotel portfolio of $163.4 million, $6.9 million, and $2.3 million for the years ended December 31, 2003, 2002 and 2001, respectively. For the year ended December 31, 2003, continuing operations also included an impairment loss of $25 million on our investment in MeriStar Investment Partners, L.P.

We adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 145 on January 1, 2003. Certain 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. Our prior period extraordinary items were reclassified, and in the future we expect any gains and losses from the extinguishment of our debt to be classified as a component of continuing operations. Prior period amounts reclassified to continuing operations were as follows:

	•	during 2001, we repaid term loans under our previous credit facility and wrote off deferred financing costs associated with this facility totaling $2.7 million, net of tax;
	•	during 2000, we repurchased some of our 4.75% notes payable to MeriStar Hospitality at a discount, resulting in a $3.1 million gain, net of tax, on the repurchase; and
	•	during 1999, we refinanced some of our loan facilities and wrote off deferred financing costs associated with these facilities totaling $4.5 million, net of tax.

(D)	We adopted the provisions of 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. During 2003, we sold 15 hotels in separate transactions for an aggregate of $127.9 million in cash. As of December 31, 2003, we had seven hotels classified as held for sale, six of which were sold in early 2004 for an aggregate of $44.5 million in cash. During 2002, we sold five hotels in separate transactions for an aggregate of $60.7 million in cash. Discontinued operations included losses on asset impairments of $131.7 million, $71.8 million, and $41.3 million for the years ended December 31, 2003, 2002, and 2001, respectively.
(E)	Includes $51 million and $110 million of assets held for sale as of December 31, 2003 and 2002, respectively.

(F)	Total number of rooms occupied by hotel guests on a paid basis, divided by total available rooms. Prior periods have been restated to reflect occupancy data for the 85 hotels included in continuing operations.

(G)	Average Daily Rate, or ADR, represents total room revenue divided by total number of rooms occupied by hotel guests on a paid basis. Prior periods have been restated to reflect ADR for the 85 hotels included in continuing operations.
(H)	Revenue Per Available Room, or RevPAR, represents total room revenue divided by total available rooms. Prior periods have been restated to reflect RevPAR for the 85 hotels included in continuing operations.

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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 primarily upscale, full-service hotels and resorts. Our portfolio is diversified geographically as well as by franchise and brand affiliations. As of December 31, 2003, we owned 92 hotels with 24,733 rooms. We have sold nine hotels with 2,197 rooms since January 1, 2004. Ten of the remaining 83 hotels are currently planned for disposition. Our hotels are located in major metropolitan areas, rapidly growing secondary markets or resort locations in the United States and one in Canada. All of our hotels are leased by our taxable subsidiaries and all are currently 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.

      Our taxable subsidiaries are parties to management agreements with a subsidiary of Interstate Hotels to manage all of our hotels. Under these management agreements, the taxable subsidiaries pay a management fee for each property to a subsidiary of Interstate Hotels. The taxable subsidiaries in turn make rental payments to our operating partnership under the participating leases. Under the management agreements, the base management fee is 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. All of the agreements expire in 2010 and have three renewal periods of five years each at the option of Interstate Hotels, subject to some exceptions.

      Since the July 2002 merger that formed Interstate Hotels, we and Interstate Hotels have been separating the senior management teams of the two companies in order to allow each senior management team to devote more attention to its respective company’s matters. In December 2003, our Board of Directors and that of Interstate Hotels each formed a special committee of independent directors to explore further changes to the relationship between our company and Interstate Hotels, including possible changes to the terms, or complete elimination, of the intercompany agreement. Discussions also include possible changes to the provisions of the various management agreements relating to our hotels, including the method of calculation for the incentive fee and termination fees.

Results Overview

      At the beginning of 2003, we set out a strategy to position our company to best take advantage of an expected economic and industry recovery. Our strategy included the following key initiatives: reshape the portfolio through asset sales; enhance liquidity; reduce our leverage and extend our debt maturities; begin an aggressive renovation program of our core product offering; and focus on asset performance through aggressive asset management.

      We have made significant progress in reshaping our portfolio with our asset disposition program, completing the sale of 24 non-core assets through March 8, 2004. We have generated $190.8 million in gross cash proceeds, which has significantly enhanced our liquidity. Through the borrowing of $170 million of 9.5% notes payable from MeriStar Hospitality due 2010 in July of this year, we were able to nearly completely refinance the borrowings under our 4.75% notes payable to MeriStar Hospitality due 2004 to below $4 million and extend this nearest maturing debt security to 2010. Our issuance of OP units for cash in September 2003, the debt for OP unit exchange transactions, as well as the completion of our $101 million, 10-year, 6.88% commercial mortgage-backed securities financing, and the $50 million senior credit facility have also significantly enhanced our liquidity, reduced our leverage and aided in extending our debt maturities.

      We have begun an aggressive renovation program for our core assets. We expect to invest approximately $225 million in capital expenditures over the next two years to upgrade our core product to meet or exceed the standards of our primary brands — Hilton, Marriott, and Starwood — to improve the competitiveness of these assets in their markets and enable them to more fully participate in any economic recovery.

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      Our operating results were negatively affected by the continued sluggish economy in the first half of 2003, as well as geopolitical events, war and the continued threat of domestic terrorism. Although the general economic indicators began to show positive signs of recovery in the second half of the year, as of year end, this general economic growth had not yet translated into meaningful growth in lodging demand and consequently RevPAR. However, it has not been unusual for demand growth in the hospitality industry historically to lag an economic recovery by at least six to nine months. We continue to face the challenge of decreased corporate travel, changing channels of distribution including increased internet bookings, pressure on room rates and margin erosion. See “Results of Operations” section below for a more detailed discussion.

Results of Operations

      Our revenues are 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. Included in our operating results is our 16% cumulative preferred return on our partnership interest in MIP. Operating costs include direct costs to run our hotels, management fees to Interstate Hotels for the management of our properties, depreciation of our properties, impairment charges, property tax and insurance, as well as sales, marketing and general and administrative costs. Our expenses also include interest on our debt, amortization of related debt-issuance costs and minority interest allocations, which represent the allocation of income and losses to outside investors for properties that are not wholly owned.

      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 requirement. See Footnote 14, “Dispositions and Acquisitions,” included in Item 8 of this Annual Report on Form 10-K for further information regarding the amounts reclassified.

      Summary data for the years ended December 31 were as follows (dollars in thousands, except operating data statistics):