FELCOR LODGING L P - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 333-3959-01

FelCor Lodging Limited Partnership
(Exact name of registrant as specified in its charter)

DELAWARE 75-254994
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

545 E. JOHN CARPENTER FRWY., SUITE 1300, IRVING, TEXAS 75062
(Address of principal executive offices) (Zip Code)

(972) 444-4900
(Registrant's telephone number, including area code)

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

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------

NONE

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

NONE
(Title of class)

Indicate by check mark whether the registrant (i) 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 (ii) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

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

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

The aggregate market value of the voting and non-voting limited
partnership interests held by non-affiliates of the registrant, as of June 28,
2002, was approximately $30 million.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the 2003 Annual Meeting of
Stockholders of FelCor Lodging Trust Incorporated, filed pursuant to Regulation
14A, is incorporated herein by reference into Part III.

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FELCOR LODGING LIMITED PARTNERSHIP

INDEX

This Annual Report on Form 10-K contains registered trademarks owned or
licensed by companies other than us, including but not limited to Bristol
House(R), Conrad(R), Courtyard by Marriott(R), Crowne Plaza(R), Crown Plaza
Suites(R), Disney(R), Doubletree(R), Doubletree Guest Suites(R), Embassy Suites
Hotels(R), Fairfield Inn(R), Hampton Inn(R), Harvey Hotel(R), Harvey Suites(R),
Hilton(R), Hilton Suites(R), Holiday Inn(R), Holiday Inn & Suites(R), Holiday
Inn Express(R), Holiday Inn Express & Suites(R), Holiday Inn Select(R), Homewood
Suites(R) by Hilton, Inter-Continental(R), Sheraton(R), Sheraton Suites(R),
Staybridge Suites(R), Walt Disney World(R), Westin(R) and Wyndham(R).

PART I

ITEM 1. BUSINESS

At December 31, 2002, FelCor Lodging Limited Partnership and its
subsidiaries, or FelCor LP, owned real estate interests in 183 hotels with
nearly 50,000 rooms and suites. The sole general partner of FelCor LP is FelCor
Lodging Trust Incorporated, or FelCor, a Maryland corporation, the nation's
second largest hotel real estate investment trust, or REIT. At December 31,
2002, FelCor owned a greater than 95% equity interest in FelCor LP. Our hotels
are located in the United States (35 states) and Canada, with concentrations in
Texas (41 hotels), California (19 hotels), Florida (17 hotels) and Georgia (14
hotels). We own the largest number of Embassy Suites Hotels, Crowne Plaza,
Holiday Inn and independently owned Doubletree-branded hotels.

We seek to increase operating cash flow through aggressive asset
management and the competitive positioning of our hotels, to maintain a sound
and flexible capital structure, and to reposition our portfolio through the sale
of non-strategic hotels and reinvestment in newer, higher quality hotels in
major urban and resort markets with greater growth potential. The hotels in
which we will reinvest sale proceeds are expected to be ones that are affiliated
with, or will benefit from affiliation with, one of the premium brands available
to us through our strategic brand owner and manager relationships with Hilton
Hotels Corporation, or Hilton, Six Continents Hotels and Starwood Hotels &
Resorts Worldwide Inc., or Starwood.

At December 31, 2002, we had an aggregate of 62,056,414 shares of
FelCor common stock, and units of FelCor LP limited partner interest
outstanding.

BACKGROUND

As a result of the passage of the REIT Modernization Act, effective
January 1, 2001, REITs are allowed to own the lessees of their hotels through
taxable REIT subsidiaries, or TRSs. In 2001, we acquired our hotel leases from
DJONT Operations L.L.C., or DJONT, and Six Continents Hotels.

Upon acquisition of our hotel leases, we began recording hotel revenues
and expenses, rather than just rental revenue, and became exposed to all of the
risks and rewards of hotel operations. Under the leases, the rent payable to us
would vary only as a result of changes in hotel revenues. By acquiring the
leases, our cash flow and net income also vary as a result of changes in the
operating margins of the hotels. Through the ownership of our operating lessees,
we now consolidate the operating revenues and expenses of 169 of our hotels. We
have 50% unconsolidated interests in the operating revenues and expenses of the
remaining 14 hotels, which are accounted for using the equity method.

Our business is conducted in one reportable segment, which is
hospitality. We derived 97% of our revenues from hotels located within the
United States and the balance from our Canadian hotels.

Additional information on our business can be found on FelCor's website
at www.felcor.com and in the Notes to Consolidated Financial Statements located
elsewhere in this Annual Report on Form 10-K.

DEVELOPMENTS DURING 2002

During 2002, we sold various non-strategic assets, realizing net cash
proceeds of approximately $29 million. These assets included the retail space at
our Allerton Crowne Plaza hotel in Chicago, Illinois, the 183-room Doubletree
Guest Suites hotel in Boca Raton, Florida, and the Holiday Inn hotel in Colby,
Kansas. In addition, we sold four Holiday Inn-branded hotels and a Hampton Inn
hotel to a new joint venture, in which we retain a 50% equity interest.

In July 2002, we acquired the 208-suite SouthPark Suite Hotel in
Charlotte, North Carolina for $14.5 million, and the 385-room Wyndham Myrtle
Beach Resort, and a leasehold interest in the associated Arcadian Shores Golf
Club, in Myrtle Beach, South Carolina, for $35.3 million. We have converted the
SouthPark Suite Hotel to a Doubletree Guest Suites hotel managed by Hilton. The
Wyndham Myrtle Beach Resort is currently under renovation, and we expect to
convert it to a Hilton hotel in April of 2003.

1

In April 2002, FelCor issued approximately $25 million of their Series
B preferred stock. FelCor contributed the proceeds of this preferred stock to us
in exchange for Series B preferred units. The preference on these units is the
same as FelCor's Series B preferred stock. We utilized the proceeds for working
capital and discretionary capital expenditures.

In 2002, we entered into two amendments to our unsecured line of
credit. In June 2002, we amended our line of credit to relax certain covenant
levels to provide us with greater financial flexibility. In December 2002, we
further amended our line of credit, to relax covenant levels, and to reduce the
line to $300 million from $615 million. The pricing and maturity of our line
remained unchanged but with added pricing tiers to reflect the higher permitted
leverage.

Through a 50/50 joint venture agreement with Hilton, we started the
development of a 251-unit luxury oceanfront residential condominium project in
Myrtle Beach, South Carolina. We expect this project to be completed in 2004.

For 2002, we paid common distributions of $0.60 per unit,
preferred distributions of $1.95 per unit on our Series A preferred units and
preferred distributions of $2.25 per depository unit on our Series B preferred
units.

RECENT DEVELOPMENTS

In February 2003, we announced our plan to sell 33 non-strategic hotels
over the next 36 months, six of which had been previously designated as held for
sale. These non-strategic hotels include smaller hotels in secondary or tertiary
markets and include some Texas hotels, and specifically, hotels in Dallas, Texas
(an area in which we desire to reduce our concentration of hotels). It is our
intention to reinvest most of the proceeds from these sales in newer, larger and
higher quality hotels, primarily in urban and resort locations with higher
growth rates and barriers to competition. For those hotels currently managed by
Six Continents Hotels, we are liable for liquidated damages under the terms of
our management agreement, unless we reinvest the net proceeds to purchase one or
more hotels licensed and managed by Six Continents Hotels within one year of the
sale. We recorded $157.5 million in impairment losses in 2002, principally
related to the shorter holding periods associated with our decision to sell
these non-strategic hotels.

The 33 hotels identified as non-strategic represented 14% of our hotel
rooms, but less than 7% of our 2002 consolidated hotel EBITDA. (For a discussion
of the computation of EBITDA, see the Funds from Operations and EBITDA section
in Part II of this Annual Report on Form 10-K, under Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.) These
non-strategic hotels have an average of 196 rooms, while the average number of
rooms for the remainder of our portfolio is 294.

THE INDUSTRY
The continued stagnation of the U.S. and global economies, the negative
wealth effect from the sharp decline in stock values, the erosion of consumer
confidence, the difficulties associated with air travel and the prospect of war
in Iraq, combined to adversely affect lodging demand. The unprecedented decline
in lodging demand is evidenced by the decline in industry revenue per available
room, or RevPAR, for 2001 and 2002, the first two-year consecutive decline since
industry RevPAR has been tracked. After 18 months of consecutive industry RevPAR
declines, the industry recorded increased RevPAR for the last four months of
2002. The RevPAR increases for the last four months of 2002 were driven by
occupancy increases over the same period in the prior year. In addition to weak
demand, ADR has declined because of competitive pressures and discounting of
room rates through the Internet.

Business travel is a key profit driver in the lodging industry. In a
UBS Warburg survey conducted in October 2002, corporate travel managers reported
that they anticipate 2003 hotel spending and negotiated rates will be slightly
lower than in 2002 and approximately 80% of their spending is projected to be in
downtown/urban markets. These corporate travel managers indicated that they plan
to direct less business to luxury hotels, and more to midscale and upscale
hotels.

2

One of the most positive fundamentals for the lodging industry is that
supply growth has been sharply curtailed. According to PricewaterhouseCoopers'
Hospitality Directions - U.S. Edition December 2002 Forecast Update, room supply
rose only 1.9% and 1.8% in 2001 and 2002, respectively, and is projected to
increase only 1.1% in each of 2003 and 2004. This level of growth is the lowest
since 1993, and is well below the historical 15-year average of 2.7% per annum.

We do not anticipate a significant recovery in lodging industry RevPAR
during 2003. Although most economists are forecasting GDP growth in 2003, growth
in lodging demand has historically "lagged" the general economy by six to 12
months. Increasing business travel is typically foreshadowed by growth in both
corporate profits and employment. Companies tend to wait for growth in profits
prior to hiring, and hire prior to releasing funds for travel. The recovery to
date has been termed the "jobless recovery". As such, we do not anticipate that
corporations will increase their travel budgets until there is more clarity with
regard to the economy and corporate profits. Additionally, lodging demand will
be adversely affected during 2003 by the continued fear of an event of
terrorism, the commencement of war with Iraq and the increased inconvenience
encountered during air travel due to heightened security.

Smith Travel Research, a leading provider of industry data, classifies
hotel chains into five distinct categories: Upper Upscale, Upscale, Midscale
With Food & Beverage, Midscale Without Food & Beverage, and Economy. We own
properties in the Upper Upscale (including Doubletree Guest Suites, Doubletree,
Embassy Suites Hotels, Sheraton and Westin hotels), Upscale (including Crowne
Plaza and Homewood Suites), and Midscale With Food & Beverage (including Holiday
Inn and Holiday Inn Select hotels) categories, from which we derived
approximately 98% of our EBITDA in 2002. More than 50% of our EBITDA in 2002 was
derived from upper upscale all-suite hotels.

Smith Travel Research also categorizes hotels based upon their relative
market positions, as measured by average daily rate, or ADR, as Luxury, Upscale,
Midprice, Economy and Budget. The following table contains information with
respect to average occupancy (determined by dividing occupied rooms by available
rooms), ADR and RevPAR for our hotels, as well as all Upscale U.S. hotels, all
Midprice U.S. hotels and all U.S. hotels, as reported by Smith Travel Research,
for the periods indicated.

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(1) Information is historical, including periods prior to ownership by
FelCor LP.

(2) This category includes hotels in the "upscale price level," defined as
hotels with ADRs in the 70th to 85th percentiles in their respective
markets.

(3) This category includes hotels in the "midscale level," defined as
hotels with ADRs in the 40th to 70th percentiles in their respective
markets.

3

BUSINESS STRATEGY

In the current operating environment, in which the lodging industry has
experienced declines in RevPAR for two consecutive years, we intend to continue
focusing on preserving capital, maximizing operating cash flow by actively
overseeing the operation of our hotels by our managers, maintaining financial
flexibility and placing ourselves in the best position possible to take
advantage of opportunities that may arise in the future. We have established,
and intend to maintain, strong strategic relationships with our brand owners and
managers and have successfully demonstrated our ability to apply our asset
management expertise to the renovation, redevelopment and rebranding of our
hotels.

Maintenance of Financial Flexibility

During the current challenging economic environment, we have committed
ourselves to conserving capital, maximizing operating cash flow from our hotels
and maintaining financial flexibility to take advantage of opportunities that
may arise in the future. We expect FelCor's board of directors to suspend our
common distributions until our hotels experience an increase in RevPAR of 2% to
4%; decisions on future distributions on common and preferred units will be made
based on hotel operating results and minimum distributions required to maintain
FelCor's REIT status. We intend to limit distributions generally to not more
than available cash flow, after debt service and maintenance capital
expenditures, and to restrict discretionary capital expenditures. We have
scheduled debt maturities of $35 million in 2003 and $189 million in 2004. In
February 2003, we announced our decision to dispose of 33 non-strategic hotels
over the next 36 months. These non-strategic hotels include smaller hotels in
secondary or tertiary markets and certain hotels in Texas, and specifically in
Dallas, areas where we want to reduce our concentration of hotels. We will seek
to sell $50 to $75 million of these non-strategic hotels that are unencumbered
by debt and management agreement reinvestment requirements during 2003, and to
use the proceeds from these sales to pay down debt.

Maintenance of Strong Strategic Relationships

We benefit from strategic brand owner and manager relationships with
Hilton (Embassy Suites Hotels, Hilton and Doubletree), Six Continents Hotels
(Crowne Plaza and Holiday Inn) and Starwood (Sheraton and Westin). These
relationships enable us to work effectively with our managers to maintain
operating margins and maximize operating cash flow from our hotels.

o Hilton has a hotel system of approximately 2,000 hotels with
more than 330,000 guest rooms worldwide, and is the largest
operator of full-service, all-suite hotels in the United
States. Hilton owns Hilton Hotels, Conrad, Embassy Suites
Hotels, Doubletree and Doubletree Guest Suites brands among
others. Subsidiaries of Hilton managed 73 of our hotels at
December 31, 2002. Hilton is a 50% partner in joint ventures
with us in the ownership of 12 hotels and the development of a
residential luxury condominium, and is the holder of a 10%
equity interest in certain of our consolidated subsidiaries
owning six hotels.

o Six Continents Hotels is the world's largest hotel company.
Six Continents Hotels owns, operates or franchises more than
3,300 hotels with approximately 515,000 guest rooms in nearly
100 countries around the world. Among the brands owned by Six
Continents Hotels are Crowne Plaza, Holiday Inn, Holiday Inn
Select, Holiday Inn Express and Inter-Continental.
Subsidiaries of Six Continents Hotels managed 82 of our hotels
at December 31, 2002, and also own approximately 17% of
FelCor's outstanding common stock. On October 1, 2002, Six
Continents plc announced a proposal to separate its hotel and
soft drink businesses from its retail business, with the new
hotel to be called InterContinental Hotels Group plc. This
separation is currently expected to be effective on or about
April 15, 2003.

o Starwood is one of the world's largest hotel operating
companies. Directly and through subsidiaries, Starwood owns,
leases, manages or franchises more than 740 properties with
approximately 224,000 rooms in more than 80 countries.
Subsidiaries of Starwood managed 11 of our hotels at December
31, 2002. Starwood is a 40% joint venture partner with us in
the ownership of two hotels and a 50% joint venture partner
with us in the ownership of one hotel.

4

Hotel Renovation, Redevelopment and Rebranding

We expect to continue to differentiate ourselves from many of our
competitors by:

o our success in upgrading, renovating and/or redeveloping our
hotels to enhance their competitive position, and, in certain
instances, rebranding them to improve their revenue generating
capacity; and

o our ongoing program for the maintenance of our upgraded hotel
assets, which generally includes:

-- contribution of approximately 4% of total annual room
and suite revenue to a capital reserve for routine
capital replacements and improvements; and

-- adherence to a rigorous maintenance and repair
program, resulting in the additional expenditure of
approximately 4 to 5% of annual hotel revenues on
maintenance of the hotels.

We have demonstrated our ability to successfully execute renovations.
During 2002, we substantially completed a $13 million renovation on our San
Diego, California Holiday Inn, we upgraded and converted the recently acquired
SouthPark Suite Hotel in Charlotte, North Carolina to a Doubletree Guest Suites
hotel and started a $10 million renovation project at the Wyndham Myrtle Beach
Resort Hotel, which will allow us to convert this hotel to a Hilton hotel in
April 2003. We believe that our historical capital expenditures should limit the
need for future major renovation expenditures. During 2002, we made capital
expenditures aggregating approximately $63 million and we currently anticipate
2003 capital expenditures of between $60 and $70 million.

COMPETITION

The hotel industry is highly competitive. Each of our hotels is located
in a developed area that includes other hotel properties and competes for guests
primarily with other full service and limited service hotels in its immediate
vicinity and secondarily with other hotel properties in its geographic market.
We believe that brand recognition, location, the quality of the hotel and
services provided, and price are the principal competitive factors affecting our
hotels.

ENVIRONMENTAL MATTERS

We customarily obtain a Phase I environmental survey from an
independent environmental consultant before acquiring a hotel. The principal
purpose of a Phase I survey is to identify indications of potential
environmental contamination for which a property owner may have liability and,
secondarily, to assess, to a limited extent, the potential for environmental
regulatory compliance liabilities. The Phase I surveys of our hotels were
designed to meet the requirements of the then current industry standards
governing Phase I surveys, and consistent with those requirements, none of the
surveys involved testing of groundwater, soil or air. Accordingly, they do not
represent evaluations of conditions at the studied sites that would be revealed
only through such testing. In addition, their assessment of environmental
regulatory compliance issues was general in scope and was not a detailed
determination of the hotel's complete environmental compliance status.
Similarly, the surveys did not involve comprehensive analysis of potential
offsite liability. The Phase I survey reports did not reveal any environmental
liability that we believe would have a material adverse effect on our business,
assets or results of operations, nor are we aware of any such liability.
Nevertheless, it is possible that these reports do not reveal or accurately
assess all environmental liabilities and that there are material environmental
liabilities of which we are unaware.

We believe that our hotels are in compliance, in all material respects,
with all federal, state, local and foreign laws and regulations regarding
hazardous substances and other environmental matters, the violation of which
would have a material adverse effect on us. We have not been notified by any
governmental authority or private party of any material noncompliance, liability
or claim relating to hazardous or toxic substances or other environmental
matters in connection with any of our current or former properties. However,
obligations

5

for compliance with environmental laws that arise or are discovered in the
future may adversely affect our financial condition.

TAX STATUS OF FELCOR

FelCor elected to be taxed as a REIT under the federal income tax laws,
commencing with our initial taxable year ended December 31, 1994. As a REIT,
FelCor generally is not subject to federal income taxation at the corporate
level on its taxable income that is distributed to its stockholders. FelCor may,
however, be subject to certain state and local taxes on its income and property.
A REIT is subject to a number of organizational and operational requirements,
including a requirement that it currently distribute annually at least 90% of
its taxable income. In connection with FelCor's election to be taxed as a REIT,
FelCor's charter imposes restrictions on the ownership and transfer of shares of
its common stock. We expect to make distributions on our units sufficient to
enable FelCor to meet its distribution obligations as a REIT. As a result of the
passage of the REIT Modernization Act, in 2001 we acquired or terminated all of
our hotel leases and contributed them to TRSs. These TRSs are subject to both
federal and state income taxes.

EMPLOYEES

We have no employees. FelCor as our sole general partner performs our
management functions. Mr. Thomas J. Corcoran, Jr., FelCor's President and Chief
Executive Officer, entered into an employment agreement with FelCor in 1994 that
continues in effect until December 31, 2003, and automatically renews for
successive one-year terms unless terminated by either party. FelCor's other
executive officers have change in control contracts that renew annually. FelCor
had 65 full-time employees at December 31, 2002.

All persons employed in the day-to-day operation of our hotels are
employees of the management companies engaged by us, and are not our employees.

CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

Certain statements and analyses contained in this Annual Report on Form
10-K or that may in the future be made by, or be attributable to, us, may
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, and can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations thereon or
comparable terminology. All of such forward-looking statements are based upon
present expectations and assumptions that may or may not actually occur. The
following factors constitute cautionary statements identifying important
factors, including material risks and uncertainties, with respect to such
forward-looking statements that could cause actual results to differ materially
from those reflected in such forward-looking statements or in our historical
results. Each of the following factors, among others, could adversely affect our
ability to meet the current expectations of management.

TERRORIST ACTIVITIES AND THE POTENTIAL OF A MILITARY CONFLICT IN IRAQ HAVE
ADVERSELY AFFECTED, AND CREATED UNCERTAINTY IN, OUR BUSINESS

The terrorist attacks of September 11, 2001, caused a significant
disruption in travel-related businesses in the United States. Consistent with
the rest of the lodging industry, we experienced substantial declines in
occupancy and ADR due to a decline in both business and leisure travel. In 2002,
the economic slowdown, the increasing likelihood of war with Iraq and continued
threats of terrorism continued to restrict travel and lodging demand. The
commencement of war in Iraq, and the actual or threatened bankruptcy of several
major airlines could result in further decreases in travel. We are unable to
predict with certainty when or if travel and lodging demand will be fully
restored to historically normal levels. Military actions against terrorists, new
terrorist attacks (actual or threatened), the military conflict in Iraq, and
other political or economic events may cause a lengthy period of uncertainty
that could continue to adversely affect the lodging industry, including us, as a
result of customer reluctance to travel.

6

OUR FINANCIAL LEVERAGE IS HIGH DUE TO DEPRESSED OPERATING CASH FLOWS

At December 31, 2002, our consolidated debt of $1.9 billion equaled 65%
of our total market capitalization and 41% of our investment in hotel assets, at
cost. Our consolidated debt to EBITDA ratio for the year ended December 31,
2002, was 6.1 times. The decline in our revenues and cash flow from operations
during 2001 and 2002, have adversely affected our public debt ratings and may
limit our access to additional debt capital. Historically, we have incurred debt
for acquisitions and to fund our renovation, redevelopment and rebranding
program and a share repurchase program.

At December 31, 2002, we had:

o approximately $1.9 billion in consolidated debt, of which
approximately $683 million was secured by mortgages or capital
leases; and

o a ratio of EBITDA to cash interest paid, including interest
expense from unconsolidated entities, for the year then ended
of 1.9x.

The current economic slowdown, which began in early 2001 and which was
exacerbated by the terrorist attacks of September 11, 2001, has resulted in
declines in RevPAR during both 2001 and 2002, compared to the prior years. If
the economic slowdown and the reduced RevPAR experienced in 2001 and 2002
worsen, or continue for a protracted period of time, they could have a material
adverse effect on our operations and earnings, including our ability to pay
distributions and service our debt.

As a consequence of the economic slowdown in our business, and in the
travel and lodging industries generally, Standard & Poor's lowered its ratings
on our $1.2 billion in senior unsecured debt from BB- to B+, in February 2003.
Although Moody's affirmed its current rating on our senior unsecured debt in
February 2003 (Ba3), we remain on negative outlook. Should Moody's downgrade its
ratings to B1, the interest rate on $900 million of our $1.2 billion senior
unsecured debt would increase by 50 basis points, which would increase our
interest expense by approximately $4.5 million on an annual basis.

Our leverage could have important consequences. For example, it could:

o limit our ability to obtain additional financing for working
capital, renovation, redevelopment and rebranding plans,
acquisitions, debt service requirements and other purposes;

o require us to agree to additional restrictions and limitations
on our business operations and capital structure to obtain
additional or continued financing;

o increase our vulnerability to adverse economic and industry
conditions, as well as to fluctuations in interest rates;

o require us to dedicate a substantial portion of our cash flow
from operations to payments on our debt, thereby reducing
funds available for operations, future business opportunities,
payment of distributions or other purposes;

o limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we compete; and

o place us at a competitive disadvantage, compared to our
competitors that have less debt.

7

WE HAVE RESTRICTIVE DEBT COVENANTS THAT COULD ADVERSELY AFFECT OUR ABILITY TO
RUN OUR BUSINESS

The indentures governing our existing senior unsecured notes and the
agreements governing our line of credit contain various restrictive covenants
including, among others, provisions that can restrict our ability to:

o incur indebtedness;

o make common and preferred distributions;

o make investments;

o make investments in capital expenditures and acquiring hotels
in excess of certain amounts;

o engage in transactions with affiliates;

o incur liens;

o merge or consolidate with another person;

o dispose of all or substantially all of our assets; and

o permit limitations on the ability of our subsidiaries to make
payments to us.

These restrictions may adversely affect our ability to finance our
operations or engage in other business activities that may be in our best
interest.

In addition, some of these agreements require us to maintain certain
specified financial ratios. Our ability to comply with such ratios may be
adversely affected by events beyond our control.

In 2002, we entered into two amendments to our line of credit. In June
2002, we amended our line of credit to relax covenant levels to provide us with
greater financial flexibility. In December 2002, we further amended our line of
credit to relax covenant levels and reduce the line to $300 million from $615
million. The maturity of the line of credit remains at October 31, 2004, but we
have the right to extend the maturity date for two consecutive one-year periods,
subject to certain conditions. We recorded a $3.2 million expense to write off
unamortized deferred financing costs associated with the reduction in our line
of credit. Although we were in compliance with our existing covenants prior to
the amendments, it was necessary to amend the line of credit in anticipation of
a continued negative RevPAR environment. The amended line allows for the
relaxation of certain financial covenants through the maturity date, with a
step-up in covenants on June 30, 2004, including the unsecured interest
coverage, fixed charge coverage, secured leverage, and total leverage tests. The
interest rate remains on the same floating rate basis with a tiered spread based
on our debt leverage ratio, but with an added tier to reflect higher permitted
leverage. There was no amount outstanding under the facility at December 31,
2002.

Unless our business and cash flow stabilizes, we may not be able to
satisfy the relaxed financial covenant requirements. In such an event, we may
need to obtain further amendments from our lenders on the line of credit to
continue being able to borrow under it. We are not certain whether, to what
extent, or upon what terms the lenders may be willing to continue a relaxation
of the covenants. Further amendments to our line of credit may result in
additional restrictions on us that, together with any limitation on our ability
to borrow under the line, may adversely affect our ability to run our business
and manage our financial affairs.

The breach of any of these covenants and limitations under our line of
credit could result in the acceleration of amounts outstanding under our line of
credit. Our failure to satisfy any accelerated indebtedness, if in the amount of
$10 million or more, could result in the acceleration of most of our other
unsecured recourse indebtedness. We may not be able to refinance or repay our
debt in full under those circumstances.

8

CONFLICTS OF INTEREST COULD ADVERSELY AFFECT OUR BUSINESS

Certain FelCor directors. Six Continents Hotels currently manages 82 of
our hotels. Richard C. North, who joined FelCor's board during 1998, is the
Chief Executive Officer of Six Continents PLC Hotels Division, which, through
its affiliates, owns approximately 17% of FelCor's outstanding common stock.

Issues may arise under the management contracts, and in the allocation
of acquisition and management opportunities, that present conflicts of interest
due to the relationship of Mr. North to the companies with which he is
associated. As an example, in the event we enter into new or additional hotel
management contracts or other transactions with Six Continents Hotels, the
interests of Mr. North, by virtue of his relationship with Six Continents
Hotels, may conflict with our interests. Any increase in management fees payable
to Six Continents Hotels may decrease our profits to the benefit of Six
Continents Hotels. Also, in the selection of brands under which our hotels will
be operated, Mr. North, by virtue of his relationship with Six Continents
Hotels, may have interests that conflict with our interests.

We anticipate that any director who has a conflict of interest with
respect to an issue presented to the FelCor board will abstain from voting upon
that issue, although he or she will have no legal obligation to do so. We have
no provisions in our bylaws or charter that require an interested director to
abstain from voting upon an issue. We do not expect to add provisions in our
charter and bylaws to this effect. Although each director has a fiduciary duty
of loyalty to us, there is a risk that, should an interested director vote upon
an issue in which he or one of his affiliates has an interest, his vote may
reflect a bias that could be contrary to our best interests. In addition, even
if an interested director abstains from voting, the director's participation in
the meeting and discussion of an issue in which he or companies with which he is
associated have an interest could influence the votes of other directors
regarding the issue.

For information regarding the management agreements entered into by us
with Six Continents Hotels and others, reference is made to the description of
these agreements under the caption "Management Agreements" in Item 2 of this
Annual Report on Form 10-K.

Adverse tax consequences to affiliates on a sale of some hotels. Mr.
Corcoran and Mr. Robert A. Mathewson, a director of FelCor, may incur additional
tax liability if we sell our investments in six hotels that we acquired in July
1994 from partnerships in which they were investors. Consequently, our interests
could differ from Messrs. Corcoran's and Mathewson's interests in the event that
we consider a sale of any of these hotels. Decisions regarding a sale of any of
these six hotels must be made by a majority of FelCor's independent directors.

WE MAY BE UNABLE TO REALIZE THE ANTICIPATED BENEFITS OF OUR RENOVATIONS

The majority of our hotels recently have been substantially renovated,
redeveloped and, in some cases, rebranded. The completed improvements may not
achieve the results anticipated when we made the decision to invest in the
improvements.

WE WILL ENCOUNTER INDUSTRY RELATED RISKS THAT MAY ADVERSELY AFFECT OUR BUSINESS

The current economic slowdown has had a significant adverse effect on
our RevPAR performance and earnings. If it worsens or continues, the effects on
our financial condition could be material. We have experienced declines in
RevPAR, beginning in March 2001 and continuing through August 2002. A sharper
than anticipated decline in business travel was the primary cause of the
decline, which was reflected in decreased occupancies, which led to declines in
room rates as hotels competed more aggressively for guests, both of which have
had a significant adverse effect on our RevPAR and operating performance. On a
national basis, the hotel industry experienced a RevPAR decline of 7.0% for the
year ended December 31, 2001, and 2.5% for the year ended December 31, 2002. If
the economic slowdown worsens, or continues for a protracted period of time, it
could have a material adverse effect on our operations, earnings and financial
condition.

9

Investing in hotel assets involves special risks. We have invested in
hotel-related assets, and our hotels are subject to all of the risks common to
the hotel industry. These risks could adversely affect hotel occupancy and the
rates that can be charged for hotel rooms, and generally include:

o competition from other hotels;

o construction of more hotel rooms in a particular area than
needed to meet demand;

o increases in energy costs and other travel expenses that
reduce business and leisure travel;

o adverse effects of declines in general and local economic
activity;

o fluctuations in our revenue caused by the seasonal nature of
the hotel industry;

o adverse effects of a downturn in the hotel industry; and

o risks generally associated with the ownership of hotels and
real estate, as discussed below.

We could face increased competition. Each of our hotels competes with
other hotels in its geographic area. A number of additional hotel rooms have
been or may be built in a number of the geographic areas in which our hotels are
located, which could adversely affect the results of operations of these hotels.
An oversupply of hotel rooms could adversely affect both occupancy and rates in
the markets in which our hotels are located. A significant increase in the
supply of midprice, upscale and upper upscale hotel rooms and suites, if demand
fails to increase proportionately, could have a severe adverse effect on our
business, financial condition and results of operations.

We face reduced coverages and increased costs of insurance. Following
the events of September 11, 2001, certain types of insurance coverage, such as
for acts of terrorism, are only available at high cost. In an effort to keep our
cost of insurance within reasonable limits, we have only purchased terrorism
insurance for those hotels that are secured by mortgage debt, as required by our
lenders. We have established a self-insured retention of $250,000 per occurrence
for general liability insurance with regard to 68 of our hotels; the remainder
of our hotels participate in general liability programs of our managers, with no
deductible. Our property program has a $100,000 all risk deductible, a
deductible of 2% of insured value for named windstorm coverage and a deductible
of 5% of insured value for California earthquake coverage. Should such uninsured
or not fully insured losses be substantial, they could have a material adverse
impact on our operating results and cash flows.

We have geographic concentrations that may create risks from regional
economic and weather conditions. Approximately 54% of our hotel rooms and 56% of
our hotel EBITDA for the year ended December 31, 2002, were generated from
hotels located in four states: California, Florida, Georgia and Texas.
Additionally, we have concentrations in three major metropolitan areas, Atlanta,
San Francisco Bay Area and Dallas, which represented approximately 20% of our
hotel EBITDA for the year ended December 31, 2002. Therefore, adverse economic
or weather conditions in these states or metropolitan areas will have a greater
effect on us than similar conditions in other states.

We have designated 33 hotels as non-strategic and intend to sell them
within the next 36 months. We may be unable to sell the 33 hotels at acceptable
prices, or at all, within the proposed time frame; and we may be unable to
acquire suitable replacement properties at acceptable prices, or at all, which
could trigger substantial penalties payable to Six Continents Hotels under our
management agreements. Furthermore, if we sell these hotels and fail to reinvest
the net proceeds in assets with returns equal to, or better than, the hotels
sold, our results of operations will be adversely affected.

We are subject to possible adverse effects of franchise and licensing
agreement requirements. Substantially all of our hotels are operated under
existing franchise or license agreements with nationally recognized hotel
brands. Each such agreement requires that the licensed hotel be maintained and
operated in accordance with specific standards and restrictions in order to
maintain uniformity within the franchisor system. Compliance with these
standards could require us to incur significant expenses or capital
expenditures, which could adversely affect our results of operations and ability
to make distributions to our partners and

10

payments on our indebtedness. Also, changes to these standards could conflict
with a hotel's specific business plan or limit our ability to make improvements
or modifications to a hotel without the consent of the brand owner.

If such an agreement terminates due to our failure to make required
improvements, we may be liable to the brand manager or franchisor for a
termination payment. These termination payments vary by agreement and hotel. The
loss of a substantial number of brand licenses, and the related termination
payments, could have a material adverse effect on our business because of the
loss of associated name recognition, marketing support and centralized
reservation systems provided by the brand manager or franchisor. The franchise
agreements could also expire or terminate, with specified renewal rights, at
various times. As a condition to renew, the franchise agreements could involve a
renewal application process that would require substantial capital improvements
to be made to the hotels for which we would be responsible. The agreements
providing franchise licenses with respect to 15 of our hotels expire within the
next five years.

We are subject to the risks of brand concentration. We are subject to
the potential risks associated with concentration of our hotels under a limited
number of brands. A negative public image or other adverse event that becomes
associated with the brand could adversely affect hotels operated under that
brand. The following percentages of our hotels' EBITDA were generated by hotels
operated under each of the indicated brands during the year ended December 31,
2002:

o Embassy Suites Hotels 42%

o Holiday Inn-branded hotels 26%

o Crowne Plaza 11%

o Sheraton 8%

o Doubletree-branded hotels 6%

Should any of these brands suffer a significant decline in popularity
with the traveling public, it could adversely affect our revenues and
profitability.

We are subject to the risks of hotel operations. Through our ownership
of our lessees, we are subject to the risk of fluctuating hotel operating
expenses at our hotels, including but not limited to:

o wage and benefit costs;

o repair and maintenance expenses;

o the costs of gas and electricity;

o the costs of insurance, including health, general liability
and workers compensation; and

o other operating expenses.

These operating expenses are more difficult to predict and control than
revenue, resulting in an increased risk of volatility in our results of
operations.

The lodging business is seasonal in nature. Generally, hotel revenues
for our hotel portfolio are greater in the second and third calendar quarters
than in the first and fourth calendar quarters, although this may not be true
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 can be expected to cause
quarterly fluctuations in our revenues. Quarterly earnings also may be adversely
affected by events beyond our control, such as extreme weather conditions,
economic factors and other considerations affecting travel.

We lack control over the management and operations of our hotels. We
are dependent on the ability of unaffiliated third party managers to operate and
manage our hotels. In order to maintain FelCor's REIT

11

status, we cannot operate our hotels or any subsequently acquired 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, the salary and benefits provided to hotel employees, the
conduct of food and beverage operations and similar matters.

OUR ABILITY TO GROW OR SUSTAIN OUR BUSINESS MAY BE LIMITED BY OUR ABILITY TO
ATTRACT DEBT OR EQUITY FINANCING AND WE MAY HAVE DIFFICULTY ACCESSING CAPITAL ON
ATTRACTIVE TERMS

We may not be able to fund future growth and operations solely from
cash provided from operating activities because of recent declines in cash flows
and our requirement to distribute at least 90% of our taxable income each year
to FelCor who, in turn, must distribute it to its stockholders to maintain its
status as a REIT. Consequently, we rely upon the availability of debt or equity
capital to fund hotel acquisitions and discretionary capital improvements and we
may be dependent upon our ability to attract debt financing from public or
institutional lenders. The capital markets have been adversely affected by the
occurrence of recent events, including the possibility of war in Iraq, the
terrorist attacks on September 11, 2001, the ongoing war against terrorism by
the United States and the bankruptcy of several major companies, such as Enron
Corp. These events, or an escalation in the anti-terrorism war, new terrorist
attacks, the war in Iraq or additional bankruptcies in the future, could
adversely affect the availability and cost of capital for our business. We
cannot assure you that we will be successful in attracting sufficient debt or
equity financing to fund future growth and operations at an acceptable cost, or
at all.

WE OWN AND MAY ACQUIRE INTERESTS IN HOTEL VENTURES WITH THIRD PARTIES THAT
EXPOSE US TO SOME RISK OF ADDITIONAL LIABILITIES

We own, through our subsidiaries, interests in several real estate
ventures with third parties. Those ventures that are not consolidated into our
financial statements, own a total of 29 hotels, in which we have an aggregate
investment of approximately $142 million. The operations of 15 of these hotels
are included in our consolidated results of operations due to our ownership of
the lessee of the hotels. None of our directors or officers holds any interest
in any of these ventures. The ventures and hotels were subject to non-recourse
mortgage loans aggregating approximately $268 million at December 31, 2002.
Additionally, one joint venture had a $97.6 million advance type construction
loan for a residential condominium development that has been guaranteed equally
on a several basis by us and our joint venture partner. At December 31, 2002,
there was $11.4 million outstanding on this loan, of which we have guaranteed
our pro rata share of $5.7 million at December 31, 2002. The personal liability
of our subsidiaries under the non-recourse loans is generally limited to the
guaranty of the borrowing ventures' personal obligations to pay for the lender's
losses caused by misconduct, fraud or misappropriation of funds by the ventures
and other typical exceptions from the non-recourse covenants in the mortgages,
such as those relating to environmental liability. We may invest in other
ventures in the future that own hotels and have recourse or non-recourse debt
financing. If a venture defaults under its mortgage loan, the lender may
accelerate the loan and demand payment in full before taking action to foreclose
on the hotel. As a partner or member in any of these ventures, our subsidiary
may be exposed to liability for claims asserted against the venture, and the
venture may not have sufficient assets or insurance to discharge the liability.
Our subsidiaries may not legally be able to control decisions being made
regarding these ventures and their hotels. In addition, the hotels in a venture
may perform at levels below expectations, resulting in the potential for
insolvency of the venture unless the partners or members provide additional
funds. In some ventures, the partners or members may elect to make additional
capital contributions. In many of the foregoing events, we may be faced with the
choice of losing our investment in the venture or investing more capital in it
with no guaranty of receiving a return on that investment.

FELCOR IS SUBJECT TO POTENTIAL TAX RISKS

The federal income tax laws governing REITs are complex. FelCor has
operated and intends to continue to operate in a manner that is intended to
enable them to qualify as a REIT under the federal income tax laws. The REIT
qualification requirements are extremely complicated, and interpretations of the
federal income tax laws governing qualification as a REIT are limited.
Accordingly, FelCor cannot be certain that they have been, or will continue to
be, successful in operating so as to qualify as a REIT. At any time, new laws,
interpretations or court decisions may change the federal tax laws relating to,
or the federal income tax consequences of, qualification as a REIT.

12

Failure to make required distributions would subject FelCor to tax.
Each year, a REIT must pay out to its stockholders at least 90% of its taxable
income, other than any net capital gain. To the extent that FelCor satisfies the
applicable distribution requirement, but distributes less than 100% of their
taxable income, they will be subject to federal corporate income tax on their
undistributed taxable income. In addition, they will be subject to a 4%
nondeductible tax if the actual amount they pay out to their stockholders in a
calendar year is less than a minimum amount specified under federal tax laws.
FelCor's only source of funds to make such distributions comes from
distributions from us. Accordingly, we may be required to borrow money or sell
assets to make distributions sufficient to enable FelCor to pay out enough of
its taxable income to satisfy the applicable distribution requirement and to
avoid corporate income tax and the 4% tax in a particular year.

Failure to qualify as a REIT would subject FelCor to federal income
tax. If FelCor fails to qualify as a REIT in any taxable year, they would be
subject to federal income tax on their taxable income. We might need to borrow
money or sell hotels in order to distribute to FelCor the funds to pay any such
tax. If FelCor ceases to be a REIT, they no longer would be required to
distribute most of their taxable income to their stockholders. Unless their
failure to qualify as a REIT were excused under federal income tax laws, FelCor
could not re-elect REIT status until the fifth calendar year following the year
in which they failed to qualify.

Failure to have distributed earnings and profits of Bristol Hotel
Company in 1998 could cause FelCor to fail to qualify as a REIT. At the end of
any taxable year, a REIT may not have any accumulated earnings and profits,
described generally for federal income tax purposes as cumulative undistributed
net income, from a non-REIT corporation. In connection with the merger of
Bristol Hotel Company, or Bristol, with and into FelCor in 1998, Arthur Andersen
LLP prepared and provided to FelCor its computation of Bristol's accumulated
earnings and profits through the date of the merger, and FelCor made a
corresponding special distribution to their stockholders. However, the
determination of accumulated earnings and profits for federal income tax
purposes is extremely complex and the computations by any professional service
firm are not binding upon the Internal Revenue Service. Should the Internal
Revenue Service successfully assert that Bristol's accumulated earnings and
profits were greater than the amount so distributed by FelCor, they may fail to
qualify as a REIT. Alternatively, the Internal Revenue Service may permit FelCor
to avoid losing its REIT status by paying a deficiency dividend to eliminate any
remaining accumulated earnings and profits of Bristol. There can be no
assurance, however, that FelCor would be able to make any such required
distribution or that the Internal Revenue Service would not assert loss of REIT
status as the penalty for failing to distribute any accumulated earnings and
profits of Bristol in 1998.

A sale of assets acquired from Bristol within ten years after the merger
may result in corporate income tax. If we sell any asset acquired from Bristol
within ten years after our merger with Bristol, and we recognize a taxable gain
on the sale, we will be taxed at the highest corporate rate on an amount equal
to the lesser of:

o the amount of gain that we recognize at the time of the sale;
or

o the amount of gain that we would have recognized if we had
sold the asset at the time of the Bristol merger for its then
fair market value.

The sales of Bristol hotels that have been made to date have not
resulted in any material amount of tax liability. If we are successful in
selling the hotels that we have designated as non-strategic, the majority of
which are Bristol hotels, we could incur corporate income tax with respect to
the related built in gain, the amount of which cannot yet be determined.

13

DEPARTURE OF KEY PERSONNEL, INCLUDING MR. CORCORAN, COULD ADVERSELY AFFECT OUR
FUTURE OPERATING RESULTS

WE WILL ENCOUNTER RISKS THAT MAY ADVERSELY AFFECT REAL ESTATE OWNERSHIP

General Risks. Our investments in hotels are subject to the numerous
risks generally associated with owning real estate, including among others:

o adverse changes in general or local economic or real estate
market conditions;

o changes in zoning laws;

o changes in traffic patterns and neighborhood characteristics;

o increases in assessed valuation and real estate tax rates;

o increases in the cost of property insurance;

o governmental regulations and fiscal policies;

o the potential for uninsured or underinsured property losses;

o the impact of environmental laws and regulations; and

o other circumstances beyond our control.

Moreover, real estate investments are relatively illiquid, and we may
not be able to vary our portfolio in response to changes in economic and other
conditions.

Compliance with environmental laws may adversely affect our financial
condition. Owners of real estate are subject to numerous federal, state, local
and foreign environmental laws and regulations. Under these laws and
regulations, a current or former owner of real estate may be liable for the
costs of remediating hazardous substances found on its property, whether or not
it was responsible for their presence. In addition, if an owner of real property
arranges for the disposal of hazardous substances at another site, it may also
be liable for the costs of remediating the disposal site, even if it did not own
or operate the disposal site. Such liability may be imposed without regard to
fault or the legality of a party's conduct and may, in certain circumstances, be
joint and several. A property owner may also be liable to third parties for
personal injuries or property damage sustained as a result of its release of
hazardous or toxic substances, including asbestos-containing materials, into the
environment. Environmental laws and regulations may require us to incur
substantial expenses and limit the use of our properties. We could have
substantial liability for a failure to comply with applicable environmental laws
and regulations, which may be enforced by the government or, in certain
instances, by private parties. The existence of hazardous substances on a
property can also adversely affect the value of, and the owner's ability to use,
sell or borrow against, the property.

We cannot provide assurances that future or amended laws or
regulations, or more stringent interpretations or enforcement of existing
environmental requirements, will not impose any material environmental
liability, or that the environmental condition or liability relating to the
hotels will not be affected by new information or changed circumstances, by the
condition of properties in the vicinity of such hotels, such as the presence of
leaking underground storage tanks, or by the actions of unrelated third parties.

Compliance with the Americans with Disabilities Act may adversely
affect our financial condition. Under the Americans with Disabilities Act of
1990, all public accommodations, including hotels, are required to meet certain
federal requirements for access and use by disabled persons. Various state and
local jurisdictions have also adopted requirements relating to the accessibility
of buildings to disabled persons. We believe that our hotels substantially
comply with the requirements of the Americans with Disabilities Act and other
applicable laws. However, a determination that the hotels are not in compliance
with such laws could result in liability for both governmental fines and
payments to private parties. If we were required to make unanticipated major
modifications to the hotels to comply with the requirements of the Americans
with Disabilities Act and other similar laws, it could adversely affect our
ability to make distributions to our partners and to pay our obligations.

14

FELCOR'S CHARTER CONTAINS LIMITATIONS ON OWNERSHIP AND TRANSFER OF SHARES OF ITS
STOCK THAT COULD ADVERSELY AFFECT ATTEMPTED TRANSFERS OF FELCOR COMMON STOCK

To maintain FelCor's status as a REIT, no more than 50% in value of
their outstanding stock may be owned, actually or constructively, under the
applicable tax rules, by five or fewer persons during the last half of any
taxable year. FelCor's charter prohibits, subject to some exceptions, any person
from owning more than 9.9%, as determined in accordance with the Internal
Revenue Code and the Exchange Act, of the number of outstanding shares of any
class of its stock. FelCor's charter also prohibits any transfer of their stock
that would result in a violation of the 9.9% ownership limit, reduce the number
of stockholders below 100 or otherwise result in their failure to qualify as a
REIT. Any attempted transfer of shares in violation of the charter prohibitions
will be void, and the intended transferee will not acquire any right in those
shares. FelCor has the right to take any lawful action that they believe
necessary or advisable to ensure compliance with these ownership and transfer
restrictions and to preserve their status as a REIT, including refusing to
recognize any transfer of stock in violation of its charter.

SOME PROVISIONS IN ITS CHARTER AND BYLAWS AND MARYLAND LAW MAKE A TAKEOVER OF
FELCOR MORE DIFFICULT

Ownership Limit. The ownership and transfer restrictions of FelCor's
charter may have the effect of discouraging or preventing a third party from
attempting to gain control of us without the approval of FelCor's board of
directors. Accordingly, it is less likely that a change in control, even if
beneficial to partners, could be effected without the approval of FelCor's
board.

Staggered Board. FelCor's board of directors is divided into three
classes. Directors in each class are elected for terms of three years. As a
result, the ability of stockholders to effect a change in control of FelCor
through the election of new directors is limited by the inability of
stockholders to elect a majority of their board at any particular meeting.

Authority to Issue Additional Shares. Under FelCor's charter, their
board of directors may issue preferred stock without stockholder action. The
preferred stock may be issued, in one or more series, with the preferences and
other terms designated by FelCor's board that may delay or prevent a change in
control of FelCor, even if the change is in the best interests of its
stockholders or our partners. FelCor currently has outstanding 5,980,475 shares
of their Series A preferred stock and 67,758 shares, represented by 6,775,800
depositary shares, of their Series B preferred stock. FelCor has contributed the
proceeds of all of its preferred stock to us in exchange for preferred units.
The preference on these units is the same as FelCor's preferred stock. The
preferred stock and units reduce the amount of distributions available, and has
distribution, liquidation and other rights superior, to the holders of FelCor's
common stock and our common units.

Maryland Takeover Statutes. As a Maryland corporation, FelCor is
subject to various provisions under the Maryland General Corporation Law,
including the Maryland business combination statute, that may have the effect of
delaying or preventing a transaction or a change in control that might involve a
premium price for the stock or otherwise be in the best interests of
stockholders. Under the Maryland business combination statute, some "business
combinations," including some issuances of equity securities, between a Maryland
corporation and an "interested stockholder," which is any person who
beneficially owns 10% or more of the voting power of the corporation's shares,
or an affiliate of that stockholder, are prohibited for five years after the
most recent date on which the interested stockholder becomes an interested
stockholder. Any of these business combinations must be approved by a
stockholder vote meeting two separate super majority requirements unless, among
other conditions, the corporation's common stockholders receive a minimum price,
as defined in the statute, for their shares and the consideration is received in
cash or in the same form as previously paid by the interested stockholder for
its common shares. FelCor's charter currently provides that the Maryland control
share statute will not apply to any of their existing or future stock. That
statute may deny voting rights to shares involved in an acquisition of one-tenth
or more of the voting stock of a Maryland corporation. To the extent these or
other laws are applicable to FelCor or us, they may have the effect of delaying
or preventing a change in control of FelCor even though beneficial to FelCor's
stockholders.

15

ITEM 2. PROPERTIES

We own a diversified portfolio of nationally branded, upscale and
full-service hotels managed by its strategic brand managers, which are Hilton,
Six Continents Hotels, and Starwood. We are competitively positioned, with a
strong management team, strategic brand manager alliances, diversified upscale
and full-service hotels, and value creation expertise.

We consider our hotels, generally, to be high quality lodging
properties with respect to desirability of location, size, facilities, physical
condition, quality and variety of services offered in the markets in which they
are located. Our hotels are designed to appeal to a broad range of hotel
customers, including frequent business travelers, groups and conventions, as
well as leisure travelers. The hotels generally feature comfortable, modern
guest rooms, extensive meeting and convention facilities and full-service
restaurant and catering facilities. Our hotels are located in 35 states and
Canada, and are situated primarily in major markets near airport, suburban or
downtown areas. The following tables illustrate the distribution of our hotels.

Our hotels have an average of approximately 275 rooms, with eight of
them having more than 500 rooms. Although obsolescence arising from age and
condition of facilities can adversely affect our hotels, we have invested in
excess of $600 million, in the aggregate, during the past five years to upgrade,
renovate and/or redevelop our hotels to enhance their competitive position. We
are committed to maintaining the high

16

standards of our hotels and spend at least 4% of hotel revenues annually for
maintenance and repair programs, in addition to necessary capital.

HOTEL BRANDS

A key part of our business strategy is to have our hotels managed by
one of our strategic brand managers. Our hotels are operated under some of the
nation's most recognized and respected hotel brands. We maintain strategic
relationships with our brand owners, who also manage substantially all of our
hotels. We are the owner of the largest number of Embassy Suites Hotels, Crowne
Plaza, Holiday Inn and independently owned Doubletree-branded hotels. The
following table illustrates the distribution of our hotels among these premier
brands.

BRAND DISTRIBUTION

17

HOTEL OPERATING STATISTICS

The following tables set forth historical occupied rooms, or Occupancy,
ADR and RevPAR at December 31, 2002 and 2001, and the percentage changes therein
between the periods presented for our 169 consolidated hotels:

OPERATING STATISTICS BY BRAND

18

OPERATING STATISTICS FOR OUR TOP TEN MARKETS

19

Embassy Suites Hotels

Embassy Suites Hotels are upscale, full-service, all-suite hotels
designed to attract frequent business travelers, leisure travelers and weekend
guests. Embassy Suites Hotels typically offer numerous services and amenities,
such as:

o two-room suites, containing two telephones, a
mini-refrigerator, coffeemaker, microwave oven, wet bar, and
two color televisions;

o complimentary, cooked-to-order breakfast;

o complimentary cocktails during two hours every evening,
subject to local laws and regulations, in an atrium
environment; and

o business centers equipped with fax and copy machines.

Holiday Inn and Holiday Inn Select Hotels

The Holiday Inn brand is positioned to attract the business and leisure
traveler seeking up-to-date products and features, value and friendly service.
Holiday Inn hotels typically offer a full-service restaurant and lounge,
swimming pool, meeting and banquet facilities, optional fitness center and
electronic locks. In-room amenities generally include a hair dryer, coffeemaker
and iron. The Holiday Inn name is recognized around the world, with more than
1,500 hotels currently being operated under this brand.

The Holiday Inn Select hotels focus on the business traveler. Each room
offers a residential decor with a well-lit work area, including a dataport and
voicemail, and in-room coffeemakers. Amenities offered at the Holiday Inn Select
hotels generally include full business services, such as photocopying and
telecopying, meeting capabilities for small to mid-size groups, exercise
facilities and a full-service restaurant and lounge.

The Holiday Inn, Holiday Inn Select and Crowne Plaza brands are part of
the family of brands owned, operated and franchised by Six Continents Hotels.
Six Continents Hotels owns, operates or franchises more than 3,300 hotels with
approximately 515,000 guest rooms in nearly 100 countries around the world.

Crowne Plaza Hotels

Crowne Plaza hotels offer upscale accommodations for business and
leisure travelers looking for a full range of services. Guests receive
personalized attention through a wide variety of premium guest service offerings
which typically include: fully appointed guest rooms with ample work areas, a
full complement of business services, excellent dining choices, quality fitness
facilities and comprehensive meeting capabilities. There are currently 193
Crowne Plaza hotels in 49 countries around the world.

Doubletree and Doubletree Guest Suites Hotels

Doubletree hotels and Doubletree Guest Suites are part of an upscale,
full-service hotel chain that primarily serves major metropolitan areas and
leisure destinations. Each property attempts to reflect the local or regional
environment in its design. Typical properties offer a full-service restaurant
and lounge, room service, swimming pool, health club, complete meeting and
banquet facilities, oversized guest rooms and luxury amenities.

Sheraton and Sheraton Suites

Sheraton hotels, including Sheraton Suites, are part of Starwood, which
owns the Sheraton, Westin and other brand names. There are currently more than
400 Sheraton hotels and resorts in over 70 countries. Sheraton hotels typically
offer a wide variety of on-site business services, a full range of amenities and
rooms that feature generous work spaces. In more than 150 locations, Sheraton
Smart Rooms feature ergonomically designed chairs, ample task lighting, modem
hookups and personalized voice mail, as well as printing, copying and faxing
capabilities. Starwood owns, leases, manages or franchises more than 750
properties in over 80 countries.

20

Other Hotels

As of December 31, 2002, 19 of our hotels were operated under other
brands, as follows:

o Hampton Inn (5 hotels);

o Holiday Inn Express (3 hotels);

o Harvey Hotel (4 hotels);

o Hilton Suites (1 hotel);

o Homewood Suites (1 hotel);

o Westin (1 hotel);

o Wyndham(1) (1 hotel); and

o Independent (3 hotels).

- ------------------
(1) This hotel is scheduled to convert to a Hilton in April 2003.

21

HOTEL PORTFOLIO

The following table sets forth certain descriptive information regarding our
hotels at December 31, 2002:

- ----------------------------

(1) We own 100% of the real estate interests unless otherwise
noted.

(2) Encumbered by mortgage debt.

(3) Conversion to a Hilton hotel is expected in April 2003.

(4) Converted to a Staybridge Suites hotel in March 2003.

MANAGEMENT AGREEMENTS

In July 2001, we acquired the leasehold interests in 88 hotels from Six
Continents Hotels. In connection with this acquisition, Six Continents Hotels
assigned the leases to those hotels to our TRSs, and the TRSs executed new
management agreements with Six Continents Hotels for each of the 88 hotels that
was previously leased.

Additionally, as a result of our acquisition of DJONT, our TRSs became
parties to management agreements with subsidiaries of Hilton, including Promus
Hotels, Inc. and its affiliates, DT Management, Inc. and its affiliates, and
subsidiaries of Starwood, including Sheraton Operating Corporation and its
affiliates.

25

The management agreements governing the operation of 95 of our hotels
that are (i) managed by Six Continents Hotels or Starwood under brands owned by
them, or (ii) managed by Hilton under the Doubletree brand, contain the right
and license to operate the hotels under the specified brands. No separate
franchise agreements are required for the operation of these hotels.

Management Fees and Performance Standards. Under the management
agreements with Six Continents Hotels, the TRS lessees generally pay Six
Continents Hotels a basic management fee for each hotel equal to 2% of total
revenue of the hotel plus 5% of the room revenue of the hotel for each fiscal
month during the initial term and any renewal term. The basic management fees
owed under the other management agreements are generally as follows:

o Doubletree -- between 2% and 3% of the hotel's total revenue
per month;

o Sheraton -- 2% of the hotel's total revenue per month; and

o Embassy Suites Hotels -- 2% of the hotel's total revenue per
month.

Under the management agreements with Six Continents Hotels, the TRS
lessees are required to pay an incentive management fee based on the performance
of all the managed hotels, considered in the aggregate. The incentive management
fee is computed as a percentage of hotel profits in excess of specified returns
to us, based on our investment in the managed hotels. The management agreements
with the other managers generally provide for an incentive management fee based
on a percentage of the TRS lessee's net income before overhead, on a hotel by
hotel basis.

Term and Termination. The management agreements with Six Continents
Hotels generally have initial terms of 12 to 17 years. Six Continents Hotels may
renew the management agreements for one additional five-year term on mutually
acceptable terms and conditions, provided the hotel meets certain performance
standards. The TRSs may elect not to continue to operate the hotels under the
brand beyond the expiration of the initial term, however such election will give
Six Continents Hotels the right to force us to sell such hotel to it at an
appraised value. The management agreements with the other managers generally
have initial terms of between 10 and 20 years, and the agreements are generally
renewable beyond the initial term for a period or periods of between five and 10
years only upon the mutual written agreement of the parties. Management
agreements covering 64 of our hotels expire, subject to any renewal rights,
within the next five years.

The management agreements are generally terminable upon the occurrence
of standard events of default or if the hotel subject to the agreement fails to
meet certain financial expectations. Upon termination by either party for any
reason the TRSs generally will pay all amounts due and owing under the
management agreement through the effective date of such termination. Under the
Six Continents Hotels management agreements, if we sell any individual hotel, we
may be required to pay Six Continents Hotels a monthly replacement management
fee equal to the existing fee structure for up to one year. In addition, if a
TRS breaches the agreement, resulting in a default and termination thereof, or
otherwise causes or suffers a termination for any reason other than an event of
default by Six Continents Hotels, the TRS may be liable for liquidated damages
under the terms of the management agreement. However, if the termination results
from the sale of a hotel, no such liquidated damages will be owed if the net
proceeds of the sold hotel are reinvested to purchase one or more hotels
licensed and managed by Six Continents Hotels within one year from the sale of
the hotel.

Assignment. Generally, neither party to the management agreements has
the right to sell, assign or transfer the agreements to an unaffiliated third
party without the prior written consent of the other party to the agreement,
which consent shall not be unreasonably withheld. A change in control of either
party will generally require the other's consent, which may not be unreasonably
withheld.

FRANCHISE AGREEMENTS

With the exception of our 95 hotels whose rights to use a brand name
are contained in the management agreement governing their operations and our
seven hotels that do not operate under a nationally recognized brand name, each
of our hotels operates under a franchise or license agreement. Of our 67 hotels

26

that are operated under a franchise or license agreement, 59 are operated under
the Embassy Suites Hotels brand.

The Embassy Suites Hotels franchise license agreements to which we are
a party grant us the right to the use of the Embassy Suites Hotels name, system
and marks with respect to specified hotels and establish various management,
operational, record-keeping, accounting, reporting and marketing standards and
procedures with which the licensed hotel must comply. In addition, the
franchisor establishes requirements for the quality and condition of the hotel
and its furnishings, furniture and equipment, and we are obligated to expend
such funds as may be required to maintain the hotel in compliance with those
requirements.

Typically, our Embassy Suites Hotels franchise license agreements
provide for payment to the franchisor of a license fee or royalty of 4% of suite
revenues. In addition, we pay approximately 3.5% of suite revenues as marketing
and reservation system contributions for the systemwide benefit of Embassy
Suites Hotels.

Our typical Embassy Suites Hotels franchise license agreement provides
for a term of 20 years, but we have a right to terminate the license for any
particular hotel on the 10th or 15th anniversary of the agreement upon payment
by us of an amount equal to the fees paid to the franchisor with respect to that
hotel during the two preceding years. The agreements provide us with no renewal
or extension rights. The agreements are not assignable by us and a change in
control of the franchisee will constitute a default on our part. In the event we
breach one of these agreements, in addition to losing the right to use the
Embassy Suites Hotels name for the operation of the applicable hotel, we may be
liable, under certain circumstances, for liquidated damages equal to the fees
paid to the franchisor with respect to that hotel during the three preceding
years. Franchise license agreements covering nine of our Embassy Suites Hotels
expire within the next five years.

ITEM 3. LEGAL PROCEEDINGS

There is no litigation pending or known to be threatened against us or
affecting any of our hotels, other than claims arising in the ordinary course of
business or which are not considered to be material. Furthermore, most of these
claims are substantially covered by insurance. We do not believe that any claims
known to us, individually or in the aggregate, will have a material adverse
effect on us, without regard to any potential recoveries from insurers or other
third parties.

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

Not applicable.

27

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

There is not an established public trading market for our common
units. The units, however, are redeemable at the option of the holder for a like
number of shares of common stock of FelCor or, at the option of FelCor, for the
cash equivalent thereof. The following information is provided regarding the
common stock of FelCor. FelCor's common stock is traded on the New York Stock
Exchange under the symbol "FCH." The following table sets forth for the
indicated periods the high and low sale prices for its common stock, as traded
on that exchange.

STOCKHOLDER INFORMATION

At March 17, 2003, FelCor had approximately 465 holders of record of
their common stock and approximately 55 holders of record of their Series A
preferred stock (which is convertible into common stock). It is estimated that
there were approximately 16,200 beneficial owners, in the aggregate, of FelCor's
common stock and Series A preferred stock at that date. At March 17, 2003, we
had approximately 36 holders of record of our common units.

IN ORDER TO COMPLY WITH CERTAIN REQUIREMENTS RELATED TO FELCOR'S
QUALIFICATION AS A REIT, FELCOR'S CHARTER LIMITS, SUBJECT TO CERTAIN EXCEPTIONS,
THE NUMBER OF SHARES OF COMMON STOCK THAT MAY BE OWNED BY ANY SINGLE PERSON OR
AFFILIATED GROUP TO 9.9% OF THE OUTSTANDING COMMON STOCK.

DISTRIBUTION INFORMATION

We have, historically, had a policy of paying regular quarterly
distributions on our common units, and cash distributions have been paid on our
common units with respect to each quarter since our inception. However, on
February 4, 2003, we announced that, as the result of the uncertain political
environment and soft business climate, together with the risk of further margin
deterioration should we continue to experience declines in our portfolio's
average daily rate, we do not expect FelCor's board of directors to declare
future common distributions until there is a 2 to 4% increase in hotel RevPAR.
We currently expect to determine the amount of each future quarterly common and
preferred distribution, if any, based upon the operating results of that
quarter, economic conditions and other operating trends. Future distributions,
if any, paid by us will be at the discretion of FelCor's board of directors and
will depend on our actual cash flow, financial condition, capital requirements,
the annual distribution requirements for FelCor under the REIT provisions of the
Internal Revenue Code and such other factors as FelCor's board of directors
deems relevant.

28

The following table sets forth information regarding the declaration
and payment of distributions by us on our units during 2001 and 2002.

The foregoing distributions represent approximately a 30% return of
capital in 2002 and a 45% return of capital in 2001. In order to maintain
FelCor's qualification as a REIT, they must make annual distributions to their
stockholders of at least 90% of taxable income (which does not include net
capital gains). For the years ended December 31, 2002 and December 31, 2001,
FelCor had annual distributions totaling $0.60 and $1.70 per common share,
respectively, of which only $0.23 and $0.41 per share, respectively, were
required to satisfy the 90% REIT distribution tests in the respective years. All
of such funds were provided by us through distributions on our units. Under
certain circumstances we may be required to make distributions in excess of cash
available for distribution in order to meet FelCor's REIT distribution
requirements. In that event, we presently would expect to borrow funds, or to
sell assets for cash, to the extent necessary to obtain cash sufficient to make
the distributions required to retain FelCor's qualification as a REIT for
federal income tax purposes.

ISSUANCES OF UNREGISTERED SECURITIES

None.

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth the number of FelCor's securities to be
issued upon exercise of outstanding options, warrants and rights; weighted
average exercise price of outstanding options, warrants and rights; and the
number of securities remaining available for future issuance.

EQUITY COMPENSATION PLAN INFORMATION

29

ITEM 6. SELECTED FINANCIAL DATA

The following tables set forth selected financial data for us for the
years ended December 31, 2002, 2001, 2000, 1999, and 1998 that has been derived
from our audited financial statements and the notes thereto. This data should be
read in conjunction with Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, and Item 15(a), the Consolidated
Financial Statements and Notes thereto, appearing elsewhere in this Annual
Report on Form 10-K.

SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

- ----------

(1) Includes hotel revenue and expenses with respect to 88 hotels that were
leased to Six Continents Hotels prior to July 1, 2001. Prior to acquisition of
these leases, our revenues with respect to these 88 hotels were comprised mainly
of percentage lease revenues. Accordingly, revenues, expenses and operating
results for the year ended December 31, 2002, are not directly comparable to the
same period in 2001. Additionally, for the year ended December 31, 2002, we
recognized impairment charges totaling $157.5 million. This impairment resulted
primarily from our decision to dispose of 33 non-strategic hotels over the next
36 months.

(2) Includes hotel revenues and expenses with respect to 96 hotels that were
leased to either DJONT or subsidiaries of Six Continents Hotels prior to January
1, 2001, and 88 hotels that were leased to Six Continents Hotels prior to July
1, 2001. Prior to the acquisition of the leases, our revenues were comprised
mainly of percentage lease revenues. Accordingly, revenues, expenses and
operating results for the year ended December 31, 2001, are not directly
comparable to the same period in 2000. Additionally, for the year ended December
31, 2001, we recorded approximately $78 million of expenses, including lease
termination costs of $36.6 million, merger termination costs of $19.9 million,
merger related financing costs of $5.5 million, swap termination costs of $7.0
million, loss on hotels held for sale of $7.0 million, the write-off of deferred
loan costs of $1.3 million, and abandoned project write-offs of $0.8 million.

(3) In the second quarter of 2000, we recorded a $63.0 million loss to reflect
the difference between our book value and the expected realizable value of 25
hotels in connection with our decision to sell these non-strategic hotel assets,
and an extraordinary charge of $3.9 million for the write-off of deferred loan
costs associated with debt retired in 2000, prior to its maturity.

(4) On July 28, 1998, we completed the merger of Bristol Hotel Company's real
estate holdings with and into FelCor. The merger resulted in the net acquisition
of 107 primarily full-service hotels in return for approximately 31 million
shares of newly issued common stock. FelCor subsequently contributed all assets
and liabilities acquired in the merger to us, in exchange for approximately 31
million units.

(5) In 2002, we paid distributions of $0.15 per unit each quarter, and in the
fourth quarter of 2001, we paid distributions of $0.05 per unit. This represents
a reduction in distributions compared to periods prior to the fourth quarter of
2001, and was prompted by the decrease in revenues resulting from the disruption
in travel-related businesses and the general economic downturn that began in
2001. In 1998, we declared a special distribution of accumulated but
undistributed earnings and profits as a result of Bristol Hotel Company merging
with and into FelCor, in addition to the aggregate quarterly distributions of
$2.20 per unit. The amount of the special distribution was $0.345 per unit.

(6) A more detailed description and computation of FFO and EBITDA is contained
in the "Funds From Operations and EBITDA" section of Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 7 below.

30

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

For background information relating to us and the definitions of
certain capitalized terms used herein, reference is made to the Notes to
Consolidated Financial Statements of FelCor Lodging Limited Partnership
appearing elsewhere in this Annual Report on Form 10-K.

The current economic downturn, which started in 2001, resulted in a
decline in lodging demand for 2001 that continued into 2002. This had an adverse
effect on our operating results for these years. For the year ended December 31,
2002, our hotels' revenue per available room, or RevPAR, decreased by 8.1%
compared to 2001. This decline resulted in lower revenues from our hotels and a
reduction in our operating income. Also affecting our results of operations for
2002, were impairment related charges of $157.5 million resulting primarily from
our decision to designate 33 hotels as non-strategic and to sell them over the
next 36 months.

We raised a net total of $24 million in new equity capital during 2002,
through the issuance of FelCor's Series B preferred stock. FelCor contributed
the proceeds to us in exchange for our Series B preferred units. We had no
borrowings under our line of credit at December 31, 2002.

FINANCIAL COMPARISON

(1) The net loss for the year ended December 31, 2002, includes
$157.5 million in impairment related charges, principally
associated with our decision to sell 33 non-strategic hotels
over the next 36 months.

(2) The net loss for the year ended December 31, 2001, includes
$78.1 million of expenses, consisting of merger termination
costs of $19.9 million, merger related financing costs of $5.6
million, lease termination costs of $36.6 million, swap
termination costs of $7.0 million, a loss on assets held for
sale of $7.0 million, abandoned project write-offs of $0.8
million, and a loss of $1.3 million from the write-off of
deferred loan costs.

(3) The net income for the year ended December 31, 2000, was
reduced by a $63 million loss recognized to reflect the
difference between our book value and the estimated realizable
value of 25 non-strategic hotel assets that we decided to
sell, and a $4 million loss from the write-off of deferred
loan costs.

REVPAR DECLINE

We experienced declines in RevPAR from March 2001 through August 2002.
An overall decline in both business and leisure travel was reflected in
decreased occupancies, which led to declines in room rates as hotels competed
more aggressively for guests, both of which had a significant adverse effect on
our RevPAR and operating performance. Our hotel RevPAR declined 8.1% in 2002,
compared to 2001. On a national basis, the hotel industry experienced RevPAR
declines of 2.5% and 7.0% for 2002 and 2001, respectively.

Our hotel occupancies declined by only 2.8% in 2002, compared to 2001,
while our average daily rates ("ADR") declined 5.5% from those experienced in
2001.

31

In 2002, our hotels had a 220 basis point drop in pro forma hotel
operating margins from the prior year. The compression in margins was
principally related to improving occupancies of our hotels coupled with
decreasing ADR. Also affecting hotel margins were increases in employee related
costs, marketing, and repair and maintenance costs.

We continue to actively work with our brand managers to increase
revenues and control operating costs, while still maintaining the satisfaction
and security of our hotel guests.

SALE OF NON-STRATEGIC HOTELS

In February 2003, we announced our plan to sell 33 non-strategic hotels
over the next 36 months, six of which had been previously designated as held for
sale. These non-strategic hotels include smaller hotels in secondary or tertiary
markets and include some Texas hotels, and specifically, hotels in Dallas, Texas
(an area in which we desire to reduce our concentration of hotels). It is our
intention to reinvest most of the proceeds from these sales in newer, larger and
higher quality hotels, primarily in urban and resort locations with higher
growth rates and barriers to competition. For those hotels currently managed by
Six Continents Hotels, we are liable for liquidated damages under the terms of
our management agreement, unless we reinvest the net proceeds to purchase one or
more hotels licensed and managed by Six Continents Hotels within one year of the
sale. We will seek to sell $50 to $75 million of these non-strategic hotels that
are unencumbered by debt and management agreement reinvestment requirements
during 2003, and use the proceeds from these sales to pay down debt. We recorded
$157.5 million in impairment related losses in 2002, principally related to
shorter hold periods associated with our decision to sell these non-strategic
hotels.

The 33 hotels identified as non-strategic represent 14% of our hotel
rooms, but less than 7% of our 2002 consolidated hotel EBITDA. These
non-strategic hotels have an average of 196 rooms, while the average number of
rooms for the remainder of our portfolio is 294.

RESULTS OF OPERATIONS

Comparison of the Years Ended December 31, 2002 and 2001

On July 1, 2001, we acquired operating leases covering 88 of our hotels
and contributed them to our TRSs. As the leases were acquired, we began
receiving and recording hotel revenues and expenses, rather than percentage
lease revenue, for these hotels. Consequently, the historical results for the
year ended December 31, 2002, and the year ended December 31, 2001, are not
directly comparable.

We recorded a net loss applicable to unitholders of $218.6 million in
2002, compared to a net loss of $74.7 million in 2001. The principal components
of the 2002 loss were impairment related charges of $157.5 million, principally
related to shorter holding periods associated with our decision to sell 33
non-strategic hotels; the decrease in hotel RevPAR of 8.1%; and contraction of
hotel operating margins, principally associated with the decline in RevPAR.

Total revenue for the year ended December 31, 2002, increased $117.0
million over 2001. The increase is principally associated with reporting hotel
operating revenues for 88 of the hotels during the first six months of 2002, of
$305.3 million, contrasted with percentage lease revenue we reported for these
hotels during the same period in 2001, of $115.1 million. This increase was
partially offset by a $62.0 million reduction in hotel operating revenues and an
$11.2 million net reduction from disposition and acquisition of hotels during
the periods reported.

Total operating expenses increased $114.4 million for the year ended
December 31, 2002, over 2001. This increase primarily resulted from the
inclusion of $208.3 million in hotel operating expenses, management fees and
other property related costs for the 88 hotels during the first six months of
2002 that were not included in the same period of 2001, prior to our acquisition
of the leases. Offsetting this increase were $19.9 million of merger termination
costs associated with the termination of the MeriStar Hospitality merger and
$36.6 million of lease termination costs associated with the acquisition of
hotel leases that were recorded in 2001.

32

Taxes, insurance and lease expense decreased $8.6 million, principally
as the result of decreases in lease expense of $9.7 million, and property taxes
of $4.1 million, partially offset by increased insurance costs of $5.2 million.
The decrease in lease expense is related to participating leases that are based
principally on revenues. Property taxes decreased principally from the
resolutions of prior year property tax disputes.

Included in the year ended December 31, 2002, were $1.7 million of
abandoned project costs related to our pursuit of a large portfolio acquisition.
We were unable to reach mutually acceptable pricing and terms with the seller as
a result of the uncertain operating environment and softening capital markets.
The year ended December 31, 2001, included $0.8 million of abandoned project
costs.

Recurring interest expense, net of interest income, increased $6.0
million for the year ended December 31, 2002, over 2001. The increase is
primarily related to excess cash that we carried during 2002, an increase in
average debt outstanding of $45.3 million, over 2001, and higher average
interest rates in 2002 resulting from our senior unsecured notes issued during
2001. The year ended December 31, 2002, included a $3.2 million charge-off of
capitalized costs from reduced line commitments. The prior year included $5.5
million of merger related financing costs related to the $300 million in senior
debt that was repaid in October 2001, and a $1.3 million loss related to the
charge-off of capitalized costs from reduced line commitments. Also in 2001, in
connection with the issuance of favorably priced fixed rate debt and the
prepayment of floating rate debt, we terminated $250 million of interest rate
swaps, resulting in a $7.0 million swap termination cost.

We recorded impairment related losses of $157.5 million during the
fourth quarter of 2002. Of these losses, $118.3 million primarily related to
shorter holding periods associated with our recent decision to sell 33 hotels
over the next 36 months. Six of these 33 hotels had been identified for sale in
prior periods and were included in the hotels for which an impairment loss of
$7.0 million was recorded in 2001. Of the remaining 2002 impairment charge:
$25.8 million related to two hotels held for investment that are not included in
the disposition plan and $13.4 million related to an other than temporary
decline in the value of certain equity method investments.

Equity in the income of unconsolidated entities decreased by $17.5
million, compared to 2001. The decrease in 2002 principally resulted from the
previously described $13.4 million impairment loss and an 8.6% drop in RevPAR
from our unconsolidated hotels.

Minority interests decreased $2.5 million for the year ended December
31, 2002, over 2001. Minority interest represents the proportionate share of the
income or loss of other consolidated subsidiaries not owned by us.

Partially offsetting the net loss for the year ended December 31, 2002,
was a gain of $5.1 million on the sale of retail space and $0.9 million on the
sale of a hotel. The net loss for the year ended December 31, 2001, was reduced
by a gain of $3.0 million related to condemnation proceeds received and a gain
of $0.4 million on the sale of land.

Comparison of the Year Ended December 31, 2002 with Pro Forma 2001

On July 1, 2001, we acquired the operating leases covering 88 of our
hotels and contributed them to our TRSs. As the leases were acquired, we began
receiving and recording hotel revenues and expenses, rather than percentage
lease revenue. Consequently, a comparison of historical results for the year
ended December 31, 2002, to the year ended December 31, 2001, may not be as
meaningful as a discussion of pro forma results. Accordingly, we have included a
discussion of the comparison of the pro forma results of operations. The pro
forma results of operations for the year ended December 31, 2001, assumes that
our acquisition of the 88 hotel leases had occurred on January 1, 2001.

33

CONDENSED CONSOLIDATED STATEMENTS OF OPERATING INCOME
(IN THOUSANDS)

The 2001 Pro Forma Condensed Consolidated Statement of Operating Income
is presented for illustrative purposes only and is not necessarily indicative of
what the actual results of operations would have been had the transaction
previously described occurred on the indicated date, nor do they purport to
represent our results of operations for future periods.

The pro forma numbers presented represent our historical revenues and
expenses, modified as described in the pro forma adjustments below.

Pro forma adjustments:

(a) Total revenue adjustments consist of the increase in our
historical revenue from the elimination of historical
percentage lease revenue and the addition of historical hotel
operating revenues.

(b) Hotel operating expense adjustments consist of: (i) the
increase in our historical operating expense from the addition
of historical hotel operating expenses and the elimination of
percentage lease expense for the 88 hotel leases acquired from
Six Continents Hotels on July 1, 2001, (ii) the recording of
management fees at their new contractual rates, and (iii) the
elimination of historical franchise fees, which are included
in the new management fees for these hotels.

Revenues decreased $125.0 million in 2002, compared to pro forma 2001.
The decrease in revenue resulted principally from a decline in both business and
leisure travel for the year ended December 31, 2002 compared to 2001, which
reflected the weak economy and political uncertainties during the period. During
the year ended December 31, 2002, RevPAR for our hotels decreased 8.1%, compared
to the prior year pro forma; the decline in RevPAR was comprised of a decrease
in hotel occupancy of 1.8 percentage points (or 2.8%), to 62.4%, and a decline
in ADR of 5.5%, to $97.90.

Hotel operating expenses decreased $68.5 million in 2002, compared to
pro forma 2001. This decrease is primarily related to a decrease in the expenses
from hotel operations associated with the 8.1% decrease in RevPAR. However,
hotel operating expenses, as a percentage of total revenue, increased from 87%
to 90%. The principal reason for the increase in operating expenses, as a
percentage of total revenue, was a 220 basis point drop in hotel operating
margins. This margin compression primarily relates to the reduction in revenue
and the inability to reduce labor costs, repair and maintenance costs and
marketing costs proportionately. We are actively working with our managers to
implement cost cutting programs at our hotels to maximize hotel operating
profits. These measures include reducing labor costs, streamlining staffing, and
consolidating operations by closing unused floors in hotels when possible.

Included in the year ended December 31, 2002, were $1.7 million of
abandoned project costs related to our pursuit of a large portfolio acquisition.
We were unable to reach mutually acceptable pricing and terms with the seller as
a result of the uncertain operating environment and softening capital markets.
The year ended December 31, 2001, included $0.8 million of abandoned project
costs.

34

Included in the prior year were $36.6 million in lease termination
costs, associated with the acquisition of our hotel leases and $19.9 million of
costs associated with the termination of the proposed MeriStar Hospitality
merger.

Our operating income was $124.5 million in 2002, compared to pro forma
operating income of $125.3 million in 2001. The 2001 pro forma operating income
included $57.4 million in costs associated with abandoned project costs, lease
termination costs and merger termination costs. The principal reasons for this
decline in pro forma total revenues and pro forma hotel operating expenses were
an 8.1% decline in RevPAR and the contraction of hotel operating margins
principally associated with the decline in RevPAR.

Comparison of the Years Ended December 31, 2001 and 2000

Prior to December 31, 2000, we leased 184 hotels to either DJONT or Six
Continents Hotels and reported the lease revenue from the percentage lease
agreements. Our historical revenues for 2000 represented, principally, rental
income on leases. Expenses during this period represented specific ownership
costs, including real estate and property taxes, property insurance and ground
leases. Effective January 1, 2001, through our TRSs, we acquired 96 of these
hotel leases and, effective July 1, 2001, acquired the leases on our remaining
88 hotels, assuming all operating risks and rewards of these 184 hotels. As a
result of acquiring these leases, we reported hotel operating revenues and
expenses. Our expenses included all hotel operating costs, including management
fees, salary expenses, hotel marketing, utilities, and food and beverage costs,
in addition to ownership costs. Accordingly, operating results for the year
ended December 31, 2001, are not directly comparable to 2000.

For the year ended December 31, 2001, we recorded total revenues of
$1.2 billion, compared to $539.9 million for the year ended December 31, 2000.
The increase in total revenues of $661.0 million is principally associated with
reporting hotel operating revenues in 2001, rather than the percentage lease
revenue reported in the previous year. The 96 hotels acquired from DJONT
contributed approximately $787.9 million in hotel operating revenue in 2001,
compared to $277.3 million in percentage lease revenue for 2000. The 88 hotels
acquired July 1, 2001, from Six Continents Hotels contributed approximately
$115.1 million in percentage lease revenue and $295.0 million in hotel operating
revenue, following the acquisition of these leases, compared to $259.6 million
in percentage lease revenue for these same hotels in 2000.

Total operating expense increased $813.5 million for the year ended
December 31, 2001, over 2000, primarily as a result of the inclusion of hotel
operating expenses, management fees and other property related costs of $710.6
million, which were not included in 2000, prior to our acquisition of the hotel
leases. Also included in total operating expenses for 2001 are: lease
termination costs; merger termination costs; depreciation; taxes, insurance and
lease expense; and corporate expenses.

Taxes, insurance and lease expense increased by $48.2 million for year
ended December 31, 2001, over 2000. The majority of this increase is related to
percentage lease expense paid to unconsolidated ventures owning hotels whose
operations were acquired with the acquisition of DJONT. We included in operating
expenses $36.6 million of costs associated with the acquisition of DJONT and the
Six Continents Hotels leases, and $19.9 million of expenses associated with the
termination of the MeriStar merger. We also incurred $5.5 million in merger
related financing costs related to the $300 million in senior debt that was
repaid in October 2001, as a result of the termination of the MeriStar merger.

In connection with the issuance of favorably priced fixed rate debt,
and the prepayment of floating rate debt, we terminated $250 million of interest
rate swaps, resulting in a $7.0 million swap termination cost. In June 2000, we
announced our intention to sell 25 non-strategic hotels and, in 2000, recorded
an expense of $63.0 million representing the difference between the net book
value of these hotels and their estimated net proceeds from sale. In 2001, an
additional $7.0 million loss provision was recorded related to the remaining 13
hotels held for sale.

Equity in income from unconsolidated entities decreased $7.5 million in
2001, compared to 2000. The principal reasons for the decrease in 2001 were a
gain of $3.7 million recorded in 2000 from the development and sale of
condominiums by an entity in which we own a 50% equity interest and a decline in

35

percentage lease revenue in 2001 from these unconsolidated entities, related to
a 11.2% decline in the RevPAR of the hotels owned by them during 2001.

We recorded a net loss applicable to unitholders of $74.7 million in
2001, compared to a net income of $41.7 million in 2000. The principal
components of the loss in 2001 were the decrease in hotel RevPAR of 11.4%,
contraction of hotel operating margins principally associated with the decline
in RevPAR, costs of terminating the MeriStar merger of $19.9 million, merger
financing costs of $5.5 million, lease termination costs of $36.6 million
associated with acquiring hotel leases, swap termination costs of $7.0 million
associated with repayment of variable rate debt, and a loss on assets held for
sale of $7.0 million.

Comparison of the pro forma years ended December 31, 2001 and 2000

Between January 1 and July 1, 2001, we acquired the operating leases
covering our hotels and contributed them to our TRSs. As the leases were
acquired, we began directly receiving and recording hotel revenues and expenses,
rather than percentage lease revenue. Consequently, a comparison of historical
results for the year ended December 31, 2001, to the year ended December 31,
2000, may not be as meaningful as a discussion of pro forma results.
Accordingly, we have included a discussion of the comparison of the pro forma
results of operations. The pro forma results of operations for the years ended
December 31, 2001, and 2000 assumes that the following occurred on January 1,
2000:

o Our acquisition of DJONT for 416,667 units, valued at
approximately $10 million;

o Our acquisition of 12 hotel leases, together with their
associated management contracts, from Six Continents Hotels
for which FelCor issued 413,585 shares of its common stock,
valued at approximately $10 million; and

o Our acquisition of the remaining 88 hotel leases held by Six
Continents Hotels.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATING INCOME
(IN THOUSANDS)

The 2002 and 2001 Condensed Consolidated Statements of Operating Income
are presented for illustrative purposes only and are not necessarily indicative
of what the actual results of operations would have been had the above
transactions occurred on the indicated date, nor do they purport to represent
our results of operations for future periods.

Pro forma numbers presented represent our historical revenues and
expenses, modified as described in the pro forma adjustments below.

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Pro forma adjustments:

(a) Total revenue adjustments consist of the changes in our
historical revenue from the elimination of historical
percentage lease revenue and the addition of historical hotel
operating revenues.

(b) Hotel operating expense adjustments consist of: (i) the
increase in our historical operating expense from the addition
of historical hotel operating expenses and the elimination of
percentage lease expense; (ii) the recording of management
fees at their new contractual rates; and (iii) the elimination
of historical franchise fees, which are included in the new
management fees for these hotels.

Pro forma revenues decreased $224.3 million in 2001, primarily as a
result of the economic downturn and disruptions in business and leisure travel
following the terrorist attacks on September 11, 2001. As a result of these
events, both business and leisure travel declined significantly during the year
ended December 31, 2001, compared to 2000. During 2001, our hotels' RevPAR
decreased 11.4%, comprised of a decrease in occupancy of 6.6 percentage points
(or 9.4%), to 63.9%, and a decline in ADR of 2.4%, to $102.18. During the
four-week period following the terrorist attacks on September 11, 2001, our
hotels recorded average occupancy rates as low as 33.9%. However, our hotel
RevPAR performance improved throughout the fourth quarter, with RevPAR decreases
compared to the prior year periods, of 25.2% in October, 23.6% in November, and
18.8% in December.

Pro forma hotel operating expenses decreased $141.7 million in 2001,
compared to 2000, but pro forma hotel operating expense as a percentage of total
revenue increased from 84% to 87%. The principal reason for the increased
operating expense, as a percentage of total revenue, was a 260 basis point drop
in hotel operating margins (gross operating profit less franchise and management
fees). This margin compression primarily related to increased labor costs, the
cost of frequent guest programs and utility costs as a percentage of total
revenue. The increase in pro forma costs as a percentage of pro forma revenue is
principally related to the decrease in hotel revenue previously discussed. We
have been actively working with our managers to implement cost cutting programs
at the hotels to stabilize the hotels' operating profits. These measures include
reducing labor costs, streamlining staffing, and consolidating operations by
closing unused floors in hotels, when possible.

Our pro forma operating income was $125.3 million in 2001, compared to
pro forma operating income of $265.3 million in 2000. The principal reasons for
the drop in pro forma operating income were the decrease in pro forma hotel
RevPAR of 11.4%, contraction of pro forma operating margins principally
associated with the decline in RevPAR, costs of terminating the MeriStar merger
of $19.9 million and lease termination costs of $36.6 million associated with
acquiring the hotel leases.

Funds From Operations and EBITDA

We and FelCor consider FFO and EBITDA to be key measures of a REIT's
performance and should be considered along with, but not as an alternative to,
net income and cash flow as a measure of FelCor's and our operating performance
and liquidity.

The White Paper on Funds From Operations approved by the Board of
Governors of the National Association of Real Estate Investment Trusts
("NAREIT") defines FFO as net income or loss (computed in accordance with GAAP),
excluding gains or losses from sales of properties, plus real estate related
depreciation and amortization, after comparable adjustments for the applicable
portion of these items related to unconsolidated entities and joint ventures. We
and FelCor believe that FFO and EBITDA are helpful to investors as a measure of
the performance of an equity REIT because, along with cash flow from operating
activities, financing activities and investing activities, they provide
investors with an indication of the ability of the REIT to incur and service
debt, to make capital expenditures, to pay distributions and to fund other cash
needs. We compute FFO in accordance with standards established by NAREIT, except
that we add back certain significant non-recurring items, such as lease
termination costs, merger termination costs, merger financing costs, abandoned
project costs, impairment losses, charge-off of deferred financing costs and
interest rate swap termination expenses to derive FFO. This may not be
comparable to FFO reported by other REITs that do not define the term in
accordance with the current NAREIT definition, or that interpret the current
NAREIT definition differently than we do.
FFO and EBITDA do not represent cash generated from operating
activities as determined by GAAP, and should not be considered as an alternative
to net income (determined in accordance with GAAP) as an indication of our
financial performance or to cash flow from operating activities (determined in
accordance with GAAP) as a measure of our liquidity, nor does it necessarily
reflect the funds available to fund our cash needs, including our ability to
make cash distributions. FFO and EBITDA may include funds that may not be
available for our discretionary use due to functional requirements to conserve
funds for capital expenditures and property acquisitions, and other commitments
and uncertainties.

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The following table details our computation of FFO and EBITDA (in
thousands):

(a) FFO and EBITDA are adjusted to exclude significant
non-recurring items.

(b) Weighted average units outstanding are computed including
dilutive options, unvested stock grants, and assuming
conversion of Series A preferred units to units, when
dilutive.

LIQUIDITY AND CAPITAL RESOURCES

Our principal source of cash to meet our cash requirements, including
distributions to unitholders and repayments of indebtedness, is from the results
of operations of our hotels. For the year ended December 31, 2002, net cash flow
provided by operating activities, consisting primarily of hotel operations, was
$106 million. We currently expect that our operating cash flow for 2003 will be
within the range of $70 to $90 million using current RevPAR forecasts. Our debt
maturities for 2003 are $35 million and we expect 2003 capital expenditures to
be approximately $60 to $70 million. Cash necessary to fund cash flow shortfalls
and distributions, if any, will be funded from our cash balances, which were
approximately $150 million at the date of this filing, proceeds from the sale of
hotels or additional borrowings. However, due to the sharp reduction in travel
that began in 2001, and the resultant drop in RevPAR and profits from our hotel
operations, we expect

38

FelCor's Board of Directors to defer future common distributions until our
hotels experience a 2% to 4% increase in RevPAR, and to determine the amount of
preferred distributions, if any, for each quarterly period, based upon the
operating results of that quarter, economic conditions, other operating trends
and FelCor's minimum REIT distribution requirements. Currently, we do not
anticipate paying any distributions on our common units during 2003.

Recent events, including the threat of additional terrorist attacks,
the commencement of war in Iraq and the bankruptcy of several major
corporations, have had an adverse impact on the capital markets. These events,
new terrorist attacks, a prolonged war in Iraq or additional bankruptcies could
further adversely affect the availability and cost of capital for our business.
In addition, should the anticipated recovery of the overall economy, and of the
lodging industry, continue to be delayed significantly, that too could adversely
affect our operating cash flow and the availability and cost of capital for our
business. As a consequence of the economic slowdown in our business, and the
travel and lodging industries generally, Standard & Poor's lowered its ratings
on our $1.2 billion in senior unsecured debt from BB- to B+ with a stable
outlook, in February 2003. Although Moody's affirmed its current rating on our
senior debt in February 2003 (Ba3), we remain on negative outlook. Should
Moody's downgrade our current rating, the interest rate on $900 million of our
$1.2 billion in senior unsecured debt would increase by 50 basis points, which
would increase our interest expense by $4.5 million on an annual basis.

We are also subject to the risks of fluctuating hotel operating margins
at our hotels, including but not limited to wage and benefit costs, repair and
maintenance expenses, utilities, liability insurance, and other operating
expenses that can fluctuate disproportionately to revenues. These operating
expenses are difficult to predict and control, resulting in an increased risk of
volatility in our results of operations. The economic slowdown and the sharp
drop in Occupancy and ADR that began in 2001, have resulted both in declines in
RevPAR and an erosion in operating margins. If the declines in hotel RevPAR
and/or operating margins worsen or continue for a protracted time, they could
have a material adverse effect on our operations, earnings and cash flow.

On April 4, 2002, FelCor completed the private placement of
approximately $25 million of their Series B preferred stock. These shares of
preferred stock were issued at a discount to yield an effective rate of 9.4%.
FelCor contributed the proceeds of this preferred stock to us in exchange for
Series B preferred units. The preference on these units is the same as FelCor's
Series B preferred stock. The proceeds were used for working capital, and
allowed us to accelerate certain capital expenditures.

In August 2002, we contributed five of our hotels held for sale to a
joint venture in which one of our subsidiaries holds a 50% equity interest, and
a subsidiary of our joint venture partner holds the other 50% equity interest.
An affiliate of our joint venture partner manages these hotels. Pursuant to the
joint venture agreement, our joint venture partner contributed $1.4 million to
the new venture. The venture closed on a $10 million line of credit, of which
approximately $4.4 million was drawn at closing, with the cash proceeds going to
us. The remaining $5.5 million under the line of credit is being used for
capital improvements at the hotels. In addition to our 50% equity interest, we
retained a preferred right to receive approximately $6.3 million from the
venture.

In 2002, we entered into two amendments to our line of credit. In June
2002, we amended our line of credit to relax covenant levels to provide us with
greater financial flexibility. In December 2002, we further amended our line of
credit to relax covenant levels and to reduce capacity under the line to $300
million from $615 million. The maturity of the line of credit remains at October
31, 2004, but we have the right to extend the maturity date for two consecutive
one-year periods, subject to certain conditions. We recorded a $3.2 million
expense to write-off unamortized deferred financing costs associated with the
reduction in our line of credit. Although we were in compliance with our
existing covenants prior to the amendments, it was necessary to amend the line
of credit in anticipation of a continued negative RevPAR environment. The
amended line allows for the relaxation of certain financial covenants through
the maturity date, with a step-up in covenants on June 30, 2004, including the
unsecured interest coverage, fixed charge coverage, secured leverage, and total
leverage tests. The interest rate remains on the same floating rate basis with a
tiered spread based on our debt leverage ratio, but with an added tier to
reflect the higher permitted leverage. There was no amount outstanding under the
facility at December 31, 2002. As of the date of this filing, we had $149
million

39

outstanding under our line of credit and cash and cash equivalents of
approximately $150 million. The primary reason for the outstanding balance on
our line of credit was our decision to carry excess cash because of the current
geopolitical and economic uncertainties and their potential impact on our
operating results.

In addition to financial covenants, our line of credit includes certain
other affirmative and negative covenants, including restrictions on our ability
to create or acquire wholly-owned subsidiaries; restrictions on the
operation/ownership of our hotels; limitations on our ability to lease property
or guarantee leases of other persons; limitations on our ability to make
restricted payments (such as distributions on units and preferred units, FelCor
share repurchases and certain investments); limitations on our ability to merge
or consolidate with other persons to issue stock of our subsidiaries and to sell
all or substantially all of our assets; restrictions on our ability to construct
new hotels or acquire hotels under construction; limitations on our ability to
change the nature of our business and limitations on our ability to modify
certain instruments, to create liens, to enter into transactions with affiliates
and limitations on our ability to enter into joint ventures. Under the most
recent amendment to our line of credit, at higher permitted leverage levels we
agreed to certain more stringent limitations on acquisitions, restricted
payments and discretionary capital expenditures. At December 31, 2002, we were
in compliance with all of these covenants.

Unless our business and cash flow stabilizes, we may not be able to
satisfy the relaxed financial covenant requirements. In such an event, we may
need to obtain further amendments from our lenders under the line of credit to
continue being able to borrow under it. We are not certain whether, to what
extent, or upon what terms the lenders may be willing to further relax the
covenants. Further amendments to our line of credit may result in additional
restrictions on us that, together with any limitation on our ability to borrow
under the line, may adversely affect our ability to run our business and manage
our financial affairs.

The breach of any of the covenants and limitations under our line of
credit could result in the acceleration of amounts outstanding. Our failure to
satisfy any accelerated indebtedness, if in the amount of $10 million or more,
could result in the acceleration of most of our other unsecured recourse
indebtedness. We may not be able to refinance or repay our debt in full under
those circumstances.

Our other borrowings contain affirmative and negative covenants that
are generally equal to or less restrictive than the line of credit. Most of our
mortgage debt is non-recourse to us and contains provisions allowing for the
substitution of collateral upon satisfaction of certain conditions. Most of our
mortgage debt is prepayable, subject to various prepayment penalties, yield
maintenance or defeasance obligations. At December 31, 2002, we had unencumbered
investments in hotels with a net book value totaling $2.3 billion.

Our publicly traded senior unsecured notes require that we satisfy a
total leverage, a secured leverage and an interest coverage test in order to
incur additional indebtedness, except under our line of credit or to refinance
maturing debt with replacement debt, as defined under our indentures; to pay
distributions in excess of the minimum distributions required to meet FelCor's
REIT qualification test; to repurchase units; or to merge. As of the date of
this filing, we have satisfied all such incurrence tests. We currently expect
that we will have the flexibility to meet these tests unless RevPAR declines
continue or become more severe. We have debt maturing of $35 million in 2003 and
$189 million in 2004, including $175 million of our senior unsecured notes that
mature in October 2004. We anticipate meeting these obligations through a
combination of cash on hand, cash flow from operations, borrowing under our line
of credit, additional secured debt and sale of non-strategic hotel assets.

We currently anticipate that we will meet our financial covenant and
incurrence tests under the RevPAR guidance provided at FelCor's fourth quarter
earnings conference call on February 5, 2003. For the first quarter of 2003, we
currently anticipate that our portfolio RevPAR will be 3% to 5% below the
comparable period of the prior year. FFO is expected to be within the range of
$8 to $11 million for the first quarter of 2003, and EBITDA is expected to be
within the range of $59 million to $62 million for the same period. The RevPAR
decline in 2003, compared to the same periods in 2002, was approximately 3.6%
for January, 5.8% for February, and was 6.5% for the first 19 days of March. We
currently anticipate that full year 2003 hotel portfolio RevPAR will be
approximately the same as 2002, plus or minus 1%. FFO, for the year 2003, is
anticipated to be within the range of $74 to $87 million and EBITDA is expected
to be within the range of $277 to $289 million.

40

Certain significant credit and debt statistics at December 31, 2002,
and 2001, are as follows:

(a) EBITDA to consolidated interest paid represents consolidated
EBITDA divided by interest expense before capitalized interest
and amortization of debt costs.

(b) EBITDA to total interest expense represents consolidated
EBITDA divided by interest expense, including our pro rata
share of unconsolidated interest expense. Our interest
coverage incurrence test under our senior unsecured notes
allows the exclusion of certain unrestricted subsidiaries that
are included in the consolidated numbers used to compute this
ratio.

(c) Fixed charge coverage ratio represents consolidated EBITDA
divided by consolidated interest expense, our pro rata share
of unconsolidated interest expense and preferred
distributions.

At December 31, 2002, we had:

o $66.5 million of cash and cash equivalents;

o No balance outstanding under our $300 million line of credit;

o Fixed interest rate debt equal to 89% of our total debt;

o Weighted average maturity of fixed interest rate debt of
approximately six years; and

o Secured debt to total assets of 18.1%

The following details our debt outstanding at December 31, 2002, and
2001 (in thousands):

(a) At December 31, 2002, we had unencumbered investments in
hotels with a net book value totaling $2.3 billion.

41

(b) At December 31, 2002, our $175 million in publicly traded
notes due October 2004, and $25 million of our publicly traded
notes due October 2007, were matched with interest rate swap
agreements that effectively converted the fixed interest rate
on these notes to a floating interest rate tied to LIBOR. The
differences to be paid or received by us under the terms of
the interest rate swap agreements are accrued as interest
rates change and are recognized as an adjustment to interest
expense. The interest rate swaps decreased our interest
expense by $4 million during 2002.

(c) Calculated based on the weighted average of outstanding debt
at December 31, 2002.

All of our floating rate debt at December 31, 2002, was based upon
LIBOR. Six month LIBOR at December 31, 2002, was 1.38%.

At December 31, 2002, we had $175 million of publicly traded term notes
due October 2004, and $25 million of publicly traded term notes due October
2007, that were matched with interest rate swap agreements which effectively
convert the fixed interest rate on these notes to a variable interest rate.
These interest rate swap agreements have maturity dates coinciding with the
maturity dates of these publicly traded term notes. We entered into seven
separate interest rate swap agreements with three different financial
institutions. Under these agreements, we receive a fixed rate of 7.375% for the
agreements maturing in October 2004, and 7.625% for the agreement maturing in
October 2007. We pay the six-month LIBOR rate plus a spread ranging from 2.57%
to 3.57%. The weighted average spread over LIBOR at December 31, 2002, was
3.25%.

In January and February 2003, we executed two additional interest rate
swaps. These new fair value swaps are similar to those that existed at December
31, 2002; they modify a portion of the interest characteristics of our
outstanding fixed rate debt without an exchange of the underlying principal
amount and effectively convert fixed rate debt to a variable rate. As designated
fair value hedges, these swaps will be marked to market through the income
statement, but are offset by the change in fair value of our swapped outstanding
fixed rate debt. The notional amount of these new swaps is $50 million, on which
we receive a fixed rate of 7.625% and pay a rate of LIBOR plus an average spread
of 4.325%.

We spent approximately $63 million on upgrading and renovating our
hotels during the year ended December 31, 2002. Our unconsolidated entities
spent approximately $17.2 million on upgrading and renovating hotels, and
approximately $8.1 million on a residential condominium development project,
during the year ended December 31, 2002. Notwithstanding the current significant
economic downturn, we believe that our hotels will continue to benefit from our
extensive capital expenditure programs in previous years. We currently
anticipate our 2003 capital expenditures to be between $60 and $70 million.

Contractual Obligations

We have obligations and commitments to make certain future payments
under debt agreements and various contracts. The following schedule details
these obligations at December 31, 2002 (in thousands):

(a) We currently expect that this obligation will be satisfied by
our investment in one or more hotels licensed and managed by
Six Continents Hotels.

42

We have guaranteed the payment of 50% of a loan related to the
construction of a residential condominium project in Myrtle Beach, South
Carolina, and a full recourse loan for one of our 50% owned unconsolidated hotel
ventures. The following schedule details these obligations and maturity dates at
December 31, 2002 (in thousands):

Investments in Unconsolidated Entities

At December 31, 2002, we had unconsolidated 50% investments in ventures
that own an aggregate of 29 hotels (referred to as hotel joint ventures), and we
had unconsolidated 50% investments in ventures that operate 14 of those 29
hotels (referred to as operating joint ventures). We own 100% of the lessees
operating the remaining 15 hotels owned by the hotel joint ventures. None of our
directors, officers or employees owns any interest in any of these hotel or
operating joint ventures. The hotel ventures had approximately $267 million of
non-recourse mortgage debt relating to 29 of the hotels. This debt is not
reflected as a liability on our consolidated balance sheet. The liability of our
subsidiaries that are members or partners in these ventures is generally limited
to the guarantee of the borrowing venture's personal obligations to pay for the
lender's losses caused by misconduct, fraud or misappropriation of funds by the
venture and other typical exceptions from the nonrecourse provisions in the
mortgages, such as for environmental liabilities. One hotel joint venture had a
full recourse loan outstanding of $0.3 million at December 31, 2002, that we
guaranteed.

At December 31, 2002, we also had an unconsolidated 50% investment in a
venture that is developing a residential condominium project in Myrtle Beach,
South Carolina. This joint venture has a $97.6 million full recourse
construction loan. We and our joint venture partner, Hilton, have each
guaranteed 50% of the amount outstanding under this loan. At December 31, 2002,
an aggregate of $11.4 million had been drawn under this loan, of which we have
guaranteed our pro rata share of $5.7 million. Our pro rata share of the entire
amount available under the construction loan is $48.8 million. The anticipated
completion date of this development is late 2004.

Capital expenditures on the hotels owned by our hotel joint ventures
are generally paid from the capital reserve account, which is funded from the
income from operations of these ventures. However, if a venture has insufficient
cash to make necessary capital improvements, the venture may make a capital call
upon the venture members or partners to fund such necessary improvements. It is
possible that, in the event of a capital call, the other joint venture member or
partner may be unwilling or unable to make the necessary capital contributions.
Under such circumstances, we may elect to make the other party's contribution as
a loan to the venture or as an additional capital contribution by us. Under
certain circumstances, a capital contribution by us may increase our investment
equity to greater than 50% and may require that we consolidate the venture,
including all of its assets and liabilities, into our consolidated financial
statements.

With respect to those ventures that are partnerships, any of our
subsidiaries that serve as a general partner will be liable for all of the
recourse obligations of the venture, to the extent that the venture does not
have sufficient assets or insurance to satisfy the obligations. In addition, the
hotels owned by these ventures could perform below expectations and result in
the insolvency of the ventures and the acceleration of their debts, unless the
members or partners provide additional capital. In some ventures, the members or
partners may be required to make additional capital contributions or have their
interest in the venture be reduced or offset for the benefit of any party making
the required investment on their behalf. In the foregoing and other
circumstances, we may be faced with the choice of losing our investment in a
venture or investing additional capital under circumstances that do not assure a
return on that investment.

Quantitative and Qualitative Disclosures About Market Risk

At December 31, 2002, approximately 89% of our consolidated debt had
fixed interest rates. Currently, market rates of interest are below the rates we
are obligated to pay on our fixed-rate debt.

43

The following tables provide information about our financial
instruments that are sensitive to changes in interest rates, including interest
rate swaps and debt obligations. For debt obligations, the tables present
scheduled maturities and weighted average interest rates, by maturity dates. For
interest rate swaps, the tables present the notional amount and weighted average
interest rate, by contractual maturity date. The fair value of our fixed rate
debt indicates the estimated principal amount of debt having the same debt
service requirements that could have been borrowed at the date presented, at
then current market interest rates. The fair value of our variable to fixed
interest rate swaps indicates the estimated amount that would have been received
or paid by us had the swaps been terminated at the date presented.

EXPECTED MATURITY DATE
AT DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)

(a) At December 31, 2002, our $175 million in publicly traded
notes due October 2004, and $25 million of our publicly traded
notes due October 2007, were matched with interest rate swap
agreements that effectively converted the fixed interest rate
on these notes to a variable interest rate tied to LIBOR. The
interest rate swap agreements also have maturities that
coincide with those notes. The differences to be paid or
received by us under the terms of the interest rate swap
agreements are accrued as interest rates change and are
recognized as an adjustment to interest expense. The interest
rate swaps decreased our interest expense by $4 million during
2002.

(b) The average floating rate of interest represents the implied
forward rates in the yield curve at December 31, 2002.

EXPECTED MATURITY DATE
AT DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)

(a) The average floating rate of interest represents the implied
forward rates in the yield curve at December 31, 2001.

44

Swap contracts, such as described above, contain a credit risk, in that
the counterparties may be unable to fulfill the terms of the agreement. We
minimize that risk by evaluating the creditworthiness of our counterparties, who
are limited to major banks and financial institutions, and we do not anticipate
nonperformance by the counterparties. The credit ratings for the financial
institutions that are counterparties to the interest rate swap agreements range
from A to AA-.

INFLATION

Operators of hotels, in general, possess the ability to adjust room
rates daily to reflect the effects of inflation. Competitive pressures may,
however, require us to reduce room rates in the near term and may limit our
ability to raise room rates in the future.

SEASONALITY

The lodging business is seasonal in nature. Generally, hotel revenues
are greater in the second and third calendar quarters than in the first and
fourth calendar quarters, although this may not be true 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 can be expected to cause quarterly
fluctuations in our revenues. Quarterly earnings also may be adversely affected
by events beyond our control, such as extreme weather conditions, economic
factors and other considerations affecting travel. Historically, to the extent
that cash flow from operations has been insufficient during any quarter, due to
temporary or seasonal fluctuations in revenues, we have utilized cash on hand or
borrowings under our line of credit to make distributions to our equity holders.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities.

On an on-going basis, we evaluate our estimates, including those
related to bad debts, the carrying value of investments in hotels, litigation,
and other contingencies. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.

We believe the following critical accounting policies affect the most
significant judgments and estimates used in the preparation of our consolidated
financial statements.

o We are required by GAAP to record an impairment charge when we
believe that an investment in one or more of our hotels has
been impaired, such that future undiscounted cash flows would
not recover the book basis, or net book value, of the
investment. We test for impairment when certain events occur,
including one or more of the following: projected cash flows
are significantly less than recent historical cash flows;
significant changes in legal factors or actions by a regulator
that could affect the value of our hotels; events that could
cause changes or uncertainty in travel patterns; and a current
expectation that, more likely than not, a hotel will be sold
or otherwise disposed of significantly before the end of its
previously estimated useful life. In February 2003, we
announced our plan to sell 33 non-strategic hotels over the
next 36 months. The shorter probable holding periods related
to our decision to sell these hotels was the primary factor
that led to an impairment charge of $118.3 million on 20 of
these 33 hotels. Additional impairment charges of $25.8
million were recorded in the fourth quarter of 2002, resulting
from decreased estimates of future cash flows from two hotels
not included in our disposition plan. We revised our estimates
of future cash flows in the fourth quarter of 2002, when it
became apparent that the recovery of

45

the travel industry would take longer than we had originally
expected. In the evaluation of impairment of our hotel assets,
and in establishing the impairment charge, we made many
assumptions and estimates on a hotel by hotel basis, which
included the following:

o Annual cash flow growth rates for revenues and
expenses;

o Holding periods;

o Expected remaining useful lives of assets;

o Estimates in fair values taking into consideration
future cash flows, capitalization rates, discount
rates and comparable selling prices; and o Future
capital expenditures.

Changes in these estimates, future adverse changes in market
conditions or poor operating results of underlying hotels
could result in losses or an inability to recover the carrying
value of the hotels that may not be reflected in the hotel's
current carrying value, thereby requiring additional
impairment charges in the future.

o We own a 50% interest in various real estate joint ventures
reported under the equity method of accounting. In accordance
with GAAP, we record an impairment of these equity method
investments when they experience an other than temporary
decline in value. During the fourth quarter of 2002, we
determined that certain of our equity method investments had
experienced an other than temporary decline in value, because
a recovery of their value in excess of previously recorded
book values was not expected to occur within the next year. As
such, we recorded a related impairment loss of $13.4 million.
Changes in our estimates or future adverse changes in the
market conditions of the hotels owned by equity method
investments could result in additional declines in value that
could be considered other than temporary.

o We make estimates with respect to contingent liabilities for
losses covered by insurance in accordance with FAS 5,
Accounting for Contingencies. We record liabilities for self
insured losses under our insurance programs when it becomes
probable that an asset has been impaired or a liability has
been incurred at the date of our financial statements and the
amount of the loss can be reasonably estimated. In 2002, we
became self-insured for the first $250,000, per occurrence, of
our general liability claims with regard to 68 of our hotels.
We review the adequacy of our reserves for our self-insured
claims on a regular basis. Our reserves are intended to cover
the estimated ultimate uninsured liability for losses with
respect to reported and unreported claims incurred as of the
end of each accounting period. These reserves represent
estimates at a given accounting date, generally utilizing
projections based on claims, historical settlement of claims
and estimates of future costs to settle claims. Estimates are
also required since there may be reporting lags between the
occurrence of the insured event and the time it is actually
reported. Because establishment of insurance reserves is an
inherently uncertain process involving estimates, currently
established reserves may not be sufficient. If our insurance
reserves of $2.3 million, at December 31, 2002, for general
liability losses are insufficient, we will record an
additional expense in future periods. Property and
catastrophic losses are event-driven losses and, as such,
until a loss occurs and the amount of loss can be reasonably
estimated, no liability is recorded. We have recorded no
contingent liabilities with regard to property or catastrophic
losses at December 31, 2002.

o Credit is extended to hotel guests, and terms of credit range
from one day for the clearing of credit card receivables to 30
days for corporate accounts. We make estimates with respect to
the collectability of our trade receivables and provide an
allowance for doubtful accounts for our estimate of probable
losses. Our estimate of losses is based on several factors,
including historical losses, the aging of the outstanding
receivables, and the financial condition of the customers. If
a customer becomes insolvent or files for bankruptcy, we
charge-off the entire amount due from that customer. At both
December 31, 2002 and 2001, we had an allowance for doubtful
accounts of $1.4 million and had recorded bad debt expense of
$1.5 million and $1.8 million for the years ended December 31,
2002 and 2001, respectively. No bad debt expense was recorded
during the year ended December 31, 2000, as this period was
prior to

46

our purchase of the hotel leases. Significant judgments and
estimates must be made and used in connection with
establishing allowances in any accounting period. Material
differences may result in the amount and timing of our
allowances for any period if adverse economic conditions cause
widespread financial difficulties among our customers, in
general. Specifically, additional bankruptcies of other
companies in the travel industry, such as airlines, may result
in additional charges to bad debt expense.

o SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities" establishes accounting and reporting standards for
derivative instruments. In accordance with this pronouncement,
all of our interest rate swap agreements outstanding at
December 31, 2002, were designated as fair value hedges
because they are hedging our exposure to the changes in the
fair value of our fixed rate debt. Our swaps meet the criteria
necessary to assume no ineffectiveness of the hedge. These
instruments are marked to our estimate of their fair market
value through the income statement, but are offset by the
change in the estimated fair value of our swapped fixed rate
debt. We estimate the fair value of our interest rate swaps
and fixed rate debt through the use of a third party
valuation. We may use other methods and assumptions to
validate the fair market value. At December 31, 2002, our
estimate of the fair market value of the interest rate swaps
was approximately $7.7 million and represents the amount that
we estimate we would currently receive upon termination of
these instruments, based on current market rates and
reasonable assumptions about relevant future market
conditions.

o Our TRSs have cumulative future tax deductions totaling $103.4
million. The gross deferred income tax asset associated with
these future tax deductions was $39.3 million. We have
recorded a valuation allowance equal to 100% of our $39.3
million deferred tax asset related to our TRSs, because of the
uncertainty of realizing the benefit of the deferred tax
asset. SFAS 109, "Accounting for Income Taxes," establishes
financial accounting and reporting standards for the effect of
income taxes. The objectives of accounting for income taxes
are to recognize the amount of taxes payable or refundable for
the current year and deferred tax liabilities and assets for
the future tax consequences of events that have been
recognized in an entity's financial statements or tax returns.
In accordance with SFAS 109 we have considered future taxable
income and ongoing prudent and feasible tax planning
strategies in assessing the need for a valuation allowance. In
the event we were to determine that we would be able to
realize all or a portion of our deferred tax assets in the
future, an adjustment to the deferred tax asset would increase
operating income in the period such determination was made.

RECENT ACCOUNTING ANNOUNCEMENTS

During the year ended December 31, 2002, we elected early adoption of
the provisions of Statement of Financial Accounting Standards ("SFAS") No. 145,
"Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections." SFAS 145, among other things, rescinds SFAS 4,
which required that gains and losses from extinguishments of debt be classified
as an extraordinary item, net of related income tax effects. We have
reclassified all losses from extinguishment of debt reported in prior periods to
be included in income before equity in income of unconsolidated entities,
minority interests and gain on sale of assets in the accompanying financial
statements to conform to SFAS 145.

The Financial Accounting Standards Board ("FASB") has issued SFAS No.
146, "Accounting for Exit or Disposal Activities." SFAS 146 addresses
significant issues regarding the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the
guidance that the Emerging Issues Task Force ("EITF") of the FASB, has set forth
in EITF Issue No 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." The scope of SFAS 146 also included (1) costs related to
terminating a contract that is not a capital lease and (2) termination benefits
that employees who are involuntarily terminated receive under the terms of a
one-time benefit arrangement that is not an ongoing benefit arrangement or an
individual deferred compensation contract.

47

SFAS 146 will be effective for exit or disposal activities initiated after
December 31, 2002. We do not currently expect SFAS 146 to have a material impact
on our results of operations and financial position.

The FASB has issued SFAS No. 147, "Acquisitions of Certain Financial
Institutions," which is effective for certain transactions arising on or after
October 1, 2002. SFAS 147 will have no impact on us.

The FASB has issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to a fair value based method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. We
have adopted the disclosure requirements of SFAS 148. The Company currently
accounts for stock-based employee compensation in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
In accordance with one of the alternative methods of transition for a voluntary
change to a fair value based method of accounting for stock-based employee
compensation mandated by SFAS 148, we intend to adopt the "prospective method"
as of January 1, 2003. Under this method, compensation expense will be
recognized for any new awards issued after December 31, 2002. We do not
currently expect the adoption of SFAS 148 to have a material impact on our
financial position or results of operations.

FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of FASB Statements No. 5, 57, and 107 and rescission
of FASB Interpretation No. 34," ("FIN 45") was issued in November 2002. FIN 45
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 does not prescribe a specific
approach for subsequently measuring the guarantor's recognized liability over
the term of the related guarantee. The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The disclosure requirements in FIN 45 are effective
for financial statements of interim or annual periods ending after December 15,
2002. We have made the disclosures required by FIN 45.

FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities - an interpretation of ARB No. 51" ("FIN 46"), was issued in January
2003. FIN 46 clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties.

FIN 46 requires existing unconsolidated variable interest entities to
be consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among the parties involved. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003.

We have no unconsolidated variable interest entities that would be
consolidated under the requirements of FIN 46.

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

Portions of this Annual Report on Form 10-K include forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Forward looking statements include, without limitation, any statement that
may predict, forecast, indicate or imply future results, performance or
achievements. Forward-looking statements involve risks and uncertainties that
may cause actual results to differ materially from the results contained in the
forward-looking statements. The risks, uncertainties and

48

assumptions that may affect our actual results, which are discussed more fully
under "Cautionary Factors That May Affect Future Results" in Item 1 hereof and
in our previous filings under the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended (collectively, "Cautionary
Disclosures"), include: general economic conditions, including the timing and
magnitude of any recovery from the current soft economy; future acts of
terrorism and the commencement of war in Iraq; the availability of capital; and
numerous other factors which may affect results, performance and achievements.
The forward looking statements included herein, and all subsequent written and
oral forward looking statements attributable to us or persons acting on our
behalf, are expressly qualified in their entirety by the Cautionary Disclosures.
We undertake no obligation to update any forward-looking statements to reflect
future events or circumstances.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information and disclosures regarding market risks applicable to us are
incorporated herein by reference to the discussion under "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" contained elsewhere in this Annual
Report on Form 10-K for the year ended December 31, 2002.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Included herein beginning at page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

49

PART III. -- OTHER INFORMATION

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

We have no directors or officers. FelCor as the general partner
performs our management functions. Information about the directors and executive
officers of FelCor called for by this Item is contained in FelCor's definitive
Proxy Statement for their 2003 Annual Meeting of Stockholders, and is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

We have no directors or officers. FelCor as the general partner
performs our management functions. Information about the directors and executive
officers of FelCor called for by this Item is contained in FelCor's definitive
Proxy Statement for their 2003 Annual Meeting of Stockholders, and is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information called for by this Item is contained in FelCor's
definitive Proxy Statement for their 2003 Annual Meeting of Stockholders, or in
Item 5 of this Annual Report on Form 10-K for the year ended December 31, 2002,
and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by this Item is contained in FelCor's
definitive Proxy Statement for their 2003 Annual Meeting of Stockholders, and is
incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of FelCor's senior
management, including FelCor's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that
evaluation, FelCor's Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective in timely
accumulating and communicating to them material information relating to us and
our consolidated subsidiaries that are required to be included in our periodic
SEC filings.

(b) Changes in internal controls.

Not applicable.

50

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) 1. Financial Statements

Included herein at pages F-1 through F-38.

2. Financial Statement Schedules

The following financial statement schedule is included herein at page
F-39 through F-43.

Schedule III - Real Estate and Accumulated Depreciation for
FelCor Lodging Limited Partnership

All other schedules for which provision is made in Regulation S-X are
either not required to be included herein under the related instructions or are
inapplicable or the related information is included in the footnotes to the
applicable financial statement and, therefore, have been omitted.

3. Exhibits

The following exhibits are filed as part of this Annual Report on Form
10-K:

- -----------------
* Indicates that the document is filed herewith.

(b) Reports on Form 8-K

No current reports on Form 8-K were filed by FelCor LP during the three
months ended December 31, 2002.

57

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

FELCOR LODGING LIMITED PARTNERSHIP
a Delaware Limited Partnership

By: FelCor Lodging Trust Incorporated
Its General Partner

By: /s/ LAWRENCE D. ROBINSON
--------------------------------------
Lawrence D. Robinson
Executive Vice President

Date: March 24, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

DATE SIGNATURE

March 24, 2003 /s/ Donald J. McNamara
-----------------------------------------------------
Donald J. McNamara
Chairman of the Board and Director

March 24, 2003 /s/ Thomas J. Corcoran, Jr.
-----------------------------------------------------
Thomas J. Corcoran, Jr.
President and Director (Chief Executive Officer)

March 26, 2003 /s/ Richard J. O'Brien
-----------------------------------------------------
Richard J. O'Brien
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)

March 26, 2003 /s/ Lester C. Johnson
-----------------------------------------------------
Lester C. Johnson
Senior Vice President and Controller
(Principal Accounting Officer)

March 24, 2003 /s/ Melinda J. Bush
-----------------------------------------------------
Melinda J. Bush, Director

March 24, 2003 /s/ Richard S. Ellwood
-----------------------------------------------------
Richard S. Ellwood, Director

March 24, 2003 /s/ Richard O. Jacobson
-----------------------------------------------------
Richard O. Jacobson, Director

March 24, 2003 /s/ Charles A. Ledsinger, Jr.
-----------------------------------------------------
Charles A. Ledsinger, Jr., Director

March 24, 2003 /s/ Robert H. Lutz, Jr.
-----------------------------------------------------
Robert H. Lutz, Jr., Director

March 25, 2003 /s/ Robert A. Mathewson
-----------------------------------------------------
Robert A. Mathewson, Director

March 24, 2003 /s/ Richard C. North
-----------------------------------------------------
Richard C. North, Director

March 24, 2003 /s/ Michael D. Rose
-----------------------------------------------------
Michael D. Rose, Director

58

CERTIFICATIONS

I, Thomas J. Corcoran, Jr., certify that:

1. I have reviewed this annual report on Form 10-K of FelCor Lodging Limited
Partnership,

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange act rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

March 27, 2003 /s/ Thomas J. Corcoran, Jr.
---------------------------------------------
Thomas J. Corcoran, Jr.
Chief Executive Officer
FelCor Lodging Trust Incorporated
General Partner

59

CERTIFICATIONS

I, Richard J. O'Brien, certify that:

1. I have reviewed this annual report on Form 10-K of FelCor Lodging Limited
Partnership,

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange act rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

March 27, 2003 /s/ Richard J. O'Brien
-------------------------------------------
Richard J. O'Brien
Chief Financial Officer
FelCor Lodging Trust Incorporated
General Partner

60

FELCOR LODGING LIMITED PARTNERSHIP

INDEX TO FINANCIAL STATEMENTS

PART I - FINANCIAL INFORMATION

Report of Independent Accountants.......................................................................F-2
Consolidated Balance Sheets - December 31, 2002 and 2001................................................F-3
Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000..............F-4
Consolidated Statements of Comprehensive Income.........................................................F-5
Consolidated Statements of Partners' Capital for the years ended December 31, 2002, 2001 and 2000.......F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000..............F-7
Notes to Consolidated Financial Statements..............................................................F-8
Report of Independent Accountants on Financial Statement Schedule......................................F-39
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2002........................F-40

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
and Stockholders of FelCor Lodging Trust Incorporated

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive income (loss), partners'
capital and cash flows present fairly, in all material respects, the financial
position of FelCor Lodging Limited Partnership at December 31, 2002 and 2001,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

As discussed in Note 2 to the financial statements, effective January 1, 2001,
the Company adopted the provisions of Statement of Financial Accounting Standard
133, "Accounting for Derivative Instruments and Hedging Activities."

PricewaterhouseCoopers LLP

Dallas, Texas
February 3, 2003,
except as to Note 26,
which is as of March 21, 2003

F-2

FELCOR LODGING LIMITED PARTNERSHIP

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(IN THOUSANDS)

The accompanying notes are an integral part of these
consolidated financial statements.

F-3

FELCOR LODGING LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2002
(IN THOUSANDS, EXCEPT PER UNIT DATA)

The accompanying notes are an integral part of these
consolidated financial statements.

F-4

FELCOR LODGING LIMITED PARTNERSHIP

CONSOLIDIATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(IN THOUSANDS)

The accompanying notes are an integral part of these
consolidated financial statements.

F-5

FELCOR LODGING LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS)

xxx

The accompanying notes are an integral part of these
consolidated financial statements.

F-6

FELCOR LODGING LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(IN THOUSANDS)

The accompanying notes are an integral part of these
consolidated financial statements.

F-7

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

FelCor Lodging Limited Partnership, or FelCor LP, and our subsidiaries
at December 31, 2002, had ownership interests in the real estate of 183 hotels,
with nearly 50,000 rooms and suites. Our sole general partner is FelCor Lodging
Trust Incorporated, or FelCor, a Maryland corporation, the nation's second
largest hotel real estate investment trust, or REIT. At December 31, 2002,
FelCor owned a greater than 95% equity interest in our operations. At December
31, 2002, we owned a 100% real estate interest in 145 of the hotels, a 90% or
greater interest in entities owning seven hotels, a 60% interest in an entity
owning two hotels and 50% interests in unconsolidated entities that own 29
hotels. The operations of 15 of these 29 hotels are included in our consolidated
results of operations due to our ownership of the lessee of the hotels.

At December 31, 2002, we had an aggregate of 62,056,414 shares of
FelCor common stock, and units of FelCor LP limited partnership outstanding.

On January 1, 2001, the REIT Modernization Act, or RMA, went into
effect. Among other things, the RMA permits a REIT to form taxable subsidiaries,
or TRSs, that lease hotels from the REIT, provided that the hotels continue to
be managed by unrelated third parties. Effective January 1, 2001, we completed
transactions that resulted in our newly formed TRSs acquiring leases for 96
hotels that were previously leased to either DJONT Operations, L.L.C. and its
consolidated subsidiaries, DJONT, or subsidiaries of Six Continents Hotels.
Effective July 1, 2001, we acquired the remaining 88 hotel leases held by Six
Continents Hotels. By acquiring these leases through our TRSs, we acquired the
economic benefits and risks of the operations of these hotels, and began
reporting hotel revenues and expenses rather than percentage lease revenues.

Through the ownership of our operating lessees, where we have a
majority ownership interest, we consolidate the operating revenues and expenses
of 169 of our hotels. We have 50% unconsolidated interests in the operating
revenues and expenses of the remaining 14 hotels, which are accounted for using
the equity method. The following table provides a schedule of our 169
consolidated hotel operations, by brand, at December 31, 2002:

F-8

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. ORGANIZATION -- (CONTINUED)

At December 31, 2002, the operations of our 169 hotels were located in
the United States (35 states) and Canada (six hotels), with a concentration in
Texas (36 hotels), California (19 hotels), Florida (16 hotels) and Georgia (12
hotels). Approximately 51% of our hotel room revenues were generated from hotels
in these four states.

At December 31, 2002 of the 169 hotels, (i) subsidiaries of Six
Continents Hotels managed 82, (ii) subsidiaries of Hilton managed 72, (iii)
subsidiaries of Starwood managed 11, (iv) subsidiaries of Interstate Hotels
Corporation, or IHC, managed two, and (v) two independent management companies
managed two.

Certain reclassifications have been made to prior period financial
information to conform to the current period's presentation, with no effect to
our previously reported net income or partner's capital.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation -- Our accompanying consolidated financial
statements include the assets, liabilities, revenues and expenses of all
majority-owned subsidiaries over which we exercise control, and for which
control is other than temporary. Intercompany transactions and balances are
eliminated in consolidation. Investments in unconsolidated entities (50 percent
owned ventures) are accounted for by the equity method.

Use of Estimates -- The preparation of the financial statements in
conformity with accounting principles generally accepted in the United States of
America, requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.

Investment in Hotels -- Our hotels are stated at cost and are
depreciated using the straight-line method over estimated useful lives of 40
years for buildings, 15 to 20 years for improvements and three to seven years
for furniture, fixtures, and equipment.

We periodically review the carrying value of each of our hotels to
determine if circumstances exist indicating an impairment in the carrying value
of the investment in the hotel or that depreciation periods should be modified.
If facts or circumstances support the possibility of impairment, we will prepare
a projection of the undiscounted future cash flows, without interest charges, of
the specific hotel and determine if the investment in such hotel is recoverable
based on the undiscounted future cash flows. If impairment is indicated, we will
make an adjustment to the carrying value of the hotel based on discounted future
cash flows.

Maintenance and repairs are expensed and major renewals and betterments
are capitalized. Upon the sale or disposition of a fixed asset, the asset and
related accumulated depreciation are removed from our accounts and the related
gain or loss is included in operations.

Investment in Unconsolidated Entities --We own a 50% interest in
various real estate ventures in which the partners or members jointly make all
material decisions concerning the business affairs and operations, additionally,
we own a preferred equity interest in two of these real estate ventures. As we
do not control these entities, we carry our investment in unconsolidated
entities at cost, plus our equity in net earnings or losses, less distributions
received since the date of acquisition, less any adjustment for impairment. Our
equity in net earnings or losses is adjusted for the straight-line depreciation,
over the lower of 40 years or the remaining life of the venture, of the
difference between our cost and our proportionate share of the underlying net
assets at the date of acquisition. Our investment in unconsolidated entities is
periodically reviewed for other than temporary declines in market value. Any
decline that is not expected to recover in the next 12 months is considered
other than temporary and an impairment is recorded as a reduction in the
carrying value of the investment. Estimated fair values are based on our
projections of cash flows and market capitalization rates.

F-9

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

Hotels Held for Sale -- We classify any hotel that meets the held for
sale criteria of Statement of Financial Accounting Standards ("SFAS") 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," as held for
sale. We adopted SFAS 144 in 2002, and at December 31, 2002, we had no hotels
held for sale under this new standard. At December 31, 2002, we transferred six
of our hotels designated as held for sale, into investment in hotels at the
lower of estimated fair value at that date or the depreciated value that would
have been the carrying value of these hotels had we not ceased depreciation once
they were transferred to our held for sale portfolio. No adjustment to carrying
value was required upon the transfer of these six hotels into investment in
hotels. We will resume the depreciation of these hotels effective January 1,
2003. We had no discontinued operations in or prior to 2002 under SFAS 144,
because all sales related to assets that either did not meet the definition of a
component or were designated as held for sale prior to the adoption of SFAS 144.

Cash and Cash Equivalents -- All highly liquid investments with a
maturity of three months or less when purchased are considered to be cash
equivalents. Included in cash and cash equivalents is $16.4 million and $13.2
million in 2002 and 2001, respectively, which is held in escrow under certain of
our debt agreements.

We place cash deposits at major banks. Our bank account balances may
exceed the Federal Depository Insurance Limits of $100,000; however, management
believes the credit risk related to these deposits is minimal.

Deferred Expenses -- Deferred expenses, consisting primarily of loan
costs, are recorded at cost. Amortization is computed using a method that
approximates the interest method over the maturity of the related debt. In 2002,
we early adopted the provisions of SFAS 145, "Recission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
Under SFAS 145, losses from the extinguishment of debt are no longer considered
extraordinary. The charge-offs of deferred financing costs in 2001 of $1.3
million and in 2000 of $3.9 million have been reclassified from an extraordinary
loss to a component of continuing operations in the accompanying consolidated
statements of operations, consistent with the 2002 treatment.

Other Assets -- Other assets consist primarily of hotel operating
inventories, prepaid expenses and deposits.

Revenue Recognition -- Prior to January 2001, our principal source of
revenue was from percentage lease revenue. Percentage lease revenue was
comprised of fixed base rent and percentage rent based on room revenues above
certain annual thresholds. All annual thresholds were based on periods ending
December 31. We recognized base rent as income on the straight-line basis and
percentage rent when annual thresholds were met. At December 31, 2002, we had no
hotels leased to third parties.

Beginning in January 2001, in conjunction with the effectiveness of the
RMA, we started acquiring our lessees and leases and began to earn room revenue,
food and beverage revenue and other revenue through the operations of our
hotels. We recognize these revenues as the hotel services are performed.

Foreign Currency Translation -- Results of operations for our Canadian
hotels are maintained in Canadian dollars and translated using the average
exchange rates during the period. Assets and liabilities are translated to U.S.
dollars using the exchange rate in effect at the balance sheet date. Resulting
translation adjustments are reflected in accumulated other comprehensive income.

Capitalized Cost -- We capitalize interest and certain other costs,
such as property taxes, land leases, and property insurance relating to hotels
undergoing major renovations and redevelopments. Such costs capitalized in 2002,
2001, and 2000, were approximately $1.4 million, $1.2 million and $2.0 million,
respectively.

F-10

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

Net Income (Loss) Per Unit -- We computed basic earnings per unit by
dividing net income (loss) available to unitholders by the weighted average
number of units outstanding. We computed diluted earnings per unit by dividing
net income (loss) available to unitholders by the weighted average number of
units and unit equivalents outstanding. Unit equivalents represent units
issuable upon exercise of FelCor stock options and FelCor's unvested officers'
restricted stock grants.

At December 31, 2002, 2001, and 2000, our Series A Cumulative Preferred
Units, or Series A preferred units, if converted to units, would be
antidilutive; accordingly we do not assume conversion of the Series A preferred
units in the computation of diluted earnings per unit. At December 31, 2002,
2001 and 2000, the majority of FelCor stock options granted are not included in
the computation of diluted earnings per unit because the average market price of
FelCor common stock during each respective year exceeded the exercise price of
the options.

Stock Compensation -- FelCor applies APB Opinion 25 and related
interpretations in accounting for their stock based compensation plans. In 1995,
SFAS 123, "Accounting for Stock-Based Compensation," was issued, which, if fully
adopted, would have changed the methods applied in recognizing the cost of the
plans. Adoption of the cost recognition provisions of SFAS 123 is optional, and
FelCor has decided to adopt the provisions of SFAS 123 beginning in the first
quarter of 2003. Had the compensation cost for FelCor's stock-based compensation
plans been determined in accordance with SFAS 123, our net income or loss and
net income or loss per unit for 2002, 2001, and 2000 would approximate the pro
forma amounts below (in thousands, except per unit data):

The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts.

Derivatives -- On January 1, 2001, we adopted SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
SFAS 133, as amended, establishes accounting and reporting standards for
derivative instruments. Specifically, SFAS 133 requires an entity to recognize
all derivatives as either assets or liabilities on the balance sheet and to
measure those instruments at fair value. Additionally, the fair value
adjustments will affect either partner's capital or net income, depending on
whether the derivative instrument qualifies as a hedge for accounting purposes
and the nature of the hedging activity.

Upon adoption of SFAS 133, on January 1, 2001, we recorded the fair
value of our interest rate swap agreements, having a notional value of $250
million, as an asset of $248,000 with a corresponding credit to accumulated
other comprehensive income reported in partner's capital.

Segment Information -- SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," requires the disclosure of selected
information about operating segments. Based on the guidance provided in the
standard, we have determined that our business is conducted in one operating
segment.

F-11

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

Distributions and Dividends -- We and FelCor have historically paid
regular quarterly distributions on FelCor's common stock and our units.
Additionally, we have paid regular quarterly distributions on our preferred
units in accordance with our unit distribution requirements. FelCor's ability to
make distributions is dependent on our quarterly distributions to them.

For 2002, we paid distributions of $0.60 per unit, $1.95 per unit of
our Series A preferred units, and $2.25 per depositary unit evidencing our 9%
Series B Redeemable Preferred Units, or Series B preferred units.

Minority Interests -- Minority interests in consolidated subsidiaries
represents the proportionate share of the equity not owned by us. We allocate
income and loss to minority interest based on the weighted average percentage
ownership throughout the year.

Income Taxes -- We are a partnership under the Internal Revenue Code.
Prior to January 1, 2001, as a partnership all of our taxable income or loss, or
tax credits were passed through to our partners. Under the RMA that became
effective January 1, 2001, we generally lease our hotels to wholly-owned TRSs
that are subject to federal and state income taxes. We account for income taxes
in accordance with the provisions of Statement of Financial Accounting Standards
109. Under SFAS 109, we account for income taxes using the asset and liability
method under which deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax losses.

3. ACQUISITION OF HOTEL LEASES

As a result of the passage of the RMA, effective January 1, 2001, we
acquired 100% of DJONT, which owned leases on 85 of our hotels, and contributed
it to a TRS. In consideration, we issued 416,667 of our units, valued at
approximately $10 million, and we assumed DJONT's accumulated stockholders'
deficit of $25 million, which we expensed as lease termination cost in 2001. On
January 1, 2001, we acquired from Six Continents Hotels the leases covering 11
hotels, terminated one additional lease in connection with the sale of the
related hotel and terminated the 12 related management agreements in exchange
for 413,585 shares of FelCor's common stock valued at approximately $10 million
and we issued a corresponding number of partnership units to FelCor. Of this $10
million in consideration, we expensed approximately $2 million as lease
termination costs in 2001 and $8 million in 2000, in connection with the
designation of certain of these hotels as held for sale. Of the 11 hotels, two
have been sold, eight have been contributed to a joint venture with IHC, and one
has been classified as held for investment.

We purchased certain assets and assumed certain liabilities in
connection with the acquisition of the leases on these 96 hotels. The fair
values of the acquired assets and liabilities at January 1, 2001, are as follows
(in thousands):

Cash and cash equivalents ......................... $25,300
Accounts receivable ............................... 30,214
Other assets ...................................... 17,318
-------
Total assets acquired ............................. 72,832
-------

Accounts payable .................................. 18,656
Due to FelCor LP .................................. 30,687
Accrued expenses and other liabilities ............ 40,372
-------
Total liabilities assumed ......................... 89,715
-------
Liabilities assumed in excess of assets acquired .. 16,883
Value of FelCor common stock and units issued ..... 19,721
-------
Lease termination costs ...................... $36,604
=======

We acquired the remaining 88 hotel leases held by Six Continents Hotels
on July 1, 2001. In consideration for the acquisition of these leases, we
entered into long-term management agreements with

F-12

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. ACQUISITION OF HOTEL LEASES -- (CONTINUED)

Six Continents Hotels with regard to these hotels, and FelCor issued to Six
Continents Hotels 100 shares of their common stock and we issued a corresponding
number of partnership units to FelCor. The management fees payable to Six
Continents Hotels include compensation to Six Continents Hotels for both
management services and the acquisition of the 88 leases and, as such, are
higher than we pay to other managers for comparable services. Management fees
under these management contracts will be expensed as incurred.

We purchased certain assets and acquired certain liabilities with the
acquisition of the 88 hotel leases. The fair value of the acquired assets and
liabilities at July 1, 2001, are as follows (in thousands):

Cash and cash equivalents .............. $ 4,431
Accounts receivable .................... 30,964
Other assets 6,941
-------
Total assets acquired ........ $42,336
=======

Accounts payable ....................... $ 7,660
Accrued expenses and liabilities 34,676
-------
Total liabilities assumed .... $42,336
=======

4. INVESTMENT IN HOTELS

Investment in hotels at December 31, 2002 and 2001, consists of the
following (in thousands):

On July 12, 2002, we acquired the 208-suite SouthPark Suite Hotel in
Charlotte, North Carolina for $14.5 million. We converted this hotel to a
Doubletree Guest Suites hotel in October 2002. We entered into a 15-year
management agreement with Hilton for the hotel concurrent with the acquisition
closing. We utilized excess cash on hand to acquire the hotel.

On July 19, 2002, we acquired the 385-room Wyndham(R) resort and a
lease on the Arcadian Shores Golf Club in Myrtle Beach, South Carolina. We
intend to convert this hotel to a Hilton hotel in April 2003. We purchased this
hotel, adjacent land and a leasehold interest in the golf course for $35.3
million. We entered into a 15-year management agreement with Hilton for the
hotel concurrent with the acquisition closing. We utilized excess cash on hand
to acquire this hotel.

In June 2002, we sold retail space associated with the Allerton Hotel
located in Chicago, Illinois, for net proceeds of $16.7 million and recorded a
net gain of approximately $5.1 million. In addition, in 2002 we also recognized
a $0.2 million gain related to the condemnation of land adjacent to one of our
hotels.

In 2001, we received $3.9 million from the condemnation of three
parcels of land and recorded a gain of $2.9 million. In 2001, we sold an
undeveloped parcel of land adjacent to one of our hotels in Atlanta and recorded
a gain of $0.5 million.

In 2000, we sold two hotels for $33.8 million, recognizing a gain of
$2.6 million, and vacant excess land and a billboard for $2.3 million,
recognizing a gain of $1.8 million.

F-13

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. HOTELS HELD FOR SALE

In 2000, we identified 25 hotels that we considered non-strategic and
announced our intention to sell such hotels. In connection with the decision to
sell these hotels, in 2000 we recorded an impairment charge of $63 million
representing the difference between the net book value and the then estimated
fair market value of these hotels. In 2001, we recognized an additional $7
million impairment charge to reflect the deterioration of the market value of
the then remaining 13 hotels held for sale. The net valuation allowance on these
13 hotels held for sale as of December 31, 2001 was $39.1 million. At December
31, 2002, we transferred the remaining six hotels to hotels held for investment.
No depreciation expense has been recorded on these hotels since June 30, 2000;
however, since we transferred these hotels to held for investment, depreciation
of these six hotels resumed on January 1, 2003.

During 2000, one of these hotels was sold and we recognized a gain of
approximately $0.1 million, included in the total gains recognized in 2000
discussed previously.

In March 2001, we contributed eight of the hotels held for sale to a
joint venture in which we retain a 50% equity interest and an affiliate of IHC
holds the other 50% equity interest. We contributed hotels with a book value of
approximately $77 million, and received net cash proceeds of approximately $52
million. We retained an $8 million common equity interest and a $16.6 million
preferred equity interest paying 8.85%. No gain or loss was recorded in
connection with this transaction. We also made a loan of approximately $4
million to IHC, secured by its interest in the venture.

In June 2001, we sold the 140-room Hampton Inn located in Marietta,
Georgia, for a net sales price of $7 million. In September 2001, we sold the
119-room Hampton Inn located in Jackson, Mississippi, for a net sales price of
$4 million. In November 2001, we sold the 129-room Doubletree Hotel located in
Tampa, Florida for a net sales price of $3 million. We recorded no gain or loss
from these sales.

We sold our 183-room Doubletree Guest Suites hotel in Boca Raton,
Florida, in April 2002, and received net sales proceeds of $6.5 million. We
recorded a net gain of approximately $0.8 million on the sale.

In August 2002, we contributed five of the hotels held for sale,
located in Kansas, to a joint venture in which we retain a 50% equity interest
and an independent hotel company holds the other 50% equity interest. We
received net cash proceeds of approximately $4.4 million and retained a $1.4
million common equity interest and a $6.3 million preferred equity interest
paying 8.19%. Also in August 2002, we sold our 71-room Holiday Inn Express hotel
in Colby, Kansas, receiving net proceeds of $1.7 million. We recorded no gain or
loss in connection with these transactions as the proceeds received approximated
the book value of the properties.

Revenues related to the hotels held for sale, less costs associated
with those assets, were included in our results of operations for the year ended
December 31, 2002, 2001, and 2000, and represented net income of approximately
$0.1 million, $11 million, and $16 million, (net of $3 million in depreciation
expense for 2000), respectively.

6. INVESTMENT IN UNCONSOLIDATED ENTITIES

We owned 50% interests in joint venture entities that owned 29 hotels
at December 31, 2002, and 24 hotels at December 31, 2001. We also owned a 50%
interest in entities that own an undeveloped parcel of land, provides
condominium management services, develops condominiums in Myrtle Beach, South
Carolina, and leases 13 hotels. We account for our investments in these
unconsolidated entities under the equity method.

F-14

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. INVESTMENT IN UNCONSOLIDATED ENTITIES -- (CONTINUED)

Summarized unaudited combined balance sheet information for 100% of
these unconsolidated entities is as follows (in thousands):

Debt of our unconsolidated entities at December 31, 2002, consisted of
$267.4 million of non-recourse mortgage debt. It also included $6.0 million of
mortgage debt guaranteed by us and $5.7 million of mortgage debt guaranteed by
Hilton, one of our joint venture partners. The debt guaranteed by us consisted
primarily of 50% of a loan related to the construction of a residential
condominium project in Myrtle Beach, South Carolina. The loan commitment is for
$97.6 million of which approximately $11.4 million was outstanding as of
December 31, 2002. Our guarantee reduces from 50% to 25% of the outstanding
balance when the condominium project is completed and receives a certificate of
occupancy, which we expect to occur in late 2004. Our guarantee is a payment
guarantee and will trigger in the event that the joint venture fails to pay
interest or principal due under the debt agreement. The loan matures in August
2005 and bears interest at LIBOR plus 200 basis points. As of December 31, 2002,
we have not established any liability related to our guarantees of debt because
it is not probable that we will be required to perform under these guarantees.

Summarized unaudited combined statement of operations information for
100% of these unconsolidated entities is as follows (in thousands):

A summary of the components of our investment in unconsolidated
entities as of December 31, 2002 and 2001, is as follows:

This investment included net preferred interests, including unpaid
preferred returns, of $23.8 million and $17.7 million as of December 31, 2002
and 2001, respectively. We cease the accrual of preferred returns if it becomes
probable that the returns will not be realized. Under this policy, we did not
recognize $0.4 million of owed but unpaid preferred returns during the year
ended December 31, 2002.

F-15

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. INVESTMENT IN UNCONSOLIDATED ENTITIES -- (CONTINUED)

A summary of the components of our equity in income (loss) of
unconsolidated entities for the years ended December 31, 2002, 2001, and 2000,
are as follows:

7. DEBT

Debt at December 31, 2002 and 2001, consists of the following (in
thousands):

(a) At December 31, 2002, we had unencumbered investments in
hotels with a net book value totaling $2.3 billion.

(b) At December 31, 2002, our $175 million publicly-traded notes
due October 2004 and $25 million of our publicly traded notes
due October 2007, were matched with interest rate swap
agreements that effectively converted the fixed interest rate
on the notes to a floating interest rate tied to LIBOR. The
differences to be paid or received by us under the terms of
the interest rate swap agreements are accrued as interest
rates change and recognized as an adjustment to interest
expense. The interest rate swaps decreased interest expense by
$4 million during 2002.

(c) Calculated based on the weighted average of outstanding debt
as of December 31, 2002.

All of our floating rate debt at December 31, 2002, was based upon
LIBOR (1.39% as of December 31, 2002).

We reported interest expense net of interest income of $2.1 million,
$2.9 million and $1.9 million, and capitalized interest of $0.8 million, $0.8
million and $1.1 million for the years ended December 31, 2002, 2001, and 2000,
respectively.

F-16

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. DEBT -- (CONTINUED)

Interest expense associated with the $300 million in senior debt that
was repaid in October 2001, relating to our terminated merger with MeriStar
Hospitality Corporation, or MeriStar, was $5.5 million, and is presented net of
$2.9 million of interest income from the proceeds of the senior notes held in
escrow, during the year ended December 31, 2001.

We charged off $3.2 million of unamortized deferred financing costs as
a result of a reduction of the line of credit commitments in 2002. In 2001, we
recorded charge-offs of $0.2 million and $1 million of unamortized costs related
to the prepayment of floating rate debt and the renewal of the line of credit,
respectively. Also in 2000, we recorded charge-offs of $0.6 million and $3.3
million of unamortized costs related to the reduction of the line of credit and
the repayment of a $375 million floating rate senior term loan, respectively.

On January 11, 2001, we completed the private placement of $100 million
in 9 1/2% senior unsecured notes that mature in September 2008. These notes were
issued at a premium to yield an effective rate of 91/8%. The proceeds were used
initially to pay down our line of credit. In October 2001, we exchanged the $100
million in privately placed senior notes for notes with identical terms that are
registered under the Securities Act of 1933.

In June 2001, we completed the private placement of $600 million in 8
1/2% senior unsecured notes that mature in 2011. We placed approximately $315
million of the proceeds in escrow, pending the closing or termination of the
merger with MeriStar. The remaining proceeds were used to pay down the line of
credit and other floating rate debt. In October 2001, as the result of the
merger termination, in accordance with the requirements of the indenture
governing these notes, we redeemed $300 million in principal amount of these
notes. The redemption price was 101% of the principal amount redeemed plus
accrued interest and was paid out of the $315 million in escrowed funds. In
October 2001, we exchanged the remaining privately placed notes for notes with
identical terms that were registered under the Securities Act of 1933.

In June 2001, in connection with the issuance of fixed rate senior
notes and the subsequent prepayment of floating rate debt, we terminated $200
million of interest rate swaps, resulting in a $4.8 million swap termination
cost recorded in the second quarter.

In December 2001, we completed the private placement of $100 million in
9 1/2% senior unsecured notes that mature in September 2008. These notes were
issued at a discount to yield 9.6%. The proceeds were used initially to pay down
our line of credit. In connection with the issuance of these notes and the
prepayment of floating rate debt, we terminated $50 million of interest rate
swaps resulting in a $2.2 million swap termination cost during the fourth
quarter of 2001.

In 2002, we entered into two amendments to our line of credit. In June
2002, we amended our line of credit to relax covenant levels to provide us with
greater financial flexibility. In December 2002, we further amended our line of
credit to relax covenant levels and reduce the line to $300 million from $615
million. The maturity of the line of credit remains at October 31, 2004, but we
have the right to extend the maturity date for two consecutive one-year periods,
subject to certain conditions. We charged off $3.2 million of unamortized
deferred financing costs associated with the reduction in our line of credit.
Although we were in compliance with our existing covenants prior to the
amendments, it was necessary to amend the line of credit in anticipation of a
continued negative RevPAR environment. The amended line allows for the
relaxation of certain financial covenants through the maturity date, with a
step-up in covenants on June 30, 2004, including the unsecured interest
coverage, fixed charge coverage, secured leverage, and total leverage tests. The
interest rate remains on the same floating rate basis with a tiered spread based
on our debt leverage ratio, but with an added tier to reflect the higher
permitted leverage. There was no amount outstanding under the facility at
December 31, 2002.

F-17

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. DEBT -- (CONTINUED)

In addition to financial covenants, our line of credit includes certain
other affirmative and negative covenants, including: Restrictions on our ability
to create or acquire wholly-owned subsidiaries; restrictions on the
operation/ownership of our hotels; limitations on our ability to lease property
or guarantee leases of other persons; limitations on our ability to make
restricted payments (such as distributions on units and preferred units, unit
repurchases and certain investments); limitations on our ability to merge or
consolidate with other persons, issue stock of our subsidiaries and sell all or
substantially all of our assets; restrictions on our ability to construct new
hotels or acquire hotels under construction; limitations on our ability to
change the nature of our business; limitations on our ability to modify certain
instruments; limitations on our ability to create liens; limitations on our
ability to enter into transactions with affiliates; and limitations on our
ability to enter into joint ventures. Under the most recent amendment to our
line of credit, at higher permitted leverage levels we agreed to certain more
stringent limitations on acquisitions, restricted payments and discretionary
capital expenditures. At December 31, 2002, we were in compliance with all
covenants under our line of credit.

If RevPAR declines continue or become more severe, we may be unable to
satisfy all of the covenant requirements under our line of credit. In such an
event, we may need to obtain further amendments from our lenders or seek other
sources of financing. Further amendments to our line of credit, if any, may
result in additional restrictions on our financial flexibility.

Failure to satisfy one or more of the financial or other covenants
under our line of credit could result in an event of default, notwithstanding
our ability to meet our debt service obligations. Other events of default under
our line of credit include a default in the payment of other recourse
indebtedness of $10 million or more, bankruptcy and a change of control.

Our other borrowings contain affirmative and negative covenants that
are generally equal to or less restrictive than the line of credit. Most of the
mortgage debt is non-recourse to us and contains provisions allowing for the
substitution of collateral upon satisfaction of certain conditions. Most of our
mortgage debt is prepayable, subject to various prepayment penalties, yield
maintenance, or defeasance obligations.

Our publicly traded senior unsecured notes require that we satisfy a
total leverage, a secured leverage and an interest coverage test in order to
incur additional indebtedness, except under our line of credit or to refinance
maturing debt with replacement debt, as defined in our senior unsecured note
indenture; to pay distributions in excess of the minimum distributions required
for FelCor to meet the REIT qualification test; to repurchase units; or to
merge. As of December 31, 2002, and the date of this filing, we have satisfied
all such incurrence tests. In addition, the interest rate on $900 million of our
senior debt increases by 50 basis points if two major rating agencies downgrade
our debt below certain levels.

Future scheduled principal payments on debt obligations at December 31,
2002, are as follows (in thousands):

F-18

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. DERIVATIVES

On the date we enter into a derivative contract, we designate the
derivative as a hedge to the exposure to changes in the fair value of a
recognized asset or liability or a firm commitment (referred to as a fair value
hedge), or the exposure to variable cash flows of a forecasted transaction
(referred to as a cash flow hedge). We have entered into both types of
derivative contracts. For a fair value hedge the gain or loss is recognized in
earnings in the period of change together with the offsetting loss or gain on
the hedged item attributable to the risk being hedged. The effect of that
accounting is to reflect in earnings the extent to which the hedge is not
effective in achieving offsetting changes in fair value. For a cash flow hedge
the effective portion of the derivative's gain or loss is initially reported as
a component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. The
ineffective portion of the gain or loss is reported in earnings immediately. At
December 31, 2002, all of our derivative contracts are fair value hedges.

We formally document all relationships between hedging instruments and
hedged items, as well as our risk-management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives to specific assets and liabilities on the balance sheet or specific
firm commitments. We also formally assess (both at the hedge's inception and on
an ongoing basis) whether the derivatives that are used in hedging transactions
have been highly effective in offsetting changes in the cash flows or fair
values of hedged items and whether those derivatives may be expected to remain
highly effective in future periods. When we determine that a derivative is not
(or has ceased to be) highly effective as a hedge, we discontinue hedge
accounting prospectively, as discussed below.

In the normal course of business, we are exposed to the effect of
interest rate changes. We limit these risks by following established risk
management policies and procedures including the use of derivatives. It is our
objective to use interest rate hedges to manage our fixed and floating interest
rate position and not to engage in speculation on interest rates. We manage
interest rate risk based on the varying circumstances of anticipated borrowings,
and existing floating and fixed rate debt, including our revolving line of
credit. We will generally seek to pursue interest rate risk mitigation
strategies that will result in the least amount of reported earnings volatility
under generally accepted accounting principles, while still meeting strategic
economic objectives and maintaining adequate liquidity and flexibility.
Instruments that meet these hedging criteria are formally designated as hedges
at the inception of the derivative contract.

To manage the relative mix of our debt between fixed and variable rate
instruments, at December 31, 2002, we had entered into interest rate swap
agreements with four financial institutions with a notional value of $200
million. These interest rate swap agreements modify a portion of the interest
characteristics of our outstanding fixed rate debt, without an exchange of the
underlying principal amount, and effectively convert fixed rate debt to a
variable rate.

To determine the fair values of our derivative instruments, we use a
variety of methods and assumptions that are based on market conditions and risks
existing at each balance sheet date. All methods of assessing fair value result
in a general approximation of value, and such value may never actually be
realized.

The interest rate swap agreements held at December 31, 2002, are
designated as fair value hedges, are marked to market through the income
statement, but are offset by the change in fair value of our swapped outstanding
fixed rate debt. The estimated unrealized net gain on these interest rate swap
agreements was approximately $7.7 million at December 31, 2002, and represents
the amount we would receive if the agreements were terminated based on current
market rates. At December 31, 2001, we had a net unrealized loss of $1.5 million
related to these agreements.

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FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. DERIVATIVES -- (CONTINUED)

The fixed rates we will receive and the variable rate we will pay under
these swaps as of December 31, 2002, are summarized in the following table:

The differences to be paid or received by us under the terms of the
interest rate swap agreements are accrued as interest rates change and we
recognize them as an adjustment to interest expense, pursuant to the terms of
our interest rate swap agreement; they will have a corresponding effect on our
future cash flows. Under interest rate swaps then in force, we received $4
million during 2002, paid $0.5 million in 2001 and received $1.8 million during
2000. Agreements such as these contain a credit risk in that the counterparties
may be unable to meet the terms of the agreement. We minimize that risk by
evaluating the creditworthiness of our counterparties, who are limited to major
banks and financial institutions, and we do not anticipate nonperformance by the
counterparties. The credit ratings for the financial institutions that are
counterparties to the interest rate swap agreements range from A to AA-.

9. FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS 107 requires disclosures about the fair value of all financial
instruments, whether or not recognized for financial statement purposes.
Disclosures about fair value of financial instruments are based on pertinent
information available to management as of December 31, 2002. Considerable
judgment is necessary to interpret market data and develop estimated fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that we could realize on disposition of the financial instruments.
The use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.

Our estimates of the fair value of (i) accounts receivable, accounts
payable and accrued expenses approximate carrying value due to the relatively
short maturity of these instruments; (ii) notes receivable approximate carrying
value based upon effective borrowing rates for issuance of debt with similar
terms and remaining maturities; (iii) the borrowings under our line of credit
approximate carrying value because these borrowings accrue interest at floating
interest rates based on market; and (iv) our interest rate swaps and the hedged
debt are recorded at estimates of fair value. The estimated fair value of our
debt of $1.9 billion is $1.7 billion at December 31, 2002, based on current
market interest rates estimated by us for similar debt with similar maturities.

10. INCOME TAXES

FelCor has elected to be taxed as a REIT under the Internal Revenue
Code. To qualify as a REIT, FelCor must meet a number of organizational and
operational requirements, including a requirement that it distribute at least
90% of its taxable income to its stockholders. It is FelCor's management's
current intent to adhere to these requirements and maintain its REIT status. As
a REIT, FelCor generally will not be subject to corporate level federal income
taxes on net income it distributes to its stockholders. If FelCor fails to
qualify as a REIT in any taxable year, it will be subject to federal income
taxes at regular corporate rates (including any applicable alternative minimum
tax) and may not qualify as a REIT for subsequent taxable years. Even if

F-20

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. INCOME TAXES -- (CONTINUED)

FelCor qualifies for taxation as a REIT, it may be subject to certain state and
local taxes on its income and property and to federal income and excise taxes on
its undistributed taxable income. In addition, taxable income from non-REIT
activities managed through TRSs is subject to federal, state and local taxes.

Under the RMA, which became effective January 1, 2001, we generally
lease our hotels to wholly-owned TRSs that are subject to federal and state
income taxes. We account for income taxes in accordance with the provisions of
SFAS 109, "Accounting for Income Taxes." Under SFAS 109, we account for income
taxes using the asset and liability method, under which deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. At December 31, 2002 and 2001,
our TRS had a deferred tax asset, prior to any valuation allowance, primarily
comprised of the following (in thousands):

We have provided a 100% valuation allowance against this asset as of
December 31, 2002 and 2001, due to the uncertainty of realization and,
accordingly, no provision or benefit for income taxes is reflected in the
accompanying Consolidated Statements of Operations.

11. REDEEMABLE OPERATING PARTNERSHIP UNITS AND PARTNERS' CAPITAL

FelCor is our sole general partner and is obligated to contribute the
net proceeds from any issuance of its equity securities to us in exchange for
units corresponding in number and terms to the equity securities issued by it.
We may also issue units to third parties in exchange for like number of shares
of FelCor common stock or, at the options of FelCor, for the cash equivalent
thereof. Due to these redemption rights, these limited partnership units have
been excluded from partners' capital and are included in redeemable units and
measured at redemption value as of the end of the periods presented. At December
31, 2002 and 2001 there were 3,289,651 and 9,005,328 redeemable units
outstanding. The value of the redeemable units are based on the closing market
price of FelCor's common stock at the balance sheet date, which at December 31,
2002 and 2001 was $11.44 and $16.71, respectively.

In consideration for the acquisition of all the equity interests in
DJONT, we issued 416,667 units on January 1, 2001. This transaction reduced
FelCor's ownership of limited partnership units from approximately 86% to
approximately 85%.

During 2002, 5,713,185 units owned by a subsidiary of Six Continents
Hotels were exchanged for a like number of FelCor's newly issued common stock,
and 2,492 units were redeemed for $49,000 in cash. The exchange with Six
Continents Hotels resulted in an increase in FelCor's ownership of us from
approximately 85% to 95%.

As of December 31, 2002, FelCor had approximately $920 million of
common stock, preferred stock, debt securities, and/or common stock warrants
available for offerings under shelf registration statements previously declared
effective.

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FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. REDEEMABLE OPERATING PARTNERSHIP UNITS AND PREFERRED UNITS -- (CONTINUED)

Preferred Units

FelCor's board of directors is authorized to provide for the issuance
of up to 20,000,000 shares of preferred stock in one or more series, to
establish the number of shares in each series, to fix the designation, powers
preferences and rights of each such series, and the qualifications, limitations
or restrictions thereof.

In 1996, FelCor issued 6.1 million shares of their Series A preferred
stock at $25 per share. The Series A preferred stock bears an annual cumulative
dividend payable in arrears equal to the greater of $1.95 per share or the cash
distributions declared or paid for the corresponding period on the number of
shares of common stock into which the Series A preferred stock is then
convertible. Each share of the Series A preferred stock is convertible at the
stockholder's option to 0.7752 shares of common stock, subject to certain
adjustments, and could not be redeemed by us before April 30, 2001. The proceeds
from the Series A preferred stock were contributed to us in exchange for a like
number of Series A preferred units. The preference on these units is the same as
FelCor's Series A preferred stock. During 2000, holders of 69,400 shares of
Series A preferred stock converted their shares to 53,798 common shares, which
were issued from treasury shares.

On May 1, 1998, FelCor issued 5.75 million depositary shares,
representing 57,500 shares of their Series B preferred stock at $25 per
depositary share. They may call the Series B preferred stock and the
corresponding depositary shares at $25 per depositary share on or after May 7,
2003. These shares have no stated maturity, sinking fund or mandatory
redemption, and are not convertible into any of our other securities. The Series
B preferred stock has a liquidation preference of $2,500 per share (equivalent
to $25 per depositary share) and is entitled to annual cumulative dividends at
the rate of 9% of the liquidation preference (equivalent to $2.25 annually per
depositary share). The proceeds from the Series B preferred stock were
contributed to us in exchange for a like number of Series B preferred units. The
preference on these units is the same as FelCor's Series B preferred stock.

On April 4, 2002, FelCor issued 1,025,800 depositary shares,
representing 10,258 shares of Series B preferred stock at $24.37 per depositary
share to yield 9.4%. The proceeds from FelCor's Series B preferred stock
issuance were contributed to us in exchange for a like number of Series B
preferred units. The preference on these units is the same as FelCor's Series B
preferred stock. We used the net proceeds of $23.8 million for working capital
and discretionary capital expenditures.

At December 31, 2002, all distribution then payable on the Series A and
Series B preferred units had been paid.

Treasury Stock Repurchase Program

In 2000, FelCor's board of directors authorized the repurchase of up to
$300 million of their outstanding common shares. This share repurchase program
was suspended in March 2001. Stock repurchases may, at the discretion of
FelCor's management, be made from time to time at prevailing prices in the open
market or through privately negotiated transactions. Through March 2001, FelCor
repurchased approximately 10.5 million shares of its common stock at an
aggregate of approximately $189 million. This has been recorded as a reduction
to partner's capital as a result of the redemption of units held by FelCor to
fund the repurchase. FelCor has suspended the stock repurchase program and,
since March 27, 2001, they have not repurchased any additional shares of their
common stock in the open market.

F-22

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. REDEEMABLE OPERATING PARTNERSHIP UNITS AND PREFERRED UNITS -- (CONTINUED)

In consideration for the acquisition of 12 leases that were held by Six
Continents Hotels, in January 2001, FelCor issued to Six Continents Hotels,
413,585 shares of its common stock previously held in treasury. In July 2001,
FelCor issued 100 shares of its common stock from treasury to Six Continents
Hotels to acquire the remaining 88 leases still held by Six Continents Hotels.
We issued a corresponding number of partnership units to FelCor for the common
stock issued.

Activity during 2002 included FelCor's issuance of 58,606 shares under
restricted stock grants to its employees and directors, offset by the forfeiture
of 3,292 shares under restricted stock grants and the exercise of 3,100 stock
options.

12. OTHER PROPERTY OPERATING COSTS

Hotel operating revenue is comprised of the following for the year
ended December 31, 2002 and 2001 (in thousands):

Hotel operating expenses are comprised of the following for the year
ended December 31, 2002 and 2001 (in thousands):

Other property operating costs is comprised of the following for the
year ended December 31, 2002 and 2001 (in thousands):

F-23

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. TAXES, INSURANCE AND LEASE EXPENSE

Taxes, insurance and lease expense is comprised of the following for
the years ended December 31, 2002, 2001, and 2000 (in thousands):

(a) Includes lease expense associated with the hotels owned by
unconsolidated entities.

14. LAND LEASES AND HOTEL RENT

We lease land occupied by certain hotels from third parties under
various operating leases that expire through 2073. Certain land leases contain
contingent rent features based on gross revenue at the respective hotels. In
addition, we recognize rent expense for 15 hotels that are owned by
unconsolidated entities and are leased to our wholly-owned TRSs. These leases
expire through 2015 and require the payment of base rents and contingent rent
based on revenues at the respective hotels. Future minimum lease payments under
our land lease obligations and hotel leases at December 31, 2002, are as follows
(in thousands):

15. MERGER TERMINATION COSTS

On May 9, 2001, we entered into a merger agreement with MeriStar. On
September 21, 2001, we announced jointly with MeriStar the termination of the
merger. The decision to terminate the merger resulted from the September 11
terrorist attacks and their subsequent adverse impact on the financial markets.
As a result of the merger termination, we expensed $19.9 million associated with
the merger and $5.5 million in merger financing costs for the year ended
December 31, 2001.

16. IMPAIRMENT LOSS

We recorded impairment losses aggregating $157.5 million during the
fourth quarter of 2002.

The provisions of SFAS 144 resulted in $144.1 million of this
impairment charge. This related principally to our fourth quarter 2002 decision
to sell 33 non-strategic hotels over the next 36 months. An impairment charge of
$118.3 million was recorded on 20 of these 33 hotels. Six of these 33 hotels had
been previously identified for sale and had been included in previous impairment
losses. The 33 hotels identified as non-strategic represented 14% of our hotel
rooms and 9% of our consolidated hotel revenue during the year ended December
31, 2002, and had a net book value of $235.1 million as of December 31, 2002. Of
the remaining 2002 impairment charge, $25.2 million related to two hotels held
for investment that are not included in our disposition plan. In accordance with
the provisions of SFAS 144, because the estimated future undiscounted cash flows
from these individual hotels did not exceed the hotel's carrying values, we
reduced

F-24

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. IMPAIRMENT LOSS -- (CONTINUED)

the carrying value of the 22 impaired hotels to our estimate of each hotel's
estimated fair value as of December 31, 2002. In addition, the 2002 impairment
charge included a $0.6 million write-down of construction in progress.

We recorded an impairment charge of $13.4 million related to an other
than temporary decline in value of certain equity method investments under the
provisions of Accounting Principles Board Opinion 18, "The Equity Method of
Accounting for Common Stocks" ("APB 18"). In accordance with APB 18, other than
temporary declines in fair value of our investment in unconsolidated entities
result in reductions in the carrying value of these investments. We consider a
decline in value in our equity method investments that is not estimated to
recover within 12 months to be other than temporary.

We recorded impairment charges of $7 million and $63 million in 2001
and 2000, respectively, in conjunction with the designation of certain hotels as
held for sale.

17. EARNINGS PER UNIT

The following table sets forth the computation of basic and diluted
earnings per unit for the years ended December 31, 2002, 2001 and 2000 (in
thousands, except per unit data):

F-25

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

17. EARNINGS PER UNIT -- (CONTINUED)

Securities that could potentially dilute basic earnings per unit in the
future that were not included in computation of diluted earnings per unit,
because they would have been antidilutive for the periods presented, are as
follows (unaudited, in thousands):

Series A preferred units that would be excluded from net income (loss)
applicable to unitholders, if the Series A preferred units were dilutive were
$11.7 million for 2002, 2001 and 2000.

18. COMMITMENTS AND RELATED PARTY TRANSACTIONS

The acquisition of DJONT, one of our primary lessees, was completed
effective January 1, 2001. In consideration for the acquisition of DJONT, we
issued 416,667 units valued at approximately $10 million. The acquisition of
DJONT required negotiations between FelCor and the owners of DJONT, including
Thomas J. Corcoran, Jr., FelCor's President, Chief Executive Officer, and a
director of FelCor, and the children of Charles N. Mathewson, a former director
of FelCor. The interests of Mr. Corcoran and Mr. Mathewson were in direct
conflict with FelCor's interests in these negotiations and, accordingly, they
abstained from participation in FelCor's board of directors' discussion and vote
on this matter.

Prior to our acquisition of DJONT, which was effective January 1, 2001,
our general partner, FelCor, shared the executive offices and certain employees
with FelCor, Inc., and DJONT, (both companies were controlled by Thomas J.
Corcoran, Jr., President and CEO) and each company paid its share of the costs
thereof, including an allocated portion of the rent, compensation of certain
personnel, office supplies, telephones, and depreciation of office furniture,
fixtures, and equipment. We reimbursed FelCor for our share of such allocated
costs. Any such allocation of shared expenses to us is required to be approved
by a majority of FelCor's independent directors. At December 31, 2002, FelCor,
Inc. had a 10% ownership interest in one hotel and limited other investments.
During 2000, we and FelCor paid approximately $7.5 million (approximately 89.4%)
of the allocable expenses under this arrangement. Following the acquisition of
DJONT, FelCor, Inc. continued to share certain overhead costs. FelCor, Inc. paid
$50,000 and $45,000 for shared office costs in 2002 and 2001, respectively.

In December 2000, we sold one hotel and, effective January 1, 2001,
completed the acquisition of leases with respect to 12 hotels that had been
leased to and operated by Six Continents Hotels. In consideration for the
acquisition of such leases and termination of the related management agreements,
FelCor issued 413,585 shares of their common stock, valued at approximately $10
million, to Six Continents Hotels. We acquired the remaining leases held by Six
Continents Hotels, effective July 1, 2001. We contributed these leases to our
TRSs. In consideration for these 88 leases, FelCor issued 100 shares of their
common stock and caused their subsidiaries to agree to new long-term management
agreements with subsidiaries of Six Continents Hotels to manage these hotels.
The acquisition of the leases held by Six Continents Hotels involved
negotiations between FelCor and Six Continents Hotels. Richard C. North, a
director of FelCor, was the Group Finance Director of Six Continents plc, the
parent of Six Continents Hotels and, together with its affiliates, the owner of
approximately 17% of FelCor's outstanding shares and our units. The interest of
Six Continents plc in those negotiations was in direct conflict with our
interests. Mr. North abstained from participating in any discussion or vote by
FelCor's board relating to these transactions.

Following the events of September 11, 2001, certain types of insurance
coverage, such as for acts of terrorism, were only available at a high cost. In
an effort to keep our cost of insurance within reasonable

F-26

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

18. COMMITMENTS AND RELATED PARTY TRANSACTIONS -- (CONTINUED)

limits, we have only purchased terrorism insurance for those hotels that are
secured by mortgage debt, as required by our lenders. We have established a
self-insured retention of $250,000 per occurrence for general liability
insurance with regard to 68 of our hotels; the remainder of our hotels
participate in general liability programs, of our managers, with no deductible.
Due to the increase in our general liability deductible for the 68 hotels, we
maintain reserves to cover the estimated ultimate uninsured liability for losses
with respect to reported and unreported claims incurred as of the end of each
accounting period. At December 31, 2002, our reserves for this self-insured
portion of general liability claims was $2.3 million. Our property program has a
$100,000 all risk deductible, a deductible of 2% of insured value for named
windstorm and a deductible of 5% of insured value for California quake. No
reserves have been established as of December 31, 2002, for these property
deductibles, as no related losses are estimated to have been incurred. Should
such uninsured or not fully insured losses be substantial, they could have a
material adverse impact on our operating results and cash flows.

There is no litigation pending or known to be threatened against us or
affecting any of our hotels, other than claims arising in the ordinary course of
business or which are not considered to be material. Furthermore, most of these
claims are substantially covered by insurance. We do not believe that any claims
known to us, individually or in the aggregate, will have a material adverse
effect on us, without regard to any potential recoveries from insurers or other
third parties.

Our hotels are operated under various management agreements that call
for base management fees, which range from 2% to 7% of hotel room revenue and
generally have an incentive provision related to the hotel's profitability. In
addition, the management agreements generally require us to invest approximately
3% to 4% of revenues in capital maintenance. The management agreements have
terms from 10 to 20 years and generally have renewal options.

With the exception of 95 hotels whose rights to use a brand name are
contained in the management agreement governing their operations, and seven of
our hotels that do not operate under a nationally recognized brand name, each of
our hotels operates under a franchise or license agreement. Typically, our
franchise or license agreements provide for a royalty fee of 4% of room revenues
to be paid to the franchisor.

Under our management agreement with Six Continents Hotels, we are
obligated to replace the amount of investment in hotels that were under Six
Continents Hotels management but were sold or otherwise transferred to non-Six
Continents Hotels management or pay liquidated damages. As a result of the 2002
sales and contributions to joint ventures, we are required to spend $13.6
million on the purchase of one or more hotels licensed and managed by Six
Continents Hotels by August 2003. Until that replacement occurs, we must pay a
replacement fee of approximately $21,000 per month. If we do not replace the
investment by August 2003, we may incur liquidated damages of $4.5 million. We
currently expect that this obligation will be satisfied by our investment in one
or more hotels licensed and managed by Six Continents Hotels. Also under our Six
Continents Hotels management agreement, if a TRS breaches the agreement,
resulting in a default and termination thereof, or otherwise causes or suffers a
termination for any reason other than an event of default by Six Continents
Hotels, the TRS may be liable for liquidated damages under the terms of the
management agreement.

In the event we breach one of our Embassy Suites Hotels franchise
license agreements, in addition to losing the right to use the Embassy Suites
Hotels name for the operation of the applicable hotel, we may be liable, under
certain circumstances, for liquidated damages equal to the fees paid to the
franchisor with respect to that hotel during the three preceding years.

F-27

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

19. SUPPLEMENTAL CASH FLOW DISCLOSURE

Approximately $15 million, $8 million, and $34 million of aggregate
preferred distributions and partnership unit distributions had been declared as
of December 31, 2002, 2001, and 2000, respectively. These amounts were paid in
the following January of each year.

As the result of Six Continent's exchange of 5,713,185 units for common
stock in 2002, there was a reduction in redeemable units of $73.4 million and
corresponding increase in partner's capital.

20. FELCOR STOCK BASED COMPENSATION PLANS

FelCor sponsors four restricted stock and stock option plans (the
"FelCor Plans"). In addition, upon completion of the merger with Bristol Hotel
Company (the "Merger") in 1998, they assumed two stock option plans previously
sponsored by Bristol Hotel Company (the "Bristol Plans"). FelCor was initially
obligated to issue up to 1,271,103 shares of its common stock pursuant to the
Bristol Plans. No additional options may be awarded under the Bristol Plans. The
FelCor Plans and the Bristol Plans are referred to collectively as the "Plans."
Upon the issuance of any stock, FelCor is obligated to contribute the proceeds
to us in exchange for a like number of units.

FelCor is authorized to issue 3,700,000 shares of common stock under
the FelCor Plans pursuant to awards granted in the form of incentive stock
options, non-qualified stock options, and restricted stock. All options have
10-year contractual terms and vest either over five equal annual installments
(20% per year), beginning in the year following the date of grant or 100% at the
end of a four-year vesting term. Under the FelCor plans there were approximately
1,133,000 shares available for grant at December 31, 2002.

The options outstanding under the Bristol Plans generally vest either
in four equal annual installments (25% per year) beginning in the second year
following the original date of award, in five equal annual installments (20% per
year) beginning in the year following the original date of award, or on a single
date that is three to five years following the original date of the award.
Options covering 93,434 shares were outstanding under the Bristol Plans at
December 31, 2002.

Stock Options

A summary of the status of FelCor's non-qualified stock options under
the Plans as of December 31, 2002, 2001, and 2000, and the changes during these
years are presented in the following tables:

(a) In the second quarter of 2000, FelCor purchased options
covering an aggregate of 349,443 shares of their common stock
for approximately $1.9 million. These options were held by
employees of Bristol and were issued in substitution for stock
options previously granted by Bristol Hotel Company that were
outstanding at the time of its merger with us in 1998. These
options so purchased and retired had exercise prices ranging
from $10.33 to $16.95 per share and the majority of these
options were scheduled to vest in the third quarter of 2000.
The purchase price was recorded as a reduction in partner's
capital.

F-28

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

20. STOCK BASED COMPENSATION PLANS -- (CONTINUED)

The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions for 2001 and 2000 when options were granted: dividend yield
of 12.44% to 11.28%; risk free interest rates are different for each grant and
range from 4.33% to 6.58%; the expected lives of options are six years; and
volatility of 21.04% for 2001 grants and 18.22% for 2000 grants. The weighted
average fair value of options granted during 2001 and 2000, was $0.85 and $0.90
per share, respectively. FelCor issued no stock options in 2002.

Restricted Stock

A summary of the status of FelCor's restricted stock grants as of
December 31, 2002, 2001, and 2000, and the changes during these years are
presented below:

- -------------------------------------

(a) All shares granted are issued out of treasury except for
4,100, 2,700, and 18,500 of the restricted shares issued to
directors during the years ended December 31, 2002, 2001 and
2000, respectively.

(b) Shares awarded to FelCor's Directors.

21. EMPLOYEE BENEFITS

FelCor offers a 401(k) plan, health insurance benefits and a deferred
compensation plan to its employees. FelCor's matching contribution to its 401(k)
plan was $0.5 million, $0.5 million, and $0.4 million and the cost of health
insurance benefits were $0.6 million, $0.5 million, and $0.3 million during the
years ended December 31, 2002, 2001 and 2000, respectively. The deferred
compensation plan FelCor offers is available only to directors and qualifying
senior officers. FelCor makes no matching or other contributions to the deferred
compensation plan, other than the payment of its operating and administrative
expenses.

The employees at our hotels are employees of the respective management
companies. Under the management agreements, we reimburse the management
companies for the cost of salaries and employee benefits related to the
employees who work at our hotels. We are not, however, the sponsors of their
employee benefit plans and have no obligation to fund these plans.

F-29

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

22. SEGMENT INFORMATION

SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information," requires the disclosure of selected information about operating
segments. Based on the guidance provided in the standard, we have determined
that our business is conducted in one operating segment.

The following table sets forth revenues for, and investment in hotel
assets represented by, the following geographical areas as of and for the years
ended December 31, 2002, 2001 and 2000 (in thousands):

(a) Prior to January 1, 2001, all of the revenues that we derived
from hotel assets consisted of percentage lease revenue.
Effective January 1, 2001, we acquired 96 hotel leases and
effective July 1, 2001, we acquired the remaining 88 hotel
leases. Upon acquisition of these leases, our revenue derived
from hotel assets became hotel operating revenues, including
room revenues, food and beverage revenue and other hotel
operating revenue.

23. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS

The Financial Accounting Standards Board, or FASB, has issued SFAS 146,
"Accounting for Exit or Disposal Activities." SFAS No. 146 addresses significant
issues regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for pursuant to the guidance that the Emerging
Issues Task Force ("EITF") of the FASB has set forth in EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
scope of SFAS No. 146 also included (1) costs related to terminating a contract
that is not a capital lease and (2) termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual deferred
compensation contract. SFAS No. 146 will be effective for exit or disposal
activities initiated after December 31, 2002. We do not currently expect SFAS
No. 146 to have a material impact on our results of operations and financial
position.

The FASB has issued SFAS 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure." SFAS 148 amends SFAS 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to a fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reporting results. We have
adopted the disclosure requirements of SFAS 148. We currently account for
stock-based employee compensation in accordance with APB Opinion 25, "Accounting
for Stock Issued to Employees," and related interpretations. In accordance with
one of the alternative methods of transition for a voluntary change to a fair
value based method of accounting for stock-based employee compensation mandated
by SFAS 148, we intend to adopt the "prospective method" as of January 1, 2003.
Under this method, compensation expense will be recognized for any new awards
issued after December 31, 2002. We do not currently expect the adoption of SFAS
148 to have a material impact on our financial position or results of
operations.

F-30

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

23. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS -- (CONTINUED)

FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of FASB Statements No. 5, 57, and 107 and rescission
of FASB Interpretation No. 34," or FIN 45, was issued in November 2002. FIN 45
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 does not prescribe a specific
approach for subsequently measuring the guarantor's recognized liability over
the term of the related guarantee. The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The disclosure requirements in FIN 45 are effective
for financial statements of interim or annual periods ending after December 15,
2002. We have made the disclosures required by FIN 45.

FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities - an interpretation of ARB No. 51," or FIN 46, was issued in January
2003. FIN 46 clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the equity to finance its activities
without additional subordinated financial support from other parties.

We have no unconsolidated variable interest entities that would be
consolidated under the requirements of FIN 46.

24. QUARTERLY OPERATING RESULTS (UNAUDITED)

Our unaudited consolidated quarterly operating data for the years ended
December 31, 2002 and 2001, follows (in thousands, except per unit data). In the
opinion of management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of quarterly results have been reflected in
the data. It is also management's opinion, however, that quarterly operating
data for hotel enterprises are not indicative of results to be achieved in
succeeding quarters or years. In order to obtain a more accurate indication of
performance, there should be a review of operating results, changes in partners'
capital and cash flows for a period of several years.

F-31

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

24. CONSOLIDATING FINANCIAL INFORMATION

Certain of our wholly-owned subsidiaries (FelCor/CSS Holdings, L.P.;
FelCor/CSS Hotels, L.L.C.; FelCor/LAX Hotels L.L.C.; FelCor Eight Hotels,
L.L.C.; FelCor/St. Paul Holdings, L.P.; FelCor/LAX Holdings, L.P.; FHAC Nevada
Holdings, L.L.C.; FelCor TRS Holdings, L.P.; Kingston Plantation Development
Corp.; FHAC Texas Holdings, L.P.; FelCor Omaha Hotel Company, L.L.C.; FelCor
Country Villa Hotel, L.L.C.; FelCor Moline Hotel, L.L.C.; FelCor Canada Co. and
FelCor Hotel Asset Company, L.L.C., collectively, "Subsidiary Guarantors"),
together with FelCor and two of its wholly-owned subsidiaries (FelCor Nevada
Holdings, L.L.C. and FelCor Holdings Trust), are guarantors of senior debt. The
following tables present consolidating information for the Subsidiary
Guarantors.

CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002
(IN THOUSANDS)

F-32

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

25. CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)

CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
(IN THOUSANDS)

F-33

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

25. CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)

CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
(IN THOUSANDS)

F-34

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

25. CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)

CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS)

F-35

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

24. CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)

CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS)

F-36

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

25. CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED)

CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002
(IN THOUSANDS)

CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS)

CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS)

F-37

FELCOR LODGING LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

26. SUBSEQUENT EVENTS

In January and February 2003, we executed two additional interest rate
swaps. These new fair value swaps are the same type as those that existed at
December 31, 2002, in that they modify a portion of the interest characteristics
of our outstanding fixed rate debt, without an exchange of the underlying
principal amount, and effectively convert fixed rate debt to a variable rate. As
designated fair value hedges, these swaps will be marked to market through the
income statement, but are offset by the change in fair value of our swapped
outstanding fixed rate debt. The notional amount of these new swaps is $50
million on which we will receive a fixed rate of 7.625% and pay a rate of LIBOR
plus an average spread of 4.325%.

As a consequence of the economic slowdown in our business, and the
travel and lodging industries generally, Standard & Poor's lowered its ratings
on our $1.2 billion in senior unsecured debt one level, to B+, in February 2003.
Although Moody's affirmed its current rating on our senior debt in February 2003
(Ba3), we remain on negative outlook. Should Moody's downgrade its Ba3 rating on
our senior unsecured debt to B1, the interest rate on $900 million of our $1.2
billion senior unsecured debt would increase by 50 basis points, which would
increase our annual interest expense by approximately $4.5 million.

On February 4, 2003, FelCor announced that, as the result of the
uncertain political environment and soft business climate, together with the
risk of further margin deterioration should we continue to experience declines
in our portfolio's average daily rate, they do not expect their Board of
Directors to declare future partnership distributions until there is a 2 to 4%
increase in hotel RevPAR.

Subsequent to December 31, 2002 and prior to March 21, 2003, we have
drawn $149 million on our line of credit to increase available cash on hand.

F-38

REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE

To the Board of Directors
of FelCor Lodging Trust Incorporated:

Our audits of the consolidated financial statements referred to in our report
dated February 3, 2003, except as to Note 26, which is as of March 21, 2003,
appearing on page F-2 of the Annual Report on Form 10-K of FelCor Lodging Trust
Incorporated (which report and consolidated financial statements are included in
this Annual Report on Form 10-K) also included an audit of the financial
statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion,
this financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.

PricewaterhouseCoopers LLP

Dallas, Texas
February 3, 2003

F-39

FELCOR LODGING LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2002
(IN THOUSANDS)

F-40

F-41

F-42

1. Embassy Suites 12. Hampton Inn
2. Holiday Inn 13. Holiday Inn Express
3. Sheraton 14. Hilton Suites
4. Fairfield Inn 15. Holiday Inn Hotel & Suites
5. Doubletree Guest Suites 16. Homewood Suites
6. Crowne Plaza 17. Bristol House
7. Doubletree 18. Crowne Plaza Suites
8. Independents 19. Harvey Hotel
9. Holiday Inn Select 20. Westin
10. Courtyard by Marriott 21. Harvey Suites
11. Sheraton Suites

F-43

INDEX TO EXHIBITS

- -----------------
* Indicates that the document is filed herewith.