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TABLE OF CONTENTS
PART IV

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

For the Fiscal Year Ended December 31, 2002

For the transition period from                                      to                                     

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

        Indicate by check mark whether the registrants (1) have 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 Registrants were required to file such reports), and (2) have 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 Registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. /X/

        Indicate by check mark whether the registrants are accelerated filers (as defined in Exchange Act Rule 12b-2) Yes /X/  No / /

        As of June 28, 2002, the aggregate market value of the registrants' voting and non-voting common equity held by non-affiliates was $741,157,850.25 based upon the closing price of $7.25 on the New York Stock Exchange composite tape on that date.

        As of February 24, 2003, La Quinta Corporation had 151,545,134 shares of common stock outstanding and La Quinta Properties, Inc. had 100,000 shares of class A common stock and 142,115,134 shares of class B common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        Certain portions of La Quinta Corporation's definitive proxy statement for the 2003 annual meeting of shareholders, to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K, are incorporated by reference in Part III of this Form 10-K.

TABLE OF CONTENTS

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About this Joint Annual Report

Summary

        This Joint Annual Report on Form 10-K, which we sometimes refer to as this Joint Annual Report, is filed by La Quinta Corporation, a Delaware corporation ("LQ Corporation"), and its controlled subsidiary, La Quinta Properties, Inc., a Delaware corporation ("LQ Properties") that has elected to be treated as a real estate investment trust, or "REIT," for federal income tax purposes. We sometimes refer to LQ Corporation and LQ Properties in this Joint Annual Report collectively as "The La Quinta Companies." The shares of common stock, par value $0.01 per share, of LQ Corporation and the shares of class B common stock, par value $0.01 per share, of LQ Properties are attached and trade together and may be held or transferred only in units consisting of one share of LQ Corporation common stock and one share of LQ Properties class B common stock. Both LQ Corporation and LQ Properties have securities, which are publicly traded and listed on the New York Stock Exchange. Accordingly, this Joint Annual Report includes information, including financial statements, about LQ Corporation on a consolidated basis with its controlled subsidiary, LQ Properties, as well as financial statements for LQ Properties on a consolidated basis.

        In this Joint Annual Report, unless the context otherwise requires, the term LQ Corporation includes those entities owned or controlled by LQ Corporation (including its controlled subsidiaries LQ Properties and La Quinta Inns, Inc.); the term LQ Properties includes those entities owned or controlled by LQ Properties; and the terms "we," "us," "our," "companies," "La Quinta" or "The La Quinta Companies" refers to LQ Corporation, LQ Properties and their respective subsidiaries, collectively. The terms "paired shares" and "paired common stock" means the shares of common stock. The LQ Corporation common stock that are attached and trade as a unit with the shares of class B common stock, par value $0.01 per share, of LQ Properties. LQ Corporation and LQ Properties completed a legal and tax restructuring (the "Restructuring") on January 2, 2002, as more fully described in this Joint Annual Report. Prior to our Restructuring, the common stock of LQ Corporation was paired and traded as a unit with the common stock of LQ Properties. Unless otherwise indicated in this Joint Annual Report, all information with respect to paired shares, or paired common stock, prior to January 2, 2002 means the common stock of LQ Corporation that was paired and traded as a unit with the common stock of LQ Properties.

Forward-Looking Statements

        Certain statements in this Joint Annual Report that are not historical facts constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "believes," "anticipates," "expects," "intends," "estimates," "projects," and other similar expressions, which are predictions of or indicate future events and trends, typically identify forward-looking statements.

        We have used forward-looking statements in a number of parts of this Joint Annual Report, including, without limitation, "Items 1 and 2—Description of Our Business and Our Properties," including specifically the section captioned "Our Strategy", and "Item 7—Management's Discussion and Analysis of Financial Condition and Results for Operations." These forward-looking statements may include statements regarding the intent, belief or current expectations of the companies or their respective directors or officers with respect to the matters discussed in this Joint Annual Report. Our forward-looking statements are subject to a number of risks and uncertainties, which could cause actual results, or the timing of events to differ materially from those described in the forward-looking statements. We have included a discussion of some of these risks and uncertainties in this Joint Annual Report within Item 1 and 2 under the headings Description of Our Business and Our Properties—Certain Factors You Should Consider About Our Companies, Our Businesses And Our Securities. The risks and uncertainties described within these sections include those related to our lodging business, our

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investments in real estate, LQ Properties' status as a REIT, our capital expenditures and requirements, our corporate structure and our debt and liquidity needs as well as risks and uncertainties related to our industry, the economy, the threat of U.S. military action, terrorist attacks on the U.S. and global affairs. We have discussed these risks and uncertainties in detail within these sections and encourage you to read them in their entirety in order to understand the risks and uncertainties, which can affect our forward-looking statements, as well as our business generally.

        Given the risks and uncertainties, you are cautioned not to place undue reliance on the forward-looking statements that may be made in this Joint Annual Report. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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PART I

ITEMS 1 AND 2—DESCRIPTION OF OUR BUSINESS AND OUR PROPERTIES

General

        We are a leading, limited-service lodging company providing clean and comfortable guest rooms at affordable prices in convenient locations. We conduct our lodging business within the La Quinta® system both directly through LQ Corporation and through our subsidiaries. Our brand names include La Quinta®, La Quinta Inns® and La Quinta Inn & Suites®. We own and operate hotels under our proprietary La Quinta brands. In addition, we franchise our brands to independent owner/operators. As of December 31, 2002, our system of owned and franchised hotels contained 349 La Quinta Inns and La Quinta Inn & Suites representing approximately 43,000 rooms in 33 states. We are one of the largest owner/operators of limited-service hotels in the United States. We owned and operated 284 La Quinta Inns and La Quinta Inn & Suites representing approximately 37,000 rooms in 28 states as of December 31, 2002.

        We strive to design hotels that attract both business and leisure travelers seeking consistently clean and comfortable rooms that are generally comparable to those of mid-price, full service hotels but at lower average room rates. We believe that by not providing full-service, management-intensive facilities and services, such as in-house restaurants, cocktail lounges, or room service, that typically carry high fixed costs and low margins, we are able to deliver a product that satisfies our customers' needs and price expectations, while also permitting us to concentrate on the high-margin nature of our business of renting clean and comfortable hotel rooms to our guests.

        LQ Corporation was incorporated in the State of Delaware on August 23, 1979. LQ Properties, a self-administered REIT, was incorporated in the State of Delaware on August 23, 1979. LQ Properties is a controlled subsidiary of LQ Corporation. LQ Corporation and LQ Properties' principal executive offices are located at 909 Hidden Ridge, Suite 600, Irving, TX 75038 and (214) 492-6600.

        The La Quinta Companies maintain a website on the World Wide Web at www.LQ.com. The La Quinta Companies make available, free of charge, on its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. The La Quinta Companies' reports filed with, or furnished to, the SEC are also available at the SEC's website at www.sec.gov. The information on our website is not part of or incorporated by reference in this Joint Annual Report.

        The common stock of LQ Corporation and the class B common stock of LQ Properties are attached and trade together and may be held or transferred only in units consisting of one LQ Corporation share and one LQ Properties class B share. Prior to our Restructuring on January 2, 2002, the common stock of LQ Properties was paired and traded together with the common stock of LQ Corporation under provisions of the "grandfathered" paired share REIT structure. The January 2, 2002 Restructuring primarily served to address the challenges imposed by federal tax legislation on our previous "grandfathered" paired share REIT structure. We believe that these changes were necessary in order to reposition our business to permit growth of our lodging operations, maintain LQ Properties' REIT status and expand the La Quinta brand.

Lodging Industry

        As of December 31, 2002, there were over four million hotel rooms in the U.S., according to Smith Travel Research. Of these rooms, approximately 70% were affiliated with a brand while the remaining approximately 30% were independent and not brand-affiliated. The hotel industry is highly fragmented, with no one entity controlling a majority of hotel rooms in the U.S.

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        Smith Travel Research segments hotels by price and service levels. Full-service hotels offer food and beverage outlets such as restaurants, lounges and room service; meeting, banquet and convention facilities; and concierge and luggage service. Full-service hotel brands range from upper upscale hotels (such as Ritz-Carlton and Four Seasons) to upscale hotels (such as Courtyard by Marriott and Radisson) to midscale with food and beverage hotels (such as Holiday Inn and Ramada Inn). According to Smith Travel Research, these full-service branded hotels account for approximately 1.5 million hotel rooms. Limited-service hotels do not offer many of the full-service facilities such as restaurants, lounges and banquet rooms, focusing primarily on renting hotel rooms. Limited-service hotel brands range from midscale without food and beverage hotels (such as Hampton Inn and Fairfield Inn) to economy hotels (such as Red Roof Inn and Motel 6). La Quinta is a limited-service hotel brand that competes primarily against other limited-service hotels in both the midscale without food and beverage and economy segments; because each market is unique, however, La Quinta also competes against some full-service hotels. According to Smith Travel Research, these limited-service branded hotels account for approximately 1.4 million hotel rooms.

        The U.S. lodging industry can be segmented into three different operating structures: (i) real estate ownership, (ii) management and (iii) franchise. Some companies employ only one component while other companies employ a combination of operating structures.

•

Real estate companies own the underlying hotel assets. Profitability is determined after deducting operating and financing costs from revenues as well as deducting fees to management companies and franchise companies, if any.



•

Management companies are typically paid a percentage of a hotel's total revenues and earn incentive fees based on revenue and/or profit targets.



•

Franchise companies are typically paid a percentage of a hotel's total revenues by third party owners/operators for access to a central reservation system, brand advertising and other programs.

        La Quinta's strategy encompasses all three aspects of these hotel-operating structures. As of December 31, 2002, La Quinta owned and operated 284 hotels, franchised 65 additional hotels owned by third parties and offered management services.

        The U.S. lodging industry experienced substantial growth from 1990 to 2000. According to Smith Travel Research, revenue per available room ("RevPAR") for the U.S. lodging industry grew at a compound average annual rate of 4% during that period. Growth was fueled by increases in demand for hotel rooms and the rates charged, in addition to improvements in operating efficiencies and productivity. In 2001, the U.S. lodging industry experienced a substantial downturn as a result of a slowing national economy and the impact of the terrorist attacks on the U.S. on September 11, 2001 as well as the aftermath. Business and leisure travel slowed considerably as companies reduced corporate travel and leisure travelers cancelled or delayed trips. As a result, the U.S. lodging industry posted its largest decline in RevPAR in almost ten years. The decreased demand for hotel rooms continued in 2002 as the national economy exhibited little improvement. Based on data provided by Smith Travel Research, RevPAR in the U.S. lodging industry experienced a year-over-year decline of 2.5% in 2002 after a 7% decline in 2001.

Our Brands

        The La Quinta brand was founded in San Antonio, Texas in 1968. From the first hotel developed in downtown San Antonio, we have grown to over 300 locations in 33 states over a 35-year history. Our focus has always been to provide guests with clean and comfortable guest rooms in convenient locations at affordable prices. We were a pioneer in developing a successful niche in the lodging industry between budget motels and full-service hotels.

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La Quinta Inns®

        La Quinta Inns are designed to appeal to all types of travelers but particularly to leisure travelers due to the location of our Inns. Our Inns are primarily located in suburban areas and at highway interchanges in what we consider "drive-to" markets.

        La Quinta Inns generally feature spacious rooms with double beds and king beds; 25-inch televisions with expanded cable, movies on-demand and Nintendo®; dataport telephones with voicemail and free local calls; in-room hair dryers, coffee makers, irons and ironing boards; desks with well-lit workspaces; and comfortable recliners. La Quinta Inns also generally feature complimentary continental breakfast and swimming pools. Our guests typically have convenient access to food service at nearby freestanding restaurants, which include many national chains. We have an ownership interest in 99 buildings that are adjacent to our hotel properties, which we generally lease to third party restaurant operators.

        La Quinta Inns compete primarily in the mid-tier of limited-service properties against independent hotels as well as national chains such as Days Inn, Comfort Inn, Super 8 and Fairfield Inn.

La Quinta Inn & Suites®

        La Quinta Inn & Suites are designed to appeal to all types of travelers but particularly to business travelers due to the location and amenity package of our Inn & Suites. Our Inn & Suites are primarily located near airports and business office parks.

        La Quinta Inn & Suites generally feature the same amenities as our Inns in addition to two-room suites, which offer separate sitting and sleeping areas, sleeper sofas and two televisions. Additional amenities include: expanded continental breakfast; guest laundry facilities; complimentary USA Today® newspapers; fitness centers; meeting space for up to 70 people; and heated swimming pools with spa and gazebo seating. Selected Inn & Suites also generally offer business king rooms, which feature; high-speed internet access; pillow-top mattresses; microwaves and refrigerators; cordless and speaker telephones; and oversized desks with built-in data ports and ergonomic chairs.

        La Quinta Inn & Suites compete primarily in the upper tier of limited-service properties against independent hotels as well as national chains such as Courtyard by Marriott, Holiday Inn, Hampton Inn and Holiday Inn Express.

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        The following table summarizes our key operating statistics for the past five years:

(a)

Available room-nights in thousands.

(b)

Represents average daily rate.

(c)

Represents revenue per available room.

(d)

Results for 1998 include lodging operations of La Quinta Inns, Inc. prior to its merger on July 17, 1998 with LQ Properties.

(e)

Includes operating statistics for hotels operated by us at any time in the respective year and does not include franchise operating statistics.

(f)

Corporate assets were reclassified to property, plant and equipment as a result of our Restructuring.

(g)

For 2001 and preceding years, these statistics were reported for "The La Quinta Companies—Combined," which has been replaced by "LQ Corporation—Consolidated" for the current year presentation.

(h)

Includes Direct Lodging Expenses. See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" for discussion.

Our Properties

        As of December 31, 2002, LQ Corporation, through its controlled REIT subsidiary LQ Properties, had investments in 280 hotels. These hotels represent an aggregate of approximately 37,000 rooms in service and are leased by LQ Properties (or the respective property owning subsidiary) to a subsidiary of LQ Corporation. Additionally, as of December 31, 2002, other subsidiaries of LQ Corporation held investments in four lodging facilities.

        Generally, each of the hotel properties, including the land, related easements and rights, buildings, improvements, furniture, fixtures and equipment, that is owned by LQ Properties is leased to a subsidiary of LQ Corporation pursuant to long-term lease agreements. The lease agreements have fixed terms of

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five years. The lease agreements between LQ Properties and LQ Corporation, as amended in March 2002, include rents based on 40% of quarterly gross revenue thresholds for each of the leased hotel properties.

        LQ Corporation is required to pay rent and all operating expenses of hotel properties leased from LQ Properties, while LQ Properties assumes costs attributable to real estate taxes and insurance. LQ Corporation is required to provide for all repairs, replacements and alterations to the leased hotel properties that are not considered capital additions or material structural work, as defined in the lease agreements. LQ Properties provides for all capital additions and material structural work.

        The following table sets forth certain information as of December 31, 2002 regarding our owned-lodging properties:

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        The following table sets forth certain information regarding our top ten markets ranked by the number of owned rooms to our total owned room portfolio. The number of hotels and rooms are as of December 31, 2002. The market RevPAR performance data reflects RevPAR performance during the year ended December 31, 2002 of La Quinta's defined competitive set within each local market, as aggregated by Smith Travel Research.

        We believe that all of our hotel properties are well constructed, well maintained and are attractively landscaped to enhance their appearance. To maintain the overall quality of our hotels, each hotel undergoes refurbishment and capital improvements as needed. In addition to regular operating maintenance, major capital refurbishing has generally been provided at intervals of five to seven years, based on an annual review of the condition of each hotel. Each hotel also undergoes a regular maintenance program whereby each room is deep cleaned every quarter. During 2002, we spent approximately $99,099,000 in capital improvements and renovations to our existing hotels. We have invested approximately $233,122,000 in capital maintenance and renovation improvements to our existing hotels during the last five years.

        Included in the periodic capital expenditures mentioned above, are the expenditures related to our Gold Medal® Lite property renewal program, which we commenced in 2001. This program consists of refurbishments and enhancements to both the interior décor and exterior appearance of 200 of our company-owned La Quinta Inns properties. Gold Medal® Lite follows our earlier $200,000,000 Gold Medal redevelopment program of the mid-1990's in which guest rooms in 240 of our company-owned properties were completely refurbished. Under Gold Medal®Lite, we strive to update our guest rooms with new carpet, wall coverings, furniture, bedspreads and drapes. We believe this program will reinforce our position as a consistent provider of clean, comfortable facilities. In 2002 and 2001, an aggregate of 184 company-owned properties were updated under the Gold Medal® Lite program.

        To maintain our reputation for consistency and quality, we anticipate that, from time to time, we will sell certain hotels that no longer meet the standards of the La Quinta brand. For example, during 2002, we sold nine of our hotels and other related facilities for gross proceeds of approximately $20,725,000. We currently have seven hotels and two parcels of land, valued at approximately $25 million, that we have classified as held for sale and anticipate selling during 2003.

Our Operations

        The corporate headquarters for our hotel operations is located in Irving, Texas. Centralized corporate services include marketing, sales, finance, information systems, construction and design,

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purchasing, legal, risk management, human resources and training. Accounting, treasury, tax and reservations functions are centralized in our service centers located in San Antonio, Texas.

        We have organized our hotel operations into 15 regions with each region headed by a regional vice president located within the respective market. Each regional vice president is responsible, on average, for supervising operations of approximately 20 hotels. The regional vice presidents report to our senior management and are responsible for the service, cleanliness and profitability of the hotels in their respective regions.

        Each company-owned hotel is operated as an individual profit center, with an on-site general manager who oversees all day-to-day operations. Our general managers focus their attention on assuring friendly guest service, maintaining clean and comfortable guest rooms and achieving profitable operations. Their responsibilities also include recruiting, training and supervising the hotel's staff. A typical hotel has approximately 25 employees, including the general manager, housekeepers, laundry attendants, maintenance staff, front desk guest service representatives and a night auditor.

        Our general managers receive a five-week training program that emphasizes operations, hospitality, rate management, legal and risk management issues, interviewing, employee relations, training and budgeting prior to assuming responsibility at a hotel. We also utilize assistant managers to support the general mangers at certain properties, which provides a pool of experienced candidates to fill open general manager positions as needed.

        We use target-driven operational budgets prepared by our general managers that are implemented after review with our senior management. The hotel general managers, regional vice presidents, revenue managers, and senior management continually review our room rates so that they can be appropriately adapted to prevailing market conditions at each hotel. Each general manager can earn financial incentives based upon achieving favorable results in comparison to revenue and profit budgets and upon achieving targeted goals in guest satisfaction surveys for their respective property. We believe this incentive program increases our general managers' focus on operating efficient, well-maintained and profitable hotels.

        Our guest satisfaction is monitored through a number of initiatives. Guest satisfaction surveys, conducted by an independent market research company, provide customer feedback on each of our hotels. In addition, we operate a quality assurance department, staffed by former hotel managers, who inspect hotels for adherence to quality standards and who train hotel staff on methods to improve product quality. Regional vice presidents also inspect hotels to monitor quality standards. Financial incentives are set to reward improvements in our guest satisfaction levels.

Our Franchising Program

        In late 2000, we initiated a program to license the use of our La Quinta brand through franchising. Our franchising activities include both the franchising of newly constructed hotel properties, as well as the conversion of existing hotel properties that meet our quality specifications. We currently operate our franchising program through La Quinta Franchising LLC, a wholly owned subsidiary of La Quinta Inns, Inc.

        A prospective franchisee is required to pay us a refundable application fee of $5,000 when an application is made for a La Quinta franchise. We evaluate franchise applicants on the basis of, among other factors: their hotel operating experience and ability, the strength of their financial resources, and their credit history. Upon execution of a franchise agreement, approved franchise applicants pay us an affiliation fee generally ranging from $40,000 to $45,000, toward which the $5,000 application fee can be used as a credit. Approved franchise applicants are granted the rights (subject to the terms of their franchise agreement) to operate their hotel under the La Quinta Inn® or La Quinta Inn & Suites® brand

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name, obtain reservations through our central reservation system and use our hotel designs, operating systems and procedures, among other rights.

        We generally require a franchisee to pay a royalty fee of 4.0% of gross room revenues (as defined in the franchise agreement) during the first two years of operating under the La Quinta brand and 4.5% of gross room revenues for all periods thereafter. A franchisee can receive a rebate of 0.5% of gross room revenues if, in any calendar year, the franchise hotel achieves superior results in guest satisfaction as measured by a survey conducted by an independent market research firm. In addition to royalty fees, a franchisee generally pays, as a percentage of gross room revenues, a marketing fund fee of 2.5% for national advertising and a reservation fee of 2.0% to support the cost of reservation services provided to the hotels. Franchisees also pay La Quinta other fees, such as fees for computer software usage, training programs and Returns® loyalty program participation.

        Before a franchise hotel opens, we inspect the hotel to confirm that it meets our quality specifications. Once a franchise hotel opens, we strive to provide continued sales support and operational assistance. We currently employ two franchise service directors, who are former general managers of our hotels, to assist franchisees with pre-opening and ongoing business issues. We also employ ten franchise sales personnel located throughout the U.S. who market our franchise program to qualified applicants.

        We do not presently have a company-funded financial assistance program for franchisees. However, on occasion, we have provided, and at our discretion, may occasionally provide franchisees with various forms of financing upon varying terms, depending upon a number of factors. These factors include: the amount of the financing, the number of hotels involved and their location, the number of rooms involved, relevant market conditions, the credit worthiness of the franchisee and any proposed guarantors, and other factors that may warrant the provision of financial assistance.

        A typical franchise hotel consists of approximately 90 rooms. Each franchise hotel must adhere to the same rigorous quality standards of design, maintenance and customer service as a company-owned hotel. Each franchise hotel is inspected by a franchise service director to assure that the franchise hotel adheres to our quality standards. We have the ability to terminate a franchise agreement if a franchisee fails to meet our quality standards or fulfill other contractual obligations.

Our Sales & Marketing

        Our Sales and Marketing operations can be segmented into four functional divisions: (i) direct sales, (ii) frequency program, (iii) central reservations and (iv) electronic distribution.

        Direct Sales.    We employ a 90-member direct sales force, which was increased from 45 starting in mid 2002. The direct sales force consists of approximately 15 national sales associates who call on companies that have a significant number of individuals traveling in the regions in which we operate and who have a need for a high volume of room-nights. National sales representatives also seek to increase room sales through the inclusion of our hotels in approved or preferred lodging lists of corporate travel managers and travel agencies who operate on a national basis. We also form and continue to seek alliances with national travel and consumer organizations, such as AAA and AARP, and offer special rates or promotions to such organizations' customers. In addition to the national effort, approximately 75 of our sales managers are based in our local markets. The sales managers call on local businesses, hospitals and organizations that can provide room-nights for our local hotels. Our sales force was responsible for approximately 40% of all room-nights sold in 2002.

        Frequency Program.    In September 2002, we introduced our enhanced customer loyalty program—La Quinta Returns®—designed to reward current members and help entice new members. The new program allows members to earn points that can be redeemed for the following benefits: airline miles/credits with American Airlines® AAdvantage®, Delta Sky Miles®, Continental One Pass®, and

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Southwest Airlines Rapid Rewards®; gift certificates to national retailers and restaurants; sporting event tickets; entertainment and amusement park tickets; and special resort travel packages, in addition to the former program's benefit of free La Quinta room-nights. Members are classified as Silver, Gold or Elite based on frequency of stay and are able to earn more points and receive additional amenities at each progressive level. Our Returns program helps to expedite the reservation and check-in process and helps to improve the administrative efficiency of the reservation agents and front desk staff by providing a personal profile of each member. This profile includes information such as mailing address, room type preference, and preferred method of payment and is used by La Quinta to market directly to our Returns members. As of December 31, 2002, we had approximately 1,200,000 Returns members. These Returns members accounted for approximately 20% of all room-nights sold in 2002.

        Central Reservations.    We promote and operate our own central reservation system, teLQuik, as well as a toll-free number, 1-800-531-5900, to accept reservations. During 2002, we handled approximately three million calls through our central reservation system, of which approximately 45% resulted in room reservations. Our reservation system provides reservation agents with information about hotel locations, available rooms and prices in order to assist customers in reserving rooms. Our agents are trained in telephone sales and cross-selling techniques. Through our computer network, we continually update the number of rooms sold at a hotel property, permitting the sale of all available rooms through either the individual hotel or the reservation centers. We market our reservation services to travel agents and corporate travel planners who may access teLQuik through four global distribution systems (airline reservation systems). We also have specialized reservation agents for large group sales, motor coach sales and special service bookings.

        We estimate that approximately 32% of room sales are to customers who have made a reservation through our central reservation system either by using our toll free numbers or through electronic distribution channels. Approximately 32% of room sales are from "walk-in" customers who check into a hotel without having made reservations. Approximately 36% of room sales are to customers who have made a reservation directly with a hotel.

        Electronic Distribution.    In June 2002, we introduced our enhanced Internet site www.LQ.com. This website allows guests to self-book La Quinta room reservations and provides information regarding our hotel locations, services and amenities. Guests are able to book reservations by one of three methods: by specific hotel location, within proximity of a guest-defined attraction or by route from point of origin and destination. Reservations on-line can be made in four simple steps. In addition to our own proprietary website, we distribute our lodging product via third-party travel websites such as Travelocity, Expedia and Hotwire and we sell room inventory through Priceline.com, Hotels.com and other Internet distributors.

Our Information Systems

        Our information systems support our operations, reservations, marketing and sales, financial reporting and management reporting functions. During 2002, we continued to enhance our information systems' capabilities. These improvements include:

•

better correlation in room inventory and rate consistency between property management systems;



•

new electronic distribution channels;



•

more timely management reporting for improved operational decision making;



•

enhanced sales systems for improved tracking of leads and procurement of corporate business;

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•

completion of installation of enhanced LodgeNet services in all hotels, adding Internet access, greater movie and games selection, folio preview;

•

implementation of new credit card processing system which authorizes transactions in less than 5 seconds;

•

introduction of one-step check-in at all hotels, speeding up front-desk interactions;

•

a proprietary web-site www.LQ.com with new look and enhanced features; and

•

enhancements to our reservation system, which enabled booking of multiple rooms in a single transaction for our reservations agents and allowed for reduced call time and increased booking conversion.

        We plan to continue to invest in our information systems to enhance our ability to monitor and maximize revenues and profitability. We currently anticipate implementing systems for data warehousing and customer relationship marketing in 2003 that will allow us to better understand serve and communicate with our guests.

Our Trademarks

        La Quinta Inns®, La Quinta Inn & Suites®, Returns® program, teLQuik®, Gold Medal® and our other associated proprietary trademarks are our registered trademarks. Our trademarks are owned by La Quinta Worldwide, LLC (a consolidated subsidiary owned by LQ Properties) and licensed for use by several of our subsidiaries, including La Quinta Inns, Inc. and La Quinta Franchising LLC. The gross book values of these trademarks are reflected in the accompanying balance sheets of LQ Corporation and LQ Properties at approximately $81.1 million and $66.3 million, respectively. All of our material trademarks are registered with the United States Patent and Trademark Office. In addition, we have registered certain of our trademarks with the appropriate governmental agencies in certain foreign jurisdictions. We consider all of these trademarks and the associated name recognition to be important to our business.

Our Employees

        As a service-oriented business, our employees are important to our success. Recruiting for general managers and corporate employees is coordinated through our corporate human resources department. All employees, including hourly hotel employees, receive training upon their hire as well as on-going training to improve their skills. Our general managers receive a five-week training program that emphasizes operations, hospitality, rate management, legal and risk issues management, interviewing, employee relations, training and budgeting prior to assuming responsibility at a hotel. We provide all of our full-time employees and their families, including hourly hotel employees, the opportunity to participate in a benefits package, which includes health, dental, and vision coverage. We believe this benefit provides a competitive advantage in recruiting hourly hotel employees, as most limited service hotels do not provide benefits for their employees. Our employees are also able to earn financial incentives based on achieving targeted RevPAR, profitability, guest satisfaction and personal development goals. In addition, recognition programs have been established to acknowledge our employees' outstanding service and achievement. We believe our scale and size also provide career opportunities for our employees to advance within the organization.

        As of December 31, 2002, we employed approximately 6,700 employees, including approximately 6,200 hourly employees. Of these employees, approximately 300 were employed at our corporate headquarters in Irving, Texas and approximately 150 were employed at our support centers in San Antonio, Texas, of whom 65 work at our reservation center. Our employees are not currently represented by labor unions and we have never experienced an organized work stoppage. We believe that ongoing labor relations with our employees are good.

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Our Strategy

        We focus on providing consistently clean and comfortable guest rooms in convenient locations at affordable prices. Our objective is to enhance shareholder value by building our brand and expanding our distribution, which we believe are key factors in increasing our cash flow. In order to achieve our objective, our key strategies include: (i) increase profits from our company-owned hotels, (ii) grow our franchising program, and (iii) invest our available capital.

        Increase Profits from our Company-Owned Hotels.    We expect to increase our cash flow through increases in profit contributions from company-owned hotels, primarily by improving RevPAR. We believe that as the U.S. economy recovers and the specific markets in which we operate recover, we will be able to benefit from improvements in demand for hotel rooms. In addition, we have made and continue to make significant investments in our sales force, loyalty program and electronic distribution channels. We also believe improvements made to our properties through our Gold Medal Lite property renewal program will allow us to enhance our RevPAR.

        Grow our Franchising Program.    We believe that we will continue to grow our franchising program by capitalizing on the value of the La Quinta brand. Our franchising program is focused on developing relationships with experienced hotel owners who will develop and operate new hotels as La Quinta Inns or La Quinta Inn & Suites or convert existing hotels to the La Quinta® brand. We believe that this strategy will allow us to continue to expand our geographic coverage without requiring significant capital investment, resulting in increased revenues and cash flow while maintaining consistent quality across our entire chain. By becoming more franchise oriented, we anticipate increasing our return on assets and capitalizing on the value of our brands.

        Invest our Available Capital.    We may use our cash flow, in combination with other sources of capital, to pursue selective inn acquisitions, development and redevelopment opportunities and selected strategic acquisitions. Our current development strategy is focused on locating a select number of high visibility properties in key strategic locations, such as central business districts of major cities, areas near major airports and major vacation destinations. We currently intend to use joint ventures with experienced hotel developers for these projects. We believe that this approach to development, often used in full-service hotel projects, will allow us to reduce the overall levels of our capital requirements and the level of development risk.

        In addition, we own several older hotels in locations that have experienced substantial growth around the hotel sites. We believe that we have the opportunity to redevelop a select number of these locations with a new hotel property that will produce stronger operating results than the existing facility.

        We also may use our cash flow, in combination with other sources of capital, to pursue acquisitions to expand our brand offering, as well as our geographic territory. We believe that the current weak lodging environment may present us with opportunities to expand our lodging operations. We are exploring opportunities to grow our lodging business by converting acquired hotel real estate portfolios to the La Quinta® brand or acquiring additional brands to complement the La Quinta® brand. Acquisition opportunities would be evaluated on a number of factors, including the potential target's strategic fit, future profitability, financial condition, strength of operations, brand quality and geographic and product distribution. We believe that we have a strong infrastructure to accommodate growth that could be achieved through acquisitions and other growth opportunities. We believe that this infrastructure includes effective advertising and marketing programs, an experienced operations group, a central reservation and property management system, investments in information systems and a seasoned sales group.

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Our Competitive Strengths

        We believe that we benefit from certain competitive strengths, which assist us in implementing our business objectives and strategies, including:

        Significant Brand Awareness.    We believe that we have achieved significant brand awareness over our 35-year history as a result of our focus on providing high quality, well located accommodations and superior value. We believe that this brand awareness, as well as our reputation for price, quality and value, has earned our hotels a strong following of loyal guests. We reward our loyal returning guests through our Returns program which provides guests with recognition and an expedited reservation and check-in process as well as rewards for frequent stays. We believe that our brand identity provides us with a significant advantage over independent hotel operators and other limited- service chains. Together with our operational expertise, this brand awareness enhances the performance of existing and newly constructed or acquired properties.

        Operational Expertise and Experienced Management Team.    Our management has substantial experience in the lodging industry. On average, senior management has approximately 25 years of experience in lodging and lodging-related industries and is supported by operational and administrative vice presidents with an average of 10 years of experience. Each company-owned property is operated as an individual profit center by an on-site general manager who oversees all day-to-day guest relations and other operating activities and implements rate, occupancy and cost containment strategies. We believe this decentralized accountability reduces operating costs while creating incentives to maximize RevPAR, guest satisfaction and operating margins by adapting room rates to prevailing market conditions at our individual hotels.

        Strong Infrastructure.    We believe we have a strong corporate infrastructure to support our existing hotels as well as new hotels that may be added to our system. Centralized corporate services include marketing, sales, finance, accounting, treasury, tax, information systems, construction and design, purchasing, legal, risk management, human resources and training. We promote and operate our own central reservation system, teLQuik, and a toll-free number, 1-800-531-5900, to accept room reservations. In addition, we operate our own proprietary website, www.LQ.com, which accepts room reservations and provides our guests with information about our companies, our hotels, and special promotions. Our direct sales force consists of 90 sales managers that conduct sales programs to develop and cultivate guests from potential and existing national and local clients. Our enhanced Returns® program promotes repeat business and brand loyalty to La Quinta.

Our Restructuring

        Over the last three years, we have undergone significant financial and strategic changes. In January 2000, we began a strategy of divesting our non-lodging real estate assets in order to focus on our lodging business. As a result of that change in strategy, we replaced substantially all of our senior management with executives who have, on average, approximately 25 years of experience in lodging and lodging-related industries. Over the last three years, our management has improved the operations of our lodging assets, including the reduction of costs and the introduction of our franchising program. During this period, we also sold approximately $1.8 billion of our non-lodging assets, applying the proceeds from these sales to reduce our outstanding indebtedness, thereby strengthening our balance sheet.

        On January 2, 2002, we completed the Restructuring of the existing organization of our companies whereby LQ Properties became a subsidiary controlled by LQ Corporation while continuing its status as a REIT. As result of the Restructuring, each outstanding share of common stock of LQ Properties held by La Quinta's shareholders was converted into one share of a new class B common stock of LQ Properties and each outstanding share of common stock of LQP Acquisition Corp., a newly formed wholly-owned

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subsidiary of LQ Corporation that was merged into LQ Properties (all of which were held by LQ Corporation) was converted into one share of a new class A common stock of LQ Properties. Following the Restructuring, each share of common stock of LQ Corporation, which was previously paired with the common stock of LQ Properties, is now attached and trades as a single unit with a share of LQ Properties' class B common stock. The Restructuring was accounted for as a reorganization of two companies under common control with no revaluation of the assets and liabilities of the two companies. We implemented the Restructuring in response to federal tax legislation adopted over the past several years which made it difficult for us to maintain our former status as a "grandfathered" paired share REIT while pursuing our objective to improve, expand, and diversify our lodging real estate assets and lodging business as a whole.

        We believe that the Restructuring was the best alternative for us to grow our lodging real estate portfolio, management operations and brand franchising in light of this federal tax legislation. In addition, we believe that our Restructuring will allow both LQ Properties and LQ Corporation to make efficient use of their substantial net operating loss carryforwards, or "NOLs." We believe additional benefits of our Restructuring include our ability to deduct preferred dividends for income tax purposes and to retain capital for other corporate uses such as deleveraging, investment, acquisitions and potential share repurchases. We believe that our Restructuring should also enable us to be less dependent upon capital markets by allowing us to retain more of our cash flow.

Our Other Businesses

        As of December 31, 2002, we operated TeleMatrix, Inc., a provider of telephones, software and equipment for the lodging and telecommunications industry. This business functions relatively autonomously and generated revenues of $12,145,000 during the year ended December 31, 2002. Telematrix does not represent a significant portion of our assets, revenues, operating cash flow or expenses.

        Consistent with our previously announced intention to focus on the lodging industry, we completed our healthcare asset disposition strategy in 2002, resulting in the sale of $1,789,478,000 of healthcare investments from 2000 through 2002. As of December 31, 2002, LQ Properties held approximately $59,330,000 in permanent mortgage loan financing and seller notes receivable resulting from the sale of healthcare assets, which we currently intend to hold to maturity. Permanent mortgage loan financing provided by LQ Properties is secured by first mortgage liens on the underlying real estate and personal property of the mortgagor.

        The interest rate on LQ Properties' existing investments in mortgage loans for two operating facilities is London Interbank Offered Rate ("LIBOR") plus 1% per annum on the outstanding balances. These mortgage loans are secured by the operating facilities and mature in August 2008. LQ Properties has two additional notes that are secured by the equity interest of the borrowers. One of the notes matures in March 2006 with a fixed rate of 9% and the second note matures in August 2005 and has a rate of 9% for the first 24 months and 10% for the last 12 months.

Seasonality

        The lodging industry is seasonal in nature. The periods during which our lodging properties experience higher hotel revenue activities vary from property to property depending principally upon location. Generally, hotel revenues are greater in the second and third quarters than in the first and fourth quarter. We expect this seasonality will cause quarterly fluctuations in revenue, profit margins and net earnings.

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Environmental Matters

        Under various federal, state and local laws, ordinances and regulations, an owner of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on or in such property. These laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The costs of investigation, removal or remediation of such substances may be substantial. Additionally, the presence of hazardous or toxic substances, or the failure to properly remediate these substances, may adversely affect the owner's ability to sell or rent or to borrow using this property as collateral. People who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of a release of substances at a disposal treatment facility, whether or not the facility is owned or operated by that person. Certain environmental laws impose liability for release of asbestos containing materials, or "ACMs", into the air and third parties may seek recovery from owners or operators of real properties for personal injury associated with ACMs. In connection with the ownership (direct or indirect), operation, management and development of real properties, we may be considered an owner or operator or as having arranged for the disposal or treatment of hazardous or toxic substances and, therefore, be potentially liable for removal or remediation costs, as well as certain other related costs, including governmental fines and injuries to persons or property.

        We have retained independent environmental consultants in the past to conduct or update Phase I environmental assessments (which generally do not involve invasive techniques such as soil or ground water sampling) and asbestos surveys with respect to certain of our properties. To date, these environmental assessments have not revealed any environmental conditions that we believe will have a material adverse effect on our business, assets or results of operations. Where appropriate, on a property-by-property basis, these consultants also have conducted additional testing, including sampling for asbestos, for soil contamination where underground storage tanks are or were located, and for contamination of underground water. However, even though these environmental assessments have been conducted, there is still the risk that the environmental assessments and updates did not identify all potential environmental liabilities because either a prior owner created a material environmental condition that is not known to us or the independent consultants preparing the assessments did not discover it. Further, new environmental liabilities may have developed since the environmental assessments were conducted. We are aware that certain of our hotel properties are adjacent to gasoline stations that may put these properties at risk for soil and groundwater contamination from these neighboring properties. In addition, one of our hotel properties is located near a "Superfund Site" as designated by the Environmental Protection Agency. Currently, we are not aware of any contamination to this property and have not been required by the EPA to take any actions. Finally, our lodging properties are cleaned and maintained using various chemicals and cleaning agents, some of which may be environmentally sensitive or hazardous. We generally maintain these chemicals and cleaning agents in appropriate containers to protect against environmental hazards.

        As of December 31, 2002, we had 24 properties that have problems with mold caused by excessive moisture, which accumulates in buildings or on building materials. The presence of mold at our properties has required us to undertake a remediation program to remove the mold from the affected properties. The aggregate cost of the remediation was $3,838,000 as of December 31, 2002. Of this amount, roughly $2,800,000 is related to one new construction hotel property, and we are seeking reimbursement from our contractors and other third parties for reimbursement of this and other amounts. We intend to continually monitor the progress of the remediation of our properties. While we believe that the cost of remediation is immaterial, such costs may increase as a result of the existence of mold in our other properties. See "Certain Factors You Should Consider About Our Companies, Our Businesses And Our Securities" for additional risks associated with the presence of mold.

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        Although we have incurred and expect to incur remediation and other environmental costs during the ordinary course of operations, we anticipate that such costs will not have a material adverse effect on our operations or financial condition.

Income Tax Matters

        LQ Properties currently intends to continue to manage its investments, including the sale or disposition of property or other investments, and to operate (on its own and through its business relationships with LQ Corporation) in a manner consistent with the requirements of the Internal Revenue Code of 1986, as amended ("the Code") and the regulations there under in order to qualify as a REIT. As long as LQ Properties complies with the Code and its regulations regarding REIT qualification, LQ Properties will generally not be taxed, under the federal income tax laws, on that portion of its REIT taxable income that it distributes to its shareholders. LQ Properties utilizes taxable REIT subsidiaries to conduct the operations of TeleMatrix and to hold certain assets, which LQ Properties could not hold directly. LQ Properties has accrued and paid federal and state income taxes on the earnings of such subsidiaries.

        In order to continue to qualify as a REIT, among other factors, LQ Properties must have distributed, in general, at least 90% of its 2002 REIT taxable income (excluding net capital gain) as dividends eligible for the dividends paid deduction available to REITs. LQ Properties recognized a net operating loss for the year ended December 31, 2002 and accordingly was not required to make any distributions for the year. Distributions to preferred shareholders during 2002 have been characterized as a return of capital.

        As of December 31, 2002, our total federal NOL carryforwards were approximately $424,300,000, of which approximately $167,900,000 is available to LQ Properties and its taxable REIT subsidiaries. No valuation allowance has been provided for federal NOL carryforwards available to LQ Properties and LQ Corporation. A valuation allowance of $2,560,000 was recorded during the 12 months ended December 31, 2002 with respect to certain state operating loss carryovers. LQ Properties and its taxable REIT subsidiaries have recorded a full valuation allowance for capital loss carryforwards of approximately $40,400,000 as utilization of these losses within the statutory five-year carryover period is not reasonably assured. LQ Properties has also recorded a full valuation allowance with respect to federal tax credits of approximately $6,600,000 (primarily alternative minimum tax) made available to LQ Properties as a result of the Restructuring.

        Going forward, LQ Properties intends to utilize its available NOLs in a tax-efficient manner. For LQ Properties, this may include using its available NOLs to offset amounts that would otherwise be required to be distributed to LQ Corporation. Such amounts could be retained within LQ Properties to fund acquisitions, reduce debt, or for other corporate purposes.

        LQ Corporation's income tax expense or benefit is based on current taxable earnings before income taxes. Deferred income taxes reflect the temporary differences between assets recognized for financial reporting and such amounts recognized for tax purposes, which require recognition of deferred tax liabilities and assets. Deferred tax liabilities and assets are determined based on the differences between the financial statement and tax basis of assets and liabilities using tax rates in effect for the year in which the differences are expected to reverse.

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Certain Factors You Should Consider About Our Companies,
Our Businesses And Our Securities

        Presented below are certain factors that we believe are material to our shareholders. You should be aware that there are various risks, including those described below, which in the future and, in some cases, already do, materially affect us and our business, financial condition and results of operations. You should carefully consider these factors. This section includes or refers to certain forward-looking statements. You should read the explanation of the qualifications and limitations on such forward-looking statements in this Joint Annual Report under the headings "About this Joint Annual Report—Forward-Looking Statements."

Risks Associated with our Lodging Business

Our strategic focus on lodging related properties exposes our shareholders to risks common in this industry that may adversely affect an investment in our securities, including a number of risks that could have an adverse effect on our lodging related business.

        Our economic performance, and consequently the value of our publicly traded securities, are subject to the risk that if our properties do not generate revenues to meet our operating expenses, including debt service and capital expenditures, our cash flow will be adversely affected. The following factors, common in the lodging industry, may adversely affect the revenues generated by or expenses incurred by our hotel properties, including:

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changes in the national, regional and local general economic climate including the severity and duration of the current economic downturn;



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weather conditions;



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competition from comparable hotels, many of which have greater marketing and financial resources than our hotel-operating business;



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the desirability of particular locations;



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the quality, philosophy and performance of the lodging facility managers and supervisors;



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changes in product preferences;



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decreases in the demand for our lodging facilities as a result of technological developments;



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availability of qualified labor;



•

changes in room rates to meet market conditions or stimulate demand;



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increases in operating costs (such as healthcare and liability insurance) due to inflation and other factors;



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capability of management information systems;



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the need for capital to reinvest in order to periodically repair and upgrade our lodging facilities;



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sudden changes in travel patterns caused by factors such as terrorist attacks and U.S. military action;



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increases in travel expenses that reduce business and leisure travel;



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increases in infrastructure expenses such as real estate tax and utilities; and



•

fluctuating and seasonal demands of business travelers and tourism and the relationship, generally, between supply of and demand for hotel rooms (an oversupply of hotel properties or a reduction in demand for hotel rooms).

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The political and economic climate and other world events affecting safety and security could adversely affect lodging demand and could harm our future revenues and profitability.

        Lodging demand has been, and is expected to continue to be, affected by the public's attitude towards the safety of travel and the international political climate. The possibility of military action against Iraq, events such as the terrorist attacks in the U.S. on September 11, 2001 and the threat of additional attacks, and the resulting political instability and concerns over safety and security aspects of traveling, have had a significant adverse impact on lodging demand and may continue to do so in the future. Economic or political changes that reduce disposable income or consumer or business confidence may affect demand for hotel rooms, which in many cases are discretionary purchases. Decreases in lodging demand could lead to price discounting which, in turn, could reduce the profitability of our business. Additionally, these declines could affect our ability to comply with certain financial covenants under our revolving line of credit (the "Credit Facility").

We operate in a very competitive market, which may limit our operating margins, diminish our market share and reduce our earnings.

        Our hotels generally operate in markets that contain numerous competitors, including a wide range of lodging facilities offering full-service, limited-service and all-suite lodging options to the public. The continued success of our hotels will be substantially dependent upon our ability to compete in such areas as affordable and competitive room rates, quality of accommodations, name recognition, service level and convenience of locations. Additionally, an increasing supply of hotel rooms in our market segment, and consolidations in the lodging industry generally, have resulted in the creation of several large, multi-branded hotel chains with diversified operations that may adversely impact our business, financial condition and results of operations. We cannot assure you that demographic, geographic or other changes in markets will not adversely affect the convenience or desirability of the locations of our hotels. Furthermore, we cannot assure you that competing hotels will not provide greater competition for guests than currently exists in the markets in which our hotels operate or that new hotels will not enter such markets.

Our lodging related business and operations are subject to extensive employment and other governmental regulation.

        Our lodging business is subject to extensive federal, state and local regulation, including building and zoning requirements, all of which can prevent, delay, make uneconomical or significantly increase the cost of developing additional lodging facilities. In addition, our lodging business and hotel operators are subject to laws governing their relationship with employees, including minimum wage and overtime payment requirements, rules pertaining to working conditions, work permit requirements and discrimination and other claims. An increase in the minimum wage rate, employee benefit costs or other costs associated with employees could adversely affect our business, financial condition and results of operations.

Our franchising program depends upon third party owners/operators who may not fulfill their franchising obligations, including failing to make timely payments to us and failing to maintain quality control over the use of the La Quinta® brand.

        Our growth strategy includes, among other things, expansion of the La Quinta® brand through franchising. The success of our franchise program is dependent upon the manner in which our franchisees adhere to their respective franchise agreements and operating standards, which include:

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timely payment of royalties and other fees;



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ongoing capital expenditures and maintenance; and

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•

proper usage of the La Quinta® brand and related trademarks.

        In addition, while we have contractual controls over each franchisee, we do not have control over the day-to-day operations of franchisees. As a result, third party franchisees may not appropriately use and protect our La Quinta® brand, which may decrease its value or expose it to legal challenges.

We may utilize joint venture partnerships, which we may have limited control over, for hotel acquisitions and/or development.

        We may acquire and/or develop hotel properties through joint ventures with third parties. Joint venturers often share control over the operation of the joint venture assets. Actions by a co-venturer could subject such assets to additional risks, including:

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our co-venturers in an investment might have economic or business interests or goals that are inconsistent with our interests or goals;



•

our co-venturers may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives; and



•

our co-venturers could go bankrupt, leaving us liable for their share of joint venture liabilities.

        Although we generally will seek to maintain sufficient control of any joint venture to permit our objectives to be achieved, we might not be able to take action without the approval of our joint venture partners. Also, our joint venture partners could take actions binding on the joint venture without our consent.

Our failure to obtain and maintain proper insurance on our properties could have a material adverse effect on us.

        We are responsible for insuring our properties, including our lodging related properties, as well as for obtaining the appropriate insurance coverage to reasonably protect our interests in the regular course of business. Additionally, each of our leases and loans typically specifies that comprehensive insurance be maintained on each of our properties, including liability, fire and extended coverage. Leases and loan documents for new investments typically contain similar provisions. There are certain types of losses, generally of a catastrophic nature, such as earthquakes and floods or terrorists acts that may be uninsurable or not economically insurable. We will use our discretion in determining amounts, coverage limits and deductibility provisions of insurance, with a view to maintaining appropriate insurance coverage on our investments at a reasonable cost and on suitable terms. The events of September 11, 2001 and their aftermath have made it difficult to obtain certain types of insurance and are causing the cost of insurance to increase. We may not be able to obtain or renew insurance policies, or, if we are able to obtain or renew our coverage, it may be at a significantly higher cost than our historic experience. As a result, we may be forced to carry insurance coverage that, in the event of a substantial loss, would not be sufficient to pay the full current market value or current replacement cost of our lost investment and also may result in certain losses being totally uninsured. Inflation, changes in building codes, zoning or other land use ordinances, environmental considerations, lender imposed restrictions and other factors also might make it infeasible for us to use insurance proceeds to replace the property after it has been damaged or destroyed. Under such circumstances, the insurance proceeds, if any, that we receive might not be adequate to restore our economic position with respect to such property.

        In addition, insurance coverage for our properties and for casualty losses does not customarily cover damages that are characterized as punitive or similar damages. As a result, any claims or legal proceedings, or settlement of any such claims or legal proceedings, that result in damages that are characterized as punitive or similar damages may not be covered by our insurance. If these types of damages are substantial, our financial resources may be adversely affected.

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        Finally, property and casualty insurance has recently become more expensive and difficult to procure. As it becomes more expensive or difficult to procure, we will need to make decisions as to the types and amounts of coverage to obtain, including determining whether partially self-insuring is an economically feasible alternative.

Risks Related to La Quinta Generally

Our lodging related properties are geographically concentrated which exposes our business to the effects of geographically oriented events and occurrences.

        Our hotels are concentrated in the western and southern regions of the United States. As a result, our lodging properties are particularly sensitive to adverse economic and competitive conditions and trends in those regions and such conditions could adversely affect our business, financial condition and results of operations. The concentration of lodging properties in one region may expose us to risks of adverse economic developments, or adverse climate or weather conditions which are greater than if our portfolio were more geographically diverse.

We may be unsuccessful in increasing our cash flow from our company-owned hotels.

        We may not be successful in our strategy of increasing cash flow though increased profit contributions from our company-owned hotels due to the following factors:

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we may be unsuccessful in controlling costs;



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demand may not increase for our hotel rooms;



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we may not be successful in attracting new corporate business and leisure customers; and



•

our marketing and sales efforts may not result in increasing our RevPAR.

We must successfully compete for franchisees or our franchising program will not develop into a meaningful component of our lodging business.

        The lodging business is a heavily franchised industry. While the La Quinta® brand has been in existence since 1968, we just introduced the franchising program in the fall of 2000. Some of our competitors may have substantially greater marketing and financial resources, greater brand distribution and/or greater financial incentives than we do. We must still compete successfully against these other lodging competitors in order to successfully grow our franchising program and develop it into a long-term meaningful component of our lodging business.

Our strategy of developing and redeveloping lodging properties may not generate the economic returns we expect.

        Our strategy includes current and future development and redevelopment activities. These activities are subject to risks because, among other reasons:

•

we may be unable to proceed with the development and redevelopment of properties because we cannot obtain financing upon terms that are favorable to us or at all;



•

we might not find appropriate, strategically located properties;



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our redevelopment efforts may not produce desired operating results;



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developed properties may not meet stipulated minimum returns;



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land costs may be higher than anticipated; and

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•

we may be unable to obtain, or may be delayed in obtaining, required building permits and authorizations, which could result in increased costs and could cause us to abandon projects altogether.

        In addition, we may from time to time experience shortages of materials or qualified trades people or volatile increases in the cost of certain construction materials or labor, resulting in longer than normal construction and remodeling periods, loss of revenue and increased costs. We generally rely heavily on local contractors, who may be inadequately capitalized or understaffed. The inability or failure of one or more local contractors to perform may result in construction or remodeling delays, increased costs and loss of revenue which could adversely affect our business, financial condition and results of operations.

We may be unsuccessful in identifying and completing acquisition opportunities, which would limit our ability to grow over the long-term. Part of our growth strategy includes the potential acquisition of other lodging hotels and/or brands.

        We may compete with other lodging and leisure companies for potential hotel and/or brand acquisition opportunities. Some of these competitors may have substantially greater financial resources than we do and may be able to pay more to acquire properties than we are able to pay. These entities may be able to accept more risk than we choose to manage, including risks of a company's creditworthiness, brand identification or geographic location. Competition may generally reduce the number of acquisition opportunities that we believe are suitable. In addition, competition for properties may increase the cost of acquiring properties and/or brands.

        Even if we are able to successfully identify and acquire other lodging hotels and/or brands, such new acquisitions may fail to perform as expected or we may be unable to make acquisitions on favorable terms. Additionally, we may underestimate the costs necessary to bring an acquired property up to standards established for its intended market position or the costs to integrate an acquired property or brand with our existing operations.

We depend on our key personnel.

        Our future success and our ability to manage future growth depend, in large part, upon the efforts of our senior management and our ability to attract and retain key officers and other highly qualified personnel. Competition for such personnel is intense. There can be no assurance that we will continue to be successful in attracting and retaining qualified personnel. While we believe that we could find replacements for these key personnel, the loss of their services could have a significant adverse effect on our operations.

Changes in market conditions could adversely affect the market price of our securities.

        As with other publicly traded equity securities, the value of our publicly traded securities depends on various market conditions, which may change from time to time. Among the market conditions that may affect the value of our common stock are the following:

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the extent of investor interest in us;



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the attractiveness of our equity securities in comparison to other equity securities, including securities issued by other real estate-based or lodging related companies;



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our financial performance; and



•

general stock and bond market conditions.

        The market value of our publicly traded securities is based primarily upon the market's perception of our growth potential, including current and potential future earnings and cash flow, the value of our assets, including real estate and the La Quinta® brand, our current debt levels, and, if applicable, any

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dividend that may be paid on LQ Properties class B common stock in the future. Consequently, our common stock may trade at prices that are higher or lower than their net asset value per share. Additionally, if our future earnings are less than expected, it is likely that the market price of our common stock will diminish.

We are exposed to litigation that could result in a substantial adverse affect on our business, financial condition and results of operations.

        There could be a substantial adverse affect on our business, financial condition and results of operations if we are not successful in defending or reaching a settlement with respect to the litigation currently pending against us including an intellectual property infringement claim. Although we are pursuing settlements with terms favorable to us and/or aggressively defending the material lawsuits that have been filed against us, we may not be successful in these efforts. If the ultimate outcome of litigation against us is not resolved in our favor, we could be exposed to considerable financial liabilities, significant portions of which may not be recoverable from our insurance providers. Any judgment against us involving intellectual property infringement decisions could also include an injunction prohibiting or limiting the use of our trademarks.

Provisions of our charters and bylaws could inhibit changes in control that could be beneficial to our shareholders.

        Certain provisions of our charters and bylaws may delay or prevent a change in control or other transactions that could provide our shareholders with a premium over the then-prevailing market price of their paired shares or which might otherwise be in their best interest. In addition to staggered Boards of Directors, our charters generally prohibit ownership, directly, indirectly or beneficially, by any single shareholder of more than 9.9% of our equity stock. We refer to this limitation as the "ownership limit." Our Boards of Directors may waive or modify the ownership limit with respect to one or more persons if they are satisfied that ownership in excess of this limit would not jeopardize LQ Properties' status as a REIT for federal income tax purposes. Shares owned in violation of the ownership limit will be treated as "excess stock" and will be subject to loss of rights to distributions and voting and other penalties. The ownership limit may also have the effect of inhibiting or impeding a change in control. These restrictions on transferability and ownership also will not apply if our Boards of Directors determine that it is no longer in the best interest of LQ Properties to attempt to qualify, or to continue to qualify, as a REIT.

There is a possibility that there will be amendments to or elimination of the pairing arrangement or that, in certain circumstances, LQ Properties' Board of Directors could terminate LQ Properties' status as a REIT.

        Currently, the La Quinta Boards of Directors may modify or eliminate the pairing arrangement without the consent of the shareholders of LQ Corporation and LQ Properties. In addition, the LQ Properties Board of Directors may, under certain circumstances, terminate LQ Properties' status as a REIT without the consent of its shareholders.

The class B common stock may be redeemed for nominal value, any time, including prior to the time when the class B common stock becomes eligible for dividends, subject to certain important limitations.

        LQ Properties may redeem the class B common stock for nominal value provided that the class B common stock remains paired with the common stock of LQ Corporation and that no additional shares of class B common stock are outstanding and unpaired. Although in form such redemption price is nominal, the redemption mechanic is designed to cause the holders of the class B common stock to transfer such stock to LQ Corporation as a capital contribution, with a corresponding increase in the value of their existing common stock of LQ Corporation. LQ Properties may exercise its redemption right

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at any time, including prior to 2005 when the class B common stock becomes eligible to receive dividends. If the class B common stock is redeemed prior to 2005, holders of the class B common stock will not have received any tax-advantaged dividends.

Risks Related to Our Debt

As of December 31, 2002, we had approximately $665 million of debt, which could have important consequences for our investors and for us, some of which include:

•

our ability to obtain additional financing may be impaired, both currently and in the future;



•

a substantial portion of our cash flow from operations must be dedicated to the payment of principal and interest on this indebtedness, thereby reducing the funds available for other purposes;



•

our cash flow may be insufficient to meet required payments of principal, interest or future dividends;



•

we may be substantially more leveraged than our competitors, putting us at a competitive disadvantage;



•

our flexibility to adjust to market conditions is limited, leaving us vulnerable in a downturn in general economic conditions or in our business; and



•

some of our debt is redeemable at the option of the holders prior to the stated maturity.

Our Credit Facility contains certain financial covenants that we may not meet and, if violated, could limit our ability to continue to borrow under our Credit Facility and, under certain circumstances, could accelerate the amount due under our Credit Facility.

        We depend upon our Credit Facility for a portion of our operating funds. Our Credit Facility subjects us to financial covenants, including restrictions on our ability to engage in certain activities. Several factors, including the economic downturn and terrorist attacks and their aftermath, have had an adverse affect on the lodging business. As a result, there is a risk that we may not meet one or more of these financial covenants. Furthermore, we may be unable to amend our Credit Facility to provide for covenants that we will be able to meet in the currently challenging environment. If we violate or fail to comply with any of the financial or other covenants in our Credit Facility, there may be a material adverse effect on us. Most notably, we may be unable to borrow additional funds under our Credit Facility and, further, our outstanding debt under our Credit Facility could become immediately due. In the event that we do not satisfy a covenant, as is likely to be the case for our minimum lodging EBITDA covenant for 2003, we intend to request a waiver or amendment from our bank group. However, we cannot provide assurances that the bank group would be agreeable to such a waiver or amendment.

We may have to rely on external sources of capital to repay our debt and to pursue our strategic objectives.

        We may have to rely on third party sources of capital in order to repay our debt, fund capital expenditures and otherwise pursue our strategic objectives. These external sources of capital may or may not be available on favorable terms or at all. Our access to third party sources of capital depends upon a number of factors, including general market conditions, the market's perception of our growth potential and risk characteristics of our underlying business operations, our overall debt levels, our current and potential future earnings and cash flow and the market price of our securities. Moreover, additional equity offerings may result in the substantial dilution of our shareholders' interests and additional debt financings may further leverage us. In the event we are unable to access third party

22

sources of capital on terms favorable to us, we may be delayed in implementing capital improvements or in pursuing our growth strategy, which could reduce our revenue, or operating income.

Rising interest rates would increase our interest costs and reduce our earnings.

        We may incur indebtedness that bears interest at variable rates. Accordingly, if we do incur such indebtedness and short-term interest rates increase, so will our interest costs, which would adversely affect our earnings, cash flow, our ability to service debt and our ability to re-invest in our operations. We may also incur indebtedness that bears interest at fixed rates. If future long-term rates increase prior to such debt issuance, our interest expense would be higher.

Risks Associated With Our Investment in Real Estate

Real estate investments are subject to numerous risks.

        Because we own and lease hotels and other real property generally affiliated with or adjacent to our hotels, we are subject to the risks that generally relate to investments in real property. The investment returns available from equity investments in real estate depend in large part on the amount of income earned and capital appreciation generated by the related properties, as well as the expenses incurred. In addition, a variety of other factors affect income from properties and real estate values, including:

•

changes in national economic conditions;



•

changes in local economic conditions and neighborhood characteristics;



•

changes in interest rates;



•

changes in the availability, cost and terms of loans;



•

the impact of present or future environmental legislation and compliance with environmental laws;



•

the ongoing need for capital improvements, particularly in older structures;



•

changes in other operating expenses;



•

increases in the real property taxes that we pay;



•

the failure of our tenants to perform their obligations under their leases;



•

adverse changes in governmental rules and fiscal policies;



•

condemnation and adverse changes in zoning laws;



•

civil unrest;



•

acts of God, including earthquakes and other natural disasters (which may result in uninsured losses); and



•

other factors, such as war or terrorist attacks, that are beyond our control.

The illiquidity of real estate as an investment limits our ability to sell properties quickly in response to market conditions.

        Real estate investments are relatively illiquid and, therefore, cannot be purchased or sold rapidly in response to changes in economic or other conditions. Buyers may not be identified quickly, such buyers may not be able to secure suitable financing to consummate a transaction or we may not be able to sell such property on terms favorable to us. Furthermore, sales of certain appreciated property could generate material adverse tax consequences, which may affect our ability to sell properties in response to market conditions and adversely affect returns to shareholders.

23

We are subject to real property taxes, which are subject to significant changes by taxing authorities, which could increase operating expenses.

        Our properties are subject to real property taxes. The real property taxes may increase or decrease as property tax rates change and as the values of properties are assessed and reassessed by taxing authorities. Real property taxes may increase even if property level cash flows substantially decrease. As a result, increases in property taxes may adversely affect our financial condition and results of operations.

Potential liability for environmental contamination or the existence of mold could result in substantial costs or restrictions on the use of our properties, which could decrease our revenue, increase our operating costs or increase our capital expenditures.

        Environmental problems are possible and can be costly. It could be discovered that some of our properties are not in compliance with applicable environmental laws. Additionally, under federal, state and local environmental laws, ordinances and regulations, we may be required to investigate and clean up the effects of releases of hazardous or toxic substances or petroleum products at our properties, regardless of our knowledge or responsibility, simply because of our current or past ownership or operation of those particular real estate properties. If unidentified environmental problems arise, we may have to make substantial payments, which could adversely affect our business, financial condition and results of operations because:

•

as owner or operator, we may have to pay for property damage and for investigation and clean-up costs incurred in connection with the contamination;



•

the law typically imposes clean-up responsibility and liability regardless of whether the owner or operator knew of or caused the contamination;



•

even if more than one person may be responsible for the contamination, each person who shares legal liability under the environmental laws may be held responsible for all of the clean-up costs; and



•

governmental entities and third parties may sue the owner or operator of a contaminated site for damages and costs.

        These costs could be substantial and in extreme cases could exceed the value of the contaminated property. The presence of hazardous or toxic substances or petroleum products or the failure to properly remediate contamination may materially and adversely affect our ability to borrow against, sell or rent an affected property. In addition, applicable environmental laws create liens on contaminated sites in favor of the government for damages and costs it incurs in connection with a contamination.

        Environmental laws also govern the presence, maintenance and removal of asbestos. Such laws require that owners or operators of buildings containing asbestos:

•

properly manage and maintain the asbestos;



•

notify and train those who may come into contact with asbestos; and



•

undertake special precautions, including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a building.

        Such laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers.

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        We have discovered that some of our properties have problems with mold caused by excessive moisture, which accumulates in buildings or on building materials. Some molds are known to produce toxins or irritants. Concern about indoor exposure to mold has been increasing as exposure to mold can cause a variety of health effects and symptoms in certain individuals including allergic or other reactions. The presence of mold at our properties has required us to undertake a remediation program to remove the mold from the affected properties. With the exception of one property, the cost of remediation to date has been immaterial, and, based on our evaluation of this issue, we do not believe that it will have a material adverse affect on our business, financial condition and results of operations. However, such cost may substantially increase if we discover mold in our other properties, or if the cost related to mold such as legal and insurance expense continue to increase rapidly.

Compliance or failure to comply with the Americans with Disabilities Act of 1990 and other similar laws could result in substantial costs to us, which will increase our operating or capital expenses and reduce our earnings.

        The Americans with Disabilities Act generally requires that public buildings, including office buildings and hotels, be made accessible to disabled persons. Noncompliance could result in the imposition of fines by the federal government or the award of damages to private litigants. If, pursuant to this Act, we are required to make substantial alterations and capital expenditures in one or more of our properties, including the removal of access barriers, it could adversely affect our financial condition and results of operations.

        We may also incur significant costs complying with other regulations. Our properties are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. If we fail to comply with these requirements, we could incur fines or private damage awards. However, we do not know whether existing requirements will change or whether compliance with future requirements will include significant unanticipated expenditures that will affect our cash flow and results from operations.

Risks Associated with LQ Properties and its Status as a REIT

Failure of LQ Properties to qualify as a REIT would cause it to be taxed as a corporation, which would expose us to serious tax consequences and could substantially reduce any funds available for payment of dividends to holders of class B common stock.

        If LQ Properties fails to qualify as a REIT for federal income tax purposes, it will be taxed as a corporation with the attendant consequences described below. We believe that LQ Properties is organized and qualified as a REIT and intend to operate it in a manner that will allow it to continue to qualify as a REIT. However, we cannot assure you that LQ Properties is qualified as such, or that it will remain qualified as such in the future because qualification as a REIT involves the application of highly technical and complex provisions of the Code as to which there are only limited judicial and administrative interpretations, and involves the determination of facts and circumstances not entirely within our control. The complexity of the Code provisions governing REITs is greater in the case of a REIT that owns hotels and leases them to a corporation of which it is a subsidiary. In addition, future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws or the application of the tax laws with respect to qualification as a REIT for federal income tax purposes or the federal income tax consequences of such qualification.

        If LQ Properties fails to qualify as a REIT, we could face serious tax consequences that could substantially reduce, or possibly eliminate, the funds available for, among other things, the payment of dividends to holders of class B common stock for each of the years involved because LQ Properties:

•

would not be allowed a deduction for any dividends paid to shareholders in computing its taxable income and would be subject to federal income tax at regular corporate rates;

25

•

could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and



•

unless entitled to relief under statutory provisions, could not elect to be subject to tax as a REIT for four taxable years following the year during which it was disqualified.

        In addition, if LQ Properties fails to qualify as a REIT, it will no longer be required to pay dividends for REIT qualification purposes, and if dividends were paid they would be subject to tax as ordinary income to the extent of current and accumulated earnings and profits. As a result of all of these factors, the failure of LQ Properties to qualify as a REIT could result in significant adverse tax consequences and could adversely affect the value of our securities.

LQ Properties is subject to some taxes even if it qualifies as a REIT.

        Even if LQ Properties qualifies as a REIT, it is subject to some federal, state and local taxes on its income and property. For example, LQ Properties pays taxes on certain undistributed income and is subject to a 100% tax on net income derived from "prohibited transactions." LQ Properties may also be taxed on all or a portion of the gain recognized from the sale of assets acquired from La Quinta Inns, Inc. as a result of the July 1998 merger of La Quinta Inns, Inc. with and into LQ Properties. LQ Properties is also subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by LQ Properties with respect to any calendar year are less then the sum of:

•

85% of LQ Properties' ordinary income for that year;



•

95% of LQ Properties' capital net income for that year; and



•

100% of LQ Properties' undistributed income from prior year.

        Additionally, LQ Properties' income derived from properties located in some states is subject to local taxes.

LQ Properties may need to borrow money in the future to meet its minimum distribution requirements and to continue to qualify as a REIT.

        LQ Properties' ability to make distributions to shareholders could be adversely affected by increased debt service obligations if it needs to borrow money in the future in order to maintain its REIT qualification. For example, differences in timing between when LQ Properties receives income and when it has to pay expenses could require LQ Properties to borrow money to meet the minimum distribution requirements applicable to REITs. The incurrence of large expenses also could cause LQ Properties to need to borrow money to meet this requirement. LQ Properties might need to borrow money for these purposes even if we believe that market conditions are not favorable for such borrowings. However, there is no assurance that we will be able to obtain additional money or that we may borrow such money on favorable terms.

ITEM 3. LEGAL PROCEEDINGS

        Incorporated by reference to the description of legal proceedings is Note 13, "Commitments and Contingencies," in the notes to the financial statements set forth in Part II, Item 8, "Financial Statements and Supplementary Data."

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

        None.

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ITEM 4A. OUR EXECUTIVE OFFICERS

        We have provided information about our executive officers in this Item 4a of this Joint Annual Report. We also encourage you to refer to LQ Corporation's proxy statement for its 2003 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission within 120 days following our fiscal year-end.

        The following information relative to LQ Corporation and LQ Properties' executive officers is given as of February 15, 2003:

        Francis W. Cash has been President and Chief Executive Officer of LQ Corporation and LQ Properties since April 2000. Mr. Cash was also the Treasurer of LQ Corporation from April 2000 until June 2000, at which time David L. Rea was appointed Treasurer. Mr. Cash was the Chairman of the Board, Chief Executive Officer, President and a Director of Mariner Healthcare Group, Inc. from September 1999 until March 2000. From July 1995 to August 1999, Mr. Cash served as President and Chief Executive Officer of Red Roof Inns, Inc. He also served as Chairman of the Board of Red Roof Inns from June 1996 to August 1999. Prior to his service at Red Roof Inns, Mr. Cash served as President and Chief Operating Officer of NovaCare, Inc. from October 1992 to June 1995. Prior to that, Mr. Cash served in a number of senior executive positions for 18 years at Marriott Corporation, most recently as President, Marriott Service Group.

        David L. Rea has been Executive Vice President and Chief Financial Officer of LQ Corporation since June 2000 and of LQ Properties since December 2000. Mr. Rea was also the Treasurer of LQ Corporation from June 2000 to January 2002 and of LQ Properties from December 2000 to January 2002. Most recently, Mr. Rea served as CFO of the start-up e-commerce company, SingleSourceIT.com. Prior to that, he was with Red Roof Inns, Inc. from 1996 through 1999 where he served in various roles, including Executive Vice President, CFO and Treasurer. From 1995 through 1996, he served as Vice President of Finance at DeBartolo Realty Corporation and held various investment management related positions with T. Rowe Price Associates from 1986 through 1995.

        Rufus K. Schriber has served as Executive Vice President Marketing and Brand Positioning of LQ Corporation since November 2002. Prior to joining LQ Corporation, Mr. Schriber served as a consultant with the consulting firm Still Pond Enterprises, Inc. from May 2000 to November 2002, during part of which time he also served as an advisor to La Quinta. From July 1987 to May 2000, Mr. Schriber served in a number of senior executive positions at Marriott International, most recently as Executive Vice President of Brand Management and Marketing.

        Alan L. Tallis has been Executive Vice President and Chief Development Officer of LQ Corporation since July 2000. Mr. Tallis has also served as an Executive Vice President and Development Officer for

27

LQ Properties since May 2002. He previously served in various executive positions with LQ Corporation from 1980 to 1992. Prior to returning to LQ Corporation in 2000, Mr. Tallis served as Executive Vice President-Development and General Counsel of Red Roof Inns, Inc. and Managing Director of Tallis & Associates.

        Sandra K. Michel has been Senior Vice President and General Counsel of LQ Corporation and LQ Properties since December 2001 and Secretary of LQ Corporation and LQ Properties since January 2002. Ms. Michel also serves as Senior Vice President, General Counsel and Secretary of LQ Properties. Prior to joining the companies, Ms. Michel served as General Counsel and Secretary of Sunterra Corporation from June 2000 through April 2001 and Deputy General Counsel and Assistant Secretary from August 1999 through June 2000. Prior to that, Ms. Michel served as Senior Counsel to W.R. Grace & Co. from December 1991 to August 1999 assuming the role of Assistant Secretary in September 1998. Ms. Michel was an attorney in private practice with nationally recognized firms for 11 years prior to joining W.R. Grace & Co.

        Wayne B. Goldberg has been Senior Vice President of Operations of LQ Corporation since October 2001 and, prior to that, was Group Vice President of Operations since July 2000. Prior to joining LQ Corporation, Mr. Goldberg was Chief Operating Officer for Bridge Street Accommodations. Prior to Bridge Street, Mr. Goldberg spent over 20 years at Red Roof Inns, Inc. Mr. Goldberg served in various roles at Red Roof Inns, including: Group Vice President, District Vice President, Regional Manager, Area Manager and General Manager.

        A. John Novak has served as Senior Vice President and Chief Information Officer of LQ Corporation since January 2001. Prior to joining LQ Corporation, Mr. Novak was Senior Vice President and Chief Information Officer for Resort Condominiums International (RCI), a division of Cendant Corporation, beginning in April 1999. He served as Vice President of Lodging Property Systems for Marriott International from 1996 to 1999. Mr. Novak also served as Vice President of Resorts and Sales Systems for Walt Disney World Company from 1990 until 1996.

        A. Brent Spaeth has been Senior Vice President of Human Resources and Administration of LQ Corporation since October 2001 and, prior to that, was Group Vice President of Operations since August 2000. Mr. Spaeth has been with LQ Corporation since February of 1989. He has served in various roles including Regional Vice President of La Quinta Inn & Suites in the Western Regions and Divisional Vice President for the Central Division. He formerly held various property and regional operations positions with Drury Industries and Mid-America Hotels corporations.

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PART II

ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Our Common Stock

        Market Information.    Our shares trade on the New York Stock Exchange under the symbol "LQI." The following table sets forth, for the periods shown, the high and low sales prices for our shares traded together (our publicly traded paired common stock prior to our Restructuring) as reported on the New York Stock Exchange Composite Tape:

        LQ Properties' class A common stock is currently held by LQ Corporation and has never been publicly traded.

        Holders of Record.    There were approximately 10,182 holders of record of our shares as of February 24, 2003. Included in the number of shareholders of record are shares held in "nominee" or "street" name. As of February 24, 2003, LQ Corporation was the only holder of LQ Properties' class A common stock.

        Dividends.    In order to qualify for the beneficial tax treatment accorded to REITs, LQ Properties is generally required each year to distribute to its preferred and common shareholders at least 90% of its REIT taxable income, determined without regard to the dividends paid deduction and by excluding any net capital gain. During the fiscal year ended December 31, 2002, LQ Properties paid $60,575,000 in dividends to LQ Corporation, the sole holder of its class A common stock. In addition, its consolidated subsidiary, La Quinta Worldwide, LLC ("LQ Worldwide"), made periodic proportional distributions totaling approximately $3,960,000 to LQ Corporation, which holds a 40.6% interest in LQ Worldwide. In connection with the Restructuring, LQ Properties' shareholders approved the terms of LQ Properties' class B common stock which provide that no dividends will be paid on LQ Properties' class B common stock prior to 2005. Until 2005, dividends may be paid on LQ Properties' class A common stock, including dividends necessary to maintain LQ Properties' status as a REIT. Commencing in 2005, the holders of class B common stock, may receive, on a quarterly basis, a dividend of $0.10 per share per annum although this dividend payment is not mandatory. We do not anticipate paying cash dividends on LQ Corporation's common stock in the foreseeable future.

Our Series A Preferred Stock

        Market Information.    On June 10, 1998, LQ Properties issued 7,000,000 depositary shares (the "Series A Depositary Shares"). Each Series A Depositary Share represents one-tenth of a share of 9% Series A Cumulative Redeemable Preferred Stock with a par value of $0.10 per share ("Series A Preferred Stock"). LQ Properties' Series A Depository Shares trade on the New York Stock Exchange

29

under the symbol "LQIPR". The following table sets forth, for the periods shown, the high and low sales prices for the Series A Depository Shares:

        Holders of Record.    There were approximately 205 holders of record of LQ Properties' Series A Depositary Shares as of February 24, 2003. Included in the number of holders of record are Series A Depositary Shares held in "nominee" or "street" name.

        Dividends.    For the year ended December 31, 2002, LQ Properties designated the following cash distributions to holders of its Series A Depositary Shares as non-taxable returns of capital:

        For the year ended December 31, 2001, LQ Properties designated the following cash distributions to holders of its Series A Depositary Shares as non-taxable returns of capital:

ITEM 6. SELECTED FINANCIAL AND OTHER DATA

Overview

        In November 1997, Meditrust, a Massachusetts business trust and predecessor to LQ Properties, merged with Santa Anita Realty Enterprises, Inc., with Santa Anita Realty Enterprises, Inc. continuing as the surviving corporation. Concurrently, Meditrust Acquisition Company merged with Santa Anita Operating Company, with Santa Anita Operating Company continuing as the surviving corporation. We refer to these two mergers as the Santa Anita merger. Upon completion of the Santa Anita merger, Santa Anita Realty Enterprises, Inc. changed its corporate name to "Meditrust Corporation" and Santa Anita Operating Company changed its corporate name to "Meditrust Operating Company." The common stock of Meditrust Operating Company was paired together with the common stock of Meditrust Corporation, so that the two entities, known collectively as The Meditrust Companies, traded together on

30

the New York Stock Exchange as one unit. During early 1998 and after completion of the Santa Anita merger, The Meditrust Companies, which focused primarily on the health care industry, began pursuing a strategy of diversification into additional new businesses, which culminated in mergers with La Quinta Inns, Inc., a lodging company, and Cobblestone Holdings, Inc., a golf course company.

        The Meditrust Companies, as a result of the Santa Anita merger, acquired the benefits of a unique organizational structure known as a "grandfathered" paired share REIT. Federal tax legislation adopted in July 1998 limited benefits attributable to future use of the "grandfathered" paired share structure. In addition, during the summer of 1998 and thereafter, the debt and equity markets available to REITs generally, and healthcare and lodging REITs specifically, deteriorated, thus limiting our companies' access to cost efficient capital. As a result, during the latter part of 1998 and throughout 1999 our companies sought to strengthen our financial position and clarify our investment and operating strategy, where we:

•

sold over $1.4 billion in assets (including the Cobblestone Golf Group and the Santa Anita Racetrack);



•

sold over $820 million of healthcare properties;



•

repaid over $625 million in debt; and



•

settled our forward equity investment transaction with certain affiliates of a third-party investment company.

        During 2000, we implemented a plan intended to further strengthen our position and focus on the lodging division. Consistent with components of the plan which called for, among other things, an orderly disposition of a significant portion of healthcare assets and substantial reduction in debt, we have completed healthcare asset sales and received mortgage repayments totaling approximately $1.8 billion between January 1, 2000 and December 31, 2002 and applied substantially all of the proceeds toward reduction of our total indebtedness of $2.6 billion as of December 31, 1999 to $665 million as of December 31, 2002.

        On June 20, 2001, we changed our name to La Quinta to reflect our focus on the La Quinta lodging brand and the lodging industry. Meditrust Corporation was renamed La Quinta Properties, Inc. and Meditrust Operating Company was renamed La Quinta Corporation. Our common stock continued to trade together on the New York Stock Exchange as one unit under the ticker symbol "LQI".

        On December 20, 2001, our shareholders approved certain proposals which permitted LQ Corporation and LQ Properties to restructure the existing organization of the two companies by merging LQP Acquisition Corp., a newly formed, wholly owned subsidiary of LQ Corporation, with and into LQ Properties, with LQ Properties surviving the Restructuring and becoming a subsidiary controlled by LQ Corporation while continuing its status as a REIT. Pursuant to the Restructuring, which we consummated on January 2, 2002, each outstanding share of common stock of LQ Properties held by our shareholders was converted into one share of a new class B common stock of LQ Properties and each outstanding share of common stock of LQP Acquisition Corp. (all of which were held by LQ Corporation) were converted into one share of a new class A common stock of LQ Properties. Following the Restructuring, each share of common stock of LQ Corporation, that previously had been paired with the common stock of LQ Properties, become attached and traded together with the new class B common stock. The outstanding common stock of LQ Corporation was unaffected by the Restructuring other than a reduction in par value from $0.10 to $0.01 and the change of the pairing arrangement as described above.

        We believe that the Restructuring was the best alternative for us to grow our lodging real estate portfolio, management operations and brand franchising. In addition, we believe that our Restructuring will allow both LQ Properties and LQ Corporation to make efficient use of their substantial net operating

31

loss carryforwards ("NOLs"). We believe additional benefits of our Restructuring include our ability to deduct preferred dividends for income tax purposes and to retain capital for other corporate uses such as deleveraging, investment, acquisitions and potential share repurchases. Our Restructuring should also enable us to be less dependent upon capital markets by allowing us to retain more of our cash flow.

Financial Information

        The following tables set forth, among other information, selected financial information for LQ Corporation and LQ Properties. All significant intercompany and inter-entity balances and transactions have been eliminated in consolidation. Likewise, the consolidated financial information for LQ Properties includes the accounts of the respective company and its majority owned partnerships after elimination of all significant intercompany accounts and transactions. Financial information related to results of operations for Cobblestone Golf Group and Santa Anita Racetrack have been reflected as discontinued operations. This information is based on and should be read in conjunction with the information set forth in Item 7—"Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the notes thereto appearing elsewhere in this Joint Annual Report.

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LA QUINTA CORPORATION

Selected Financial Information

(a)

Certain reclassifications have been made to the 2001, 2000, 1999 and 1998 presentation to conform to the presentation of the financial position and results of operations as of and for the year ended December 31, 2002 including the change to a classified balance sheet presentation. Additionally, these figures were reported for "The La Quinta Companies—Combined," which has been replaced by "LQ Corporation—Consolidated" for the current year presentation.

(b)

Financial results for 1998 include lodging segment results for the period from the date of the La Quinta Merger, July 17 through December 31.

(c)

Includes $200 million of liquidation preference on preferred stock in 2002.

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LA QUINTA PROPERTIES, INC.

Selected Financial Information

(a)

Certain reclassifications have been made to the 2001, 2000, 1999 and 1998 presentation to conform to the presentation of the financial position and results of operations as of and for the year ended December 31, 2002, including the change to a classified balance sheet presentation.

(b)

Financial results for 1998 include lodging segment results for the period from the date of the La Quinta Merger, July 17, through December 31.

(c)

Does not include dividends paid by LQ Properties to LQ Corporation, the sole holder of its class A common stock.

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

        You should read the following discussion together with the financial statements and related notes included elsewhere in this Joint Annual Report. The results discussed below are not necessarily indicative of the results to be expected in any future periods. This discussion contains forward-looking statements based on current expectations, which involve risks and uncertainties. Actual results and the timing of certain events may differ significantly from those projected in such forward-looking statements due to a number of factors. You should read the sections of this Joint Annual Report under the heading "Items 1 and 2—Description of Our Business and Our Properties—Certain Factors You Should Consider About Our Companies, Our Businesses And Our Securities". We undertake no obligation to publicly update or revise any forward-looking statement to reflect current or future events or circumstances, including those set forth herein, in the section entitled "Certain Factors You Should Consider About Our Companies, Our Businesses and Our Securities" and elsewhere in this Joint Annual Report.

Overview

        The basis of presentation includes Management's Discussion and Analysis of Financial Condition and Results of Operations for each of the separate companies, LQ Corporation and LQ Properties, on a consolidated basis. Our management believes that the LQ Corporation's consolidated presentation is most informative to holders of our common stock.

General

        We are a leading limited-service lodging company providing clean and comfortable rooms at affordable prices in convenient locations. We are one of the largest owner/operators of limited-service hotels in the United States. We owned and operated 211 La Quinta® Inns and 73 La Quinta Inn & Suites® containing approximately 37,000 rooms in 28 states as of December 31, 2002. We strive to design and operate hotels that attract both business and leisure travelers seeking quality rooms that are generally comparable to those of mid-price, full service hotels, but at lower average room rates. We believe that by not providing full-service, management-intensive facilities and services, such as in-house restaurants, cocktail lounges, or room service, that typically carry high fixed costs and low margins, we are able to deliver a product that satisfies our customers' needs and price expectations, while also permitting us to concentrate on the variable cost structure and the high-margin nature of our limited service product.

        In addition to owning and operating our hotel properties, we began, in late 2000, to license the use of our proprietary brand names, including La Quinta®, La Quinta Inns® and La Quinta Inn & Suites® in return for royalty and other fees through franchise agreements with franchisees. As of December 31, 2002, our franchisees operated 37 La Quinta Inns® and 28 La Quinta Inn & Suites® representing approximately 6,000 rooms under our brands.

        As of December 31, 2002, we held approximately $59,330,000 of healthcare related investments. Consistent with our intention to focus on the lodging industry, the remaining healthcare operations and assets in our portfolio have been divested pursuant to our healthcare asset disposition strategy. We were successful in selling these assets to other healthcare real estate investors or to the operators of the facilities.

        Over the last three years, we have undergone significant financial and strategic changes. In January 2000, we began a strategy of selling non-lodging real estate assets in order to focus on our lodging business. As a result of that change in strategy, we replaced substantially all of our senior management with executives who have, on average, approximately 25 years of experience in lodging and lodging-related industries. Over the last three years, we have improved the operations of our lodging assets, including the reduction of costs and the introduction of a franchising program. During that

35

period, we also have sold approximately $1.8 billion of our non-lodging assets, with proceeds from those sales applied to reduce indebtedness and strengthen our balance sheet.

        On December 20, 2001, our shareholders approved certain proposals which permitted us to restructure the existing organization of our companies by merging a newly formed, wholly owned subsidiary of LQ Corporation, with and into LQ Properties, with LQ Properties surviving the Restructuring and becoming a subsidiary controlled by LQ Corporation while continuing its status as a REIT. The new structure went into effect on January 2, 2002. We believe the Restructuring, which was proposed primarily to address the challenges imposed by federal tax legislation on our previous "grandfathered" paired share REIT structure, will enable us to grow our lodging real estate portfolio, management operations and brand franchising program without the restrictions imposed by this federal tax legislation.

        As part of our continued focus on the improvement of revenue performance, we launched our redesigned loyalty program on September 24, 2002, called La Quinta Returns®. While the previous program allowed members to earn "free stay" certificates, the new Returns program allows members to earn points that can be redeemed for a variety of rewards, in addition to free stay certificates. In addition, we added several new electronic distribution channels during the year and are currently expanding and reshaping our sales force to put more emphasis on local sales efforts. These programs are anticipated to increase our costs in 2003.

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La Quinta Corporation—Consolidated Results of Operations

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

        We earn revenue primarily by owning and operating 211 La Quinta Inns and 73 La Quinta Inn & Suites as well as licensing the use of our brand in return for license and other fees under our franchise program.

(1)

Other income or expense has not been allocated to a segment. See the section entitled Other Expense in management's discussion and analysis regarding comparison of 2002 to 2001 and 2001 to 2000 for a comprehensive discussion of items included in this caption.

        Net loss available to common shareholders increased by $207,393,000, or $1.45 per diluted common share, to $507,753,000, or $3.55 per diluted common paired share, for the year ended December 31, 2002, compared to a net loss of $300,360,000, or $2.10 per diluted common paired share, for the year ended December 31, 2001. The increase in net loss available to common shareholders was primarily due to the following charges in 2002:

•

a one-time charge of approximately $196,520,000 recorded in January 2002 as a result of our Restructuring to establish the net deferred tax liability of La Quinta and recognize the future

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impact of temporary differences between book value and tax basis of lodging and healthcare assets and liabilities, including NOLs of LQ Properties and LQ Corporation;

•

a charge of approximately $258,957,000 recorded in January 2002 as a cumulative effect of change in accounting principle to reflect an adjustment to goodwill as a result of the implementation of SFAS No. 142, "Goodwill and Other Intangible Assets," ("SFAS 142"); and



•

an impairment of goodwill of approximately $8,000,000 recorded in September 2002 related to our TeleMatrix telecommunications reporting unit.

        The effect of these charges on net loss available to common shareholders for 2002 was partially offset by the following charges taken in 2001:

•

a charge of approximately $169,421,000 recorded in December 2001 as a result of our Restructuring to write off the carrying value of our paired-share intangible; and



•

impairment charges amounting to approximately $115,347,000 taken during 2001 to write down the carrying value of certain property, plant and equipment as well as mortgages and other notes receivable.

        The following table summarizes statistical lodging data for the years ended December 31, 2002 and 2001: