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TABLE OF CONTENTS
Financial Statement Schedules

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

For the Fiscal Year Ended December 31, 2003

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 30, 2003, the last business day of the registrants, most recently completed second fiscal quarter, the aggregate market value of the registrants' voting and non-voting common equity held by non-affiliates was $591,743,665 based upon the closing price of $4.31 on the New York Stock Exchange composite tape on that date.

        As of February 23, 2004, La Quinta Corporation had 187,387,170 shares of common stock outstanding and La Quinta Properties, Inc. had 100,000 shares of class A common stock and 177,957,022 shares of class B common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        Certain portions of La Quinta Corporation's definitive proxy statement for the 2004 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 ("REIT") for federal income tax purposes. Both LQ Corporation and LQ Properties have securities that 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" mean the shares of common stock of LQ Corporation that are attached and trade as a single unit with the shares of class B common stock, par value $0.01 per share, of LQ Properties. On January 2, 2002, LQ Corporation and LQ Properties completed a legal and tax reorganization (the "Reorganization"), which is described in this Joint Annual Report. Prior to the Reorganization, 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 Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and 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 of 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 Items 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 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 aftermath of United States military action in Iraq, further terrorist attacks on

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the United States 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 that 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 undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or other changes.

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PART I

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

General

        La Quinta is one of the largest owner/operators of limited service hotels in the United States. We provide clean and comfortable guest rooms at affordable prices in convenient locations. We own and operate hotels under our proprietary La Quinta brand. In addition, we franchise our brand to independent owner/operators. Our trade names, trademarks and service marks include La Quinta®, La Quinta Inns®, La Quinta Inn & Suites®, Returns® and teLQuik®. As of December 31, 2003, our system of owned and franchised hotels contained 372 La Quinta Inns and La Quinta Inn & Suites representing approximately 45,000 rooms in 33 states. As of December 31, 2003, we owned and operated 201 La Quinta Inns (including 6 La Quinta Inns that are located on land that we lease from third parties) and 75 La Quinta Inn & Suites representing approximately 36,000 rooms in 28 states.

        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-priced, 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 produce 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.

Organizational Structure

        LQ Corporation was incorporated in the State of Delaware on August 23, 1979. LQ Corporation operates and manages hotel properties that it leases from its controlled subsidiary, LQ Properties. In addition, as described below, our franchising program is operated through subsidiaries of LQ Corporation. 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.

        LQ Properties is a controlled subsidiary of LQ Corporation and is a self-administered REIT that was incorporated in the State of Delaware on August 23, 1979. All of our company-owned hotels are owned by LQ Properties (or one or more of its direct and indirect subsidiaries) other than two La Quinta Inn & Suites that are owned by a subsidiary of LQ Corporation and two La Quinta Inns that are owned by joint ventures in which subsidiaries of LQ Corporation own a controlling interest and operate these hotels. Due to certain tax laws restricting REITs from deriving revenues directly from the operations of hotels, our hotel properties are leased to LQ Corporation.

Availability of Reports

        The La Quinta Companies maintain a website at www.LQ.com. The La Quinta Companies make available, free of charge, on this website their 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 Securities and Exchange Commission ("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.

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Lodging Industry and Competition

        As of December 31, 2003, there were over 4.4 million hotel rooms in the United States, according to Smith Travel Research. Of these rooms, approximately 66% were affiliated with a brand while the remaining approximately 34% were independent and not brand-affiliated. The hotel industry is highly fragmented, with no one entity controlling a majority of hotel rooms in the United States.

        Hotels compete on the basis of product, amenities, price and service. Smith Travel Research segments hotels by price and service levels. Price is often a function of the product type and amenities offered. 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 luxury hotels (such as Ritz-Carlton and Four Seasons) to upper upscale hotels (such as Hilton and Marriott) 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, as of December 31, 2003, these full service branded hotels accounted for approximately 1.6 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, as of December 31, 2003, these limited-service branded hotels accounted for approximately 1.4 million hotel rooms.

        The United States lodging industry is generally segmented into three different operating structures: real estate ownership, management and 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 and operators for access to a central reservation system, brand advertising and other programs.

        La Quinta's strategy encompasses two aspects of these hotel operating structures. As of December 31, 2003, La Quinta owned and operated 276 hotels (including six La Quinta Inns located on land that we lease from third parties) and franchised 96 additional hotels owned by third parties. We also offer reservation, national advertising, training and systems related services to our franchisees.

        The United States lodging industry experienced substantial growth from 1990 to 2000. According to Smith Travel Research, revenue per available room, or RevPAR, for the United States 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

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Research, RevPAR in the U.S. lodging industry experienced a year-over-year increase of 0.2% in 2003 after a 2.5% decline in 2002 and a 6.6% decline in 2001.

Our Strategy

        We focus on providing consistently clean and comfortable guest rooms in convenient locations at affordable prices. Our objective is to increase profitability by growing our brand and expanding our distribution. We intend to achieve our objective by implementing our key strategies that include increasing profits from our company-owned hotels, growing our franchising program, and investing our available capital to grow the La Quinta brand and company through new hotel development, existing location development and acquisitions.

        Increasing Profits from our Company-Owned Hotels.    We expect to increase the profitability of our company-owned hotels, primarily by improving RevPAR. We believe that as the United States economy continues to recover 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 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, which was completed in 2003, and our continuing efforts to increase guest satisfaction will allow us to enhance our RevPAR.

        Growing our Franchising Program.    We plan 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 profitability. We actively monitor our franchisees in order to maintain consistent quality across our entire chain. By becoming more franchise-oriented, we believe we will be able to increase our return on assets and capitalize on the value of our brand.

        Investing our Available Capital.    We may consider using a portion of our available capital to pursue development and redevelopment opportunities with respect to certain of our current properties, as well as acquisitions.

•

New Hotel Development. Our current development strategy is focused on locating a select number of highly visible properties in key locations, such as central business districts of major cities, areas near major airports and major vacation destinations with high barriers to entry. We intend to enter into 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.



•

Redevelop and Refurbish Existing Locations. Several of our hotels are situated in locations that have experienced increased business activities around the hotel sites over a period of years. We believe that we have the opportunity to redevelop a select number of these locations with new hotel properties that will produce stronger operating results than the existing facilities. We are currently redeveloping one such hotel property in downtown San Antonio, which will be funded primarily through our cash flow from operations.

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. During 2003 and 2002, we spent approximately $33,429,000 and $98,228,000, respectively in capital improvements and renovations to our existing hotels. We anticipate spending approximately $28,000,000 in capital improvements and renovations to our

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existing hotels during 2004. These expenditures will be funded primarily through our cash flow from operations.

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Acquisitions. We may also consider pursuing opportunistic acquisitions of lodging properties, lodging companies and/or brands. In November 2003, we issued 34,500,000 paired shares for net proceeds of approximately $184,294,000 for the primary purpose of investing through acquisitions. We believe the current lodging environment may present us with opportunities to expand our lodging operations. We may acquire lodging properties that we would convert to the La Quinta brand. These acquisitions would most likely be in geographic areas where we are currently underrepresented. We may also acquire other lodging brands with the intent to keep these brands and grow them along with our La Quinta brand. Our current acquisition strategy is targeted towards limited service lodging properties and/or brands that do not contain food and beverage outlets, such as restaurants, lounges and banquet services. Acquisition opportunities will be evaluated on a number of factors, including price, the potential target's strategic fit, future profitability, financial condition, strength of operations, brand quality and geographic and product distribution.

Our Competitive Strengths

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

        Significant Brand Awareness.    We believe that we have achieved significant brand awareness over our 36-year history as a result of our focus on providing high quality, conveniently 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 frequent stayer program, La Quinta Returns, which provides guests with recognition and an expedited reservation and check-in process, as well as rewards for frequent stays. Approximately 30% of our revenues in 2003 were attributed to our Returns members. 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 hotel properties. As of December 31, 2003, our system of owned and franchised hotels included 372 La Quinta Inns and La Quinta Inn & Suites in 33 states, representing approximately 45,000 rooms. La Quinta operates in 19 of the top 25 lodging markets in the United States.

        Operational Expertise and Experienced Management Team.    Our management has substantial experience in the lodging industry. On average, our senior management team members have approximately 25 years of experience in lodging and lodging-related industries and is supported by operational and administrative vice presidents with an average of ten years of experience in these industries. 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.

        Capital Structure.    We believe that our strong balance sheet provides us with a significant competitive advantage over other more highly leveraged companies. In addition to maintaining one of the lowest leverage levels in the lodging industry, we have no floating rate debt, no mortgage debt and we do not lease any of our hotel properties from third parties (although six La Quinta Inns are subject to ground leases). At December 31, 2003, we had $327,083,000 of cash. In addition, we had no borrowings (other than $20,046,000 in outstanding letters of credit) on our $150,000,000 revolving line of credit.

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        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 website, www.LQ.com, which accepts room reservations and provides our guests with information about our companies, our hotels and special promotions. We also participate in third-party websites that accept room reservations for our hotels. As of December 31, 2003, our direct sales force consisted of approximately 90 sales managers who conduct sales programs to develop and cultivate guests from potential and existing national and local clients.

Our Hotels

        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 370 locations in 33 states over our 36-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.

        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. As of December 31, 2003, we had an ownership interest in approximately 100 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 Hampton Inn, Days Inn, Comfort Inn, 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 and also offer two-room suites with separate sitting and sleeping areas, sleeper sofas and two televisions. Additional amenities include: expanded continental breakfast; high speed internet access, 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: 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, 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)

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

(e)

Corporate assets were reclassified to property and equipment as a result of our Reorganization.

(f)

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.

(g)

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

(h)

Unless otherwise noted, data is for company-owned hotels and includes properties held for sale and discontinued operations (impact of discontinued operations is insignificant).

(i)

Amounts have been reclassified for discontinued operations.

(j)

Includes one open hotel currently undergoing redevelopment for the year ended December 31, 2003.

Our Properties

        As of December 31, 2003, we owned and operated 276 hotels representing an aggregate of approximately 36,000 rooms in 28 states. All of our company-owned hotels are owned by LQ Properties (or one or more of its direct and indirect subsidiaries) other than two hotel properties that are owned by a subsidiary of LQ Corporation and two hotel properties in which third parties own less than a controlling interest. Our hotel properties are leased by LQ Properties (or the respective property owning subsidiary) to a subsidiary of LQ Corporation.

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        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 lease agreements. The hotel facility lease agreements, as modified, were for a five-year term, which expired in July 2003. These leases were amended to extend the term through December 31, 2003. Through March 31, 2002, the leases provided for a fixed payment of base rent plus a percentage rent based on room and other revenues and required LQ Properties to assume costs attributable to property taxes and insurance and to fund certain capital expenditures. Subsequent to March 31, 2002, the modified lease agreements provided for a percentage rent payment only in an amount equal to 40 percent of the gross revenues from the hotel facilities and required LQ Properties to pay property taxes and insurance and to fund certain capital expenditures. New lease agreements became effective as of January 1, 2004. The new lease agreements have substantially the same terms as the previous lease agreements other than a decrease in the percentage rent payment to an amount equal to 36 percent of the gross revenues from the hotel facilities and differing initial terms of four, five or six years.

        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 property 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.

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        The following table sets forth certain information as of December 31, 2003 regarding our owned-lodging properties (including properties held for sale):

        We believe that all our hotel properties are well constructed, 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 the year ended December 31, 2003 and the year ended December 31, 2002, we spent approximately $33,429,000 and $98,228,000, respectively, in capital improvements and renovations to our existing hotels. In total, we have invested approximately $229,586,000 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 and completed in early 2003. This program consists of refurbishments and enhancements to both the interior decor and exterior appearance of 200 of our company-owned La Quinta Inns properties. Gold Medal Lite follows our earlier

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$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 updated 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.

        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, for the year ended December 31, 2003, we sold eight of our hotels for gross proceeds of approximately $20,000,000. We currently have two hotels and four parcels of land, valued at approximately $12,474,000, that we have classified as held for sale.

Our Operations

        Our corporate headquarters is located in Irving, Texas. Centralized corporate services include marketing, sales, finance, treasury, tax, information systems, construction and design, purchasing, legal, risk management, human resources and training. Accounting 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 20-25 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 managers 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.

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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 right (subject to the terms of their franchise agreement) to operate their hotel under the La Quinta Inns or La Quinta Inn & Suites brand 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 to compensate for computer software usage, training programs and La Quinta 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 three 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 United States 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 locations, 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 and our quality assurance department 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: direct sales; loyalty program; central reservations and global distribution systems; and Internet.

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        Direct Sales.    As of December 31, 2003, we employed a direct sales force made up of approximately 90 members, which was increased from 45 starting in mid 2002. The direct sales force consists of 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 need 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 that 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 direct sales force was responsible for approximately 40% of all room sales in 2002 and 2003.

        Loyalty 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 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 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. These Returns members accounted for approximately 20% of all room sales in 2002 and for approximately 30% of all room sales for the year ended December 31, 2003.

        Central Reservations and Global Distribution Systems.    We promote and operate our own central reservation system, teLQuik, as well as a toll-free number, 1-800-531-5900, to accept 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.

        Internet.    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.

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        We estimate that our room sales in 2003 and 2002 were made through the following booking channels:

Our Information Systems

        Our information systems support our operations, reservations, sales and marketing, financial reporting and management reporting functions. During 2003, we continued to enhance our information systems' capabilities. These improvements include:

•

new customer management software for our sales organization;



•

new features for www.LQ.com, including capabilities for Returns members to manage their own accounts and improved booking capabilities;



•

integration with new electronic booking channels;



•

new human resources and payroll systems;



•

enhanced systems for data warehousing;



•

ability for franchisees to manage their own rates remotely; and



•

expansion of complimentary high-speed Internet access for guests at selected hotels.

        We currently anticipate implementing customer relationship management and new financial systems in 2004.

Our Trademarks

        "La Quinta," "La Quinta Inns," "La Quinta Inn & Suites," "Returns," "teLQuik" 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. Our material trademarks are registered with the United States Patent and Trademark Office for hotel and motel services. In addition, we have registered certain of our trademarks for hotel and motel services 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 hotel employees, including hourly employees, receive training upon their hire as well as ongoing training to improve their skills. 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 provide all of

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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 these benefits provide a competitive advantage in recruiting hourly hotel employees, as most limited service hotels do not provide benefits for their hourly 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, 2003, we employed approximately 6,900 employees, including approximately 6,200 hourly employees. Of these employees, approximately 300 were employed at our corporate headquarters in Irving, Texas and approximately 250 were employed at our support centers in San Antonio, Texas, of whom approximately 175 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.

Our Reorganization

        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 four years, our management has improved the operations of our lodging assets, including the reduction of inn level 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 reorganization of our companies whereby LQ Properties became a subsidiary controlled by LQ Corporation while continuing its status as a REIT. As a result of this Reorganization, 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 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 Reorganization, each share of common stock of LQ Corporation, which was previously paired with the common stock of LQ Properties, is now attached to and trades as a single unit with a share of LQ Properties' class B common stock. The Reorganization 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 Reorganization 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.

Our Other Businesses

        In December 2003, we completed the sale of TeleMatrix, a non-strategic business that provided telephone equipment and software to the lodging and telecommunications industries, for net proceeds of approximately $6,000,000 and therefore, we have presented the results of TeleMatrix herein in discontinued operations. The impact of this sale as well as its operations were not material to our results for 2003.

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        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 $1.8 billion of healthcare assets from 2000 through 2002. As of December 31, 2003, LQ Properties held approximately $57,844,000 in permanent mortgage loan financing and a seller note receivable, which we currently intend to hold to maturity, resulting from the sale of healthcare assets. 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 LIBOR plus 1% per annum on the outstanding balances. The interest rate on the seller note receivable is 9% per annum. The mortgage loans are secured by the operating facilities and mature in August 2008. The seller note receivable is secured by the equity interest of the borrower and matures in March 2006.

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 quarters. We expect this seasonality will cause quarterly fluctuations in revenue, profit margins and net earnings.

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

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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 on a "Superfund Site" as designated by the Environmental Protection Agency, or EPA. 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, 2003, we had three 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 estimated aggregate cost of the remediation for these three properties was $175,000 as of December 31, 2003. In addition, we have spent over $3,600,000 related to one new construction hotel property, and we are seeking reimbursement from our contractors and other third parties 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, if any. See "Certain Factors You Should Consider About Our Companies, Our Businesses and Our Securities—Risks Associated With Our Investment in Real Estate" for additional risks associated with the presence of mold.

        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 (the "Code") and the regulations thereunder 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 utilized taxable REIT subsidiaries to conduct the operations of TeleMatrix and continues to utilize taxable REIT subsidiaries to hold certain assets that 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 REIT taxable income (excluding net capital gains) as dividends eligible for the dividends paid deduction available to REITs. Distributions to preferred shareholders during 2003 have been characterized as ordinary income. LQ Properties recognized a net operating loss for the year ended December 31, 2002 and accordingly was not required to make any distributions for that year. Distributions to preferred shareholders during 2002 were characterized as a return of capital.

        As of December 31, 2003, our total federal net operating loss ("NOL") carryforwards were approximately $459,500,000, of which approximately $178,400,000 is available to LQ Properties and its taxable REIT subsidiaries. As of December 31, 2003, our total capital loss carryforwards were approximately $28,600,000 and our federal tax credit carryforwards (primarily alternative minimum tax credit carryforwards available only to LQ Properties) were approximately $5,900,000. A valuation allowance of $27,816,000 has been provided with respect to deferred tax assets related to certain NOL carryforwards, capital loss carryforwards and tax credit carryforwards for which realization of the benefit is not reasonably assured.

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        Going forward, LQ Properties intends to utilize its available NOL carryforwards in a tax-efficient manner. For LQ Properties, this may include using its available NOL carryforwards to offset amounts that would otherwise be required to be distributed. 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.

Policies with Respect to Certain Activities

        The following is a discussion of our investment policies and our policies with respect to other activities, including financing matters. These policies may be amended or revised from time to time at the discretion of our boards of directors without notice to, or a vote of, the holders of our paired shares.

        Distribution Policy.    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 taxable gain. In connection with our Reorganization in January 2002, LQ Properties' shareholders approved the terms of LQ Properties' class B common stock, which provide that no dividends will be paid on the class B common stock prior to 2005. Until 2005, dividends may be paid on LQ Properties' class A common stock (all of which is held by LQ Corporation), 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 up to $0.10 per share per annum although this dividend payment is not mandatory. Instead, these dividends represent a dividend that must, commencing in 2005, be paid on a quarterly basis in preference to, or prior to, the payment of any dividends on the class A common stock in that quarter.

Investment Policies

        Investments in Real Estate or Interests in Real Estate.    Our primary focus is the lodging business. We conduct the majority of our business through one principal business unit that owns and operates our lodging real estate assets. Our business is primarily focused on limited-service hotels. Our investment objectives are to increase profits from our company-owned hotels, grow our franchising program and appropriately invest our available capital in select projects. We may also use our cash flow, in combination with other sources of capital, to pursue acquisitions of lodging properties, lodging companies and/or brands. Where appropriate, we may sell certain of our hotels.

        Investments in Real Estate Mortgages.    Although we have done so in the past, consistent with our focus on the lodging business, we do not anticipate engaging in any significant investments in mortgages. However, we may, at our discretion, invest in mortgages, deeds of trust and other similar interests. As of December 31, 2003, LQ Properties held approximately $57,844,000 in permanent mortgage loan financing and a seller note receivable resulting from the sale of healthcare assets.

        Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers.    We may invest, subject to, in the case of LQ Properties, the gross income and asset tests necessary for REIT qualification, in securities of entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities. Further, in addition to our two joint ventures, we may acquire and develop hotel properties through joint ventures with third parties. We may

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acquire all or substantially all of the securities or assets of other REITs, other lodging entities or similar entities where such acquisitions would be consistent with our investment policies.

        Although we have no formal policy setting forth the criteria that we will follow with regard to the purchase of securities of or interests in persons primarily engaged in real estate activities, we consider the following when evaluating an investment in limited liability companies and joint ventures holding one or more franchise properties: the adequacy of our risk-adjusted return on such investment; the credit history of the entity; and whether the property is located in a strategic or high profile location such as a vacation destination, major airport or central business district. With regard to investments in public or private companies, we consider whether we are able to acquire a controlling interest (with the intention of fully integrating such acquisition into La Quinta); the adequacy of risk-adjusted returns; whether there is a strategic fit with our business objectives; our ability to realize synergies; and the risks associated with integration.

        Other than the criteria described above, we have no formal policy with regard to engaging in the purchase and sale (or turnover) of investments. Rather, subject to the gross income and asset tests, in the case of LQ Properties, we will make investment decisions on a case-by-case basis.

Financing Policies

        We do not have a policy limiting the amount of indebtedness we may incur other than complying with our debt covenants. The organizational documents of LQ Corporation and LQ Properties currently contain no restrictions on incurring debt. However, our senior credit facility, which matures in April 2007 and the indentures pursuant to which we issued certain notes impose limitations on the incurrence of indebtedness. We may from time to time, reduce our outstanding indebtedness by repurchasing a portion of our outstanding notes, subject to the restrictions imposed by our senior credit facility and the terms of our outstanding indebtedness.

        We expect to provide financing for new investments through a combination of long-term and short-term financing, including debt, equity and cash. We also anticipate funding new investments through internally generated cash flow and the sale of selected assets. We may obtain long-term financing through the issuance of equity securities, long-term secured or unsecured notes, convertible debentures and the assumption of mortgage notes. We may obtain short-term financing through the use of our senior credit facility, which may be replaced with long-term financing as appropriate. From time to time, we may utilize interest rate swaps to manage our variable interest rate exposure.

Lending Policies

        We do not have a policy limiting our ability to make loans to other persons other than complying with our debt covenants. We may make loans to joint ventures in which we participate. Although we presently do not have a formal company-funded financial assistance program for franchisees, we may, at our discretion, offer financial assistance to our franchisees upon varying terms. Currently, under certain franchise agreements, we are committed to providing financial assistance, including but not limited to loans, reimbursements, rebates, credits and other incentive payments, to help defray the costs of construction and other costs associated with opening and operating a La Quinta hotel.

Policies with Respect to Other Activities

        Our boards of directors have the authority, without further shareholder approval, to issue additional authorized shares of common stock and preferred stock or otherwise raise capital through the issuance of senior securities. Existing shareholders will have no preemptive right to shares of common stock or other shares of our capital stock issued in any offering, and any offering might cause a dilution of a shareholder's investment in us. Although we have no current plans to do so, we may in the future issue common stock in connection with acquisitions. Subject to restrictions set forth in our senior credit facility and indentures, we may repurchase or otherwise reacquire our paired shares. We have not engaged in trading, underwriting or agency distribution or sales of securities of other issuers. Our policies with respect to the activities described above may be reviewed or modified or amended from time to time by our boards of directors without a vote of our shareholders.

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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 that 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 heading "About this Joint Annual Report- Forward-Looking Statements."

Risks Associated with our Industry

Our strategic focus on our lodging business exposes our investors 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 business.

        Our economic performance, and consequently the value of our securities, are subject to the risk that if our hotel 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:

•

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



•

weather conditions;



•

competition from comparable hotels, many of which have greater marketing and financial resources than us;



•

the desirability of particular locations;



•

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



•

changes in product preferences;



•

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



•

availability of qualified labor;



•

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



•

increases in our operating costs;



•

capability of our management information systems;



•

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



•

sudden changes in travel patterns caused by factors such as terrorist attacks and United States military action;



•

increases in travel expenses that reduce business and leisure travel; 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 military action against Iraq and its aftermath, events such as the terrorist attacks in the United States 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 that, in turn, could reduce our revenues and the profitability of our business.

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 at 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, which has increased competition for guests in the markets in which our hotels operate. Moreover, full service hotels have lowered their rates to a level comparable to those of limited service hotels such as ours that, in turn, has further increased competitive pressure in our markets. In the future, competing hotels may provide greater competition for guests than currently exists in our markets and new hotels may enter our markets. All of these competitive factors may limit our operating margins, diminish our market share and reduce our earnings.

Our business and operations are subject to extensive legislation and other governmental regulation, which could result in increased operating costs and reduce our earnings.

        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 will increase operating costs and, in turn, could reduce our earnings.

        We may also incur significant costs complying with other statutes and regulations, such as the Americans with Disabilities Act, the Securities Exchange Act of 1934, as amended, reporting requirements and New York Stock Exchange regulations. Our hotel 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 by the federal government or damage awards to private litigants. For example, if, pursuant to the Americans with Disabilities Act, we are required to make substantial alterations to and capital expenditures for our hotel properties, including the removal of access barriers, it could increase our expenditures and, in turn, could reduce our earnings. 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.

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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. We currently have two joint ventures that are consolidated with our financial statements. Our share of the aggregate revenue of these two joint ventures for the years ended December 31, 2003 and 2002 was approximately $2,000,000 during each year. Furthermore, at December 31, 2003 and 2002, our share of the assets held by these two joint ventures aggregated approximately $8,000,000. Joint venturers often share control over the operation of the joint venture assets. Actions by a joint venturer could subject such assets to additional risks, including:

•

our joint venturers might have economic or business interests or goals that are inconsistent with our interests or goals;



•

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



•

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

        All of the foregoing could diminish our market share and reduce our earnings.

        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 venturers. Also, our joint venturers could take actions binding on the joint venture without our consent.

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

        We are responsible for insuring our hotel properties as well as for obtaining the appropriate insurance coverage to reasonably protect our interests in the ordinary course of business. Additionally, each of our leases and loans typically specifies that comprehensive insurance be maintained on each of our hotel properties, including liability, fire and extended coverage. There are certain types of losses, generally of a catastrophic nature, such as earthquakes and floods or terrorist acts, which may be uninsurable or not economically insurable. We will use our discretion in determining amounts, coverage limits, deductibility provisions of insurance and the appropriateness of self-insuring, 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 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 not feasible 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 hotel 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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Risks Related to Our Business

Our hotel 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. Specifically, at December 31, 2003, approximately 38% of our owned rooms are located in ten geographic markets. These ten markets are: Dallas/Ft. Worth; Houston; San Antonio; Denver; Austin; New Orleans; Phoenix; Miami/Ft. Lauderdale; Orlando; and Atlanta. As a result, our hotel properties are subject to the effects of adverse economic and competitive conditions and trends in these regions and markets and we will face a greater risk of a negative impact on our revenues in the event these areas are more severely impacted by adverse economic and competitive conditions than other areas in the United States. The concentration of hotel properties in one region or a limited number of markets may expose us to risks of adverse economic developments that are greater than if our portfolio were more geographically diverse. These economic developments include regional economic downturns, significant increases in the number of our competitors' properties in these markets and potentially higher local property, sales and income taxes in the geographic markets in which we are concentrated. In addition, our hotel properties are subject to the effects of adverse weather conditions, such as hurricanes and tornados, which have, in the past, caused damage, such as flooding, to our hotel properties in specific geographic locations, including in our top ten markets. Depending on the severity of these adverse weather conditions, the damage to our hotel properties could require us to close all or substantially all of our hotel properties in one or more markets for a period of time while the necessary repairs and renovations, as applicable, are undertaken.

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 through increased profit contributions from our company-owned hotels due to the following factors:

•

we may be unsuccessful in controlling costs;



•

demand may not increase for our hotel rooms;



•

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.

        All of these factors could impede our strategies to increase our cash flow, which could increase our operating costs and could reduce our earnings.

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

        We may not be successful in our strategy of increasing our revenues through the growth of our franchising program. The lodging business is a heavily franchised industry. While the La Quinta brand has been in existence since 1968, we only 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 business that increases our revenues. If we are unsuccessful in our efforts to increase our revenues through the growth of our franchise program, it could diminish our market share and reduce our earnings.

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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.

        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:

•

timely payment of royalties and other fees;



•

ongoing capital expenditures and maintenance; and



•

proper usage and protection 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.

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 if we cannot obtain financing upon terms that are favorable to us or at all;



•

we might not find appropriate, strategically located properties at commercially reasonable prices;



•

our redevelopment efforts may not produce the desired operating results;



•

developed properties may not meet stipulated minimum returns; and



•

we may be unable to obtain, or may be delayed in obtaining, required building permits and authorizations.

        In addition, we may from time to time experience shortages of materials or qualified trades people or substantial increases in the cost of certain construction materials or labor. This may result in longer than normal construction and remodeling periods, loss of revenue and increased costs.

        Furthermore, 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 its obligations may result in construction or remodeling delays, increased costs and loss of revenue. As a result, we may not increase our revenues or generate expected cash flows from the development or redevelopment of lodging properties.

We may be unsuccessful in identifying and completing acquisition opportunities for other lodging properties, lodging companies and/or brands, which would limit our ability to implement our long-term growth strategies and may result in significant costs that may not be allocated to successful acquisitions.

        We compete with other lodging and leisure companies for potential lodging properties, lodging companies 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 lodging properties, lodging companies and/or brands.

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        We also may incur significant costs and divert management attention in connection with evaluating and negotiating potential acquisitions that we are subsequently unable to complete. These significant costs could materially impact our operating results, as they would generally be expensed in the time period during which they are incurred. In addition, our management's attention to acquisitions that we subsequently do not complete would divert their attention from our business, as well as other potential growth opportunities, which could materially impact our operating results and limit our ability to achieve our long-term growth strategies.

If we make any acquisitions, we will incur a variety of costs and might never realize the anticipated benefits.

        If appropriate opportunities become available, we might attempt to acquire additional lodging properties, lodging companies and/or brands that we believe fit our asset and operating profiles. Currently, however, we are not a party to any definitive acquisition agreements. If we pursue any acquisition opportunities, the process of negotiating the acquisition and integrating an acquired lodging property, lodging company and/or brand might result in operating difficulties and substantial expenditures and might require significant management attention that would otherwise be available for the ongoing development of our business. Moreover, we might never realize the anticipated benefits of any acquisition. Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities and/or impairment expenses related to goodwill and impairment or amortization expenses related to other intangible assets, which could harm our financial condition.

Investment returns from our acquisition of other lodging properties, lodging companies and/or brands may be lower than anticipated.

        Even if we are able to successfully identify and acquire other lodging properties, lodging companies and/or brands, these 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 the standards established for its intended market position or the costs to integrate an acquired lodging property, lodging company and/or brand with our existing operations. This can increase our operating costs that, in turn, could reduce our earnings.

We depend on our key personnel for the future success of our business and the loss of one or more of our key personnel could have an adverse effect on our ability to manage our business and implement our growth strategies.

        Our future success and our ability to manage future growth depend, in large part, upon the efforts and continued service of Francis W. Cash, our President and Chief Executive Officer, and of the other members of our senior management team. Although we have entered into an employment agreement with each of Mr. Cash and the other members of our senior management team, there is no guarantee that Mr. Cash or the other members of our senior management team will remain employed with us. Mr. Cash and our senior management team are particularly important to our future success due to their substantial experience in the lodging industry. On average, our senior management team members have approximately 25 years of experience in lodging and lodging-related industries. It could be difficult for us to find replacements for our key personnel, as competition for such personnel is intense. The loss of services of one or more members of our senior management team could have an adverse effect on our ability to manage our business and implement our growth strategies. Further, such a loss could be negatively perceived in the capital markets, which could reduce the value of our securities.

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

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

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the extent of investor interest in us;



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



•

our financial performance; and



•

general stock and bond market conditions.

        The market value of our 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, and our current debt levels. Additionally, if our future earnings are less than expected, it is likely that the market price of our securities will decrease.

We are exposed to litigation that could result in considerable financial liabilities and limitations on the use of certain trademarks.

        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 for the use of the trademark "La Quinta," we could be exposed to considerable financial liabilities, significant portions of which may not be recoverable from our insurance providers. With respect to our intellectual property infringement claim, an estimate of the possible range of loss cannot be made. In addition, we are defending claims arising out of alleged misrepresentation in the offering memorandum for our 7.114% Exercisable Put Option Securities pursuant to which the plaintiff sought approximately $15,000,000 plus other potential damages. In June 2003, our motion for summary judgment was granted and the court dismissed in its entirety the plaintiff's case against us. However, the plaintiff has filed an appeal. In November 2003, the parties attended mediation, and although a written settlement agreement has not been entered into by the parties. We anticipate that the ultimate resolution of this matter will not be material to our consolidated financial position or results of operations.

        If the payment of a material sum of money by us were to occur, in connection with any of these material litigation matters, there could be a material adverse effect on our financial condition. Any judgment against us involving intellectual property infringement decisions could also include an injunction prohibiting or limiting the use of our trademarks.

Risks Related to Our Debt

Our substantial indebtedness could adversely affect our financial health.

        We have now and will continue to have a significant amount of indebtedness. On December 31, 2003, we had total indebtedness of approximately $895,154,000. Our substantial indebtedness could have important consequences to holders of our securities. For example, it could:

•

increase our vulnerability to general adverse economic and industry conditions;



•

require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, marketing, franchising and development efforts and other general corporate purposes;

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•

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



•

place us at a competitive disadvantage compared to our competitors that have less debt; and



•

limit our ability to borrow additional funds.

Our senior credit facility and other debt agreements contain certain financial covenants that we may not meet and, if violated, could limit our ability to continue to borrow under the facility and, under certain circumstances, could accelerate the amount due under the facility and result in the acceleration of all our outstanding indebtedness.

        We will depend upon our senior credit facility for a portion of our operating funds. This senior credit facility matures in April 2007, subjects us to certain financial covenants, and includes restrictions on our ability to engage in certain activities. Our debt securities also contain financial covenants, restrictions and limitations on our ability to incur indebtedness. Several factors, including the economic downturn, terrorist attacks and their aftermath and the military action in Iraq and its aftermath, have had an adverse effect on the lodging business. Accordingly, there is a risk that we may not meet one or more of these financial covenants in the future as a result of these factors. If we violate or fail to comply with any of the financial or other covenants in our senior credit facility or debt securities, there may be a material adverse effect on us. Most notably, we may be unable to borrow additional funds under our senior credit facility and the outstanding debt under our senior credit facility and debt securities could become immediately due. If we do not satisfy a covenant under our senior credit facility, we intend to request a waiver or amendment from our bank group. If the lenders under our senior credit facility do not agree to such a waiver or amendment, an event of default under our senior credit facility would occur and the outstanding debt under our senior credit facility could become immediately due, which in turn could result in the acceleration of all of our outstanding indebtedness.

We may have to rely on external sources of capital to repay our debt and to pursue our strategic objectives. If we are unable to access such external sources of capital, we may be delayed in implementing capital improvements or in pursuing our growth strategy, which could reduce our revenue and operating income.

        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 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. If we are unable to access third-party 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 future revenue and 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.

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If our 7.114% Notes remain outstanding after August 2004, we will incur additional costs.

        If our 7.114% Notes remain outstanding after August 15, 2004, the interest rate on our 7.114% Notes will increase by "a spread amount," as defined in the applicable indenture. Our 7.114% Notes will remain outstanding after August 15, 2004 if a third party (referred to as the Call Holder) exercises its option to purchase the 7.114% Notes for the principal amount of $150,000,000 and we do not exercise our option to repurchase the 7.114% Notes at a price equal to the greater of par or the fair value of the 7.114% Notes. In this case, our 7.114% Notes will remain outstanding at an increased interest rate until their stated maturity of August 15, 2011. The estimated fair value for the repurchase of the 7.114% Notes was approximately $176,500,000 and $172,580,000 at December 31, 2003 and 2002, respectively. Accordingly, if the option to purchase the 7.114% Notes is exercised by the Call Holder, we will incur either additional interest costs above the current 7.114% interest rate or additional costs to repurchase at fair value (as noted above) the 7.114% Notes in August 2004, which could adversely affect our earnings, cash flow, our ability to service debt and our ability to re-invest in our operations. If the 7.114% Notes remain outstanding after August of 2004, our additional interest costs above the current 7.114% rate will be dependent upon, among other factors, our credit risk as of August 2004 as measured by the interest rate spread between a risk free rate and our interest cost for a comparable maturity. The cost to us to repurchase the 7.114% Notes at fair value in August of 2004 will primarily be determined by the seven year Treasury Rate as of August 2004. Because subsequent events between December of 2003 and August of 2004 may significantly alter either the Company's credit risk or the seven year Treasury Rate, no assurance can be given that the cost to us to repurchase the 7.114% Notes or the interest rate we would pay on the 7.114% Notes after August 2004 will not have a material adverse effect on our financial condition.

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors, including those that are beyond our control.

        Our ability to make debt service payments, refinance our indebtedness and fund planned capital expenditure, marketing, franchising and development activity will depend on our ability to generate cash in the future. Our ability to generate cash, to a certain extent, is, among other things, subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

        If our business does not generate sufficient cash flow from operations, or future borrowings are not available to us under our senior credit facility or otherwise in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs, we may need to refinance all or a portion of our indebtedness on or before maturity. However, we may be unable to refinance any of our indebtedness, including our senior credit facility, on commercially reasonable terms or at all. In that case, we will not be able to repay our indebtedness. Our failure to make the required interest and principal payments on our indebtedness would result in an event of default under our senior credit facility, which may result in the acceleration of all of our outstanding indebtedness.

Risks Associated With Our Investment in Real Estate

Real estate investments are subject to numerous risks.

        Because we own hotels and own and lease 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, many of which are beyond our control, affect income from properties and real estate values, including:

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changes in national economic conditions;

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changes in local economic conditions and neighborhood characteristics;



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changes in interest rates;



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changes in the availability, cost and terms of loans;



•

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



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



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changes in other operating expenses;



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increases in the real property taxes that we pay;



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



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adverse changes in governmental rules and fiscal policies;



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condemnation and adverse changes in zoning laws;



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civil unrest, war or terrorist attacks;



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



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other factors.

        Any of these factors could impact the amount of income earned and capital appreciation generated by a hotel property, as well as expenses incurred. For example, from time to time we evaluate our hotels to determine whether renovation and/or on-going maintenance work is required. For the year ended December 31, 2003, we expended approximately $33,429,000 in cash for capital improvements related to our lodging properties and we may undertake more renovations in the future. Renovations to our hotels may be expensive and may require us to close all or a portion of the hotel to customers. As a result, it may increase our expenses and reduce our cash flows and our revenues.

        Furthermore, our other operating expenses are primarily comprised of property taxes and insurance expense. If property taxes increase as a result of changes in tax laws or if insurance premiums increase, then our other operating expenses will also increase.

        We have leasing arrangements with various tenants who operate restaurants on our properties. The terms of these leases vary between one year and over fifteen years and, for the twelve months ended December 31, 2003, the leases generated approximately $5,891,000, or approximately 1% of our total revenues. If these leasing arrangements terminate, there is no guarantee that we will be able to enter into other arrangements on similar terms.

The illiquidity of real estate as an investment limits our ability to sell hotel 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 or be able to secure suitable financing to consummate a transaction or we may not be able to sell hotel properties on terms favorable to us. Furthermore, sales of certain appreciated hotel properties could generate material adverse tax consequences, which may affect our ability to sell hotel properties in response to market conditions and adversely affect our ability to generate cash flows.

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

        Our hotel 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 increase our operating costs and decrease our net income.

Potential liability for environmental contamination could result in substantial costs or restrictions on the use of our hotel 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 significantly increase our operating costs and reduce our earnings because:

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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 and, therefore, we could bear the costs of removing these liens.

The presence, maintenance and removal of asbestos in our hotel properties could result in fines and penalties.

        Environmental laws also govern the presence, maintenance and removal of asbestos. We have determined that some of our hotel properties have asbestos containing materials and we have taken appropriate action as and when necessary. Such laws require that, as owners or operators of buildings containing asbestos, we must:

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properly manage and maintain the asbestos;



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



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

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        Such laws may impose fines and penalties on us if we fail to comply with these requirements and may allow third parties to seek recovery for personal injury associated with exposure to asbestos fibers, which could significantly increase our operating costs and reduce our earnings.

The existence of mold in our hotel properties could result in substantial costs or restrictions on the use of our properties.

        We have discovered that some of our hotel 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 hotel property, the cost of remediation to date has not been material, however, such cost may substantially increase if we discover mold in our other properties, or if costs related to mold such as legal and insurance expense continue to increase rapidly, which could significantly increase our operating costs and reduce our earnings.

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. While we intend to operate LQ Properties in a manner that will allow it to continue to qualify as a REIT, we cannot assure you that LQ Properties is qualified as such, or that it will remain qualified as such in the future. This is because qualification as a REIT involves the application of highly technical and complex provisions of the Code, as amended, 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, our available funds 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;



•

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 that it was disqualified.

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.

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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 than the sum of:

•

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



•

95% of LQ Properties' capital gain 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.

Risks Relating to an Investment in our Paired Common Stock

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 common stock or that 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, which may, in turn, impact LQ Properties' status as a REIT.

        Each share of common stock of LQ Corporation is attached and trades together with the class B common stock of LQ Properties. Under LQ Corporation's and LQ Properties' charters, the respective boards of directors may modify or eliminate this pairing arrangement without the consent of its respective shareholders at any time if that board of directors no longer deems it in the best interests of LQ Corporation and LQ Properties, as the case may be, for their shares to continue to be attached and trade together. At this time, neither board of directors has determined the circumstances under which the pairing arrangement would be terminated. However, circumstances that the respective boards might

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consider in making such a determination may include, for example, the enactment of legislation that would significantly reduce or eliminate the benefits of our current structure. With respect to such determination, the respective board of directors must fulfill at all times its respective fiduciary duties and, therefore, it is not possible to predict at this time the future circumstances wherein the respective board of directors would terminate the pairing arrangement.

        If the La Quinta boards of directors were to terminate the pairing arrangement, LQ Properties' status as a REIT may also be terminated, subjecting its taxable income to federal taxation at regular corporate rates, which could reduce our earnings.

The class B common stock may be redeemed for nominal value at 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 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.

LQ Properties' Board of Directors could terminate LQ Properties' status as a REIT and LQ Properties' taxable income would then be subject to federal income taxation resulting in an increase to its liabilities for taxes.

        LQ Properties' board of directors could terminate LQ Properties' status as a REIT without the consent of its shareholders. Under LQ Properties' charter, the board of directors of LQ Properties may terminate its REIT status at any time if the board of directors no longer deems it in the best interests of LQ Properties to continue to qualify under the Code as a REIT. The board of directors of LQ Properties has not yet determined the circumstances under which LQ Properties' status as a REIT would be terminated. However, circumstances that the board may consider in making such a determination may include, for example:

•

the enactment of new legislation that would significantly reduce or eliminate the benefits of being a REIT; or



•

LQ Properties no longer being able to satisfy the REIT requirements.

With respect to this determination, the board of directors must fulfill at all times its fiduciary duties and, therefore, it is not possible to predict at this time the future circumstances wherein the board of directors would terminate LQ Properties' status as a REIT.

        If LQ Properties' REIT status is terminated, its taxable income will be subject to federal income taxation (including any applicable alternative minimum tax) at regular corporate rates. Although LQ Properties has, as of December 31, 2003, federal net operating loss carryforwards of approximately $178,400,000 that may be available to reduce its taxable income, its liabilities for taxes would increase if it no longer qualifies as a REIT.

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Because we do not currently pay dividends on our paired common stock and cannot begin paying dividends on LQ Properties' class B common stock until 2005, shareholders would primarily benefit from an investment in our paired common stock only if it appreciates in value.

        We currently intend to retain our future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends on our paired common stock until 2005 when we may begin paying dividends of up to $0.10 per share on LQ Properties' class B common stock in preference to its class A common stock that is currently held by LQ Corporation. As a result, the success of an investment in our paired common stock will depend substantially upon future appreciation. There is no guarantee that our paired common stock will appreciate in value or maintain its current value.

ITEM 3. LEGAL PROCEEDINGS

        Incorporated by reference to the description of legal proceedings is Note 15, "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.

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 2004 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 December 31, 2003:

        Francis W. Cash, age 61, has been President, Chief Executive Officer and a director of LQ Corporation since April 2000. Mr. Cash has also served as President, Chief Executive Officer and a director of La Properties since April 2000. Mr. Cash served as the Treasurer of LQ Corporation from April 2000 until June 2000. Mr. Cash was the Chairman of the Board, Chief Executive Officer, President and a director of Mariner Post-Acute Network, Inc., a health care service provider, 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., a lodging company. 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

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and Chief Operating Officer of NovaCare, Inc., a provider of physical rehabilitation services, 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, a lodging and services company, including President of Marriott Service Group.

        David L. Rea, age 43, has been Executive Vice President and Chief Financial Officer of LQ Corporation since June 2000. Mr. Rea also serves as Executive Vice President and Chief Financial Officer of LQ Properties. Mr. Rea also served as the Treasurer of LQ Corporation and of LQ Properties from June 2000 to January 2002. Prior to joining La Quinta, Mr. Rea served as Chief Financial Officer 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, Chief Financial Officer 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, an investment firm, from 1986 through 1995.

        Rufus K. Schriber, age 59, has been Executive Vice President, Sales and Marketing of LQ Corporation since September 30, 2003. Prior thereto, he served as the Executive Vice President of Marketing and Brand Positioning since November 2002. From May 2000 through October 2002, Mr. Schriber served as a marketing consultant with the consulting firm Still Pond Enterprises, Inc. Prior to that time, he spent 15 years serving in various positions, including Executive Vice President Marketing and Brand Management, at Marriott International, a lodging company.

        Alan L. Tallis, age 57, has been Executive Vice President and Chief Development Officer of LQ Corporation and LQ Properties, since July 2000. 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, a consulting firm.

        Sandra K. Michel, age 46, has been Senior Vice President and General Counsel of LQ Corporation since December 2001 and Secretary of LQ Corporation since January 2002. Ms. Michel also serves as Senior Vice President, General Counsel and Secretary of LQ Properties. Prior to joining La Quinta, Ms. Michel served as General Counsel and Secretary of Sunterra Corporation, a vacation ownership (timeshare) company, 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 from May 1980 through December 1991.

        Wayne B. Goldberg, age 43, 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, a lodging company. Prior to that time, Mr. Goldberg spent over 22 years at Red Roof Inns, Inc. serving in various roles, including: Group Vice President, District Vice President, Regional Manager, Area Manager and General Manager.

        A. John Novak, age 51, has been 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 vacation (timeshare) exchange organization, 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, an entertainment company, from 1990 until 1996.

        A. Brent Spaeth, age 53, 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 and Divisional Vice President at La Quinta. He formerly held various property and regional operations positions with Drury Industries, Inc., and Mid-America Hotels corporations, each a lodging company.

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PART II

ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Common Stock

        Market Information.    Our paired 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 paired shares traded 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 7,600 holders of record of our shares as of February 23, 2004. As of February 23, 2004, 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 REIT's, 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, 2003, LQ Properties paid $30,000,000 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 $4,909,000 to LQ Corporation, which holds a 40.6% interest in LQ Worldwide. In connection with the Reorganization, 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, LQ Properties may begin paying dividends on its class B common stock of up to $0.10 per share per annum in preference to payment of dividends on shares of its class A voting common stock that is presently held by LQ Corporation. Unpaid dividends on LQ Properties' class B common stock do not accumulate from year-to-year. Future dividends will be declared at the discretion of our boards of directors and will depend upon cash flow, our financial condition, our capital requirements, the annual distribution requirements under the REIT provisions of the Code, and other factors that our boards of directors may deem relevant. Our boards of directors may modify our dividend policy from time to time. Distributions by us to the extent of our current earnings and profits for federal income tax purposes are generally taxable to shareholders as ordinary dividend income. Distributions in excess of earnings and profits are generally treated as non-taxable return of capital to the extent of a shareholder's basis in the paired common stock. A return of capital distribution has the effect of deferring taxation until a shareholder's sale of the paired common stock.

Our Series A Preferred Stock

        Market Information.    LQ Properties has 8,000,000 depositary shares issued and outstanding (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

34

Preferred Stock"). LQ Properties' Series A Depositary Shares trade on the New York Stock Exchange under the symbol "LQIPR".

        The following table sets forth, for the periods shown, the high and low sales prices for the Series A Depositary Shares:

        Holders of Record.    There were approximately 200 holders of record of LQ Properties' Series A Depositary Shares as of February 23, 2004.

        Dividends.    For the year ended December 31, 2003, LQ Properties designated the following cash distributions to holders of its Series A Depositary Shares as ordinary income:

        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 return of capital:

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        The following table sets forth information regarding securities authorized for issuance under the La Quinta Companies' equity compensation plans as of December 31, 2003:

(1)

Includes the La Quinta Corporation 2002 Stock Option and Incentive Plan (the "2002 Stock Option Plan"), the La Quinta Corporation Amended and Restated 1995 Share Award Plan (the "La Quinta Corporation 1995 Plan") and the La Quinta Properties, Inc. Amended and Restated 1995 Share Award Plan (the "La Quinta Properties 1995 Plan"). Other than forfeited shares that may become available for reissuance under the 2002 Stock Option Plan, no further awards may be made under the La Quinta Corporation 1995 Plan and the La Quinta Properties 1995 Plan.

(2)

Includes 750,776 shares available for future grant under the 2002 Stock Option Plan. Excludes 6,554,828 shares, which may be forfeited in the future from the La Quinta Corporation 1995 Plan and La Quinta Properties 1995 Plan and may become available for reissuance under the 2002 Stock Option Plan.

ITEM 6. SELECTED FINANCIAL AND OTHER DATA

Overview

        The selected financial information for the five year period ended December 31, 2003 reflects the transformation of our companies to a leading limited service lodging business. At the beginning of 1999, the predecessor to La Quinta, The Meditrust Companies, was a diversified organization, which owned substantial healthcare assets, the Santa Anita Racetrack, La Quinta Inns and golf courses.

        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 $820,000,000 of healthcare properties;



•

repaid over $625,000,000 in debt; and

36

•

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 that called for, among other things, an orderly disposition of a significant portion of healthcare assets and substantial reduction in debt, we completed healthcare asset sales and received mortgage repayments totaling approximately $1.8 billion between January 1, 2000 and December 31, 2003 and applied substantially all of the proceeds toward reduction of our total indebtedness of $2.6 billion as of December 31, 1999 to $895,154,000 as of December 31, 2003.

        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 reorganize 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 Reorganization and becoming a subsidiary controlled by LQ Corporation while continuing its status as a REIT. Pursuant to the Reorganization, 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) was converted into one share of a new class A common stock of LQ Properties. Following the Reorganization, each share of common stock of LQ Corporation, that previously had been paired with the common stock of LQ Properties, became attached and traded together with the new class B common stock. The outstanding common stock of LQ Corporation was unaffected by the Reorganization 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 Reorganization was the best alternative for us to grow our lodging real estate portfolio, management operations and brand franchising. In addition, we believe that our Reorganization will allow both LQ Properties and LQ Corporation to make efficient use of their substantial NOL carryforwards. We believe additional benefits of our Reorganization 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 Reorganization 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 on a consolidated basis with its controlled subsidiary LQ Properties and LQ Properties on a consolidated basis. All significant intercompany balances and transactions have been eliminated in consolidation. Financial information related to results of operations for Cobblestone Golf Group, Santa Anita Racetrack, TeleMatrix, Inc. and three inns 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 2002, 2001, 2000 and 1999 presentation to conform to the presentation of the financial position and results of operations as of and for the year ended December 31, 2003.

(b)

Includes $200 million of liquidation preference on preferred stock in 2003 and 2002.

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LA QUINTA PROPERTIES, INC.

Selected Financial Information

(a)

Certain reclassifications have been made to the 2002, 2001, 2000 and 1999 presentation to conform to the presentation of the financial position and results of operations as of and for the year ended December 31, 2003.

(b)

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

        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 earn revenue primarily by owning and operating 201 La Quinta Inns (including 6 La Quinta Inns that are located on land that we lease from third parties) and 75 La Quinta Inn & Suites containing approximately 36,000 rooms in 28 states as of December 31, 2003. We strive to design 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.

        In addition to owning and operating our hotel properties, we also earn revenue by licensing 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, 2003, our franchisees operated 50 La Quinta Inns and 46 La Quinta Inn & Suites representing over 8,700 rooms under our brand. Other than our two consolidated joint ventures, we do not currently operate or manage any hotels under management agreements with third parties where we maintain an equity ownership position, have the ability to exercise significant influence or are exposed to risks of operations sufficient to require consolidation. We also earn interest income on approximately $57,844,000 of healthcare related investments held at December 31, 2003.

        Over the last four 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. We have improved the operations of our lodging assets, including the improvement of revenue performance, reduction of costs and introduction of a franchising program. During that 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.

        As part of our continued focus on the improvement of revenue performance, we launched our redesigned La Quinta Returns loyalty program in 2002. We also invested significant capital in our hotels to enhance their competitive position and improve guest satisfaction. In addition, we have added several new electronic distribution channels and have expanded and reshaped our sales force to put more emphasis on local sales efforts.

        In December 2001, our shareholders approved certain proposals that permitted us to reorganize 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 Reorganization and becoming a subsidiary controlled by LQ Corporation while continuing its status as a REIT. The new structure went into effect in January 2002. We believe the Reorganization, which was proposed primarily to address the challenges imposed by federal tax legislation on our previous "grandfathered" paired share REIT

40

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.

Key Indicators of Financial Condition and Operating Performance

        We use a variety of financial and other information in monitoring the financial condition and operating performance of our business. Some of this information is financial information that is prepared in accordance with generally accepted accounting principles, or GAAP, while other information may be financial in nature and may not be prepared in accordance with GAAP. Our management also uses other information that may not be financial in nature, including statistical information and comparative data. Our management uses this information to measure the performance of individual hotel properties, groups of hotel properties within a geographic region and/or our business as a whole. Historical information is periodically compared against our internal budgets as well as against industry-wide information. We use this information for planning and monitoring our business, as well as in determining employee compensation.

Operating Statistics

        Guest Satisfaction.    Guest satisfaction scores are a important indicator of how our products and services are being received and viewed by our customers. We have focused our efforts over the past several years at increasing guest satisfaction scores as we believe guest satisfaction is a driver of repeat and referral business that leads to increased revenue. Guest satisfaction scores are monitored through a number of initiatives including surveys conducted by an independent market research company. We believe that high levels of guest satisfaction are important to maintaining and growing our brand's reputation and recognition.

        ADR, Occupancy Percentage and RevPAR.    Room revenue comprises approximately 95% of our revenues and is dictated by demand, as measured by occupancy percentage, pricing, as measured by ADR, and our available supply of hotel rooms. RevPAR, which is another important statistic for monitoring operating performance at the individual property level and across our business as a whole and is the result of the combined impact of ADR and occupancy. RevPAR performance is evaluated on an absolute basis with comparison to budgeted and prior period performance, as well as on a company wide and regional basis. Additionally, RevPAR performance is compared and tracked against industry data for our defined competitive set within each local market as aggregated by Smith Travel Research.

        We believe our ADR, occupancy percentage and RevPAR performance may be impacted by macroeconomic factors such as regional and local employment growth, personal income and corporate earnings, office vacancy rates and business relocation decisions, airport and other business and leisure travel levels and new hotel construction by our competitors, as well as the pricing strategies of our full service lodging competitors. Our ADR, occupancy percentage and/or RevPAR performance is also impacted by factors specific to La Quinta including our guest satisfaction scores, our choice of locations for our hotels, the expenditures that we incur to maintain and improve our hotel properties and the quality of the benefits that we offer our guests, such as our frequent traveler programs. Our available room supply is impacted by our access to capital and the expenditures that we incur to develop or acquire new hotels as well as the sale of existing hotels by us.

        Inn Operating Contribution.    IOC is a non-GAAP measure of an individual hotel property's level of profitability before fixed costs. IOC focuses on revenues and expenses that management considers are controllable components of the hotel property level operations. As part of IOC, we track and manage our costs per rented room as a measure of the variable costs to sell a room night.

        Franchise Monitoring.    We also monitor and track the number of franchise units opened and the overall growth in franchise revenues to measure the performance of our brand, as well as our franchise program, which we believe is important to increasing our presence in key geographic markets, as well as in entering additional geographic markets. In addition, our management uses ADR, occupancy percentage, RevPAR and guest satisfaction scores to monitor franchisee operating performance.

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Adjusted Earnings before Interest, Taxes, Depreciation and Amortization

        We use a variety of measures at the corporate level in order to monitor the performance of our business as a whole. Some of these measures are prepared in accordance with GAAP, while others, such as adjusted earnings before interest, taxes, depreciation and amortization, or Adjusted EBITDA, are non-GAAP measures. We use Adjusted EBITDA as a supplemental measure of performance because we believe it gives us a more complete understanding of our financial condition and operating results. We use this metric to calculate various financial ratios and to measure our performance, and we believe some debt and equity investors also utilize this metric for similar purposes. Adjusted EBITDA includes adjustments for non-cash income or expenses such as depreciation, amortization and other non-cash items. Adjusted EBITDA is also adjusted for discontinued operations, income taxes, interest expense and minority interest (which includes our preferred stock dividends of LQ Properties), as well as certain cash income or expense that we believe otherwise distort the comparability of the measure. Adjusted EBITDA is intended to show unleveraged, pre-tax operating results. This is one of the measures we use to set management and executive incentive compensation. Adjusted EBITDA is not intended to represent any measure of performance in accordance with generally accepted accounting principles ("GAAP") and our calculation and use of this measure may differ from our competitors. This non-GAAP measure should not be used in isolation or as a substitute for a measure of performance or liquidity prepared in accordance with GAAP.

La Quinta Corporation—Consolidated Results of Operations

Comparison of Years Ended December 31, 2003, December 31, 2002 and December 31, 2001

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        Net loss available to common shareholders was $83,762,000 or $0.58 per diluted common share, $507,753,000 or $3.55 per diluted common share and $300,360,000 or $2.10 per diluted common share for the years ended December 31, 2003, 2002 and 2001, respectively. Net loss available to common shareholders decreased by $423,991,000 or $2.97 per diluted common share in 2003 and increased $207,393,000 or $1.45 per diluted common share in 2002. The decrease and increase in net loss available to common shareholders in 2003 compared to 2002 and 2002 compared to 2001, respectively, were primarily due to:

•

a charge of approximately $258,957,000 (of which $10,599,000 has been reclassified to discontinued operations for 2002) recorded in January 2002 as a cumulative effect of change in accounting principle to reflect an adjustment to goodwill as a result of the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142");



•

a charge of approximately $8,000,000 recorded in September 2002 (classified in discontinued operations for that year) to write-off the balance of remaining goodwill of TeleMatrix, Inc. based on subsequent reviews of value due to declining results of that unit; and



•

a charge of approximately $196,520,000 recorded in January 2002 as a result of our Reorganization to establish the net deferred tax liability of La Quinta and recognize the future impact of temporary differences between book value and tax basis of lodging and healthcare assets and liabilities, including NOL carryforwards of LQ Properties and LQ Corporation.

        The effect of these charges was partially offset by an increase in impairment of property and equipment costs of approximately $30,571,000 in 2003 compared to 2002. The effect of these charges on the 2002 to 2001 comparison was partially offset by a charge of approximately $169,421,000 recorded in 2001 to write-off the carrying value of our paired share intangible as a result of our Reorganization and impairment charges amounting to approximately $114,419,000 taken during 2001 on certain property and equipment as well as mortgages and other notes receivable.

        The following table summarizes statistical lodging data for the years ended December 31, 2003, 2002, and 2001:

(1)

Includes one open hotel undergoing major refurbishment in 2003.

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(2)

Represents average daily rate.

(3)

Represents revenue per available room.

(4)

Available room-nights in thousands.

(5)

Excludes franchised hotels.

        Comparable hotels represent properties that have been open for at least two full years as of the two-year period ending date ("Comparable Hotels"). The following table summarizes Comparable Hotels data for the two-year period ended December 31, 2003 and the two-year period ended December 31, 2002: