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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 20, 2003.

OR

Commission file number 001-14625

HOST MARRIOTT CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

(240) 744-1000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. x  Yes  ¨  No

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

The registrant had 265,019,079 shares of its $0.01 par value common stock outstanding as of July 15, 2003.

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INDEX

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CONDENSED CONSOLIDATED BALANCE SHEETS

June 20, 2003 and December 31, 2002

(in millions, except per share amounts)

See Notes to Condensed Consolidated Statements

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Quarter Ended and Year-to-Date June 20, 2003 and June 14, 2002

(unaudited, in millions, except per share amounts)

See Notes to Condensed Consolidated Statements

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Year-to-Date June 20, 2003 and June 14, 2002

(unaudited, in millions)

See Notes to Condensed Consolidated Statements

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Year-to-Date June 20, 2003 and June 14, 2002

(unaudited, in millions)

Supplemental schedule of noncash investing and financing activities:

Through year-to-date June 20, 2003 and year-to-date June 14, 2002, we issued approximately 579,000 and 353,000 shares, respectively, of common stock upon the conversion of operating partnership units, or OP Units, of Host Marriott, L.P., held by minority partners valued at $4.6 million and $3.9 million, respectively.

During February 2002, we issued 1.1 million shares to acquire additional interests in the partnership owning the San Diego Marriott Hotel and Marina. This transaction resulted in an increase of $10.5 million to property and equipment and equity to reflect the fair value of the interests acquired. During April 2002, in a separate transaction, our ownership percentage in the San Diego partnership increased to 90% when certain of the minority partners in the San Diego partnership exchanged their interests for approximately 6.9 million OP Units. The transaction resulted in an increase of $56.1 million in property and equipment and a corresponding increase in minority interest liability to reflect the fair value of the interest acquired.

During January 2002, we transferred the St. Louis Marriott Pavilion to the mortgage lender. We recorded the difference between the debt extinguished, the deferred incentive management fees forgiven and the fair value of the assets surrendered of $22 million, net of tax expense of $9 million, as income from discontinued operations in the accompanying consolidated statements of operations.

On June 14, 2002, we acquired the Boston Marriott Copley Place in Boston, Massachusetts for a purchase price of $214 million, including the assumption of $97 million of mortgage debt.

During June 2003, we acquired the remaining general partner interest and the preferred equity interest held by outside partners in the JW Marriott in Washington, D.C. for approximately $3 million. We also became the sole limited partner after the partnership foreclosed on a note receivable from the other limited partner. As a result, we began consolidating the partnership and recorded $95 million of mortgage debt secured by the hotel and property and equipment of $131 million.

See Notes to Condensed Consolidated Statements

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Host Marriott Corporation, a Maryland corporation operating through an umbrella partnership structure, is primarily the owner of hotel properties. We operate as a self-managed and self-administered real estate investment trust, or REIT, with our operations conducted solely through Host Marriott, L.P., or the operating partnership, or Host LP, and its subsidiaries. We are the sole general partner of the operating partnership and as of June 20, 2003, owned approximately 90% of the partnership interests in the operating partnership, which are referred to as OP Units.

We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America, or GAAP, in the accompanying unaudited condensed consolidated financial statements. We believe the disclosures made are adequate to prevent the information presented from being misleading. However, the unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2002.

In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary to present fairly our financial position as of June 20, 2003 and the results of our operations for the quarter ended and year-to-date June 20, 2003 and June 14, 2002 and cash flows for year-to-date June 20, 2003 and June 14, 2002. Interim results are not necessarily indicative of full year performance because of the impact of seasonal and short-term variations.

Certain reclassifications, primarily debt extinguishments as a result of adopting SFAS No. 145, have been made to the prior period financial statements to conform to the current presentation.

Reporting Periods

We receive the results of operations of our hotels from our managers based on their reporting cycles, which are either monthly or every four weeks. As a REIT, we are required by tax laws to report results on a calendar year ended December 31. However, our quarterly results reflect the reporting cycle that is used by Marriott International, Inc., the manager of the majority of our properties, whose year ends on the Friday closest to December 31 and which reflect twelve weeks of operations for the first three quarters of the year and sixteen or seventeen weeks for the fourth quarter of the year. Our results are also adjusted to reflect a fiscal calendar year that has a January 1 starting date and a December 31 ending date. In any given quarter, quarter-over-quarter results could have different starting and/or ending dates. For example, the second quarter of 2003 ended on June 20 and the second quarter of 2002 ended on June 14, though both quarters reflect twelve weeks of operations. In addition, because our starting and ending dates may not match Marriott International’s starting and ending dates, our first and fourth quarters of each year and year-to-date periods may not have the same number of days as was reflected in a prior year. For example, our consolidated financial statements as of June 20, 2003 reflect 171 days, while our year-to-date results as of June 14, 2002 reflect 165 days.

Approximately one-fourth of our full-service hotels are operated by managers other than Marriott International and report revenues on a monthly basis versus our four week period. The accompanying consolidated financial statements reflect three months of operations for the second quarter (March, April and May), but only five months of operations year-to-date (January through May). Results in the third quarter will reflect three months of operations and fourth quarter results will reflect four months of operations for these hotels.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Principles of Consolidation

In the absence of other factors determining control, we consolidate entities when we own over 50% of the voting shares of another company or, in the case of partnership investments, when we own a majority of the general partnership interest. The control factors we consider include the ability of minority shareholders or other partners to participate in or block management decisions. Additionally, if we determine that we are an owner in a variable interest entity within the meaning of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” and that our variable interest will absorb a majority of the entity’s losses if they occur, receive a majority of the entity’s expected residual returns if they occur, or both, then we will consolidate the entity. All material intercompany transactions and balances have been eliminated.

Accounting for Stock-based Compensation

We maintain two stock-based employee compensation plans. Prior to 2002, we accounted for those plans under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Effective January 1, 2002, we adopted the fair value recognition provisions of the Financial Accounting Standards Board’s SFAS No. 123, “Accounting for Stock-Based Compensation,” and applied it prospectively to all employee awards granted, modified or settled after January 1, 2002. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all of our outstanding and unvested awards in each period.

New Accounting Pronouncements

The Financial Accounting Standards Board recently issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” or SFAS 150. This statement requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. Previously, many such

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

instruments had been classified as equity. A freestanding financial instrument is an instrument that is entered into separately and apart from any of the entity’s other financial instruments or equity transactions, or that is entered into in conjunction with some other transaction and is legally detachable and separately exercisable, such as certain put and call options. These provisions are effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We have no financial instruments that are affected by this statement.

Basic earnings (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding. Diluted earnings (loss) per common share is computed by dividing net income (loss) available to common shareholders as adjusted for potentially dilutive securities, by the weighted average number of shares of common stock outstanding plus potentially dilutive securities. Dilutive securities may include shares granted under comprehensive stock plans, preferred OP Units held by minority partners and other minority interests that have the option to convert their interests into common shares and the Convertible Preferred Securities. No effect is shown for securities if they are anti-dilutive.

In the first quarter of 2003, we repurchased $8 million of our 9.25% senior notes due in 2007 at par and prepaid $17 million of mortgage debt related to two of our Ritz-Carlton properties. We did not incur any prepayment penalties as a result of these debt extinguishments. The loss on the early extinguishment of debt related to the write-off of deferred financing fees, which was minimal, is included in interest expense in the accompanying consolidated statements of operations.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

During August 2001, we entered into a $97 million loan agreement for our four Canadian properties. As a result of a decline in operations at these properties in late 2001 and 2002, we were required under the loan agreement to escrow cash. In April 2003, approximately $7 million of the cash escrowed in accordance with the loan was applied to the outstanding balance of the indebtedness and approximately $2 million was released to us. As this indebtedness is denominated in United States dollars and the functional currency of the properties is Canadian dollars, at the time we entered into this loan we entered into currency forward contracts to buy U.S. dollars at a fixed price. These forward contracts hedge the currency exposure of converting Canadian dollars into U.S. dollars on a monthly basis to cover debt service payments, including the final balloon payment. These contracts have been designated as cash flow hedges of the debt service and balloon payments and are recorded at fair value on the balance sheet with offsetting changes recorded in accumulated other comprehensive income. As a result of the $7 million prepayment, a portion of the forward contracts no longer qualifies for hedge accounting. The pro-rata portion of the accumulated loss included in other comprehensive income as of the date of prepayment plus the change in the fair market value of the ineffective portion of the hedge from April 24, 2003, have been recognized in our consolidated statement of operations. All subsequent fair market value adjustments related to the ineffective portion of the hedge will be recognized in our consolidated statement of operations. The adjustments resulted in the recognition of approximately $1 million of expense, which is included in corporate and other expenses.

Operating results at our three properties located in Toronto have not yet fully recovered from the impact of SARS-related travel restrictions. As a result, in July 2003, we entered into an agreement with our lenders to modify certain covenants so that we would not be required to make additional prepayments at least through the end of the year. The terms of the modification required us to provide $10 million of cash collateral and pay an additional 25 basis points of interest on the loan. If we are required to make additional prepayments, the entire hedge may become ineffective for accounting purposes, at which time, any unrealized losses would be recognized in net income (loss). As of June 20, 2003, the unrealized loss is approximately $13 million, but is subject to adjustment based on future fluctuations in currency rates.

On June 19, 2003, we issued 33,182 shares of 10% Class D Cumulative Redeemable Preferred Stock to Fernwood Holdings LLC, an indirectly wholly owned taxable subsidiary of Host LP. Dividends paid on the Class D preferred stock will equal approximately $21,000 per quarter. The holder of the Class D preferred stock is entitled to receive cumulative cash dividends at a rate of 10% per annum of the $25.00 per share liquidation preference and these dividends are payable quarterly in arrears. We have the option to redeem the Class D preferred stock at any time after July 1, 2004, for $25.00 per share, plus accrued and unpaid dividends to the date of redemption. The Class D preferred stock is on parity with our Class A, B and C preferred stock. The Class D preferred stock has not been registered with the Securities and Exchange Commission or listed on the New York Stock Exchange. In accordance with Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” stock issued to a wholly-owned subsidiary is not presented on the balance sheet and dividends on such stock are not deducted in the determination of net income (loss) available to common stockholders or in the calculation of earnings per share.

On June 20, 2003, our Board of Directors declared a quarterly cash dividend of $0.625 per share for the four classes of our preferred stock. The second quarter dividend on the preferred stock was paid on July 15, 2003 to shareholders of record as of June 30, 2003. Dividends paid on the four classes of preferred stock are distributions for purposes of satisfying the minimum distribution requirement necessary to maintain our status as a REIT.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Our foreign operations consist of four properties located in Canada and two properties located in Mexico. There were no intercompany sales between the properties and us. The following table presents revenues for each of the geographical areas in which we own hotels.

Our other comprehensive income (loss) consists of unrealized gains and losses on foreign currency translation adjustments, changes in the fair value of the currency forward contracts and the receipt of cash from HMS Host Corporation, or HM Services, subsequent to the exercise of the options held by certain former and current employees of Marriott International, Inc., pursuant to our distribution agreement with HM Services.

During June 2003, we acquired the remaining general partner interest and preferred equity interest held by outside partners in the 772-room JW Marriott, Washington, D.C. for approximately $3 million. We also became the sole limited partner after the partnership foreclosed on a note receivable from the other limited partner. As a result, effective June 20, 2003, we consolidated the partnership, and recorded property and equipment of $131 million and $95 million in mortgage debt.

On January 24, 2003, we sold the 299-room Ontario Airport Marriott for $26 million. Our carrying amount for this hotel on the date of sale was $24 million of fixed assets, net of depreciation, and there was no mortgage debt. We recognized a minimal gain on the sale in the first quarter of 2003. During January 2002, we disposed of the St. Louis Marriott Pavilion through a transfer of the property to the mortgage lender. For year-to-date 2003 and 2002, our revenues for these properties were $862,000, and $5,982,000, respectively, and our income before income taxes was $47,000, and $320,000, respectively.

On July 18, 2003, we closed on the sale of the Norfolk Waterside Marriott, Oklahoma City Waterford Marriott and the Palm Beach Gardens Marriott for $71 million. For the second quarter of 2003 and 2002, our revenues for these properties were $5.8 million and $6.0 million, respectively,

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

and our income before taxes was approximately $103,000 and $250,000, respectively. Year-to-date revenues for these properties were $15.7 million and $15.9 million, respectively, and our income before taxes was $1.2 million for both year-to-date 2003 and 2002. We recorded a minimal loss on the transaction, which will be included in discontinued operations in the third quarter. The net proceeds are expected to be used to repay debt.

On July 30, 2003, we called $71 million of our 7 ⁷/8% senior notes due in 2005 for early redemption on August 29. The terms of this debt require that we pay holders a premium in exchange for the right to retire this debt in advance of its maturity date. We will also incur a loss on the early extinguishment of debt related to the acceleration of the related deferred financing fees.

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Overview

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements included elsewhere in this report. This discussion includes forward-looking statements about our business and operations. We identify forward-looking statements in this report by using words or phrases such as “believe,” “expect,” “may be,” “intend,” “predict,” “project,” “plan,” “objective,” “will be,” “should,” “estimate,” or “anticipate,” or the negative thereof or other variations thereof or comparable terminology. All forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors which may cause our actual transactions, results, performance or achievements to be materially different from any future transactions, results, performance or achievements expressed or implied by such forward-looking statements. These risks and uncertainties include those risk factors included in our 2002 annual report on Form 10-K dated March 31, 2003 and in other filings with the Securities and Exchange Commission, or the SEC. Although we believe the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that we will attain these expectations or that any deviations will not be material. Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Form 10-Q to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

As of June 20, 2003, Host Marriott Corporation, a Maryland corporation, owned 123 hotel properties, which operate primarily in the luxury and upper-upscale hotel segments. We conduct our operations as an umbrella partnership REIT through our direct and indirect subsidiaries, including Host Marriott, L.P., a Delaware limited partnership of which we are the sole general partner and hold approximately 90% of the partnership interests. As of July 15, 2003, we were the largest hotel REIT in the National Association of Real Estate Investment Trusts composite index.

Our hotels are operated under brand names that are among the most respected and widely recognized in the lodging industry—including Marriott, Ritz-Carlton, Four Seasons, Hilton and Hyatt. The majority of our properties are located in central business districts of major cities, near airports and in resort/convention locations. Our portfolio depends on revenue from large and small group business, business travel, as well as leisure and discount travelers. The target profile of our portfolio includes upper-upscale and luxury properties in hard to duplicate locations that may allow us to maintain room rate and occupancy premiums over our competitors. We seek to maximize the value of our portfolio through aggressive asset management, by directing the managers of our hotels to reduce operating costs and increase revenues through effective marketing efforts and by completing selective capital improvements.

Our results of operations primarily represent hotel-level sales, which are room, food and beverage and other ancillary income such as telephone, parking and other guest services. Operating expenses consist of the costs to provide these services as well as depreciation, management fees, real and personal property taxes, utilities, ground rent, equipment rent, property insurance and other costs.

A significant component of the cost of owning and operating hotels is fixed in nature and does not necessarily decrease when circumstances such as market factors cause a reduction in property revenues. As a result, changes in revenues (represented by RevPAR as defined below) can result in a greater percentage change in our earnings and cash flows. In response to the decline in the operations of our hotels, we have been working with our managers to achieve certain cost reductions at the properties. We believe that these efforts have slowed the decline in the operating margins of our hotels and created meaningful efficiencies that we believe will be long-term. In 2003, our operating margin has continued to decrease from comparable periods in 2002 due to declining revenues as a result of the effect on travel of such factors as the war in Iraq, terrorist threat levels, travel reduction related to severe acute respiratory

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syndrome (SARS), the weak economy and because certain of our costs, such as insurance, utilities, wages and benefits, have increased at a rate greater than inflation.

Our customers can be broadly grouped into three segments: transient, group and contract. The transient segment, which includes the individual corporate and leisure traveler, is generally accommodated at a premium rate when compared to our group and contract business. The transient segment of our business has been the most severely impacted by the current operating environment. As a result, our managers have been working to increase our group and contract business, which is generally accommodated at discounted rates, in order to maintain occupancy.

Comparable Hotel-Level Results, Reporting Periods and Operating Statistics

Comparable Hotel-level Results

We define our comparable hotels as full-service properties (1) that are owned or leased by us and the operations of which we include in our consolidated results, (2) for which we reported operating results throughout the reporting periods being compared, and (3) has not sustained substantial property damage or undergone large-scale capital projects. Comparable hotel-level results do not present operating results for our non-hotel properties or the results of our leased limited service hotels.

As of June 20, 2003, we consider 119 of our portfolio of 123 full-service hotels to be comparable hotels for the periods presented. The hotels whose operating results are excluded from comparable hotel-level results for the periods presented are the New York Financial Center Marriott (substantially damaged in the September 11, 2001 terrorist attacks and re-opened in January 2002), the Boston Marriott Copley Place (acquired in June 2002), The Ritz-Carlton, Naples Golf Resort (opened in January 2002) and the JW Marriott, Washington, D.C. (consolidated in the second quarter of 2003). The comparable hotel-level results include the results of the Norfolk Waterside Marriott, the Oklahoma City Waterford Marriott and the Palm Beach Gardens Marriott, which were sold on July 18, 2003 and will be considered non-comparable when we present our third quarter hotel operating results.

We present below certain operating results for the periods presented in this quarterly report for our comparable hotels, including hotel-level operating profit. We believe that the comparable hotel-level results help us and our investors evaluate the ongoing operating performance of our hotels and facilitate comparisons with other REITs and hotel owners. Management uses these measures to establish a baseline to assess property-level results, including when we acquire or sell assets. While these measures are based on GAAP, costs such as depreciation and amortization, income taxes, interest expense, corporate expenses, and other corporate items have been incurred by us and are not reflected in this presentation. In addition, we adjust the revenues and expenses at these properties so that the results reflect comparable reporting periods as discussed below. We believe that excluding these items provides the most accurate measure of the performance of our comparable hotels. As a result, the comparable hotel-level results do not represent our total revenues, expenses or operating profit and these hotel-level results should not be used to evaluate the performance of Host Marriott as a whole. However, our consolidated statement of operations includes such amounts, all of which should be considered when evaluating our performance, as well as the usefulness of our non-GAAP measures.

Reporting Periods

We receive the results of operations of our hotels from our managers based on their reporting cycles, which are either monthly or every four weeks. As a REIT, we are required by tax laws to report results on a calendar year ended December 31. However, our quarterly results reflect the reporting cycle that is used by Marriott International, Inc., the manager of the majority of our properties, whose year ends on the Friday closest to December 31 and which reflect twelve weeks of operations for the first three quarters of the year and sixteen or seventeen weeks for the fourth quarter of the year. Our results are also adjusted to reflect a fiscal calendar year that has a January 1 starting date and a December 31 ending date. In any

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given quarter, quarter-over-quarter results could have different starting and/or ending dates. For example, the second quarter of 2003 ended on June 20 and the second quarter of 2002 ended on June 14, though both quarters reflect twelve weeks of operations. In addition, because our starting and ending dates may not match Marriott International’s starting and ending dates, our first and fourth quarters of each year and year-to-date periods may not have the same number of days as was reflected in a prior year. For example, our consolidated financial statements as of June 20, 2003 reflect 171 days, while our year-to-date results as of June 14, 2002 reflect 165 days.

Approximately one-fourth of our full-service hotels are operated by managers other than Marriott International and report revenues on a monthly basis versus our four week period. The accompanying consolidated financial statements reflect three months of operations for the second quarter (March, April and May), but five months of operations year-to-date (January through May). Results in the third quarter will reflect three months of operations and fourth quarter results will reflect four months of operations for these hotels.

Operating Statistics

Our reported hotel operating statistics (i.e., RevPAR, average daily rate and average occupancy) for the quarters ended June 20, 2003 and June 14, 2002 reflect results for the twelve week periods from March 29, 2003 to June 20, 2003 and March 23, 2002 to June 14, 2002, respectively, for our Marriott-managed hotels and results for March, April and May for operations of all other hotels which report results on a monthly basis.

Our reported hotel operating statistics for year-to-date June 20, 2003 and year-to-date June 14, 2002 reflect results for the twenty four week periods (or 168 days) from January 4, 2003 to June 20, 2003 and December 29, 2001 to June 14, 2002, respectively, for our Marriott-managed hotels and results for January through May for operations of all other hotels which report results on a monthly basis.

Recent Events

Effective June 26, 2003, we re-branded our 500-room Swissôtel-Boston as a Hyatt Regency. We believe that the broader brand name recognition and management resources of Hyatt will help improve operations and drive increased profitability in the long term. This re-branding is consistent with our strategy to engage the leading hotel management companies to operate our properties.

During June 2003, we acquired the remaining general partner interest and the preferred equity interest held by outside partners in the 772-room JW Marriott, Washington, D.C. for approximately $3 million. We also became the sole limited partner after the partnership foreclosed on a note receivable from the other limited partner. As a result, effective June 20, 2003, we consolidated the partnership. This resulted in an increase to property and equipment of $131 million and an increase in debt of $95 million for the mortgage on the property.

On July 18, 2003, we closed on the sale of the Norfolk Waterside Marriott, Oklahoma City Waterford Marriott and the Palm Beach Gardens Marriott for $71 million. We recorded a minimal loss on the transaction, which will be included in discontinued operations in the third quarter.

On July 30, 2003, we called $71 million of our 7 ⁷/8% senior notes due in 2005 for early redemption on August 29. The terms of this debt require that we pay holders a premium in exchange for the right to retire this debt in advance of its maturity date. We will also incur a loss on the early extinguishment of debt related to the acceleration of the related deferred financing fees.

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Lodging Performance

The current operating environment for our hotels remains challenging as demand continues to be soft and booking cycles short. We use a measure common in the industry to evaluate the operations of a hotel—room revenue per available room, or RevPAR. RevPAR is defined as the product of the average daily room rate charged and the average daily occupancy achieved. RevPAR does not include food and beverage or other ancillary revenues such as parking, telephone or other guest services generated by the property. Additionally, we also present certain operating results and statistics on a comparable hotel basis.

The operating environment during the second quarter of 2003 was difficult due to reduced airline travel, weak economic conditions, concern over terrorist threat levels and the lingering effects of SARS, primarily at our Toronto, Canada properties. In addition, the effect of the war in Iraq on business and leisure travel resulted in a significant drop in occupancy during March and April of 2003. This effect is particularly significant for the 25% of our hotels which report on a different quarterly accounting calendar than us, as these hotels’ second quarter results include operations for March through May. See “Comparable Hotel-Level Results, Reporting Periods and Operating Statistics” for further detail. During the most recent quarter, the lodging industry and our company experienced declines in RevPAR and operating profits because of reduced demand and rising operating expenses, including increased insurance costs. We expect these conditions to persist throughout 2003. We are expecting RevPAR for our comparable hotels to decline by 2.5% to 4.0% for the third quarter and decline by 3.0% to 5.0% for the full year 2003. Although we and our operators continue to focus on reducing costs and maintaining margins, it is becoming more difficult to offset revenue declines with decreases in expenses. Certain important components of our operating costs, such as wages, benefits, utilities and insurance, are expected to increase at a rate greater than inflation in 2003. Thus, operating profits and margins for each quarter in 2003 were, or are expected to be, below 2002 levels.

For the second quarter of 2003, RevPAR for our comparable hotels decreased approximately 8.2% when compared to the same period in 2002. The decline is the result of a decrease in average occupancy of 3.6 percentage points and the decline in average room rates of 3.5%. The comparable hotels in all of our key markets experienced declines in RevPAR due to the difficult operating environment, except Florida, which experienced a 0.2% RevPAR increase, driven by strong performance in our Tampa market, which increased by 20%. Our North Central region experienced a RevPAR decline of only 2.1%, as our Downtown Chicago properties benefited from positive RevPAR growth and a strong convention market. Our Washington, D.C. region also continued to outperform the portfolio, with a RevPAR decline of just 2.5%, as several of our Northern Virginia hotels enjoyed a strong quarter.

Our Canadian hotels were significantly affected in the quarter as a result of the SARS epidemic, particularly in Toronto where RevPAR declined by 31%. The Atlanta market also had a difficult quarter with RevPAR declines of 16.4% as a result of increased convention competition from markets such as Orlando or New Orleans for large group functions. Operations in San Francisco continued to be weak, with RevPAR falling 13%, although these results were generated by softer demand in the suburbs and airport markets as opposed to the downtown hotels. Our San Diego market, which continued to benefit from a solid convention calendar, experienced a RevPAR decline of just 2% for the quarter. RevPAR for our New York hotels declined by 11%, as soft performance in the suburban markets was partially offset by better performance at the Marquis, which was down just 8%. Our Philadelphia market, which outperformed virtually all of last year, suffered from tough comparisons and a slow convention schedule, leading to a RevPAR decline of 10%.

Each of our market types (downtown, resort, airport and suburban), experienced declines in RevPAR for the second quarter of 2003 when compared to the second quarter of 2002. Our resort hotels had the best results for the quarter, with RevPAR declining just 5.8%. Within this market type, The Ritz-Carlton, Naples enjoyed a RevPAR increase of 2.7%. Our suburban hotels and urban hotels experienced RevPAR declines of 8.0% and 8.6% respectively. Our airport hotels, which were most affected by the decline in travel because of concerns surrounding the Iraq war, fell by 10.1%.

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The following table presents certain operating results and statistics for the periods presented in this report for our comparable hotels that we believe are useful to investors, including comparable hotel-level operating profit. See “Comparable Hotel-Level Results, Reporting Periods and Operating Statistics” for further detail.

Comparable Hotel-Level Results (a)

(in millions, except hotel statistics)

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