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Securities and Exchange Commission

Washington, D.C. 20549

Form 10-K

for the year ended December 31, 2003

OR

Commission file number: 0-16728

COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP

(Exact Name of Registrant as Specified in its Charter)

240-744-1000

Registrant’s Telephone Number, Including Area Code

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

Units of Limited Partnership Interest

(Title of Class)

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

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.    Yes  x    No  ¨

Documents Incorporated by Reference

None

ITEMS 1 & 2. Business and Properties

We are a Delaware limited partnership, formed on August 31, 1987 to acquire and own 70 Courtyard by Marriott hotels and the respective fee or leasehold interests in the land on which our hotels are located. Our hotels are located in 29 states and contain a total of 10,337 guest rooms as of December 31, 2003. The hotels are operated as part of the Courtyard by Marriott system and are managed by Courtyard Management Corporation (the “manager”), a wholly owned subsidiary of Marriott International, Inc., under long-term management agreements. CBM Joint Venture LLC, or Courtyard JV, a joint venture among Host Marriott, L.P., also referred to as Host LP, Rockledge Hotel Properties, Inc., which is a wholly-owned subsidiary of Host LP, and a subsidiary of Marriott International, Inc., also referred to as Marriott International, is the indirect holder of all of our limited and general partner interests.

Any security holder who desires additional copies of this Form 10-K may obtain one (excluding exhibits), without charge, by addressing a request to Courtyard by Marriott II Limited Partnership, Attn: Investor Relations, 6903 Rockledge Drive, Suite 1500, Bethesda, Maryland 20817. We will charge an amount equal to the reproduction cost if the exhibits are requested.

The Lodging Industry

The lodging industry in the United States consists of both private and public entities that operate in an extremely diversified market under a variety of brand names. Competition in the industry is based primarily on the level of service, quality of accommodations, location and room rates. In order to cater to a wide variety of tastes and needs, the lodging industry is broadly categorized into six groups: luxury, upper-upscale, upscale, midscale with food and beverage service, midscale without food and beverage service and economy. Our properties, which are positioned in the upscale segment of the industry, compete with both full-service and limited-service hotels in their respective markets by providing streamlined services and amenities at prices that typically are lower than those available at full-service hotels. Our competitors in the upscale segment include such brands as Amerisuites, Hilton Garden Inn, Hawthorne Suites, Homewood Suites, Radisson, Red Lion, Residence Inn and Spring Hill Suites.

Supply and demand growth in the lodging industry and the markets in which we operate may be influenced by a number of factors, including growth of the economy, capital availability, the level of interest rates and unique local considerations. Properties in the upscale segment of the lodging industry have been hurt by an increase in the construction of upscale hotels over the past decade. Over the past three years, demand has been slowed primarily due to terrorist acts, the threat of additional terrorist acts, the war in Iraq and, in 2002, continued weakness in the economy. We expect the rate of supply growth to decrease from prior year levels for at least the next two years due to the excess supply of upscale hotels currently in many markets based on data provided by Smith Travel Research and PricewaterhouseCoopers LLP. However, we still expect the rate of supply growth in the upscale segment to be at, or exceed, the historic levels for the lodging industry. We believe that demand will begin to grow during the first half of 2004, as the economy continues to strengthen and business travel increases.

Business Strategy

Our primary business objective is to provide superior total returns to our unitholders through a combination of distributions, appreciation in net asset value per unit, and growth in earnings. To achieve this objective we seek to:

We believe we are well-qualified to pursue our business strategies. Our management team has extensive experience, industry knowledge, relationships and access to market information that provide a competitive advantage with respect to the work we do to improve and maintain the quality of our assets. These efforts include maximizing the value of our portfolio by directing our manager in their efforts to reduce operating costs and to increase revenues at our hotels, monitoring property and brand performance, pursuing repositioning opportunities, overseeing capital expenditure budgets and forecasts, and analyzing competitive supply conditions in each of our markets.

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Our Portfolio

Our portfolio consists of 70 Courtyard by Marriott hotels that contain a total of 10,337 rooms. The properties are geographically diversified among 29 states and most are located in suburban areas near office parks or other business districts and are designed for business and vacation travelers who desire quality accommodations at moderate prices. Our hotels average 148 rooms and are approximately 16 years old. Our hotels are designed around a courtyard area containing a swimming pool, walkways and landscaped areas. Each hotel typically contains a small lobby, a restaurant with seating for approximately 50 guests, a lounge, a guest laundry, an exercise room and two small meeting rooms.

Refurbishments and Capital Improvements. To maintain the overall quality of our lodging properties, we annually assess the need for refurbishments and capital improvements. Typically, refurbishments occur at intervals of approximately seven years, based on an annual review of the condition of each property. However, the timing of refurbishments may vary based on the type of property and equipment being replaced and are generally divided into the following types: soft goods, hard goods and infrastructure. Soft goods include items such as carpeting, bed spreads, curtains and wall vinyl and may require more frequent updates to maintain brand quality standards. Hard goods include furniture such as dressers, desks, restaurant chairs and tables and are generally not replaced as frequently. Infrastructure includes the physical plant of the hotel, including such items as the roof, elevators, façade, fire systems, etc., which are regularly maintained and then replaced at the end of their useful lives. For the past several years, our capital expenditures have been focused on property maintenance and improvements designed to maintain appropriate levels of quality. Our management agreements require us to escrow 6.5% of hotel sales for these refurbishments and capital improvements.

During 2002, we began an effort to reposition our properties to compete with newer properties in certain of our markets. We have undertaken these repositionings in response to changing consumer tastes and trends in the industry. As of December 31, 2002, we had completed the repositioning of three properties at a cost of approximately $6.8 million (or approximately $15,500 per room). After evaluating the effect on operations of the refurbishments completed on the three properties, we modified the scope of the project to attempt to attain the same benefits at a lower cost per room and thus provide the opportunity to reposition additional properties. The revised scope includes:

As of December 31, 2003, we have $46.5 million in our property improvement fund, with which we plan to upgrade approximately 24 hotels (at a cost of approximately $12,000 per room) in 2004. We will continue to monitor the effect of the scope of these renovations and make modifications as necessary. While a portion of the portfolio can be repositioned with the amounts expected to be in the property improvement fund, the total capital expenditure budget proposed by the manager to reposition the entire portfolio exceeds the amount expected to be in the property improvement fund. Under the management agreements, the partnership is generally not obligated to fund improvements to the extent that they exceed the amounts escrowed for the property improvement fund. Therefore, the pace at which we reposition additional properties in future years will depend upon the results of our operations and the benefits that we receive from these improvements.

Competition. The lodging industry is highly competitive and over the past decade there has been a proliferation of the number of brands in the lodging industry. Competition is often specific to individual markets and is based on a number of factors, including location, brand, price, guest amenities and service, as well as property condition. Our competition includes hotels operated under brands in the midscale, upscale and upper-upscale groups. In addition, because our management contracts do not restrict our manager’s ability to convert, franchise or develop other hotel properties in our markets, we often compete with other hotels our manager manages or franchises.

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We believe, however, that our properties enjoy competitive advantages associated with their operations under the Courtyard by Marriott brand system. The national marketing programs and reservation systems of this brand, combined with the strong management systems and expertise they provide should enable our properties to continue to perform favorably in terms of both occupancy and average daily rate. Our manager maintains a national reservation system with reservation agents that have the current status of the rooms available and rates from the properties. In addition, repeat guest business is enhanced by participation in the Marriott Rewards program.

Seasonality. Our hotel sales traditionally have experienced moderate seasonality, which varies based on the individual hotel property and the region. Additionally, hotel revenues in our fiscal fourth quarter reflect sixteen or seventeen weeks of results compared to twelve weeks for each of the first three quarters of our fiscal year. Hotel sales by quarter for the years 2001 through 2003 for our lodging properties are as follows:

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Hotel Properties. The following table sets forth the location and number of rooms for each of our properties as of February 15, 2004. Except as noted, each of the properties is subject to a ground lease:

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Environmental and Regulatory Matters

Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. These laws may impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, certain environmental laws and common law principles could be used to impose liability for release of asbestos-containing materials, and third parties may seek recovery from owners or operators of real properties for personal injury associated with exposure to released asbestos-containing materials. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require corrective or other expenditures. In connection with our current or prior ownership or operation of hotels, we may be potentially liable for various environmental costs or liabilities. Although we are currently not aware of any material environmental claims pending or threatened against us, we can offer no assurance that a material environmental claim will not be asserted against us in the future.

Material Agreements

All of our hotels are managed and operated by a subsidiary of Marriott International pursuant to the management agreements. The agreements expire in 2013 with renewals at the option of the manager for one or more of the hotels for up to 35 years thereafter. In October 2000, in connection with the acquisition of the partnership by Courtyard JV, the partnership agreed to certain proposed amendments to the management agreements that would take effect at such time as all required consents of the partnership’s lenders have been obtained. Those proposed amendments primarily related to the computation of owner’s priority distribution and future subordination requirements. The partnership and the manager also agreed to increase the annual contributions to the partnership’s furniture, fixtures and equipment reserve from 5.0% to 6.5% of gross revenues and such increase became effective in the fourth quarter of 2000.

The consent of the partnership’s lenders may be required in order for the various proposed amendments to become effective. To date, the partnership has obtained the consent of the servicer on its mortgage debt to the October 2000 proposed amendments. The partnership has not sought, and does not currently contemplate seeking, consents, to the extent necessary, from the holders of its senior notes for the amendments. Our management agreements with our manager include the terms described below.

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The land on which 61 of the hotels is located is subject to ground leases. Of these, 53 are leased from Marriott International and its affiliates. The primary provisions of these leases are discussed in Note 7 to the financial statements.

Related Parties

CBM Joint Venture LLC, or Courtyard JV, a joint venture among Host Marriott, L.P., also referred to as Host LP, Rockledge Hotel Properties, Inc., which is a wholly-owned subsidiary of Host LP, and a subsidiary of Marriott International, Inc., also referred to as Marriott International, is the indirect holder of all of our limited and general partner interests. Host LP owns and Marriott International operates (and in a few cases owns) hotels other than our hotels. Additionally, Marriott International and its affiliates license others to operate other hotels under various brand names, including the Courtyard by Marriott brand name and therefore potential conflicts of interest exist. With respect to these potential conflicts of interest, Host LP, Marriott International and their affiliates retain the right to compete with our hotels, including the right to develop, own, operate and franchise competing hotels now and in the future in markets in which our hotels are located, in addition to those existing hotels which may currently compete directly or indirectly with our hotels.

Employees

We have no employees. Host LP provides the services of certain employees (including the general partner’s executive officers) to us and the general partner. We and the general partner anticipate that each of the executive officers of the general partner will generally devote a sufficient portion of his or her time to our business. However, each executive officer will also

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devote a significant portion of his or her time to the business of Host LP and its other affiliates. No officer of the general partner or Host LP devotes a significant percentage of his or her time to our business. To the extent that any officer does devote time to the partnership, the general partner or Host LP, as applicable, is entitled to reimbursement for the cost of providing such services.

Certain Policies

Our policies with respect to investing activities are determined by our general partners and may be amended or revised from time to time at their discretion. Our investment objectives are to achieve long-term sustainable growth in earnings and cash flow and to maximize the value of our portfolio through an asset management program which focuses on selectively improving and repositioning our hotels.

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ITEM 3. Legal Proceedings

The partnership and our hotels are involved in routine litigation and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and which collectively are not expected to have a material adverse effect on the business, financial condition or results of operations of the partnership.

ITEM 4. Submission of Matters to a Vote of Unit Holders

None.

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PART II

ITEM 5. Market for the Partnership’s Limited Partnership Units and Related Security Holder Matters

There currently is no established public trading market for the limited partner units of the partnership and it is not anticipated that a public market for the units will develop. As of December 31, 2003, Courtyard JV was the indirect holder of record of all of the partnership’s 1,470 units.

Subject to meeting cash flow thresholds in our senior notes indenture, cash available for distribution for any year, if any, will be distributed at least annually to the partners of record at the end of each accounting period. During 2002, we distributed $10.6 million (or $7,182 per limited partner unit) to the limited partners. As of the third quarter of 2002 and throughout 2003, we have not met certain cash flow thresholds as required by the senior notes indenture. No distributions to the partners may be made until these thresholds are met. For a further discussion of the senior note cash flow thresholds, see Note 6 to the financial statements.

ITEM 6. Selected Financial Data

The following table presents selected historical financial data which has been derived from our audited financial statements for the five years ended December 31, 2003.

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements about our business. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed in “Forward Looking Statements” and “Risk Factors” contained elsewhere in this report.

Overview

Courtyard by Marriott II Limited Partnership is a Delaware limited partnership that owns 70 Courtyard by Marriott hotels and the respective fee or leasehold interests in the land on which our hotels are located. Our hotels are operated under the Courtyard by Marriott brand name, and are located in 29 states. We seek to maximize the value of our portfolio through asset management by working with the manager of our hotels to maximize property operations through effective marketing efforts and by completing targeted capital improvements.

The majority of our customers are transient business and leisure travelers. A small portion of our customer base also comprises contracts for a specified number of rooms over a fixed period. Our results of operations primarily represent hotel-level sales, which are room, food and beverage and other ancillary income such as telephone and other guest services. Operating expenses consist of the costs to provide these services as well as depreciation, management fees paid to the operators of our hotels, real and personal property taxes, utilities, ground rent, equipment rent, property insurance and other costs.

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Our operating results are based on results of our hotels reported to us by our hotel manager. However, our manager uses a fiscal year ending on the Friday closest to December 31 and reports twelve weeks of operations for the first three quarters and sixteen or seventeen weeks for the fourth quarter of the year. As a result, our fiscal year 2002 results included 53 weeks of hotel operations, as compared to the operating results for years 2003 and 2001 which contained only 52 weeks of hotel operations and our fourth quarter for 2002 had 17 weeks of hotel operations, while the fourth quarter for 2003 and 2001 only had 16 weeks of hotel operations.

Key Performance Indicators

We have several key indicators that we use to evaluate the performance of our business. These indicators include room revenue per available room, or RevPAR, and RevPAR penetration index.

RevPAR is a commonly used measure within the hotel industry to evaluate hotel operations. RevPAR is defined as the product of the average daily room rate charged and the average daily occupancy achieved. RevPAR does not include revenue from food and beverage, telephone, or other guest services generated by the property. Although RevPAR does not include these ancillary revenues, it is generally considered the leading indicator of core revenues for many hotels. We also use RevPAR to compare the results of our hotels between periods and to compare results of our hotels.

We assess what causes changes in RevPAR because changes that result from occupancy as compared to those that result from room rate have different implications on overall revenue levels, as well as incremental operating profit. For example, increases in occupancy at a hotel may lead to increases in ancillary revenues, such as food and beverage and other hotel amenities, as well as additional incremental costs (including housekeeping services, utilities and room amenity costs). RevPAR increases due to higher room rates, however, would not result in these additional room-related costs. For this reason, while operating profit would typically increase when occupancy rises, RevPAR increases due to higher room rates would have a greater impact on our profitability.

A related revenue measure for our hotels is the RevPAR penetration index. The RevPAR penetration index reflects each property’s RevPAR in relation to the RevPAR for that property’s competitive set. We use the measure as an indicator of a property’s market share. For example, a RevPAR penetration index of 100 would indicate that a hotel’s RevPAR is, on average, the same as its competitors. A RevPAR penetration index exceeding 100 would indicate that a hotel maintains a RevPAR premium in relation to its competitive set, while a RevPAR penetration index below 100 would be an indicator that a hotel is underperforming its competitive set. One critical component in this calculation is the determination of a hotel’s competitive set. Factors that we consider include geographic proximity, as well as the level of service provided at the property. For example, a hotel located near a convention center might have a competitive set that includes other hotels located in close proximity to the convention center. Our methodology for determining a hotel’s competitive set, however, may differ from those used by other owners and/or managers.

2003 and 2004 Lodging Assessment

In 2003, we believe the lodging industry was negatively affected by low levels of business travel resulting from a weak economy (predominantly in the first half of the year), the war in Iraq, continued changes in terrorist threat levels and travel reductions and restrictions related to severe acute respiratory syndrome, or SARS. Strong economic growth in the United States economy in the second half of 2003 helped improve lodging demand, but generally not enough to offset the weak lodging demand in the first half.

Our industry outlook for 2004 is more optimistic. Historically, we have seen that lodging demand in the United States correlates to U.S. Gross Domestic Product (GDP) growth, with typically a one to two quarter lag period. Therefore, given the relatively strong U.S. GDP growth in the second half of 2003 and the forecasts for 2004, we are optimistic about improvement in lodging demand in 2004. In addition, based on these GDP forecasts, as well as the anticipated strengthening of corporate profits and capital investment, we expect an increase in business-related travel.

However, unlike the favorable demand trends forecasted to affect the lodging industry in general, we believe that supply growth trends that have existed during the past few years will continue to negatively affect our performance. Supply growth in the lodging industry and the markets in which we operate may be influenced by a number of factors, including growth of the economy, low level of interest rates, and local considerations. Historically, supply growth has averaged approximately 3% per year. Since 2000, the growth of new supply for the entire lodging industry has exhibited a declining

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trend below the historic average (2.6%, 1.9%, 1.6%, and 1.2% in 2000, 2001, 2002 and 2003, respectively) based on data prepared by Smith Travel Research and PricewaterhouseCoopers LLP. However, the upscale segment experienced significantly stronger supply growth than did the industry as a whole during this period (10%, 7%, 7% and 6% in 2000, 2001, 2002 and 2003, respectively.) We expect the supply growth to slow in the upscale segment of the lodging industry to 3.5% to 4% per year over the next two years. However, while we anticipate slower supply growth than we have experienced over the past several years, we expect that the heightened room supply levels currently in the upscale market will continue to have a negative impact on our operations until the rate of growth in room demand exceeds the rate of growth in room supply.

In 2003, our revenues declined 5.5% from 2002 as a result of the effect on travel of the factors discussed above, as well as 2002 including 53 weeks of operations compared to 52 weeks for 2003. This follows an 8.7% decline in revenues from 2001 to 2002. A significant component of the costs at our hotels, such as property taxes, ground rent, utilities, wages and benefits and insurance are generally fixed and do not necessarily decrease to the same extent as a reduction in hotel property revenues. As a result, a change in revenues usually results in a greater percentage change in our earnings and cash flows. For instance, while our revenues declined by 5.5% and 8.7% in 2003 and 2002, respectively, our declines in operating profit have been much more significant at 22.2% and 23.2%, respectively.

In response to the decline in operations of our hotels over the last several years, we have been working with our manager to achieve cost reductions at the properties. During 2002, these efforts, when combined with the effect of lower occupancy at the hotels, produced a 4.0% decline in property-level costs, which included a 3.4% decline in selling, administrative and other costs. However, in 2003, we were unable to achieve further declines in property-level costs as certain costs, such as employee wages and benefits, property taxes, insurance and utilities increased at a rate greater than inflation. As a result, despite the 5.5% decline in revenues, our property-level costs remained relatively unchanged and our operating profit deteriorated further.

The current operating environment for our hotels remains challenging as a result of continued lower levels of demand and the increased supply of moderately-priced competitive hotels. In addition, certain full-service hotels in our markets have lowered their rates, which has negatively impacted the competitive position of our hotels. During 2004, we expect RevPAR at our hotels to increase slightly from the depressed 2003 levels as a result of positive trends that are emerging, though RevPAR will remain below our historic levels. The positive trends include positive U.S. Gross Domestic Product growth forecasts for 2004 and an expected increase in lodging demand from business travelers. However, we expect that our hotels will continue to experience low occupancy levels as a result of competition within our markets remaining strong and the effect of new supply. Also, we expect that the increase in RevPAR will be exceeded by the increase in our operating costs, and as a significant number of our properties will have rooms out of service due to their renovations, we anticipate that operating profit will remain generally flat when compared to 2003.

During 2003, the average RevPAR penetration index, or market share, for our hotels declined slightly, but it remains at a substantial premium to our competitive set. We believe that this decline in market share occurred due to the relative age of our hotels when compared to the newer hotels that have entered the market over the past five years. We believe that our renovation program will help our hotels better compete with newer properties.

Management’s Priorities

Based on our primary business objectives and forecasted operating conditions, our key priorities, or financial strategies, over the next several years include the following:

There can be no assurances that any increases in hotel revenues at our properties or earnings will be achieved. Booking cycles remain relatively short, which means that it remains difficult to predict future results. In addition future terrorist attacks, or the continued threat of additional terrorist attacks, may adversely affect demand at our properties while continued increases in operating costs may result in declining operating profit.

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Results of Operations

The following table reflects key line items from our audited statements of operations and other significant operating statistics (in thousands, except operating statistics):

2003 Compared to 2002

Total Revenues. The decrease in hotel revenues during 2003 was primarily due to a decrease in demand combined with lower average room rates, as well as 2002 including 53 weeks of operations compared to 52 weeks in 2003. Some of the primary markets in which we operate that have been significantly affected include San Francisco, Dallas, and Chicago. Additionally, many of our hotels are located in suburban markets. These markets have been negatively affected by increased competition from lower room rates at downtown hotels and the increased construction of moderately-priced hotels in suburban markets. The 3.7% decline in RevPAR for our portfolio reflects a 1.3 percentage point decrease in average occupancy to 67.5% and a 1.9% decrease in the average room rate to $87.13. For the upscale segment of the lodging industry, RevPAR declined 1% according to Smith Travel Research. We believe that our performance was below the performance of the upscale segment due to the age of the properties and high level of competition in many of the markets in which we operate. We believe that our renovation program will improve our competitive position in the markets in which we operate.

RevPAR declined in every region in 2003, though RevPAR in our Southeast region declined by only .4%. Our South Central and Western regions had the largest RevPAR declines with significant declines in both occupancy and room rate. We anticipate that room rates and occupancy levels will increase to the extent that economic growth leads to increases in lodging demand, particularly among individual business travelers.

Property-level Costs. Our property-level costs were relatively unchanged, consistent with the relatively fixed nature of these costs at the reduced levels of occupancy we have experienced. The decline in occupancy-related costs was almost entirely offset by increases in wages, insurance and marketing costs. We expect that costs such as wages, benefits and insurance will continue to increase at a rate greater than inflation.

Management Fees. Management fees are computed based on revenues for base management fees and system fees and on operating profit for incentive management fees. Therefore, the $2.6 million, or 10.6%, decline in management fees reflects the decline in operations.

Operating Profit. Operating profit decreased $9.4 million, or 22%. Operating profit as a percentage of total revenues decreased from 16.6% in 2002 to 13.7% in 2003, reflecting the relatively fixed cost nature of our business.

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2002 Compared to 2001

Total Revenues. Revenues decreased as a result of the continued weakness in demand at our hotels which was exacerbated in some markets by increased competition. This decrease was partially offset by revenues including 53 weeks of operations in 2002 versus 52 weeks in 2001. The 9.8% decline in RevPAR for our portfolio reflected a 2.7 percentage point decrease in average occupancy to 68.8% and a 6.4% decrease in the average room rate to $88.78. RevPAR declined in every region, with the Mid-Atlantic region performing the best at (5.6)% and the South Central region performing the worst at (13.7)%.

Property-level Costs. Our property-level expenses declined due to both the decline in occupancy at the hotels and the broad-based cost-cutting efforts undertaken at our hotels that began in 2001.

Management Fees. Management fees are computed based on revenues for base management fees and system fees and on operating profit for incentive management fees. Therefore, the $3.6 million, or 12.7%, decline in management fees reflects the decline in operations.

Operating Profit. Operating profit decreased $12.8 million, or 23%. Operating profit as a percentage of total revenues decreased from 19.8% in 2001 to 16.6% in 2002, reflecting the significant drop in total revenues of approximately $24.1 million, which was only partially offset by a reduction in expenses of $11.4 million.

Liquidity and Capital Resources

As of December 31, 2003, we have approximately $7.1 million of unrestricted cash, which is lower than our historical balances. Based on our current forecast, we believe that our sources of cash are sufficient to meet our near-term liquidity needs; however, our ability to meet our long-term liquidity needs will depend on our future results of operations. In the event our sources of cash are insufficient to meet debt service or fund the property improvement fund, our partners are not obligated to provide additional sources of capital to the partnership.

Our principal source of cash is cash from operations including cash available to us through the subordination and deferral features affecting certain of our ground leases and our management agreements. Our principal uses of cash are to make debt service payments, fund our required reserves, repay certain deferred expenses and fund capital expenditures for property improvements. Our annual debt service includes interest payments on our senior notes of approximately $14 million and principal and interest payments on our multi-class commercial mortgage pass-through certificates (CMBS debt) of approximately $44 million.

Capital Expenditures. Our capital expenditures have been focused on property maintenance and improvements designed to maintain appropriate levels of quality. We delayed our repositioning plans for 2003, as discussed earlier, in order to reduce the per room cost of these renovations, so that the planned improvements could be made at a greater number of properties in our portfolio. We contributed $18 million to the property improvement fund in 2001. However, due to declining hotel revenues since 2001, we only contributed approximately $16.5 million and $15.6 million to the property improvement fund during 2002 and 2003, respectively. Subsequent to December 31, 2003, we have begun work on ten properties and have plans to complete an additional 14 properties in 2004 for total expenditures of approximately $42 million. Additionally, renovation and maintenance capital expenditures beyond 2004 will depend on our results of operations, as completing the renovation of the 24 properties will substantially decrease our property improvement fund.

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Debt. The decline in lodging demand has reduced the cash flow levels at our properties significantly from prior-year levels. As a result, beginning in the fourth quarter of 2002, we have made use of certain reserves and deferred a portion of our ground rent and management fees to make our required debt service payments. Under the terms of the management agreements and the ground leases with Marriott International and its affiliates, a portion of the base management fees and all of the ground rent and incentive management fees due Marriott International and its affiliates are subordinate to debt service payments on our CMBS debt and senior notes debt. These terms include the ability to defer the payment of certain amounts due under our ground leases and management agreements, as well as the ability to require the refund of payments of ground rent and certain management fees made in prior periods to the extent that cash from operations, as defined in the respective agreements, is not sufficient to pay debt service. The following events have occurred since the fourth quarter of 2002:

Prior to having the ability to make distributions to our partners, as of February 15, 2004, we must achieve certain levels of excess cash flow and replenish or repay $17.1 million as follows:

We also expect to defer an additional $0.7 million of ground rent payments and management fees in 2004, and we expect to use the remaining $1.7 million currently available in our debt service reserve. As a result, we expect that by December 31, 2004 this deficit will increase to approximately $19.5 million. We did not make any distributions to our partners in 2003. Based on our outlook, we do not expect to satisfy these conditions or make any distributions to our partners in 2004.

Further, to the extent the debt service reserve is fully funded, we are required to fund a separate supplemental debt service reserve account in an amount equal to Consolidated Excess Cash Flow for each quarter until excess cash flow meets specific levels. Through December 31, 2003, we have reserved $1.4 million of Consolidated Excess Cash Flow, all of which was funded during 2002. To the extent the supplemental debt service reserve exceeds two semi-annual interest payments (approximately $13.7 million), we are required to offer to purchase the senior notes at par in an amount equal to the greater of (i) the amount by which the supplemental debt service reserve exceeds two semi-annual interest payments, and (ii) $5 million. We do not expect to reach these cash thresholds in the supplemental debt service reserves until 2005, at the earliest.

Sources and Uses of Cash

Cash provided by operations. The decreases in cash provided by operations during 2003 and 2002 are primarily due to the decrease in operations from the prior year, partially offset by the deferral of certain ground lease and management fee amounts due to the manager and Marriott International and its affiliates.

Cash used in investing activities. Investing activities consist primarily of contributions to and distributions from the property improvement fund and capital expenditures for improvements to the hotels. Contributions to the property improvement fund are 6.5% of total hotel revenues. Distributions from the property improvement fund reflect capital expenditures for the replacement of furniture, fixtures and equipment offset by interest income earned by the fund. The increase in capital expenditures in 2003 was due primarily to renovations at certain of our properties.

Cash used in financing activities. Financing activities primarily include the repayment of principal on our commercial mortgage-backed securities and senior notes and distributions to general and limited partners. Cash used in financing in 2003 and 2002 includes the funding and utilization of the debt service reserves required under our debt agreements. Distributions for 2001 include $0.5 million that was owed to the former partners who held partnership units prior to the acquisition of the partnership by Courtyard JV.

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Credit Ratings. We have $281.0 million of CMBS debt secured by our properties as of December 31, 2003, and we have $127.4 million of senior notes secured by equity interests in the partnership that owns the hotels. The remaining balance of the CMBS debt, which matures in January 2008, bears interest at a weighted average interest rate of 7.9%. Our senior notes and our CMBS debt are rated by certain credit rating agencies. As a result of the significantly reduced operating levels, the credit rating assigned our senior notes was downgraded from B1 to B2 by Moody’s and from B- to CCC+ by Standard & Poor’s in March 2003. If our operations or our credit ratios do not otherwise improve, the ratings on our senior notes could be reduced further. If we were unable to subsequently improve our credit ratings, our cost to refinance this debt as it comes due would likely increase. The senior notes, which mature in February 2008, are interest only and bear interest at a rate of 10.75% annually.

Contractual Obligations

The table below summarizes our obligations for principal payments on our debt and future minimum lease payments on our operating and capital leases and capital expenditures (in millions):

Lodging Statistics

The following table sets forth performance information for all our properties by geographic region as of December 31, 2003 and 2002:

Inflation

Our properties have been affected by inflation through increasing costs such as wages, benefits and insurance. Over the past three years, inflation has grown an average of 2.0% based on Consumer Price Index statistics provided by the U. S.

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Department of Labor. Unlike other real estate, hotels have the ability to change room rates on a daily basis, so the effect of higher inflation can often be passed on to customers. However, the generally weak demand conditions over the past several years have restricted our manager’s ability to raise room rates to offset rising costs.

Critical Accounting Policies

Our consolidated financial statements include accounts of the partnership and all consolidated subsidiaries. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. We evaluate our estimates and judgments, including those related to the impairment of long-lived assets, on an ongoing basis. We base our estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances. All of our significant accounting policies are disclosed in the notes to our consolidated financial statements. The following represent certain critical accounting policies that require us to exercise our business judgment or make significant estimates:

Changes in these estimates, assumptions, future changes in economic conditions or property-level results could require us to record additional impairment charges, which would be reflected in operations in the future.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not have a significant market risk with respect to interest rates, foreign currency exchanges or other market rate or price risks, and we do not hold any financial instruments for trading purposes. As of December 31, 2003, all of our debt had a fixed interest rate. The table below provides information about our debt obligations.

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FORWARD LOOKING STATEMENTS

In this report on Form 10-K and the information incorporated by reference herein we make some “forward-looking” statements. These statements are included throughout this report on Form 10-K and the information incorporated by reference herein, including in the section entitled “Risk Factors” and relate to, among other things, analyses and other information based on forecasts of future results and estimates of amounts not yet determinable. These forward-looking statements are identified by their use of terms and phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “continue,” and other similar terms and phrases, including references to assumptions.

These forward-looking statements are subject to numerous assumptions, risks and uncertainties. Factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by us in those statements include, among others, the following:

Although we believe the expectations reflected in our 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 obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this annual report on Form 10-K and the information incorporated by reference herein 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.

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RISK FACTORS

Financial Risks

Our cash flows are seasonal and as such we may face short-term funding shortfalls from time to time. Because the months of November, December and January represent the lowest monthly levels of cash from operations, we utilized a portion of a debt service reserve and certain subordination provisions available to us under our management agreements and ground leases with Marriott International and their affiliates with regard to the payment of our debt service due on February 1, 2003 and 2004 on our mortgage debt and our senior notes to fund the shortfall that primarily resulted from the seasonality and reduced levels of our operations. As a result, the balance in the senior notes debt service reserve was approximately $1.7 million following the February 2004 senior notes interest payment. Deferred amounts generally must be repaid from excess cash flow, but in priority to distributions to equity. Based on forecasted operating results for 2004, we expect to be able to meet our remaining debt service obligations for 2004 from operating cash flow and our various liquidity-enhancing provisions. However, there can be no assurance that our forecasted operating results will be attained, nor can there be any assurance that to the extent operating cash flow is insufficient to cover our debt service obligations, we will be able to fully fund the shortfall by virtue of these liquidity-enhancing provisions. In addition, we expect that at the end of 2004, we will have fully drawn all funds contained in our debt service reserve to meet shortfalls and, accordingly, will not have the benefit of this reserve to meet shortfalls until we are able to replenish it from future excess cash flows.

We must use excess cash flow from operations to fund debt service reserves and pay deferred subordinated ground rent and management fees. In light of our use of a portion of the funds in our senior notes debt service reserve for both the February 2003 and 2004 debt payments and the decline in our debt service coverage ratio, our senior notes indenture requires us to use specified excess cash flow from operations to replenish our senior notes debt service reserve and to fund a supplemental senior notes debt service reserve. In addition, our management agreements require us to repay deferred amounts of subordinated ground rent and certain of our subordinated management fees out of our excess cash flow from operations. As of February 15, 2004, the aggregate of these deferred amounts and the amounts required to replenish the senior notes debt service reserve was $17.1 million. As a result of these obligations, we do not expect to be able to add to our unrestricted cash for 2004, and will thus be limited in our ability to fund both the costs of additional capital expenditures at our hotels (beyond funds required by our management agreements to be deposited into our furniture, fixture and equipment reserve) and the replenishment of our historical levels of working capital.

We do not have adequate cash reserves to renovate our hotels on the desired schedule. We and our manager have determined that most of our properties need renovations to enable them to compete more effectively in their respective markets. To complete all of the required renovations would require more funds than are currently available in our existing furniture, fixtures and equipment reserves as well as the amounts expected to be deposited in the near term, which are funded from annual contributions from operating cash flow. We currently do not have excess cash flow after debt service to supplementarily fund these renovations in the near term and our equity owner does not have additional funds to invest. Our partners have no obligation to invest additional funds for such purposes. As such, there can be no assurance that we will be able to complete these renovations in a desired time frame.

The level and terms of our indebtedness reduce our financial and business flexibility. The level and terms of our indebtedness could have important consequences. We are required to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, which reduces the availability of our cash flow to fund working capital, capital expenditures and other general business purposes. Additionally, the level and terms of our indebtedness put limitations on the following activities:

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If our cash flow and working capital, together with our debt service reserves and deferral of ground rent and certain management fees, were not sufficient to fund our expenditures or service our indebtedness, we would have to attempt to raise additional funds through:

We cannot assure you that any of these sources of funds would be available to us or, if available, would be on terms that we would find acceptable or in amounts sufficient for us to meet our obligations or fulfill our business plan.

Rating Agency downgrades may increase our cost of capital. Our mortgage debt and our senior notes are rated by independent rating agencies such as Moody’s and Standard & Poor’s. As a result of the reduced operating levels at our hotels, the credit rating assigned to our senior notes was downgraded by Moody’s and Standard & Poor’s in March 2003. To the extent operating conditions do not improve, there is risk that the rating agencies will take further ratings actions, and as a result, to the extent we seek to refinance our mortgage debt or our senior notes, our cost of capital may be adversely affected.

Holding Company Structure. Our only assets are our 100% ownership interest in the entities that own our hotels, Courtyard II Associates, L.P. (“Associates”) and Courtyard II Associates LLC. We conduct no business and are dependent on distributions from our subsidiaries to service our obligations under the senior notes.

Our hotels collateralized $281.0 million of mortgage debt as of December 31, 2003. The terms of the mortgage debt require that available cash flow from our hotels be applied first to service the mortgage debt. In addition, the mortgage debt imposes restrictions on the ability of Associates to loan, advance or distribute money to us, and upon an event of default under the mortgage debt, distributions from Associates may be prohibited. Our rights and the rights of our creditors to participate in the assets of Associates upon any liquidation or recapitalization of Associates will be subject to the prior claims of Associates’ creditors, including the holders of the mortgage debt. Further, if the mortgages on our hotels that secure the mortgage debt are foreclosed, there can be no assurance that there will be sufficient net proceeds following repayment of the mortgage debt to fund our obligations, including our obligations under the senior notes.

High Leverage of Courtyard JV. The investment of the equity owners of Courtyard JV is highly leveraged, which affects the amount of unrestricted cash that Courtyard JV is able to permit us to retain and the willingness of its equity owners to invest additional capital to fund renovations of our hotels or provide additional working capital. In addition to being subordinate to our indebtedness, the equity owners of Courtyard JV are subordinate to Courtyard JV’s outstanding indebtedness, which had a balance, including principal and accrued interest, of approximately $227 million at December 31, 2003. This indebtedness is secured by pledges of equity interests in the parent entities of our partners as well as the partners in another portfolio of Courtyard by Marriott hotels, owned by Courtyard JV. In addition, certain of our deferred management fees and ground rent, which totaled approximately $12 million at February 15, 2004, generally must be repaid, and our Senior Notes debt-service reserve must be replenished, before we are permitted to make cash distributions to Courtyard JV. As a result of the high leverage at Courtyard JV, we may not be able to retain excess cash flow we may generate in the future (after repayment of deferred amounts and replenishment of the Senior Notes debt-service reserve) for working capital or renovations for a considerable period of time. In addition, the high level of debt and deferred management fees and ground rent, as well as the obligation to replenish the Senior Notes debt-service reserve, may make the equity owners of Courtyard JV unwilling to invest additional funds in Courtyard JV, which in turn might be contributed to us to provide additional working capital or funds for renovations.

Distributions of Available Cash to Courtyard JV. Under the terms of our partnership agreement, we are required to distribute to Courtyard JV, each month, all of our available cash after debt service payments, payment of other contractual obligations, capital expenditures, and establishment of reserves, subject to compliance with restrictions in our debt instruments. Accordingly, we do not expect to accumulate significant amounts of cash, except for funding of reserves required under the terms of our senior notes indenture. The amount of such distributions could significantly

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reduce the cash available to us in subsequent periods to service our debt. Currently, the terms of our senior notes indenture do not permit us to make any distributions to Courtyard JV until we replenish our debt service reserve and satisfy certain debt service coverage requirements.

Management of the Company. We have no directors or employees; however, Host LP through our general partner, provides the services of certain of its employees to us. Our business and policy making functions are carried out through the officers and directors of our general partner. We anticipate that each of such officers will devote a sufficient portion of his or her time to our business. However, there can be no assurance that conflicts of interest with Host LP will not arise in connection with the performance by such officers of their duties for us.

Risks of Operation

Our revenues and the value of our properties are subject to conditions affecting the lodging industry. The lodging industry has experienced a difficult period and operations generally have been declining for the past several years, which has caused declines in our RevPAR and profit margins. The decline in the lodging industry has been attributed to a number of factors including a weak economy, the effect of terror alerts and potential terrorist activity in the United States and the war in Iraq, all of which have changed the travel patterns of both business and leisure travelers. It is not clear whether these changes are permanent or whether they will continue to evolve creating new opportunities or difficulties for the industry. Any forecast we make regarding our results of operations may be affected and can change based on the following risks:

There can be no assurance that the current weak economic conditions will not continue for an extended period of time, or that if such conditions do continue they will not further affect our operations. To the extent such conditions were to persist, our assets may not generate income sufficient to pay our expenses, and we may be unable to service our debt and maintain our properties.

Our expenses may not decrease if our revenue drops. Many of the expenses associated with owning and operating hotels, such as debt payments, property taxes, insurance, utilities, and employee wages and benefits, are relatively inflexible and do not necessarily decrease in tandem with a reduction in revenue at the property. Because of weak economic conditions over the last several years, particularly in the lodging industry, we have been working with our manager to reduce the operating costs of our hotels. While we have achieved reductions in operating costs as a result of these efforts, further cost reductions could be difficult to achieve if operating levels continue to decline. Some of the cost reduction efforts undertaken may eventually need to be reversed even if operations remain at reduced levels. Regardless of these efforts to reduce costs, our expenses will be affected by inflationary increases, and in the case of certain costs, such as wages, benefits and insurance, may exceed the rate of inflation in any given period. Our manager may be unable to offset any such increased expenses with higher room rates. Any of our efforts to reduce operating costs or failure to make scheduled capital expenditures could adversely affect the growth of our business and the value of our hotel properties.

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Our revenues may be affected by increased use of reservation systems based on the Internet. Although the majority of our rooms sold on the Internet are sold through a website maintained by our manager or its affiliates, a growing number of rooms are sold through independent Internet sites. Typically, participating properties provide these independent Internet sites with access to inventory for sale on the properties’ behalf, with compensation to the site being made via the difference between negotiated discounted rates and the final price to the guest. This results in lower net average room revenues with respect to sales through such sites. Our manager’s single image inventory principle of offering the same rates across reservations channels, reinforced by its recently implemented best rate guarantee program, is intended to ensure that our rooms will be offered through all channels at the same rates. However, because, as described above, we incur higher reservations costs for rooms sold on independent Internet sites, a significant increase in the percentage of our rooms that are sold on those sites could reduce our results of operations.

Our ground lease payments may increase faster than the revenues we receive on our leased hotels. As of March 1, 2004, 61 of our hotels are subject to ground leases with several ground lessors, including Marriott International and its affiliates. These ground leases generally require increases in ground rent payments approximately every three years.

We do not control our hotel operations and we are dependent on the manager of our hotels. We do not manage our hotels. Instead, the manager, a wholly owned subsidiary of Marriott International, manages our hotels pursuant to two separate management agreements. Our income from the hotels may be adversely affected if our manager fails to provide quality services and amenities or if it fails to maintain a quality brand name. We have limited specific recourse under our management agreements if we believe that the hotel manager is not performing adequately. In addition, from time to time, we have had, and continue to have, differences with our manager over interpretation of or its performance under our management agreements. Although we generally resolve issues with our manager through discussions and negotiations, we may not always be able to do so. Failure by our manager to fully perform the duties agreed to in our management agreements could adversely affect our results of operations.

Our manager collects our room revenues in its bank accounts. So long as the long-term unsecured debt of Marriott International is rated at least BBB+ by Standard & Poor’s Rating Services and our hotel manager remains a subsidiary of Marriott International, all revenues from the operation of our hotels will be deposited initially into bank accounts maintained by the manager or Marriott International. The manager makes disbursements on our behalf from the funds in such accounts to pay all operating expenses of our hotels and periodically is required to remit the net revenues to us or the servicer of our mortgage debt. In the event that Marriott International is rated less than BBB+, then we may be obligated to provide additional working capital to our manager for the operation of our hotels. In the event of a bankruptcy or other insolvency proceeding involving the manager or Marriott International, there is a risk that our ability to receive payment of revenues previously collected by the manager may be delayed or otherwise impaired.

Our relationship with Marriott International and Host LP may result in conflicts of interest. A wholly owned subsidiary of Marriott International manages our hotels. In addition, Marriott International manages, and in some cases may own or be invested in, hotels that compete with our hotels. As a result, Marriott International has in the past made, and may in the future make, decisions regarding the competing lodging facilities it manages that are or would not be in our best interests. Further, Host LP owns certain hotels, and may acquire others, that may compete with our hotels and accordingly has in the past and may in the future make decisions regarding such competing facilities that are or would not be in our best interests. In addition to our management agreements, Marriott International and its affiliates are parties to several agreements with us and our affiliates, including various ground leases and the subordinated debt of our equity owner, Courtyard JV. With respect to these various contractual arrangements, the potential exists for disagreement as to contract compliance and interpretation.

Our management agreements could impair the sale or financing of our hotels. Under the terms of the management agreements, we generally may not sell, lease or otherwise transfer the hotels unless the transferee is not a competitor of the manager and the transferee assumes the related management agreements and meets specified other conditions. Our ability to finance or sell any of the properties may, depending upon the structure of such transactions, require the manager’s consent. If the manager does not consent, we would be prohibited from taking actions in our best interest such as financing, refinancing or selling the property, without breaching the management agreements.

We may be unable to sell properties to the extent we desire to do so because real estate investments are illiquid. Real estate investments generally cannot be sold quickly. Even if we were able to obtain consents for sales of assets under our debt agreements, we may not be able to vary our portfolio promptly in response to economic or other conditions. The inability to respond promptly to changes in the performance of our investments could adversely affect our financial condition and ability to service debt.

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Environmental problems are possible and can be costly. We believe that our properties are in compliance in all material respects with applicable environmental laws. We have identified one property with environmental contamination; however, no determination has been made regarding the need for remediation or our potential responsibility as the contamination relates to a prior owner of the site. Additionally, unidentified environmental liabilities could arise and could have a material adverse effect on our financial condition and performance. Federal, state and local laws and regulations relating to the protection of the environment may require a current or previous owner or operator of real estate to investigate and clean up hazardous or toxic substances or petroleum product releases at the property. The owner or operator may have to pay a governmental entity or third parties for property damage and for investigation and clean-up costs incurred by the parties in connection with the contamination. These laws typically impose clean-up responsibility and liability without regard to whether the owner or operator knew of or caused the presence of the contaminants. Even if more than one person may have been responsible for the contamination, each person covered by the environmental laws may be held responsible for all of the clean-up costs incurred. In addition, third parties may sue the owner or operator of a site for damages and costs resulting from environmental contamination emanating from that site. Environmental laws also govern the presence, maintenance and removal of asbestos. These laws require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, that they notify and train those who may come into contact with asbestos and that they undertake special precautions, including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a building. These laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers.

Compliance with other government regulations can be costly. Our hotels are subject to various other forms of regulation, including Title III of the Americans with Disabilities Act, building codes and regulations pertaining to fire safety. Compliance with those laws and regulations could require substantial capital expenditures. These regulations may be changed from time to time, or new regulations adopted, resulting in additional or unexpected costs of compliance. Any increased costs could have a material adverse effect on our business, financial condition or results of operations.

Future terrorist attacks could adversely affect us. Previous terrorist attacks in the United States have adversely affected the travel and hospitality industries, including the upscale segment of the hotel industry. The impact which these terrorist attacks in the United States or elsewhere could have on our business in particular, and the United States economy, the global economy and global financial markets, in general, is indeterminable. It is possible that these factors could have a material adverse effect on our business, our ability to finance our business, our ability to insure our properties (see “Risk Factor—Some potential losses are not covered by insurance”) and on our financial condition and results of operations as a whole.

Some potential losses are not covered by insurance. We carry comprehensive insurance coverage for general liability, property, business interruption and other risks with respect to all of our hotels and other properties. These policies offer coverage features and insured limits that we believe are customary for similar type properties. Generally, our “all risk” policies provide that coverage is available on a per occurrence basis and that for each occurrence, there is an overall limit as well as various sub-limits on the amount of insurance proceeds we can receive. Sub-limits exist for certain types of claims such as service interruption, abatement, expediting costs or landscaping replacement, and the dollar amounts of these sub-limits are significantly lower than the dollar amounts of the overall coverage limit. Our policies also provide that all of the claims from each of our properties resulting from a particular insurable event, must be combined together for purposes of evaluating whether the aggregate limits and sub-limits contained in our policies have been exceeded and any such claims will also be combined with the claims of other owners of Marriott-managed hotels for the same purpose. That means that if an insurable event occurs that affects more than one of our hotels, or affects Marriott-managed hotels owned by others, the claims from each affected hotel will be added together to determine whether the aggregate limit or sub-limits, depending on the type of claim, have been reached and each affected hotel will only receive a proportional share of the amount of insurance proceeds provided for under the policy. We may incur losses in excess of insured limits and, as a result, we may be even less likely to receive sufficient coverage for risks that affect multiple properties such as earthquakes or certain types of terrorism.

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In addition, there are other risks such as war, certain forms of terrorism such as nuclear, biological or chemical terrorism and some environmental hazards that may be deemed to fall completely outside the general coverage limits of our policies, may be uninsurable or may be too expensive to justify insuring against. If any such risk were to materialize and materially adversely affect one or more of our properties, we would not be able to recover our losses.

We may also encounter challenges with an insurance provider regarding whether it will pay a particular claim that we believe to be covered under our policy. Should a loss in excess of insured limits or an uninsured loss occur or should we be unsuccessful in obtaining coverage from an insurance carrier, we could lose all, or a portion of, the capital we have invested in a property, as well as the anticipated future revenue from the hotel. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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INDEPENDENT AUDITORS’ REPORT

TO THE PARTNERS OF COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP:

We have audited the accompanying consolidated balance sheets of Courtyard by Marriott II Limited Partnership (a Delaware limited partnership) and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, changes in partners’ capital (deficit) and cash flows for the years then ended. In connection with our audits of the consolidated financial statements, we have also audited the related financial statement Schedules I and III as listed in the index as Item 15(a)(2). These consolidated financial statements and financial statement schedules are the responsibility of the general partner’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. The 2001 consolidated financial statements of the partnership and financial statement schedules were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements and financial statement schedules in their report dated March 18, 2002.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Courtyard by Marriott II Limited Partnership and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

KPMG LLP

McLean, Virginia

March 1, 2004

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LEGEND

For the year ended December 31, 2001, Arthur Andersen LLP was our auditor. The auditor report shown below is a copy of the previously issued report from Arthur Andersen LLP. Arthur Andersen has not reissued the report.

Report of Independent Public Accountants

TO THE PARTNERS OF COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP:

We have audited the accompanying consolidated balance sheets of Courtyard by Marriott II Limited Partnership (a Delaware limited partnership) and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in partners’ capital (deficit) and cash flows for the three years ended December 31, 2001. These financial statements and the schedules referred to below are the responsibility of the general partner’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Courtyard by Marriott II Limited Partnership and Subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the three years ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index at Item 14(a)(2) are presented for purposes of complying with the Securities and Exchange Commission’s rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Vienna, Virginia

March 18, 2002

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Courtyard by Marriott II Limited Partnership and Subsidiaries

Consolidated Balance Sheets

December 31, 2003 and 2002

(in thousands)

See Notes to Consolidated Financial Statements.

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Courtyard by Marriott II Limited Partnership and Subsidiaries

Consolidated Statements of Operations

For the Years Ended December 31, 2003, 2002 and 2001

(in thousands, except per unit amounts)

See Notes to Consolidated Financial Statements.

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Courtyard by Marriott II Limited Partnership and Subsidiaries

Consolidated Statements of Changes in Partners’ Capital (Deficit)

For the Years Ended December 31, 2003, 2002 and 2001

(in thousands)

See Notes to Consolidated Financial Statements.

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Courtyard by Marriott II Limited Partnership and Subsidiaries

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2003, 2002 and 2001

(in thousands)