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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




---

FORM 10-K

(Mark One)


|  |                                                                                         
|- | ----------------------------------------------------------------------------------------
|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31,
2003

or



|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period
from                          to

Commission File No. 1-6869



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PRIME HOSPITALITY CORP.

(Exact name of Registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 22-2640625                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

700 Route 46 East,

Fairfield, New Jersey 07004


(Address of principal executive
offices)


Registrants telephone number, including
area code: (973) 882-1010

Securities Registered Pursuant to
Section 12(b) of the Act:

|                                           |  |                        
|------------------------------------------ |  | -----------------------
|                                           |  | Name of each exchange  
|Title of each class                        |  | on which registered    
|                                           |  |                        
|Par Value $.01 Per Share, Common
    Stock |  | New York Stock Exchange

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 (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.  Yes x  No o

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

Indicate by check mark whether the Registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Securities Exchange Act of
1934).  Yes x  No o

The aggregate market value of the
registrants stock held by non-affiliates (computed by
reference to the price at which the common stock was last sold)
as of June 30, 2003, the last business day of the
Registrants most recently completed second fiscal quarter,
was $298,951,905.

The Registrant had 44,845,498 shares of Common
Stock outstanding as of March 1, 2004.

Documents Incorporated by Reference

Portions of the Proxy Statement prepared for the
2004 annual meeting of shareholders are incorporated by
reference into Part III of this report.



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TABLE OF CONTENTS



|                                       |                                                                                               |  |  |  |  |  |  | 
|-------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                                       | PART I                                                                                       
|                                       | Items 1 and 2. Business and Properties                                                       
|                                       | Item 3. Legal Proceedings                                                                    
|                                       | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                               
|                                       | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                                       | Item 6. Selected Financial Data                                                              
|                                       | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                       | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                                       | Item 8. Financial Statements and Supplementary Data                                          
|                                       | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures
|                                       | Item 9A. Controls and Procedures                                                             
|PART III                              
|                                       | Item 10. Directors and Executive Officers of the Company                                     
|                                       | Item 11. Executive Compensation                                                              
|                                       | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                       | Item 13. Certain Relationships and Related Transactions                                      
|                                       | Item 14. Principal Accountant Fees and Services                                              
|PART IV                               
|                                       | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|                                       | (Item 15(a))                                                                                 
|SIGNATURES                            
|EX-2.U: MANAGEMENT AGREEMENT          
|EX-23: CONSENT OF INDEPENDENT AUDITORS
|EX-31.1: CEO CERTIFICATION            
|EX-31.2: CFO CERTIFICATION            
|EX-32.1: 906 CERTIFICATION            
|EX-32.2: 906 CERTIFICATION            



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References in this report to we,
our, us, the Company or
Prime are to Prime Hospitality Corp. and its
subsidiaries. EBITDA represents earnings before extraordinary
items, interest expense, provision for income taxes and
depreciation and amortization and excludes interest income on
cash investments, other income and income from equity in
unconsolidated subsidiaries. EBITDA is used by the Company for
the purpose of analyzing its operating performance, leverage and
liquidity. Hotel EBITDA represents EBITDA generated from the
operations of owned hotels. Hotel EBITDA excludes management fee
income, interest income from mortgages and notes receivable,
general and administrative expenses and other revenues and
expenses which do not directly relate to operations of owned
hotels. EBITDA and Hotel EBITDA are not measures of financial
performance under accounting principles generally accepted in
the United States and should not be considered as alternatives
to net income as an indicator of the Companys operating
performance or as alternatives to cash flows as a measure of
liquidity. Unless otherwise indicated, industry data is based on
reports of Smith Travel Research.




PART I






Items 1 and
2.     Business and
Properties


The Company

We are an owner, manager and franchisor of
limited-service and full-service hotels. We have 260 hotels in
operation containing 34,324 rooms located in 36 states
and Canada (the Portfolio) as of March 1, 2004.
We control three hotel brands  AmeriSuites®,
Wellesley Inns & Suites® and Prime Hotels and
Resorts®  and operate a portfolio of
full-service hotels under franchise agreements with national
hotel chains. We operate and have ownership or leasehold
interests in 126 hotels (the Owned Hotels),
operate 54 hotels for real estate investment trusts which
have cash flow guarantees and participations (the Cash
Flow Hotels), manage 24 hotels for third parties (the
Managed Hotels), and franchise 56 hotels which
we do not operate (the Franchised Hotels). The
Portfolio is comprised of 148 AmeriSuites hotels,
82 Wellesley Inns & Suites hotels, three Prime Hotels
and Resorts hotels and 27 non-proprietary brand hotels. As of
March 1, 2004, 12 non-proprietary brand hotels were in
the process of being converted to the Prime Hotels & Resorts
brand. Prime was incorporated under the laws of Delaware in 1985.

Our current strategy is focused on growing our
proprietary brands. We intend to continue the transition of our
company which we began in 1998 primarily from an owner/operator
into a more diversified company with ownership, franchise and
management interests. Our prior emphasis focused on franchising,
through which we have been able to grow our brands and generate
additional revenues with minimal capital investments. As a
result of the reduced demand for hotel rooms and limited
financing available, our franchising program has slowed in the
past two years. We, therefore, may look to selectively acquire
hotels or hotel chains which may be converted into our brands
and we will consider limited new development of AmeriSuites in
strategic markets. Our acquisitions and development may be in
the form of acquiring a 100% interest or through potential joint
venture interests. The extent to which we are successful in
adding new units through either franchising or acquisitions will
depend on a variety of factors including the availability of
hotels and hotel sites, industry and economic conditions,
financing constraints, our financial performance and the
competitive environment for product.

We have also focused our efforts on growing our
brand infrastructure. In recent years, we have developed and are
now operating a new central reservation center, implemented a
new, upgraded frequent guest program and increased our marketing
spending. The upgraded infrastructure is intended to improve the
performance of our brands and attract franchisees to our brands.

In addition to new unit growth, we are focused on
improving the year over year profitability of our existing
hotels. We now have 204 hotels under management and we intend to
capitalize on operating efficiencies in hotel operations,
purchasing, sales and marketing, finance, administration and
technology.

Primes hotels can be categorized into three
types: AmeriSuites, Wellesley Inns & Suites and full-service.

1



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AmeriSuites:As of
March 1, 2004, there were 148 AmeriSuites in operation. We
own and operate 62 of these hotels, operate 42 hotels with cash
flow guarantees and participations and franchise the operation
of the remaining 44 hotels, eight of which are operated by
Prime. As of March 1, 2004, there were also three
AmeriSuites under construction, with an additional 20 signed
franchise agreements for new AmeriSuites to be built.
AmeriSuites are upscale, all-suite hotels containing
approximately 128 suites and are located in 32 states. The
hotels are situated primarily near suburban commercial centers,
corporate office parks and other travel destinations, within
close proximity to dining, shopping and entertainment amenities.
In 2003, AmeriSuites contributed approximately 50% of the
Companys Hotel EBITDA.

Wellesley Inns & Suites:As of March 1, 2004, there were
82 Wellesley Inns & Suites in operation. We own and operate
56 of these hotels and franchise 26 hotels, six of which are
managed by us. There is also one Wellesley Inns & Suites
under conversion. Wellesley Inns & Suites are mid-price
limited service hotels containing between 100-130 rooms and are
located in 23 states primarily in the Southeast, Northeast and
Southwest. In 2003, Wellesley Inns & Suites contributed
approximately 25% of the Companys Hotel EBITDA.

Full-Service Hotels:As of March 1, 2004, we operated
30 full-service hotels, three under the Prime Hotels and Resorts
flag and 27 under national franchises. We are in the process of
converting 12 of the non-proprietary brand full-service hotels
to the Prime Hotels & Resorts brand which we anticipate to
be completed by June 2004. We have ownership or leasehold
interests in eight of these hotels, manage 12 hotels for third
parties with cash flow guarantees and participations, and manage
another 10 hotels for third parties. The full-service hotels
operate primarily in the upscale segment under national
franchises such as Prime Hotels & Resorts, Hilton, Sheraton,
Holiday Inn and Ramada and generally provide food and beverage
service and banquet facilities. The hotels are primarily located
in the Northeast. In 2003, the full-service hotels contributed
approximately 25% of the Companys Hotel EBITDA.

Industry Overview

In 2003, the U.S. lodging industry began a slow
recovery in the second half of the year. The first half was
affected by a soft economy and travel disruptions associated
with the war in Iraq. Beginning in July, as the economy began to
show signs of improvement, the industry generated positive year
over year revenue per available room (REVPAR)
changes. For 2003, demand for hotel rooms increased by 1.6% and
supply growth was 1.3%. This balance between supply and demand
resulted in relatively flat REVPAR, occupancy and average daily
rate (ADR) statistics in 2003 compared to 2002. In
2003, REVPAR increased by 0.2% to $49.24 as occupancy increased
by 0.2% to 59.2% and ADR decreased by 0.1% to $83.28.

2



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The following table was compiled from industry
operating data as reported by Smith Travel Research and
highlights industry data for the United States and the regions
in which most of the Companys hotels are located: the
Middle Atlantic region, which is comprised of New Jersey, New
York and Pennsylvania; the South Atlantic region, which is
comprised of Florida, Georgia, South Carolina, North Carolina,
Virginia, West Virginia, Maryland and Delaware; and the West
South Central Region which is composed of Texas, Oklahoma,
Arkansas and Louisiana. The table also includes operating data
concerning the two price levels (of the five price levels
classified by Smith Travel Research) in which the Company
competes: upscale and mid-price. REVPAR data was calculated by
the Company based on occupancy and ADR data supplied by Smith
Travel Research.

|                          |  |              |     |             |  |         |     |         |  |         |     |         |  |         |     |         |  |         |     |   |  |  |      |   |  |  |      |   |  |  |      |   |  |  |       |  
|------------------------- |  | ------------ | --- | ----------- |  | ------- | --- | ------- |  | ------- | --- | ------- |  | ------- | --- | ------- |  | ------- | --- | - |  |  | ---- | - |  |  | ---- | - |  |  | ---- | - |  |  | ----- | -
|                          |  |             
|                          |  | % Change in:
|                          |  |             
|                          |  |              |     |             |  |        
|                          |  | Room Supply  |     | Room Demand |  | REVPAR 
|                          |  |              |     |             |  |        
|                          |  | 2003 v.      |     | 2002 v.     |  | 2001 v. |     | 2003 v. |  | 2002 v. |     | 2001 v. |  | 2003 v. |     | 2002 v. |  | 2001 v.
|                          |  | 2002         |     | 2001        |  | 2000    |     | 2002    |  | 2001    |     | 2000    |  | 2002    |     | 2001    |  | 2000   
|                          |  |              |     |             |  |         |     |         |  |         |     |         |  |         |     |         |  |        
|United States             |  |              | 1.3 | %           |  |         | 1.8 | %       |  |         | 2.4 | %       |  |         | 1.6 | %       |  |         | 0.8 | % |  |  | -3.4 | % |  |  | 0.2  | % |  |  | -2.5 | % |  |  | -6.9  | %
|                         
|BY REGION:                |  |              |     |             |  |         |     |         |  |         |     |         |  |         |     |         |  |         |     |   |  |  |      |   |  |  |      |   |  |  |      |   |  |  |       |  
|Middle Atlantic           |  |              | 1.9 |             |  |         | 1.9 |         |  |         | 2.3 |         |  |         | 1.1 |         |  |         | 1.5 |   |  |  | -3.7 |   |  |  | -1.8 |   |  |  | -2.4 |   |  |  | -10.8 |  
|South Atlantic            |  |              | 0.8 |             |  |         | 1.8 |         |  |         | 2.6 |         |  |         | 2.3 |         |  |         | 1.2 |   |  |  | -3.3 |   |  |  | 1.8  |   |  |  | -1.2 |   |  |  | -5.5  |  
|West South Central        |  |              | 1.4 |             |  |         | 2.4 |         |  |         | 3.5 |         |  |         | 0.1 |         |  |         | 0.0 |   |  |  | 0.0  |   |  |  | -1.1 |   |  |  | -2.3 |   |  |  | -3.5  |  
|                         
|BY SERVICE (PRICE LEVEL): |  |              |     |             |  |         |     |         |  |         |     |         |  |         |     |         |  |         |     |   |  |  |      |   |  |  |      |   |  |  |      |   |  |  |       |  
|Upscale                   |  |              | 2.2 |             |  |         | 2.6 |         |  |         | 3.7 |         |  |         | 1.9 |         |  |         | 2.6 |   |  |  | -1.7 |   |  |  | -0.9 |   |  |  | -2.3 |   |  |  | -6.4  |  
|Mid-Price                 |  |              | 1.2 |             |  |         | 2.4 |         |  |         | 3.1 |         |  |         | 1.8 |         |  |         | 0.8 |   |  |  | -2.5 |   |  |  | 0.1  |   |  |  | -3.2 |   |  |  | -4.9  |  

3



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Primes Lodging Operations

The following table sets forth information with
respect to the Portfolio as of March 1, 2004. The data
reflects hotels open and includes, as Prime Hotels, the twelve
hotels currently under conversion from the non-proprietary brand
category:

|                        |                   |              |  |       |     |  |  |        |        | 
|----------------------- | ----------------- | ------------ |  | ----- | --- |  |  | ------ | ------ | 
|                        |                   |             
|                        |                   | December 31,
|                        |                   | 2003        
|                        |                   |             
|                        |                   |             
|                        |                   | Number of   
|                        |                   |             
|                        |                   | Hotels       |  | Rooms
|                        |                   |              |  |      
|AmeriSuites             |                   |              |  |       |     |  |  |       
|                        | Owned/ Leased     |              |  | 62    |     |  |  | 8,024  |       
|                        | Managed-Cash Flow |              |  | 42    |     |  |  | 5,214  |       
|                        | Managed           |              |  | 8     |     |  |  | 1,077  |       
|                        | Franchised        |              |  | 36    |     |  |  | 4,196  |       
|                        |                   |              |  |       |     |  |  |       
|                        |                   | Total        |  |       | 148 |  |  |        | 18,511 | 
|                        |                   |              |  |       |     |  |  |       
|Wellesley Inns & Suites |                   |              |  |       |     |  |  |       
|                        | Owned/ Leased     |              |  | 56    |     |  |  | 6,906  |       
|                        | Managed           |              |  | 6     |     |  |  | 668    |       
|                        | Franchised        |              |  | 20    |     |  |  | 2,059  |       
|                        |                   |              |  |       |     |  |  |       
|                        |                   | Total        |  |       | 82  |  |  |        | 9,633  | 
|                        |                   |              |  |       |     |  |  |       
|Prime Hotels & Resorts  |                   |              |  |       |     |  |  |       
|                        | Owned/ Leased     |              |  | 3     |     |  |  | 595    |       
|                        | Managed-Cash Flow |              |  | 12    |     |  |  | 2,321  |       
|                        |                   |              |  |       |     |  |  |       
|                        |                   | Total        |  |       | 15  |  |  |        | 2,916  | 
|                        |                   |              |  |       |     |  |  |       
|Non-Proprietary Brands  |                   |              |  |       |     |  |  |       
|                        | Owned/ Leased     |              |  | 3     |     |  |  | 665    |       
|                        | Managed           |              |  | 10    |     |  |  | 1,934  |       
|                        | Joint Venture     |              |  | 2     |     |  |  | 665    |       
|                        |                   |              |  |       |     |  |  |       
|                        |                   | Total        |  |       | 15  |  |  |        | 3,264  | 
|                        |                   |              |  |       |     |  |  |       
|Total Portfolio         |                   |              |  |       |     |  |  |       
|                        | Owned/ Leased     |              |  | 124   |     |  |  | 16,190 |       
|                        | Managed-Cash Flow |              |  | 54    |     |  |  | 7,535  |       
|                        | Managed           |              |  | 24    |     |  |  | 3,679  |       
|                        | Franchised        |              |  | 56    |     |  |  | 6,255  |       
|                        | Joint Venture     |              |  | 2     |     |  |  | 665    |       
|                        |                   |              |  |       |     |  |  |       
|                        |                   | Total        |  |       | 260 |  |  |        | 34,324 | 
|                        |                   |              |  |       |     |  |  |       






|    |                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Company owns the land and building on all but
    ten hotels which are operated under ground or building lease
    agreements. The ground and building leases provide for fixed
    base rents and, in most instances, additional percentage rents
    based on a percentage of room revenues.
|   
|(2) | These Managed-Cash Flow management agreements
    require Prime to maintain a minimum level of cash flow and
    provide Prime with a share in a percentage of cash flow above
    certain levels.                                                                                                
|   
|(3) | In addition to the above, there are also three
    franchised AmeriSuites and one franchised Wellesley
    Inns & Suites under construction or conversion.                                                                                                                                        

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The following table sets forth the location of
the Portfolio by ownership interest as of March 1, 2004:

|               |       |          |    |           |  |         |       |            |  |        |   |       |  |        |     |       |  |        |   |       |  |  |       |       |  |  |    |    |  |  |       |       |  |  |    |     |  |  |       |        | 
|-------------- | ----- | -------- | -- | --------- |  | ------- | ----- | ---------- |  | ------ | - | ----- |  | ------ | --- | ----- |  | ------ | - | ----- |  |  | ----- | ----- |  |  | -- | -- |  |  | ----- | ----- |  |  | -- | --- |  |  | ----- | ------ | 
|               |       |          |    |           |  |         |       |            |  |        |   |       |  |        |     |       |  |       
|               |       |          |    | Managed  |  |         |       |            |  |       
|               |       | Owned(a) |    | Cash Flow |  | Managed |       | Franchised |  | Total 
|               |       |          |    |           |  |         |       |            |  |       
|               |       | Hotels   |    | Rooms     |  | Hotels  |       | Rooms      |  | Hotels |   | Rooms |  | Hotels |     | Rooms |  | Hotels |   | Rooms
|               |       |          |    |           |  |         |       |            |  |        |   |       |  |        |     |       |  |        |   |      
|Alabama        |       |          | 1  |           |  |         | 128   |            |  |        | 1 |       |  |        | 128 |       |  |        |  |       |  |  |      |       |  |  | 1  |    |  |  | 65    |       |  |  | 3  |     |  |  | 321   |       
|Arizona        |       |          | 6  |           |  |         | 780   |            |  |        | 6 |       |  |        | 899 |       |  |        | 1 |       |  |  | 128   |       |  |  |   |    |  |  |      |       |  |  | 13 |     |  |  | 1,807 |       
|Arkansas       |       |          | 1  |           |  |         | 129   |            |  |        |  |       |  |        |    |       |  |        |  |       |  |  |      |       |  |  | 2  |    |  |  | 242   |       |  |  | 3  |     |  |  | 371   |       
|California     |       |          | 2  |           |  |         | 279   |            |  |        | 2 |       |  |        | 360 |       |  |        | 1 |       |  |  | 96    |       |  |  | 2  |    |  |  | 256   |       |  |  | 7  |     |  |  | 991   |       
|Colorado       |       |          | 5  |           |  |         | 662   |            |  |        | 1 |       |  |        | 126 |       |  |        |  |       |  |  |      |       |  |  |   |    |  |  |      |       |  |  | 6  |     |  |  | 788   |       
|Connecticut    |       |          | 2  |           |  |         | 261   |            |  |        |  |       |  |        |    |       |  |        |  |       |  |  |      |       |  |  | 2  |    |  |  | 231   |       |  |  | 4  |     |  |  | 492   |       
|Florida        |       |          | 16 |           |  |         | 1,967 |            |  |        | 5 |       |  |        | 509 |       |  |        | 3 |       |  |  | 407   |       |  |  | 13 |    |  |  | 1,544 |       |  |  | 37 |     |  |  | 4,427 |       
|Georgia        |       |          | 9  |           |  |         | 1,122 |            |  |        | 4 |       |  |        | 518 |       |  |        | 1 |       |  |  | 189   |       |  |  | 6  |    |  |  | 647   |       |  |  | 20 |     |  |  | 2,476 |       
|Idaho          |       |          | 1  |           |  |         | 128   |            |  |        |  |       |  |        |    |       |  |        |  |       |  |  |      |       |  |  |   |    |  |  |      |       |  |  | 1  |     |  |  | 128   |       
|Illinois       |       |          | 4  |           |  |         | 521   |            |  |        | 1 |       |  |        | 143 |       |  |        | 2 |       |  |  | 256   |       |  |  | 3  |    |  |  | 324   |       |  |  | 10 |     |  |  | 1,244 |       
|Indiana        |       |          | 2  |           |  |         | 259   |            |  |        | 3 |       |  |        | 383 |       |  |        |  |       |  |  |      |       |  |  |   |    |  |  |      |       |  |  | 5  |     |  |  | 642   |       
|Kansas         |       |          | 3  |           |  |         | 374   |            |  |        | 2 |       |  |        | 261 |       |  |        |  |       |  |  |      |       |  |  |   |    |  |  |      |       |  |  | 5  |     |  |  | 635   |       
|Kentucky       |       |          | 2  |           |  |         | 251   |            |  |        |  |       |  |        |    |       |  |        |  |       |  |  |      |       |  |  |   |    |  |  |      |       |  |  | 2  |     |  |  | 251   |       
|Louisiana      |       |          |   |           |  |         |      |            |  |        | 1 |       |  |        | 128 |       |  |        |  |       |  |  |      |       |  |  |   |    |  |  |      |       |  |  | 1  |     |  |  | 128   |       
|Maine          |       |          |   |           |  |         |      |            |  |        |  |       |  |        |    |       |  |        |  |       |  |  |      |       |  |  | 1  |    |  |  | 130   |       |  |  | 1  |     |  |  | 130   |       
|Maryland       |       |          | 2  |           |  |         | 261   |            |  |        | 1 |       |  |        | 128 |       |  |        |  |       |  |  |      |       |  |  |   |    |  |  |      |       |  |  | 3  |     |  |  | 389   |       
|Massachusetts  |       |          |   |           |  |         |      |            |  |        |  |       |  |        |    |       |  |        | 1 |       |  |  | 158   |       |  |  |   |    |  |  |      |       |  |  | 1  |     |  |  | 158   |       
|Michigan       |       |          | 3  |           |  |         | 394   |            |  |        | 1 |       |  |        | 124 |       |  |        |  |       |  |  |      |       |  |  | 1  |    |  |  | 121   |       |  |  | 5  |     |  |  | 639   |       
|Minnesota      |       |          | 1  |           |  |         | 128   |            |  |        | 2 |       |  |        | 337 |       |  |        |  |       |  |  |      |       |  |  |   |    |  |  |      |       |  |  | 3  |     |  |  | 465   |       
|Missouri       |       |          |   |           |  |         |      |            |  |        | 1 |       |  |        | 134 |       |  |        |  |       |  |  |      |       |  |  |   |    |  |  |      |       |  |  | 1  |     |  |  | 134   |       
|Nevada         |       |          | 1  |           |  |         | 125   |            |  |        | 1 |       |  |        | 202 |       |  |        |  |       |  |  |      |       |  |  |   |    |  |  |      |       |  |  | 2  |     |  |  | 327   |       
|New Jersey     |       |          | 14 |           |  |         | 2,669 |            |  |        | 1 |       |  |        | 125 |       |  |        | 8 |       |  |  | 1,355 |       |  |  |   |    |  |  |      |       |  |  | 23 |     |  |  | 4,149 |       
|New Mexico     |       |          | 2  |           |  |         | 237   |            |  |        | 1 |       |  |        | 128 |       |  |        |  |       |  |  |      |       |  |  | 1  |    |  |  | 125   |       |  |  | 4  |     |  |  | 490   |       
|New York       |       |          | 6  |           |  |         | 769   |            |  |        |  |       |  |        |    |       |  |        | 3 |       |  |  | 429   |       |  |  | 1  |    |  |  | 82    |       |  |  | 10 |     |  |  | 1,280 |       
|North Carolina |       |          | 5  |           |  |         | 648   |            |  |        | 2 |       |  |        | 235 |       |  |        |  |       |  |  |      |       |  |  | 1  |    |  |  | 94    |       |  |  | 8  |     |  |  | 977   |       
|Ohio           |       |          | 4  |           |  |         | 460   |            |  |        | 4 |       |  |        | 503 |       |  |        |  |       |  |  |      |       |  |  |   |    |  |  |      |       |  |  | 8  |     |  |  | 963   |       
|Oklahoma       |       |          | 1  |           |  |         | 128   |            |  |        |  |       |  |        |    |       |  |        | 1 |       |  |  | 128   |       |  |  | 2  |    |  |  | 208   |       |  |  | 4  |     |  |  | 464   |       
|Oregon         |       |          | 1  |           |  |         | 137   |            |  |        |  |       |  |        |    |       |  |        |  |       |  |  |      |       |  |  |   |    |  |  |      |       |  |  | 1  |     |  |  | 137   |       
|Pennsylvania   |       |          | 2  |           |  |         | 256   |            |  |        |  |       |  |        |    |       |  |        | 2 |       |  |  | 343   |       |  |  |   |    |  |  |      |       |  |  | 4  |     |  |  | 599   |       
|Quebec, Canada |       |          | 1  |           |  |         | 238   |            |  |        |  |       |  |        |    |       |  |        |  |       |  |  |      |       |  |  |   |    |  |  |      |       |  |  | 1  |     |  |  | 238   |       
|South Carolina |       |          | 4  |           |  |         | 455   |            |  |        |  |       |  |        |    |       |  |        |  |       |  |  |      |       |  |  |   |    |  |  |      |       |  |  | 4  |     |  |  | 455   |       
|Tennessee      |       |          | 4  |           |  |         | 503   |            |  |        | 4 |       |  |        | 536 |       |  |        |  |       |  |  |      |       |  |  | 2  |    |  |  | 131   |       |  |  | 10 |     |  |  | 1,170 |       
|Texas          |       |          | 19 |           |  |         | 2,330 |            |  |        | 4 |       |  |        | 492 |       |  |        |  |       |  |  |      |       |  |  | 12 |    |  |  | 1,471 |       |  |  | 35 |     |  |  | 4,293 |       
|Utah           |       |          |   |           |  |         |      |            |  |        | 1 |       |  |        | 381 |       |  |        |  |       |  |  |      |       |  |  |   |    |  |  |      |       |  |  | 1  |     |  |  | 381   |       
|Virginia       |       |          | 2  |           |  |         | 256   |            |  |        | 3 |       |  |        | 385 |       |  |        | 1 |       |  |  | 190   |       |  |  | 4  |    |  |  | 362   |       |  |  | 10 |     |  |  | 1,193 |       
|Washington     |       |          |   |           |  |         |      |            |  |        | 2 |       |  |        | 370 |       |  |        |  |       |  |  |      |       |  |  |   |    |  |  |      |       |  |  | 2  |     |  |  | 370   |       
|Wisconsin      |       |          |   |           |  |         |      |            |  |        |  |       |  |        |    |       |  |        |  |       |  |  |      |       |  |  | 2  |    |  |  | 222   |       |  |  | 2  |     |  |  | 222   |       
|               |       |          |    |           |  |         |       |            |  |        |   |       |  |        |     |       |  |        |   |       |  |  |       |       |  |  |    |    |  |  |       |       |  |  |    |     |  |  |       |       
|               | Total |          |    | 126       |  |         |       | 16,855     |  |        |   | 54    |  |        |     | 7,535 |  |        |   | 24    |  |  |       | 3,679 |  |  |    | 56 |  |  |       | 6,255 |  |  |    | 260 |  |  |       | 34,324 | 
|               |       |          |    |           |  |         |       |            |  |        |   |       |  |        |     |       |  |        |   |       |  |  |       |       |  |  |    |    |  |  |       |       |  |  |    |     |  |  |       |       






|    |                                                                            
|--- | ---------------------------------------------------------------------------
|(a) | The Owned hotels include two hotels in which
    Prime owns a 40% interest.

5



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##### Table of Contents



The following table sets forth the location of
the Portfolio by product type as of March 1, 2004. The data
reflects hotels open and includes, as Prime Hotels, the twelve
hotels currently under conversion from the non-proprietary brand
category:

|               |       |             |    |                  |  |                |       |                 |  |        |    |       |  |        |       |       |  |        |   |       |  |  |     |       |  |  |   |    |  |  |       |       |  |  |    |     |  |  |       |        | 
|-------------- | ----- | ----------- | -- | ---------------- |  | -------------- | ----- | --------------- |  | ------ | -- | ----- |  | ------ | ----- | ----- |  | ------ | - | ----- |  |  | --- | ----- |  |  | - | -- |  |  | ----- | ----- |  |  | -- | --- |  |  | ----- | ------ | 
|               |       |             |    |                  |  |                |       |                 |  |        |    |       |  |       
|               |       |             |    | Wellesley Inns & |  | Prime Hotels & |       | Non-Proprietary |  |       
|               |       | AmeriSuites |    | Suites           |  | Resorts        |       | Full-Service    |  | Total 
|               |       |             |    |                  |  |                |       |                 |  |       
|               |       | Hotels      |    | Rooms            |  | Hotels         |       | Rooms           |  | Hotels |    | Rooms |  | Hotels |       | Rooms |  | Hotels |   | Rooms
|               |       |             |    |                  |  |                |       |                 |  |        |    |       |  |        |       |       |  |        |   |      
|Alabama        |       |             | 2  |                  |  |                | 256   |                 |  |        | 1  |       |  |        | 65    |       |  |        |  |       |  |  |    |       |  |  |  |    |  |  |      |       |  |  | 3  |     |  |  | 321   |       
|Arizona        |       |             | 6  |                  |  |                | 748   |                 |  |        | 4  |       |  |        | 524   |       |  |        | 3 |       |  |  | 535 |       |  |  |  |    |  |  |      |       |  |  | 13 |     |  |  | 1,807 |       
|Arkansas       |       |             | 2  |                  |  |                | 233   |                 |  |        | 1  |       |  |        | 138   |       |  |        |  |       |  |  |    |       |  |  |  |    |  |  |      |       |  |  | 3  |     |  |  | 371   |       
|California     |       |             | 4  |                  |  |                | 535   |                 |  |        | 1  |       |  |        | 96    |       |  |        | 2 |       |  |  | 360 |       |  |  |  |    |  |  |      |       |  |  | 7  |     |  |  | 991   |       
|Colorado       |       |             | 4  |                  |  |                | 510   |                 |  |        | 2  |       |  |        | 278   |       |  |        |  |       |  |  |    |       |  |  |  |    |  |  |      |       |  |  | 6  |     |  |  | 788   |       
|Connecticut    |       |             | 2  |                  |  |                | 208   |                 |  |        | 2  |       |  |        | 284   |       |  |        |  |       |  |  |    |       |  |  |  |    |  |  |      |       |  |  | 4  |     |  |  | 492   |       
|Florida        |       |             | 16 |                  |  |                | 1,994 |                 |  |        | 21 |       |  |        | 2,433 |       |  |        |  |       |  |  |    |       |  |  |  |    |  |  |      |       |  |  | 37 |     |  |  | 4,427 |       
|Georgia        |       |             | 14 |                  |  |                | 1,768 |                 |  |        | 5  |       |  |        | 565   |       |  |        | 1 |       |  |  | 143 |       |  |  |  |    |  |  |      |       |  |  | 20 |     |  |  | 2,476 |       
|Idaho          |       |             | 1  |                  |  |                | 128   |                 |  |        |   |       |  |        |      |       |  |        |  |       |  |  |    |       |  |  |  |    |  |  |      |       |  |  | 1  |     |  |  | 128   |       
|Illinois       |       |             | 8  |                  |  |                | 1,033 |                 |  |        | 1  |       |  |        | 68    |       |  |        | 1 |       |  |  | 143 |       |  |  |  |    |  |  |      |       |  |  | 10 |     |  |  | 1,244 |       
|Indiana        |       |             | 3  |                  |  |                | 383   |                 |  |        | 2  |       |  |        | 259   |       |  |        |  |       |  |  |    |       |  |  |  |    |  |  |      |       |  |  | 5  |     |  |  | 642   |       
|Kansas         |       |             | 3  |                  |  |                | 389   |                 |  |        | 2  |       |  |        | 246   |       |  |        |  |       |  |  |    |       |  |  |  |    |  |  |      |       |  |  | 5  |     |  |  | 635   |       
|Kentucky       |       |             | 2  |                  |  |                | 251   |                 |  |        |   |       |  |        |      |       |  |        |  |       |  |  |    |       |  |  |  |    |  |  |      |       |  |  | 2  |     |  |  | 251   |       
|Louisiana      |       |             | 1  |                  |  |                | 128   |                 |  |        |   |       |  |        |      |       |  |        |  |       |  |  |    |       |  |  |  |    |  |  |      |       |  |  | 1  |     |  |  | 128   |       
|Maine          |       |             | 1  |                  |  |                | 130   |                 |  |        |   |       |  |        |      |       |  |        |  |       |  |  |    |       |  |  |  |    |  |  |      |       |  |  | 1  |     |  |  | 130   |       
|Maryland       |       |             | 2  |                  |  |                | 252   |                 |  |        | 1  |       |  |        | 137   |       |  |        |  |       |  |  |    |       |  |  |  |    |  |  |      |       |  |  | 3  |     |  |  | 389   |       
|Massachusetts  |       |             | 1  |                  |  |                | 158   |                 |  |        |   |       |  |        |      |       |  |        |  |       |  |  |    |       |  |  |  |    |  |  |      |       |  |  | 1  |     |  |  | 158   |       
|Michigan       |       |             | 4  |                  |  |                | 501   |                 |  |        | 1  |       |  |        | 138   |       |  |        |  |       |  |  |    |       |  |  |  |    |  |  |      |       |  |  | 5  |     |  |  | 639   |       
|Minnesota      |       |             | 2  |                  |  |                | 256   |                 |  |        |   |       |  |        |      |       |  |        | 1 |       |  |  | 209 |       |  |  |  |    |  |  |      |       |  |  | 3  |     |  |  | 465   |       
|Missouri       |       |             | 1  |                  |  |                | 134   |                 |  |        |   |       |  |        |      |       |  |        |  |       |  |  |    |       |  |  |  |    |  |  |      |       |  |  | 1  |     |  |  | 134   |       
|Nevada         |       |             | 1  |                  |  |                | 202   |                 |  |        | 1  |       |  |        | 125   |       |  |        |  |       |  |  |    |       |  |  |  |    |  |  |      |       |  |  | 2  |     |  |  | 327   |       
|New Jersey     |       |             | 4  |                  |  |                | 552   |                 |  |        | 8  |       |  |        | 1,074 |       |  |        | 2 |       |  |  | 355 |       |  |  | 9 |    |  |  | 2,168 |       |  |  | 23 |     |  |  | 4,149 |       
|New Mexico     |       |             | 3  |                  |  |                | 381   |                 |  |        | 1  |       |  |        | 109   |       |  |        |  |       |  |  |    |       |  |  |  |    |  |  |      |       |  |  | 4  |     |  |  | 490   |       
|New York       |       |             |   |                  |  |                |      |                 |  |        | 6  |       |  |        | 611   |       |  |        | 1 |       |  |  | 240 |       |  |  | 3 |    |  |  | 429   |       |  |  | 10 |     |  |  | 1,280 |       
|North Carolina |       |             | 7  |                  |  |                | 839   |                 |  |        | 1  |       |  |        | 138   |       |  |        |  |       |  |  |    |       |  |  |  |    |  |  |      |       |  |  | 8  |     |  |  | 977   |       
|Ohio           |       |             | 6  |                  |  |                | 759   |                 |  |        | 2  |       |  |        | 204   |       |  |        |  |       |  |  |    |       |  |  |  |    |  |  |      |       |  |  | 8  |     |  |  | 963   |       
|Oklahoma       |       |             | 4  |                  |  |                | 464   |                 |  |        |   |       |  |        |      |       |  |        |  |       |  |  |    |       |  |  |  |    |  |  |      |       |  |  | 4  |     |  |  | 464   |       
|Oregon         |       |             |   |                  |  |                |      |                 |  |        | 1  |       |  |        | 137   |       |  |        |  |       |  |  |    |       |  |  |  |    |  |  |      |       |  |  | 1  |     |  |  | 137   |       
|Pennsylvania   |       |             | 2  |                  |  |                | 256   |                 |  |        | 1  |       |  |        | 104   |       |  |        |  |       |  |  |    |       |  |  | 1 |    |  |  | 239   |       |  |  | 4  |     |  |  | 599   |       
|Quebec, Canada |       |             |   |                  |  |                |      |                 |  |        |   |       |  |        |      |       |  |        |  |       |  |  |    |       |  |  | 1 |    |  |  | 238   |       |  |  | 1  |     |  |  | 238   |       
|South Carolina |       |             | 3  |                  |  |                | 368   |                 |  |        | 1  |       |  |        | 87    |       |  |        |  |       |  |  |    |       |  |  |  |    |  |  |      |       |  |  | 4  |     |  |  | 455   |       
|Tennessee      |       |             | 7  |                  |  |                | 819   |                 |  |        | 2  |       |  |        | 171   |       |  |        | 1 |       |  |  | 180 |       |  |  |  |    |  |  |      |       |  |  | 10 |     |  |  | 1,170 |       
|Texas          |       |             | 23 |                  |  |                | 2,839 |                 |  |        | 12 |       |  |        | 1,454 |       |  |        |  |       |  |  |    |       |  |  |  |    |  |  |      |       |  |  | 35 |     |  |  | 4,293 |       
|Utah           |       |             |   |                  |  |                |      |                 |  |        |   |       |  |        |      |       |  |        | 1 |       |  |  | 381 |       |  |  |  |    |  |  |      |       |  |  | 1  |     |  |  | 381   |       
|Virginia       |       |             | 7  |                  |  |                | 815   |                 |  |        | 2  |       |  |        | 188   |       |  |        |  |       |  |  |    |       |  |  | 1 |    |  |  | 190   |       |  |  | 10 |     |  |  | 1,193 |       
|Washington     |       |             |   |                  |  |                |      |                 |  |        |   |       |  |        |      |       |  |        | 2 |       |  |  | 370 |       |  |  |  |    |  |  |      |       |  |  | 2  |     |  |  | 370   |       
|Wisconsin      |       |             | 2  |                  |  |                | 222   |                 |  |        |   |       |  |        |      |       |  |        |  |       |  |  |    |       |  |  |  |    |  |  |      |       |  |  | 2  |     |  |  | 222   |       
|               |       |             |    |                  |  |                |       |                 |  |        |    |       |  |        |       |       |  |        |   |       |  |  |     |       |  |  |   |    |  |  |       |       |  |  |    |     |  |  |       |       
|               | Total |             |    | 148              |  |                |       | 18,511          |  |        |    | 82    |  |        |       | 9,633 |  |        |   | 15    |  |  |     | 2,916 |  |  |   | 15 |  |  |       | 3,264 |  |  |    | 260 |  |  |       | 34,324 | 
|               |       |             |    |                  |  |                |       |                 |  |        |    |       |  |        |       |       |  |        |   |       |  |  |     |       |  |  |   |    |  |  |       |       |  |  |    |     |  |  |       |       

6



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##### Table of Contents



The following table sets forth, for the years
ended December 31, 2003 and 2002, operating data by product
type for the comparable hotels in the Portfolio as of
December 31, 2003:

|                        |        |                 |  |      |     |        |   |        |    |  |   |       |   
|----------------------- | ------ | --------------- |  | ---- | --- | ------ | - | ------ | -- |  | - | ----- | --
|                        |        |                
|                        |        | Total Portfolio
|                        |        |                
|                        |        | Occupancy       |  | ADR  |     | REVPAR
|                        |        |                 |  |      |     |       
|Owned & Cash Flow       |        |                 |  |      |     |        |   |        |    |  |   |      
|                        | 2003   |                 |  | 63.3 | %   |        | $ | 66.02  |    |  | $ | 41.77 |   
|                        | 2002   |                 |  | 59.7 | %   |        | $ | 72.28  |    |  | $ | 43.18 |   
|                        | Change |                 |  | 3.6  | pts |        |   | (8.7   | )% |  |   | (3.3  | )%
|AmeriSuites             |        |                 |  |      |     |        |   |        |    |  |   |      
|                        | 2003   |                 |  | 63.9 | %   |        | $ | 68.64  |    |  | $ | 43.85 |   
|                        | 2002   |                 |  | 62.2 | %   |        | $ | 73.74  |    |  | $ | 45.87 |   
|                        | Change |                 |  | 1.7  | pts |        |   | (6.9   | )% |  |   | (4.4  | )%
|Wellesley Inns & Suites |        |                 |  |      |     |        |   |        |    |  |   |      
|                        | 2003   |                 |  | 62.7 | %   |        | $ | 55.71  |    |  | $ | 34.93 |   
|                        | 2002   |                 |  | 56.7 | %   |        | $ | 61.43  |    |  | $ | 34.86 |   
|                        | Change |                 |  | 6.0  | pts |        |   | (9.3   | )% |  |   | 0.2   | % 
|Full-Service Brands     |        |                 |  |      |     |        |   |        |    |  |   |      
|                        | 2003   |                 |  | 65.5 | %   |        | $ | 116.42 |    |  | $ | 76.25 |   
|                        | 2002   |                 |  | 65.0 | %   |        | $ | 122.44 |    |  | $ | 79.54 |   
|                        | Change |                 |  | 0.5  | pts |        |   | (4.9   | )% |  |   | (4.1  | )%

AmeriSuites

AmeriSuites are positioned in the upscale segment
of the lodging industry, competing predominantly with other
upscale and mid-price brands such as Courtyard by Marriott,
Springhill Suites, Hampton Inns & Suites, Comfort Suites and
Holiday Inn. While the majority of the current AmeriSuites
hotels were developed with Primes capital, we intend to
grow AmeriSuites with the bulk of capital coming from
franchisees. The average age of the AmeriSuites hotels is
approximately 6 years.

AmeriSuites are all-suite, upscale hotels which
offer guests an attractively designed suite, a complimentary
continental breakfast in a spacious lobby cafe, remote-control
cable television, fitness centers and pool facilities. The
hotels provide group meeting space, but do not include
restaurant or lounge facilities. AmeriSuites attract customers
principally because of the size and quality of the guest suites
which contain approximately 420 square feet, approximately 30%
larger than a standard hotel room. The suites offer distinct
living, sleeping and kitchen areas with microwaves,
refrigerators, in-room coffee makers, ironing boards and hair
dryers. High-speed internet access is currently being installed
in the majority of hotels. AmeriSuites hotels also offer
business suites marketed under the name TCB (Taking Care
of Business) Suites. TCB Suites were developed
specifically for the business traveler and feature a
well-equipped, in-suite office, including an oversized desk with
executive chair, easy chair and ottoman, in addition to
technology features such as dual phone lines, voice mail, data
ports, speakerphones and other amenities. The typical
AmeriSuites contains approximately 128 suites, including
20-30 TCB Suites, and two to four meeting rooms.
AmeriSuites are primarily located near suburban commercial
centers, corporate office parks and other travel destinations,
within close proximity to dining, shopping and entertainment
facilities. The target customer is primarily the business
traveler, with an average length of stay of two to three nights,
and leisure or weekend travelers. AmeriSuites are marketed
primarily through direct local sales, national marketing
programs and a central reservation system operated by Prime.

Wellesley Inns & Suites

The Wellesley Inns & Suites brand is
comprised of 39 Wellesley Inns and 43 Wellesley
Inns & Suites which, in addition to Wellesley Inn
amenities, also contain suite rooms. The Company intends to
develop this

7



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##### Table of Contents



brand primarily by converting hotels from other
brands either through franchisees or acquisitions of hotels or
hotel chains. In the past year, ten hotels have been converted
from other brands to the Wellesley Inns & Suites brand.


Wellesley Inns & Suites are positioned in the
mid-price segment of the industry and compete with other chains
such as Hampton Inns, La Quinta Inn & Suites, Holiday
Inn Express and Comfort Inns. The average age of the
chains hotels is approximately 10 years. The target
customer is the transient business traveler, although
approximately 25% of the customers stay on an extended basis.

The majority of the Companys
39 Wellesley Inns are located in Florida and the Northeast
United States. The prototypical Wellesley Inn has approximately
100 rooms and is distinguished by a stucco exterior,
spacious lobby and amenities such as pool facilities,
complimentary continental breakfast, remote control cable
television with free movie channels and in-room coffee makers.
High-speed internet access is currently being installed in the
majority of hotels.

The Companys 43 Wellesley Inns &
Suites were formed primarily from the conversion of
38 former HomeGate hotels in November 1999. Wellesley
Inns & Suites are located primarily in the Southwest,
Midwest and Southeast. The typical Wellesley Inns &
Suites consists of approximately 110 to 130 rooms. In
addition to the amenities of a typical Wellesley Inn, the
Wellesley Inns & Suites hotels offer suite
accommodations in approximately 60% of the guest rooms. The
suites contain approximately 450 square feet offering
separate living, sleeping and eating areas. The suite rooms also
contain kitchenettes with stove tops, refrigerators and
microwaves.

Marketing efforts for the Wellesley
Inns & Suites chain rely primarily on direct local
marketing, but also include national programs and a central
reservation system operated by Prime.

Prime Hotels and Resorts

Prime unveiled its new hotel brand, Prime
Hotels & Resorts, with the conversion of the Sheraton
Hotel Saratoga Springs to the Prime Hotel and Conference Center,
Saratoga Springs, New York in January 2003. Saratoga
Springs was the first re-branded property in our plan to
develop, under the Prime Hotels & Resorts flag a
portfolio of upscale, full-service hotels. The new brand will
provide us with additional hotels for our frequent guest and
national sales programs and will create cross selling
opportunities among our brands.

On March 1, 2004, we converted two owned
Radisson Hotels in Secaucus, NJ and Fairfield, NJ to the Prime
Hotels & Resorts brand. In addition, there are
currently twelve managed hotels under the Wyndham flag in the
process of being converted to the Prime brand. We expect these
conversions to be complete by June 30, 2004 at which time
we will have 15 Prime hotels open in 10 states.

Acquisitions of or from other chains or ownership
groups will provide the foundation for brand expansion. Features
of a Prime-branded hotel will include 100-500 guest rooms
and suites, a selection of dining and entertainment venues,
concierge-level services, automated check-in kiosks, swimming
pool and fitness center, business center, and ample meeting and
banquet space. Amenities will include high-speed internet
access, in-room cordless phones, and expanded cable television
offerings including on-demand viewing services. The amenity
packages are designed to provide the guest with timesaving
conveniences.

Non-Proprietary Brands

Our non-proprietary brand hotels primarily
operate in the upscale full-service segment. After the
conversion of 12 hotels to the Prime brand, we will have
15 non-proprietary brand hotels. We have ownership
interests in five of these hotels and manage ten for third
parties. The full-service hotels provide food and beverage
outlets, contain meeting and banquet facilities and are operated
under franchise agreements primarily with Hilton, Sheraton,
Holiday Inn and Ramada. The full-service hotels are concentrated
in the Northeast. The hotels are generally positioned along
major highways within close proximity to corporate headquarters,
office parks, airports, convention or trade centers and other
major facilities. The customer base for the full-service hotels
consists primarily of business travelers. Sales and marketing
efforts are concentrated at the local level where the
Companys sales force markets its rooms and its meeting and
banquet services to

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groups for seminars, business meetings and other
events. The hotels are also marketed through national franchisor
programs and central reservation systems.


The Companys full-service hotels generally
have between 150 and 400 rooms and pool, restaurant,
lounge, banquet and meeting facilities. Other amenities include
fitness rooms, room service, remote-control cable television and
business centers. In order to enhance guest satisfaction, the
Company also has theme concept lounges in a number of its hotels.

Brand Infrastructure

As we continue to evolve into a franchisor, we
have undertaken a number of brand initiatives. These include the
following:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Central Reservation
    System In November 2002,
    we opened and began operating a new reservation system in
    Fairfield, New Jersey. The new system was implemented to provide
    us with improved service quality, real time inventory
    synchronization between the system and the hotels, and enhanced
    customer data. In 2003, we realized an increase in our call
    conversion rate and a decrease in our call abandonment rate.                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | Brand
    Advertising We spent
    approximately $6.9 million on national brand advertising
    expenditures in 2003. The Companys efforts have focused
    primarily on print advertising both on a regional level and in
    national publications such as USA Today. In recent years, Prime
    has expanded its program to include national cable television
    advertisements for its AmeriSuites chain.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | National
    Accounts We have
    approximately 200 national accounts comprised of leading
    companies throughout the country which list our brands as
    preferred hotel providers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | Rewards
    Program On
    September 1, 2001, we implemented an expanded rewards
    program, covering all of our brands, designed to enhance our
    competitive position. The new program, entitled Prime Rewards,
    offers frequent guest members both points toward a free hotel
    stay and airline miles with partners such as American,
    Continental, Delta, United and America West with each stay.
    Technology features such as paperless redemptions and online
    customer statements and profiles have also been incorporated
    into this program. We have increased our membership from
    approximately 90,000 members as of September 1, 2001 to
    approximately 375,000 members as of December 31, 2003. As a
    result, frequent guests contributed approximately 15% of brand
    revenues in 2003, up from 10% in 2001.
|
| | E-Commerce
    The Companys proprietary websites (www.amerisuites.com,
    www.wellesleyonline.com and www.primehotelsandresorts.com)
    provide customers with the ability to book reservations. The
    brands hotel rooms can also be booked through wholesale
    travel websites such as TravelScape, Expedia and Hotels.com and
    excess room inventory is distributed through discount websites
    such as Priceline and Hot Wire. Primes rooms are also
    available on general travel websites such as Travelocity and
    Worldres. E-commerce related sites contributed approximately 15%
    of brand revenues in 2003.                                                                                                                                                                                                               

We believe that the growing brand infrastructure,
consisting of elements such as a central reservation system, an
improved frequent stay program, increased advertising and
marketing programs, and e-commerce initiatives, are necessary
for our brands to compete effectively with older, more
established chains.

Franchising

Franchising has been a key source of our recent
brand growth. We began our franchise sales efforts in mid-1998
when we obtained the necessary statutory approvals to begin
franchising our AmeriSuites and Wellesley brands. We have a
franchise sales team which, in addition to their direct sales
effort, also develop the franchise marketing programs which
include advertising in industry and business publications,
attending various trade shows and producing brochures and other
collateral material. Also we have a franchise services team
which has developed a variety of programs to guide our
franchisees through the various phases of opening and operating
a hotel. These include training, pre-opening, construction
management and purchasing

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services. We also offer our franchisees an
internet based communications system which provides brand
updates, operating standards and manuals and other important
communications. We perform quality control inspections of all of
our proprietary brand hotels, including those owned and operated
by us.


The following table details the number of
franchise agreements executed by us through December 31,
2003 since we began our franchising efforts in June 1998. New
franchises have been generated through a combination of
construction of new hotels, the conversion of existing hotels to
our brands and the sales of existing hotels by us to franchisees.

|                                |       |             |    |                |  |       |    |    |  |  |    |    | 
|------------------------------- | ----- | ----------- | -- | -------------- |  | ----- | -- | -- |  |  | -- | -- | 
|                                |       |             |    | Wellesley Inns |  |      
|                                |       | AmeriSuites |    | & Suites       |  | Total
|                                |       |             |    |                |  |      
|New Openings/ Conversions       |       |             | 24 |                |  |       | 11 |    |  |  | 35 |   
|Asset Sales                     |       |             | 20 |                |  |       | 15 |    |  |  | 35 |   
|Under Construction/ Conversion  |       |             | 3  |                |  |       | 1  |    |  |  | 4  |   
|                                |       |             |    |                |  |       |    |    |  |  |    |   
|                                | Total |             |    | 47             |  |       |    | 27 |  |  |    | 74 | 
|                                |       |             |    |                |  |       |    |    |  |  |    |   
|Pipeline of Executed Agreements |       |             | 20 |                |  |       | 1  |    |  |  | 21 |   
|                                |       |             |    |                |  |       |    |    |  |  |    |   

Our franchise agreements typically provide for
terms of twenty years and require the franchisee to maintain
certain operating and product standards. The franchise fees are
generally comprised of an initial application fee, plus monthly
fees based on a percentage of hotel revenues. The monthly fees
cover royalties and the cost of marketing and reservation
services. We also offer additional services including purchasing
and design services. The standard monthly fees as a percentage
of room sales are as follows:

|                        |  |         |     |           |  |             |     |   |  |  |      |  
|----------------------- |  | ------- | --- | --------- |  | ----------- | --- | - |  |  | ---- | -
|                        |  | Royalty |     | Marketing |  | Reservation
|                        |  | Fee     |     | Fee       |  | Fee        
|                        |  |         |     |           |  |            
|AmeriSuites             |  |         | 5.0 | %         |  |             | 2.0 | % |  |  | 1.55 | %
|Wellesley Inns & Suites |  |         | 4.5 | %         |  |             | 1.5 | % |  |  | 1.55 | %
|Prime Hotels & Resorts  |  |         | 4.0 | %         |  |             | 2.0 | % |  |  | 1.55 | %

Corporate Development

While we have developed the majority of our
existing AmeriSuites and Wellesley Inns & Suites, we have
focused on franchising as the primary source of recent
development.

We intend to focus any corporate development
efforts in the Northeast and West Coast, or in other areas where
the development process is more difficult, high barriers to
entry exist and the location has strategic value. Our Wellesley
Inns & Suites and Prime Hotels and Resorts development
efforts will focus on the conversion of other hotels to our
brands.

Operations

As a leading domestic hotel operating company, we
believe that we enjoy a number of operating advantages. With
approximately 200 hotels under management covering a number of
price points and broad geographic regions, we have the critical
mass to support operating, marketing and financial systems. We
believe that our broad array of central services permits on-site
hotel general managers to effectively focus on providing guest
services.

Our operating strategy combines operating service
and guidance from our central management team with decentralized
decision-making authority delegated to each hotels on-site
management. The on-site hotel management teams consist of a
general manager and, depending on the hotels size and
market position, managers of sales and marketing, food and
beverage, front desk services, housekeeping and engineering. Our
operating objective is to exceed guest expectations by providing
quality services and comfortable accommodations at a fair value.
On-site hotel management is responsible for efficient expense
controls and uses operating standards provided by the Company.
Within parameters established in the operating and capital
planning

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process, on-site management possesses broad
decision-making authority on operating issues such as guest
services, marketing strategies and hiring decisions. Each
hotels management team is empowered to take all necessary
steps to ensure guest satisfaction within established
guidelines. Key on-site personnel participate in an incentive
program based on hotel revenues and profits.


The central management team is located in
Fairfield, New Jersey. Central management provides four major
categories of services: (i) operations management,
(ii) sales and marketing management, (iii) financial
reporting and control and (iv) hotel support services.

Operations Management.Operations management consists of the
development, implementation and monitoring of hotel operating
standards and is provided by a network of regional operating
officers who are each responsible for the operations of 15 to
20 hotels. They are supported by training and food and
beverage departments, each staffed full-time by specialized
professionals. Our training efforts focus on sales,
housekeeping, food service, front desk services and leadership.

Sales and Marketing Management.Sales and marketing management is
directed by a corporate staff which includes regional marketing
directors who are responsible for each hotels sales and
marketing strategies, and the Companys national sales
group, which markets its brands to major companies which produce
a high volume of bookings. In cooperation with the regional
marketing staff, on-site sales management develops and
implements short and intermediate-term marketing plans. We focus
on yield management techniques, which optimize the relationship
between hotel rates and occupancies and seek to maximize
profitability.

Complementing regional, national and on-site
marketing efforts, the Company formed a sales group under a
wholly-owned subsidiary, Market Segments, Inc.
(MSI). MSIs marketing team targets specific
hotel room demand generators including tour operators, major
national corporate accounts, athletic teams, religious groups
and others with segment-specialized sales initiatives.
MSIs primary objective is to book hotel rooms at the
Companys hotels and its secondary objective is to market
its services on a commission basis to hotels throughout the
industry. Sales activities on behalf of non-affiliated hotels
increase the number of hotels where bookings can be made to
support marketing efforts and defray the costs of the marketing
organization.

Financial Reporting and Control.Our system of centralized financial
reporting and control permits management to closely monitor
decentralized hotel operations without the cost of financial
personnel on site. Centralized accounting personnel produce
detailed financial and operating reports for each hotel.
Additionally, central management directs budgeting and analysis,
processes payroll, handles accounts payable, manages each
hotels cash, oversees credit and collection activities and
conducts on-site hotel audits.

Hotel Support Services.Our hotel support services combine a
number of technical functions in central, specialized management
teams to attain economies of scale and minimize costs. Central
management establishes human resources guidelines, handles
purchasing, directs construction and maintenance and provides
design services. Technical staff teams support each hotels
information and communication systems needs. Additionally, we
direct safety/risk management activities, benefit programs and
provides central legal services.

Capital Improvements

We continuously refurbish our Owned Hotels in
order to maintain consistent quality standards. We generally
spend between 3% to 6% of hotel revenue on capital improvements
at our Owned Hotels. We believe that our Owned Hotels are in
generally good physical condition. We recommend refurbishment
and repair projects on the Cash Flow Hotels and Managed Hotels,
although spending amounts vary based on the plans of such
hotels owners and the Companys role as the
franchisor.

Managed Hotels  Cash Flow
Interest

In December 2003, we terminated our lease
agreement for 24 AmeriSuites hotels with Hospitality
Properties Trust (HPT) and entered into a management
agreement with HPT for the 24 AmeriSuites

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hotels and 12 full-service hotels to be
re-branded under our Prime Hotels & Resorts chain. The
agreement became effective on January 1, 2004 for the
AmeriSuites hotels and February 1, 2004 for the Prime
Hotels & Resorts hotels. The term is 15 years and
we have two renewal options of 15 years each.


Under the agreement, HPT will receive an
owners priority return of $26 million per year. This
return is guaranteed by Prime under a limited guarantee which
caps the maximum cash outlay by Prime over the life of the
agreement at $30 million. Cash flow generated by the hotels
in excess of $26 million per year will be split 50/50
between HPT and Prime with Primes share counting as its
royalty and management fee. Also, as part of the agreement, HPT
will provide $25 million during the first two years to
pay for re-branding and other capital improvements on the
36 hotels.

On January 1, 2002, we converted our
existing lease agreements on 19 AmeriSuites hotels with
Equity Inns, Inc. (Equity Inns) to management
agreements. The management agreements provide for a subsidiary
of Prime to share in the cash flow above, and to fund deficits
below, certain thresholds. The agreements also require the Prime
subsidiary to guarantee a minimum return to Equity Inns equal to
the minimum rent under the prior lease agreement. The agreements
expire in 2007 and 2008 and will then be converted to
20 year franchise agreements provided that we are in
compliance with the cash flow guarantee requirements under the
current agreements.

Managed Hotels

We provide hotel management services to third
party hotel owners of 24 Managed Hotels. Management fees
are generally based on fixed percentages of the propertys
total revenues and incentive payments based on certain measures
of hotel income. Additional fees are generated from the
rendering of specific services such as accounting, construction,
design and purchasing. Our fixed management fee percentages are
generally 2.0% to 4.0% of total revenues before giving
consideration to performance related incentive payments. Terms
of the management agreements vary with expiration dates ranging
from 2004 to 2014.

Agreements As Franchisee

We have entered into franchise licensing
agreements with third party franchisors on our non-proprietary
brand full-service hotels. These agreements typically have a
ten year term and require us to pay monthly fees, to
maintain certain standards and to implement certain capital
programs. The payment of monthly fees, which typically total 8%
to 9% of room revenues, cover royalties and the costs of
marketing and reservation services provided by the franchisors.
Franchise agreements, when initiated, generally provide for an
initial fee in addition to monthly fees payable to the
franchisor. We believe we currently enjoy generally good
relationships with our franchisors.

Working Capital

We believe that our operating cash flow is
sufficient to cover our current operational and capital needs.
The majority of our revenue is in the form of credit card
charges which are typically realized in cash in two to three
business days. We also intend to utilize any excess cash flow
and any proceeds from asset sales, for hotel portfolio growth,
repayment of debt and/or the repurchase of our common shares.
See Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations 
Liquidity and Capital Resources.

Seasonality

As the majority of our properties are focused on
the business traveler, the second and third quarters of the year
are generally the strongest due to business travel patterns.

Competition

We operate hotel properties in areas that contain
numerous other hotels, the majority of which are affiliated with
national or regional brands. We compete with other hotels for
customers primarily on the basis

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of price, physical facilities, brand recognition
and customer service. We also compete with other hotel companies
for management and franchise agreements. Some of our competitors
have greater resources and brand recognition than we do.


Employees

As of December 31, 2003, we employed
approximately 6,500 full and part time employees. At one
owned hotel, one managed hotel and the two Joint Venture hotels,
certain of our employees are covered by collective bargaining
agreements. We believe that relations with our employees are
generally good.

Environmental Matters

The Portfolio is subject to environmental
regulations under Federal, state and local laws. Certain of
these laws may require a current or previous owner or operator
of real estate to clean up designated hazardous or toxic
substances or petroleum product releases affecting the property.
In addition, the owner or operator may be held liable to a
governmental entity or to third parties for damages or costs
incurred by such parties in connection with the contamination.
The Company does not believe that it is subject to any
environmental liability that is likely, individually or in the
aggregate, to have a material adverse effect on its financial
condition or results of operations or cash flows.

Additional Information

We maintain a website at
http://www.primehospitality.com. The information on our website
is not incorporated by reference in this Annual Report on
Form 10-K and our web address is included as an inactive
textual reference only. We make available, free of charge
through our website, our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act
as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the SEC.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

The Company currently and from time to time is
involved in litigation arising in the ordinary course of its
business. The Company does not believe that it is involved in
any litigation, that is likely, individually or in the
aggregate, to have a material adverse effect on its financial
condition or results of operations or cash flows.

On August 18, 1999, plaintiff Nick Pourzal,
a former employee of the Company, filed a complaint against the
Company in the United States District Court for the Virgin
Islands. The complaint alleges that the Company contracted in
1978 to pay plaintiff ten percent of the pre-tax earnings on any
use or sale of a 16.354-acre property on St. Thomas, U.S. Virgin
Islands known as the Gilbert Land, and that the
Company breached this contract by making commercial use of the
Gilbert Land without paying the plaintiff. On January 13,
2003, plaintiff filed a motion for leave to file a second
amended compliant, to add claims for (i) conspiracy to
violate the Virgin Islands Plant Closing Act, (ii) prima
facie tort and (iii) to confirm an arbitration award
relating to the Companys termination of plaintiffs
employment in 1999. The complaint seeks compensatory, incidental
and consequential damages, interest and costs, a declaratory
judgment that the Company is liable for payment of ten percent
of pre-tax earnings on use or sale of the Gilbert Land, and
attorneys fees and expenses. Prime believes that the
plantiffs action is without merit and intends to
vigorously defend this case.

On June 13, 2003, Southeast Texas Inns, Inc.
(Southeast Texas Inns) filed a Complaint against the
Company, May-Ridge, L.P. (May-Ridge) and Ridgewood
Holdings Corp. (Ridgewood), which is now pending
before the United States District Court for the Middle District
of Tennessee. The Complaint alleges that May-Ridge has defaulted
under a Lease Agreement, dated as of July 9, 2000, with
Southeast Texas Inns pursuant to which May-Ridge leased three
properties located in Texas (the Three Properties)
that were operated as AmeriSuites Hotels. On April 2, 2003,
Southeast Texas Inns, as landlord, terminated the Lease
Agreement for default and May-Ridge surrendered the three
properties to Southeast Texas Inns. In the Complaint, Southeast
Texas Inns seeks actual and liquidated damages in an amount in
excess of $10 million

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against May-Ridge and Ridgewood, which is the
sole general partner of May-Ridge. Southeast Texas Inns also
seeks to hold the Company jointly liable for all damages under
the Lease Agreement, to which the Company is not a party. The
Company filed a motion to dismiss the Complaint against the
Company on August 19, 2003, which was granted subject to no
new evidence being brought by Southeast Texas Inns.







|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

No matters were submitted to a vote of the
security holders of the Company during the quarter ended
December 31, 2003.




PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Our common stock, par value $.01 per share,
trades on the New York Stock Exchange (the NYSE)
under the symbol PDQ. As of March 1, 2004 there
were 44,845,498 shares of common stock outstanding.

The following table sets forth the reported high
and low closing sales prices of the common stock on the NYSE.

|                             |  |      |       |     |  |   |       | 
|---------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|                             |  | High |       | Low
|                             |  |      |       |    
|Year Ended December 31, 2003 |  |      |       |     |  |   |       | 
|First Quarter                |  | $    | 8.76  |     |  | $ | 4.68  | 
|Second Quarter               |  |      | 7.15  |     |  |   | 5.10  | 
|Third Quarter                |  |      | 9.10  |     |  |   | 6.76  | 
|Fourth Quarter               |  |      | 11.02 |     |  |   | 8.69  | 
|Year Ended December 31, 2002 |  |      |       |     |  |   |       | 
|First Quarter                |  |      | 13.72 |     |  |   | 10.52 | 
|Second Quarter               |  |      | 13.66 |     |  |   | 11.90 | 
|Third Quarter                |  |      | 12.30 |     |  |   | 8.20  | 
|Fourth Quarter               |  |      | 9.40  |     |  |   | 7.55  | 

As of March 1, 2004, the closing sales price
of the common stock on the NYSE was $10.78 per share, and there
were approximately 1,510 holders of record of common stock.

We have not declared any cash dividends on our
common stock during the two prior fiscal years and do not
currently anticipate paying any dividends on our common stock in
the foreseeable future. We currently anticipate that we will
retain any future earnings for use in our business. In addition,
we are prohibited by the terms of certain debt agreements from
paying cash dividends.






|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

SELECTED CONSOLIDATED FINANCIAL DATA OF THE
COMPANY

The table below presents selected consolidated
financial data derived from the Companys historical
financial statements for the five years ended December 31, 2003.
This data should be read in conjunction with the Consolidated
Financial Statements, related notes and other financial
information included herein.

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|                                    |                                                                                                                                                |                                                                   |   |            |      |      |   |           |       |      |   |           |       |  |   |           |       |  |   |           |     | 
|----------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | - | ---------- | ---- | ---- | - | --------- | ----- | ---- | - | --------- | ----- |  | - | --------- | ----- |  | - | --------- | --- | 
|                                    |                                                                                                                                                |                                                                  
|                                    |                                                                                                                                                | As of and for the Years Ended December 31,                       
|                                    |                                                                                                                                                |                                                                  
|                                    |                                                                                                                                                | 2003                                                              |   | 2002       |      | 2001 |   | 2000      |       | 1999
|                                    |                                                                                                                                                |                                                                   |   |            |      |      |   |           |       |     
|                                    |                                                                                                                                                |                                                                  
|                                    |                                                                                                                                                | (In thousands, except per share data)                            
|STATEMENT OF OPERATIONS DATA:       |                                                                                                                                                |                                                                   |   |            |      |      |   |           |       |      |   |           |       |  |   |           |       |  |   |          
|                                    | Total revenue(a)                                                                                                                               |                                                                   | $ | 405,692    |      |      | $ | 412,385   |       |      | $ | 482,222   |       |  | $ | 554,150   |       |  | $ | 565,241   |    
|                                    | Income (loss) from continuing operations
    before the cumulative effect of change in accounting principle
    and discontinued operations(a) |                                                                   |   | (23,689    | )    |      |   | (5,648    | )     |      |   | 38,410    |       |  |   | 59,542    |       |  |   | 39,330    |    
|                                    | Cumulative effect of a change in accounting
    principle (net of income taxes)(b)                                                             |                                                                   |   |           |      |      |   |          |       |      |   |          |       |  |   |          |       |  |   | (5,315    | )  
|                                    | Discontinued operations(a):                                                                                                                    |                                                                   |   |            |      |      |   |           |       |      |   |           |       |  |   |           |       |  |   |           |    
|                                    |                                                                                                                                                | Income (loss) from discontinued operations,
    net of income tax |   |            | (174 | )    |   |           | 453   |      |   |           | 1,783 |  |   |           | 2,958 |  |   |           | 867 | 
|                                    |                                                                                                                                                | Gain (loss) on disposal, net of income taxes                      |   |            | (612 | )    |   |           | 1,328 |      |   |           |      |  |   |           |      |  |   |           |    | 
|                                    | Net income (loss)                                                                                                                              |                                                                   | $ | (24,475    | )    |      | $ | (3,867    | )     |      | $ | 40,193    |       |  | $ | 62,500    |       |  | $ | 34,882    |    
|NET INCOME (LOSS) PER COMMON SHARE: |                                                                                                                                                |                                                                   |   |            |      |      |   |           |       |      |   |           |       |  |   |           |       |  |   |          
|                                    | Basic                                                                                                                                          |                                                                   | $ | (0.55      | )    |      | $ | (0.09     | )     |      | $ | 0.90      |       |  | $ | 1.37      |       |  | $ | 0.68      |    
|                                    | Diluted                                                                                                                                        |                                                                   | $ | (0.55      | )    |      | $ | (0.09     | )     |      | $ | 0.88      |       |  | $ | 1.34      |       |  | $ | 0.67      |    
|BALANCE SHEET DATA:                 |                                                                                                                                                |                                                                   |   |            |      |      |   |           |       |      |   |           |       |  |   |           |       |  |   |          
|                                    | Total assets                                                                                                                                   |                                                                   |   | 41,007,305 |      |      | $ | 1,119,649 |       |      | $ | 1,156,770 |       |  | $ | 1,165,872 |       |  | $ | 1,328,779 |    
|                                    | Long-term debt, net of current portion                                                                                                         |                                                                   |   | 227,535    |      |      |   | 284,017   |       |      |   | 309,736   |       |  |   | 340,987   |       |  |   | 543,485   |    
|                                    | Stockholders equity                                                                                                                           |                                                                   |   | 681,014    |      |      |   | 706,676   |       |      |   | 707,941   |       |  |   | 668,100   |       |  |   | 632,000   |    



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | During 2003, in compliance with SFAS 144 the
    Company has reported revenues and expenses from assets sold
    during 2003 as discontinued operations for each period presented
    above, and recorded as revenue certain reimbursements for
    out-of-pocket expenses in accordance with EITF 01-14.                                                                                                          
|   
|(b) | Cumulative effect of a change in accounting
    principle of $5.3 million (net of income taxes) in 1999,
    relates to the adoption by the Company of Statement of Position
    98-5, Reporting on the Costs of Start-Up Activities
    (SOP 98-5). The Company adopted SOP 98-5 on
    January 1, 1999, and was required to write-off any
    unamortized pre-opening costs that remained on the balance sheet.

15



---



##### Table of Contents



Unaudited selected consolidated quarterly
financial data for the years ending December 31, 2003 and
2002 follow (in thousands, except per share amounts):

|                                                                    |  |           |        |          |  |               |         |              |  |   |         |  |  |   |        |  
|------------------------------------------------------------------- |  | --------- | ------ | -------- |  | ------------- | ------- | ------------ |  | - | ------- |  |  | - | ------ | -
|                                                                    |  | March 31, |        | June 30, |  | September 30, |         | December 31,
|Three Months Ended(a)                                               |  | 2003      |        | 2003     |  | 2003          |         | 2003        
|                                                                    |  |           |        |          |  |               |         |             
|Total revenue                                                       |  | $         | 94,622 |          |  | $             | 110,243 |              |  | $ | 108,142 |  |  | $ | 92,686 |  
|Operating income (loss)                                             |  |           | (3,478 | )        |  |               | 8,376   |              |  |   | 7,916   |  |  |   | 1,690  |  
|Income (loss) before discontinued operations,
    net of taxes      |  |           | (4,681 | )        |  |               | (18,801 | )            |  |   | 2,027   |  |  |   | (2,234 | )
|Discontinued operations, net of taxes                               |  |           | (1,951 | )        |  |               | 979     |              |  |   |        |  |  |   | 186    |  
|Net income (loss)                                                   |  |           | (6,632 | )        |  |               | (17,822 | )            |  |   | 2,027   |  |  |   | (2,048 | )
|                                                                   
|Earnings per common share:                                          |  |           |        |          |  |               |         |              |  |   |         |  |  |   |        |  
|                                                                   
|Basic:                                                              |  |           |        |          |  |               |         |              |  |   |         |  |  |   |        |  
|Income (loss) before discontinued operations                        |  | $         | (0.11  | )        |  | $             | (0.42   | )            |  | $ | 0.05    |  |  | $ | (0.05  | )
|Income (loss) from discontinued operations, net
    of income taxes |  |           | (0.04  | )        |  |               | 0.02    |              |  |   |        |  |  |   |       |  
|Net income (loss)                                                   |  | $         | (0.15  | )        |  | $             | (0.40   | )            |  | $ | 0.05    |  |  | $ | (0.05  | )
|                                                                   
|Diluted:                                                            |  |           |        |          |  |               |         |              |  |   |         |  |  |   |        |  
|Income (loss) before discontinued operations                        |  | $         | (0.11  | )        |  | $             | (0.42   | )            |  | $ | 0.05    |  |  | $ | (0.05  | )
|Income (loss) from discontinued operations,
    net of income taxes |  |           | (0.04  | )        |  |               | 0.02    |              |  |   |        |  |  |   |       |  
|Net income (loss)                                                   |  | $         | (0.15  | )        |  | $             | (0.40   | )            |  | $ | 0.05    |  |  | $ | (0.05  | )

|                                                                    |  |           |        |          |  |               |         |              |  |   |         |   |  |   |        |  
|------------------------------------------------------------------- |  | --------- | ------ | -------- |  | ------------- | ------- | ------------ |  | - | ------- | - |  | - | ------ | -
|                                                                    |  | March 31, |        | June 30, |  | September 30, |         | December 31,
|Three Months Ended(a)                                               |  | 2002      |        | 2002     |  | 2002          |         | 2002        
|                                                                    |  |           |        |          |  |               |         |             
|Total revenue                                                       |  | $         | 99,993 |          |  | $             | 112,014 |              |  | $ | 105,501 |   |  | $ | 94,876 |  
|Operating income (loss)                                             |  |           | 7,646  |          |  |               | 15,918  |              |  |   | 9,134   |   |  |   | 859    |  
|Income (loss) before discontinued operations,
    net of taxes      |  |           | 231    |          |  |               | (5,117  | )            |  |   | (1,882  | ) |  |   | 1.120  |  
|Discontinued operations, net of taxes                               |  |           | 543    |          |  |               | 632     |              |  |   | 4,666   |   |  |   | (4,060 | )
|Net income (loss)                                                   |  |           | 774    |          |  |               | (4,485  | )            |  |   | 2,784   |   |  |   | (2,940 | )
|                                                                   
|Earnings per common share:                                          |  |           |        |          |  |               |         |              |  |   |         |   |  |   |        |  
|                                                                   
|Basic:                                                              |  |           |        |          |  |               |         |              |  |   |         |   |  |   |        |  
|Income (loss) before discontinued operations                        |  | $         | 0.01   |          |  | $             | (0.11   | )            |  | $ | (0.04   | ) |  | $ | 0.02   |  
|Income (loss) from discontinued operations, net
    of income taxes |  |           | 0.01   |          |  |               | 0.01    |              |  |   | 0.10    |   |  |   | (0.09  | )
|Net income (loss)                                                   |  | $         | 0.02   |          |  | $             | (0.10   | )            |  | $ | 0.06    |   |  | $ | (0.07  | )
|                                                                   
|Diluted:                                                            |  |           |        |          |  |               |         |              |  |   |         |   |  |   |        |  
|Income (loss) before discontinued operations                        |  | $         | 0.01   |          |  | $             | (0.11   | )            |  | $ | (0.04   | ) |  | $ | 0.02   |  
|Income (loss) from discontinued operations, net
    of income taxes |  |           | 0.01   |          |  |               | 0.01    |              |  |   | 0.10    |   |  |   | (0.09  | )
|Net income (loss)                                                   |  | $         | 0.02   |          |  | $             | (0.10   | )            |  | $ | 0.06    |   |  | $ | (0.07  | )



---



|    |                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Amounts were restated from previously reported
    amounts due to the accounting for discontinued operations in
    compliance with SFAS 144, and EITF 01-14.

16



---



##### Table of Contents



The following table reconciles income before
discontinued operations to EBITDA for the years ended
December 31, 2003, 2002 and 2001 (in thousands):

|                                      |  |             |         |      |  |      |        |   |  |   |         |  
|------------------------------------- |  | ----------- | ------- | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                      |  |            
|                                      |  | December 31
|                                      |  |            
|                                      |  | 2003        |         | 2002 |  | 2001
|                                      |  |             |         |      |  |     
|Income before discontinued operations |  | $           | (23,689 | )    |  | $    | (5,648 | ) |  | $ | 38,410  |  
|Provision for income taxes            |  |             | (15,145 | )    |  |      | (3,610 | ) |  |   | 24,046  |  
|Equity in earnings of joint ventures  |  |             | (822    | )    |  |      |       |   |  |   |        |  
|Other (income) expense                |  |             | 35,706  |      |  |      | (1,244 | ) |  |   | (22,261 | )
|(Gain) loss on retirement of debt     |  |             | (1,622  | )    |  |      | 19,339 |   |  |   | 123     |  
|Interest expense                      |  |             | 20,914  |      |  |      | 27,583 |   |  |   | 33,643  |  
|Investment income                     |  |             | (1,078  | )    |  |      | (2,863 | ) |  |   | (2,244  | )
|Valuation of assets                   |  |             | 1,000   |      |  |      |       |   |  |   |        |  
|Depreciation and amortization         |  |             | 39,345  |      |  |      | 39,301 |   |  |   | 37,281  |  
|                                      |  |             |         |      |  |      |        |   |  |   |         |  
|EBITDA                                |  | $           | 54,609  |      |  | $    | 72,858 |   |  | $ | 108,998 |  
|                                      |  |             |         |      |  |      |        |   |  |   |         |  






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

MANAGEMENTS DISCUSSION AND ANALYSIS
OF

FINANCIAL CONDITION AND RESULTS OF
OPERATIONS


General

We are an owner, manager and franchisor of
limited-service and full-service hotels. We have
260 hotels in operation containing 34,324 rooms located in
36 states and Canada (the Portfolio) as of
March 1, 2004. We control three hotel brands 
AmeriSuites®, Wellesley Inns & Suites® and Prime
Hotels and Resorts®  and operate a portfolio of
full-service hotels under franchise agreements with national
hotel chains. We operate and have ownership or leasehold
interests in 126 hotels (the Owned Hotels),
operate 54 hotels for real estate investment trusts which
have cash flow guarantees and participations (Cash Flow
Hotels), manage 24 hotels for third parties (the
Managed Hotels), and franchise 56 hotels which
we do not operate (the Franchised Hotels). The
Portfolio is comprised of 148 AmeriSuites hotels,
82 Wellesley Inns & Suites hotels, three
Prime Hotels and Resorts hotels and 27 non-proprietary brand
hotels. As of March 1, 2004, 12 non-proprietary brand
hotels were in the process of being converted to the Prime
Hotel & Resorts brand.

Our growth has been focused on the development of
our proprietary brands. Through the development of our
proprietary brands, we have transformed our company from an
owner/operator into a more diversified company with ownership,
franchise and management interests, and have positioned the
company to generate additional revenues with minimal capital
investment.

Operating results for 2003 were impacted by the
continued weakness in the economy which had a significant
negative impact on business travel and the demand for hotel
rooms. Results were further impacted by concerns about airline
safety and inconvenience. As a result, for the year ended
December 31, 2003, revenues from comparable Owned and
Leased hotels declined by 3.3% and gross operating profits on
these hotels declined by 12.5%. Overall, for the year ended
December 31, 2003, revenue declined by 2.7% to
$380 million and EBITDA decreased by 25.0% to
$54.6 million due to the results of the comparable Owned
and Cash Flow Hotels and the effect of asset sales.

Certain statements in this Form 10-K
constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company, or
industry results, to differ materially from any future results,
performance or achievements expressed or implied by such
forward-looking statements.

17



---



##### Table of Contents



Forward-looking statements include the
information about Primes possible or assumed future
results of operations and statements preceded by, followed by or
that include the words believe, except,
anticipate, intend, plan,
estimate, or similar expressions, or the negative
thereof.

Actual results may differ materially from those
expressed in these forward-looking statements. Readers of this
Form 10-K are cautioned not to unduly rely on any
forward-looking statements.

The following important factors, in addition to
those discussed elsewhere in this Form 10-K or incorporated
herein by reference, could cause results to differ materially
from those expressed in such forward-looking statements:
competition within each of the Companys business segments
in areas such as access, location, quality or accommodations and
room rate structures; the balance between supply of and demand
for hotel rooms and accommodations; the Companys continued
ability to obtain new operating contracts and franchise
agreements; the Companys ability to develop and maintain
positive relations with current and potential hotel owners and
other industry participants; the level of rates and occupancy
that can be achieved by such properties and the availability and
terms of financing; the ability of the Company or its
franchisees to maintain the properties in a first-class manner,
including meeting capital expenditure requirements; changes in
travel patterns, taxes and government regulations which
influence or determine wages, prices, construction procedures
and costs; the effect of international, national and regional
economic conditions that will affect, among other things, demand
for products and services at the Companys hotels;
government approvals, actions and initiatives including the need
for compliance with environmental and safety requirements, and
change in laws and regulations or the interpretation thereof and
the potential effects of tax legislative action; and other risks
described from time to time in our filings with the SEC.

Although we believe the expectations reflected in
these forward-looking statements are based upon reasonable
assumptions, no assurance can be given that Prime 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 disseminate any
updates or revisions to any forward-looking statement contained
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.



| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | Results of Operations For the Year Ended
    December 31, 2003 Compared to the Year Ended
    December 31, 2002

Hotel revenues consist of lodging revenues (which
consist primarily of room, telephone and vending revenues) and
food and beverage revenues. Hotel revenues for the year ended
December 31, 2003 decreased by $16.7 million, or 4.5%,
from $374.1 million in 2002 to $357.3 million in 2003.
The decrease was due primarily to a 3.3% decline in revenues
from comparable Owned hotels, and the impact of asset sales and
lease terminations.

We operate three product types: our proprietary
AmeriSuites which are upscale all-suites hotels; our proprietary
Wellesley Inns & Suites which are mid-price limited
service hotels and our full-service hotels which are primarily
upscale hotels operated under national franchises.

18



---



##### Table of Contents



The following table illustrates the REVPAR
(Revenue Per Available Room) change, by segment in
2003 for the Owned and Cash Flow Hotels, which were operated for
comparable periods in 2003 and 2002.

|                        |           |                          |   |        |   |          |   |        |   |  |  |       |     
|----------------------- | --------- | ------------------------ | - | ------ | - | -------- | - | ------ | - |  |  | ----- | ----
|                        |           |                         
|                        |           | Years Ended December 31,
|                        |           |                         
|                        |           | 2003                     |   | 2002   |   | % Change
|                        |           |                          |   |        |   |         
|AmeriSuites             |           |                          |   |        |   |          |   |        |   |  |  |      
|                        | Occupancy |                          |   | 63.7   | % |          |   | 61.6   | % |  |  | 2.1   | pts.
|                        | ADR       |                          | $ | 66.74  |   |          | $ | 72.25  |   |  |  | (7.6  | )%  
|                        | REVPAR    |                          | $ | 42.52  |   |          | $ | 44.48  |   |  |  | (4.4  | )%  
|                       
|Wellesley Inns & Suites |           |                          |   |        |   |          |   |        |   |  |  |      
|                        | Occupancy |                          |   | 62.0   | % |          |   | 55.2   | % |  |  | 6.8   | pts.
|                        | ADR       |                          | $ | 55.06  |   |          | $ | 61.61  |   |  |  | (10.6 | )%  
|                        | REVPAR    |                          | $ | 34.15  |   |          | $ | 34.03  |   |  |  | 0.4   | %   
|                       
|Full-Service Hotels     |           |                          |   |        |   |          |   |        |   |  |  |      
|                        | Occupancy |                          |   | 65.5   | % |          |   | 65.0   | % |  |  | 0.5   | pts.
|                        | ADR       |                          | $ | 116.42 |   |          | $ | 122.44 |   |  |  | (4.9  | )%  
|                        | REVPAR    |                          | $ | 76.25  |   |          | $ | 79.54  |   |  |  | (4.1  | )%  
|                       
|Total                   |           |                          |   |        |   |          |   |        |   |  |  |      
|                        | Occupancy |                          |   | 63.3   | % |          |   | 59.7   | % |  |  | 3.6   | pts.
|                        | ADR       |                          | $ | 66.02  |   |          | $ | 72.28  |   |  |  | (8.7  | )%  
|                        | REVPAR    |                          | $ | 41.77  |   |          | $ | 43.18  |   |  |  | (3.3  | )%  

The REVPAR decreases reflect the weakness in the
economy which has a significant negative impact in business
travel and the demand for hotel rooms. Results were further
impacted by the war in Iraq and concerns about airline safety.
These factors have resulted in weaker pricing power which has
caused the average daily room rate (ADR) to decline.
The ADR decrease was partially offset by an increase in
occupancy achieved by attracting more leisure travelers and by
increasing inventory available to internet distributors.

Management, franchise and other fees consist
primarily of base and incentive fees earned under management
agreements, royalties earned under franchise agreements and
sales commissions earned by the Companys national sales
group. Management, franchise and other fees increased by
$7.4 million, or 43.8%, from $16.9 million in 2002 to
$24.3 million in 2003.

The increase was primarily due to an increase in
franchise royalty fees derived from hotels sold to franchisees,
new hotel openings, termination fees on three AmeriSuites hotels
in the second quarter of 2003, interim management and franchise
fees on the HPT hotels in the third quarter of 2003, and fees
charged to franchisees for providing reservation services. In
November 2002, we opened a new reservation center near our
headquarters in Fairfield, New Jersey. Previously, these
reservation services were provided by a third party.

Rental and other revenues consists of rental
income, interest on notes receivable and miscellaneous operating
income. Rental and other revenues decreased by
$0.5 million, or 21.1% from $2.5 million in 2002 to
$2.0 million in 2003 due to condemnation proceeds and other
miscellaneous revenue in 2002.

Hotel operating expenses consist of all direct
costs related to the operation of the Companys properties
(lodging, food & beverage, administration, selling &
advertising, utilities and repairs & maintenance). Hotel
operating expenses decreased by $1.1 million or 0.5% in
2003, from $209.9 million to $208.8 million as a
result of the decrease in hotel revenue. Hotel operating
expenses as a percentage of hotel revenues increased from 53.7%
in 2002 to 54.9% in 2003. Margins were impacted by an increase
in occupancy and a decrease in reservation costs, as Prime is
now providing this service, and these costs are now recorded as
brand and administrative expenses versus hotel operating
expenses in 2002.

19



---



##### Table of Contents



Rent and other occupancy expenses consist
primarily of rent expense, property insurance and real estate
and other taxes. Rent and other occupancy expenses decreased by
$2.2 million, or 2.7% to $77.0 million in 2003,
primarily due to the discontinuance of the funding of deficits
on HPT hotels since July 2002. This decrease is partially offset
by higher property insurance costs and the costs of terminating
franchise agreements on five Ramada hotels which were converted
to the Wellesley brand in 2003.

Brand and administrative expenses consist of
centralized management expenses associated with operating the
hotels, corporate expenses, national brand advertising expenses
and reservation costs. Brand and administrative expenses
increased by $11.4 million or 36.2%, primarily due to the
operation of the new reservation center which opened in November
2002.

Depreciation and amortization increased by 0.1%
in 2003 due to depreciation on capital additions on existing
hotels offset by hotel sales.

Investment income decreased by $2.0 million,
or 70.7%, from $2.8 million in 2002 to $0.8 million in
2003 due to lower cash and security deposit balances and lower
interest rates.

Interest expense decreased by $6.7 million,
or 24.2% from $27.6 million in 2002 to $20.9 million
in 2003, primarily due to debt reductions and the retirement of
9 1/4% First Mortgage Notes in August 2002 with borrowings
under our $125 Million Revolving Credit Facility (the
Credit Facility) at a lower rate, which averaged
3.67% for the year.

Gains (losses) on retirement of debt related
to the retirement of $21.3 million of the 8 3/8% Notes
during 2003. In 2002, the gains (losses) on retirement of
debt related to premiums on the retirement of the
9 3/4% Senior Subordinated Notes (the
9 3/4% Notes) and the write-off of
deferred loan fees on both the 9 3/4% Notes and our
former revolving credit facility.

Other income (loss) consists of property
transactions and other items which are not part of the
Companys recurring operations. Other income (loss) for
2003 is primarily comprised of a write-off of assets associated
with the HPT lease. Other income for 2002 consisted of gains on
property sales on hotels where we retained management partially
offset by a $4.5 million litigation charge.

Equity in earnings from unconsolidated joint
ventures related to the Meadowlands Venture and the Quebec
Venture.

Discontinued operations reflect the operations of
hotels no longer operated by Prime and the associated gain or
loss on the disposal of these properties.



| |                                                                               
| | ------------------------------------------------------------------------------
| | Results of Operations For the Year Ended
    December 31, 2002 Compared to the

Year Ended December 31, 2001


Hotel revenues consist of lodging revenues (which
consist primarily of room, telephone and vending revenues) and
food and beverage revenues. Hotel revenues for the year ended
December 31, 2002 decreased by $73.1 million, or
16.1%, from $455.3 million in 2001 to $382.2 million
in 2002. The decrease was due primarily to a 9.2% decline in
revenues from comparable Owned and Leased hotels, and the impact
of asset sales and lease terminations.

The Company operates three product types: its
proprietary AmeriSuites which are upscale all-suites hotels; its
proprietary Wellesley Inns & Suites which are mid-price
limited service hotels and its full-service hotels which are
primarily upscale hotels operated under national franchises.

20



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##### Table of Contents



The following table illustrates the REVPAR
(Revenue Per Available Room) change, by segment in
2002 for the Owned and Leased hotels, which were operated for
comparable periods in 2002 and 2001.

|                        |           |                          |   |        |   |          |   |        |   |  |  |       |       
|----------------------- | --------- | ------------------------ | - | ------ | - | -------- | - | ------ | - |  |  | ----- | ------
|                        |           |                         
|                        |           | Years Ended December 31,
|                        |           |                         
|                        |           | 2002                     |   | 2001   |   | % Change
|                        |           |                          |   |        |   |         
|AmeriSuites             |           |                          |   |        |   |          |   |        |   |  |  |      
|                        | Occupancy |                          |   | 61.8   | % |          |   | 63.6   | % |  |  | (1.8  | ) pts.
|                        | ADR       |                          | $ | 71.89  |   |          | $ | 76.03  |   |  |  | (5.4  | )%    
|                        | REVPAR    |                          | $ | 44.44  |   |          | $ | 48.37  |   |  |  | (8.1  | )%    
|                       
|Wellesley Inns & Suites |           |                          |   |        |   |          |   |        |   |  |  |      
|                        | Occupancy |                          |   | 54.7   | % |          |   | 60.2   | % |  |  | (5.5  | ) pts.
|                        | ADR       |                          | $ | 58.59  |   |          | $ | 59.99  |   |  |  | (2.3  | )%    
|                        | REVPAR    |                          | $ | 32.06  |   |          | $ | 36.15  |   |  |  | (11.3 | )%    
|                       
|Full-Service Hotels     |           |                          |   |        |   |          |   |        |   |  |  |      
|                        | Occupancy |                          |   | 64.8   | % |          |   | 67.9   | % |  |  | (3.1  | ) pts.
|                        | ADR       |                          | $ | 105.52 |   |          | $ | 113.02 |   |  |  | (6.6  | )%    
|                        | REVPAR    |                          | $ | 68.40  |   |          | $ | 76.78  |   |  |  | (10.9 | )%    
|                       
|Total                   |           |                          |   |        |   |          |   |        |   |  |  |      
|                        | Occupancy |                          |   | 60.2   | % |          |   | 63.1   | % |  |  | (2.9  | ) pts.
|                        | ADR       |                          | $ | 72.11  |   |          | $ | 75.68  |   |  |  | (4.7  | )%    
|                        | REVPAR    |                          | $ | 43.38  |   |          | $ | 47.79  |   |  |  | (9.2  | )%    

The REVPAR decreases reflect the weak economy
compounded by the effects of travel safety concerns. The decline
was comprised of a decrease in both occupancy and average daily
rate (ADR). Key markets affected were Atlanta,
Chicago, Dallas, the Northeast and South Florida.

Management, franchise and other fees consist
primarily of base and incentive fees earned under management
agreements, royalties earned under franchise agreements and
sales commissions earned by the Companys national sales
group. Management, franchise and other fees increased by
$1.5 million, or 10.0%, from $15.4 million in 2001 to
$16.9 million in 2002. The increase was primarily due to an
increase in franchise royalty fees derived from hotels sold to
franchisees and new hotel openings and an increase in management
fees due to new management agreements.

Rental and other consists of rental income,
interest on mortgages and notes receivable and other
miscellaneous operating income. Rental and other decreased by
$0.2 million, or 9.0% from $2.7 million in 2001 to
$2.5 million in 2002 due to reductions in miscellaneous
income.

Hotel operating expenses which consist of all
direct costs related to the operation of the Companys
properties (lodging, food & beverage, administration,
selling & advertising, utilities and repairs &
maintenance) decreased by $31.5 million or 12.8% in 2002
from $246.0 million to $214.5 million as a result of the
decrease in hotel revenue. Hotel operating expenses, as a
percentage of hotel revenues, increased from 54.0% in 2001 to
56.1% in 2002 due to the decline in revenues.

Rent and other occupancy expenses consist
primarily of rent expense, property insurance and real estate
and other taxes. Rent and other occupancy expenses decreased by
$4.8 million, or 5.5%, from $87.1 million in 2001 to
$82.3 million in 2002 due primarily to the termination of
leases on eight hotels with MeriStar Hospitality.

General and administrative expenses consist
primarily of centralized management expenses associated with
operating the hotels, brand marketing expenses, franchise sales
and support costs and general corporate expenses. General and
administrative expenses were relatively stable increasing by
just $0.1 million, from $28.8 million in 2001 to
$28.9 million in 2002.

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Depreciation and amortization expense increased
by $2.1 million, or 5.7%, from $37.5 million in 2001
to $39.7 million in 2002 primarily due to capital additions
at existing hotels partially offset by the disposal of hotel
properties during 2002.

Investment income increased by $0.6 million,
or 27.6%, from $2.2 million in 2001 to $2.9 million in
2002 primarily due to higher cash balances offset by lower
interest rates.

Interest expense decreased by $6.1 million,
or 18.0%, from $33.6 million in 2001 to $27.6 million
in 2002, primarily due to the paydowns of debt resulting from
asset sales and operating cash flows, the refinancing of the
9 3/4% Notes with the new 8 3/8% Notes and the
retirement of the 9 1/4% Notes funded primarily by the new
credit facility.

Other income consists of property transactions
and other items which are not part of the Companys
recurring operations. Other income for 2002 consisted of gains
on property sales on hotels where the Company retained
management partially offset by a $4.5 million litigation
charge. Other income in 2001 consisted of net gains related to
the disposition of properties and recognition of the remaining
unamortized portion of the deferred gain related to the
termination of the MeriStar hotel leases totaling
$36.3 million, partially offset by losses of
$4.3 million on the sale of marketable securities and
valuation adjustments relating primarily to vacant land parcels
of $6.7 million.

Liquidity and Capital Resources

At December 31, 2003, we had cash and cash
equivalents of $12.9 million. We also had approximately
$25 million of availability under our credit facility based
on our covenants. We may utilize any excess cash flow to grow
our brands either through acquisitions or new construction, to
retire debt and/or to repurchase shares.

Our major sources of cash for 2003 were cash
flows from operations of $43.5 million, net borrowings of
$13.0 million, net proceeds from asset sales of
$17.9 million, and proceeds from sales and financing of
interests in unconsolidated joint ventures of
$18.3 million. Our major uses of cash during the period
were debt repayments of $69.5 million, capital expenditures
of $28.7 million and an investment in a joint venture of
$6.5 million.

Sources of Capital.The Company has undertaken a strategic
initiative to diversify its operations. As part of this
strategy, we have disposed of certain hotel real estate while
retaining the franchise rights and, in some cases, management
rights. We have used the proceeds primarily to reduce debt and
fund brand growth. At December 2003, our debt to the last twelve
months EBITDA ratio was 3.8 times and our debt to book
capitalization was 25%.

In 2003, we sold one AmeriSuites and one
Wellesley Inns and a parcel of vacant land for a total proceeds
of $17.9 million. We retained the franchise rights to the
AmeriSuites and Wellesley Inns under 20-year franchise
agreements, and signed a management agreement on the AmeriSuites
hotel.

The operations and gains on sales of the hotels,
net of tax, in which we did not retain management are included
in the Consolidated Statements of Operations as part of
discontinued operations.

In July, 2002, we entered into a new
$125 million credit facility with a syndicate of financial
institutions (the Credit Facility) which expires in
August 2006. We had borrowings of $35.0 million under the
Credit Facility at LIBOR +2.50%, or approximately 3.7%, as of
December 31, 2003. The Credit Facility consists of a four
year, $125 million revolving line of credit and is secured
by the equity interests of certain of Primes subsidiaries.
The Credit Facility contains loan covenants customary for a
credit facility of this size and nature, including but not
limited to, limitation on making capital expenditures, selling
or transferring assets, making certain investments (including
acquisitions), repurchasing shares and liens. In addition, we
must maintain a debt to EBITDA ratio of 4.25 times and an
EBITDA to interest ratio of 2.50 times. We were in
compliance with all covenants at December 31, 2003.
However, there can be no assurance that we will continue to be
in compliance with these covenants.

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In March 2003, subsidiaries of Prime and UCC each
sold a ten percent interest in the Quebec Venture at cost to Ark
Quebec Inc., an unrelated third party, decreasing each of their
respective equity interests to 40%. In July 2003, the Quebec
Venture obtained an $8.2 million (CDN) first mortgage
loan at a fixed rate of 6.26% due to 2008. The loan is recourse
to the hotel only. Prime received $2.5 million of the loan
proceeds.

In March 2003, subsidiaries of Prime and UCC each
sold a ten percent interest in the Meadowlands Venture. The
interests were sold to Ark Meadowlands, Inc., an unrelated third
party, at cost decreasing Primes and UCCs equity
interests in the Meadowlands Venture to 40% each. In April 2003,
the Meadowlands Venture entered into a $25.0 million
mortgage loan secured by the hotel. The loan bears interest at
LIBOR+2.75% and is due in April 2006. The proceeds of the loan
were distributed to the partners based on their ownership
interests with Prime receiving approximately $10.0 million
in April 2003. Under a guaranty agreement, Prime and UCC jointly
and severally guaranteed $4.0 million which will be reduced
by scheduled principal payments.

Uses of Capital.In
2003, we purchased $21.3 million of 8 3/8% Senior
Subordinated Notes due 2012 (the 8 3/8 Notes) for
$19.7 million, realizing gains of $1.6 million.

We have focused the growth of our brands on
franchising and, therefore, new construction spending has been
limited. There are currently no new construction projects
underway. We spent $28.7 million on capital additions in
2003 which primarily consisted of capital improvements at our
Owned Hotels. We plan to fund capital improvements at existing
hotels primarily with internally generated cash flow.

In January 2003, Nova Scotia Company, an entity
in which Prime held a 50% interest, acquired the Quebec City
Holiday Inn Select. Located in the Lower Town district of Quebec
City, the hotel is managed by Prime and will continue to operate
under the Holiday Inn brand name. Primes partner in the
acquisition is United Capital Corp. (UCC), an entity
in which A.F. Petrocelli, Primes chairman and chief
executive officer, has a controlling ownership interest. Under
the operating agreement, all significant operating and capital
decisions are made jointly and operating profits and losses are
allocated based on ownership interest.

On April 3, 2003, a wholly owned subsidiary
of the Company terminated lease agreements on three hotels owned
by ShoLodge, Inc. (ShoLodge) due to operating
shortfalls which approximated $1.1 million in the past
twelve months. In accordance with the lease termination, Prime
forfeited its rights to receive a $3.1 million payment in
2011 which was due at the end of the lease. ShoLodge assumed
management of the hotels and is operating the hotels under new
ten-year franchise agreements with Prime, under the AmeriSuites
flag. These franchise agreements permit ShoLodge to terminate
the agreements without termination fees upon proper notice. The
results of operations for these hotels are reflected in
discontinued operations, net of tax, in the accompanying
financial statements. In addition, a loss of $1.5 million,
net of tax, was recorded in 2003 in gain (loss) on disposal
from discontinued operations for the net assets associated with
the lease.

In July 2003, a subsidiary of the Company did not
make its scheduled July 1 rent payment of approximately
$2.0 million on 24 AmeriSuites hotels and received a
default notice from HPT. Over the previous twelve months, cash
flow was negatively impacted by $11.5 million as rent
payments exceeded operating cash flow by $9.0 million and
approximately $2.5 million was required to be sent aside
for capital improvements. In December 2003, we terminated our
lease agreement for 24 AmeriSuites hotels with HPT and
entered into a management agreement with HPT for the
24 AmeriSuites hotels and 12 full-service hotels to be
re-branded under our Prime Hotels & Resorts chain. The
agreement became effective on January 1, 2004 for the
AmeriSuites hotels and February 1, 2004 for the Prime
Hotels & Resorts hotels. The term is 15 years and we
have two renewal options of 15 years each.

Under the agreement, HPT will receive an
owners priority return of $26 million per year. This
return is guaranteed by Prime under a limited guarantee that
caps the maximum cash outlay by Prime over the life of the
agreement at $30 million. Cash flow generated by the hotels
in excess of $26 million per year will be split 50/50
between HPT and Prime with Primes share counting as its
royalty and management fee. Also, as part of the agreement, HPT
will provide $25 million during the first two years to pay
for re-branding and other capital improvements on the 36 hotels.

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At December 31, 2003, the Company has net
operating loss carry forwards of approximately
$91.0 million which expire in the years 2006 through 2023
and are available to offset future Federal taxable income.
Included in the net operating loss carry forwards at
December 31, 2003, the Company has approximately
$52.4 million relating to PMI, which expires in the year
2006 and is subject to an annual limitation of $8.7 million
under the Internal revenue Code due to a change in ownership of
the Company upon consummation of the Plan. The Company has not
recognized the future tax benefits associated with the PMI net
operating loss carryforwards. Accordingly, the Company has
provided a valuation allowance of approximately
$18.3 million against the deferred tax asset at
December 31, 2003.

Critical Accounting Policies

Primes discussion and analysis of its
financial condition and results of operations are based upon
Primes consolidated financial statements which have been
prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these
financial statements requires Prime to make estimates and
judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. Prime bases its estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

Prime believes the following critical accounting
policies affect the significant judgments and estimates used in
the preparation of its consolidated financial statements.

Property, Equipment and Leasehold
Improvements

Property, equipment and leasehold improvements
that the Company intends to continue to operate are stated at
their fair market value as of July 31, 1992 plus the cost
of acquisitions subsequent to that date less accumulated
depreciation and amortization from August 1, 1992.
Provision is made for depreciation and amortization using the
straight-line method over the estimated useful lives of the
assets.

Expenditures for maintenance and repairs are
expensed as incurred. Replacements and betterments are
capitalized.

Construction in progress represents costs
incurred in the development of hotels. Such costs include
construction costs and capitalized interest.

The Company reviews each of its assets held for
use for which indicators of impairment are present to determine
whether the carrying amount of the asset will be recovered. The
Company recognizes impairment if the future undiscounted cash
flows (before interest charges) are less than the carrying
amount. In 2003, we recorded $1.0 million in impairment
charges.

Assets held for sale are recorded at the lower of
carrying value or fair value less costs to sell.

Long-Lived Assets

In October 2001, the Financial Accounting
Standards Board (FASB) issued Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets SFAS 144, which supersedes FASB Statement
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of.
However it retains the fundamental provisions of that statement
related to the recognition and measurement of the impairment of
long-lived assets to be held and used. In addition,
the Statement provides more guidance on estimating cash flows
when performing a recoverability test, requires that a
long-lived asset or asset group to be disposed of other than by
sale (e.g. abandoned) be classified as held and used
until it is disposed of, and establishes more restrictive
criteria to classify an asset or asset group as held for
sale. SFAS 144 superseded APB Opinion 30, Reporting
the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Transactions. SFAS 144 extended the
reporting of a discontinued operation to a component of an
entity. Therefore, the

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operations of assets held for sale or assets sold
are required to be presented as discontinued operations in the
Companys statement of operations.


The Company adopted this pronouncement on
January 1, 2002. This resulted in the Company having to
reclassify certain revenues and expenses to discontinued
operations for sold properties where the Company did not retain
management. This adoption had no impact on the Companys
net income or financial position.

Investments in Unconsolidated Joint
Ventures

The Company accounts for its investments in
unconsolidated joint ventures under the equity method of
accounting as the Company exercises significant influence, but
does not control these entities. These investments are recorded
initially at cost, as investments in unconsolidated joint
ventures, and subsequently adjusted for equity in earnings
(loss) and cash contributions and distributions. Any
difference between the carrying amount of these investments on
the balance sheet of the Company and the underlying equity in
net assets is amortized as an adjustment to equity in earnings
(loss) of unconsolidated joint ventures over the lesser of
the joint venture term or 40 years. As of December 31,
2003, investments in unconsolidated joint ventures consisted of
the Companys 40% ownership interest in two hotels.

Insurance Programs

The Company uses an incurred loss retrospective
insurance plan for general and auto liability and workers
compensation. Predetermined loss limits have been arranged with
insurance companies to limit the Companys per occurrence
and aggregate cash outlay.

The Company maintains a self-insurance program
for major medical and hospitalization coverage for employees and
dependents, which is partially funded by payroll deductions.
Payments for major medical and hospitalization below specified
aggregate annual amounts are self-insured by the Company. Claims
for benefits in excess of these amounts are covered by insurance
purchased by the Company.

Provisions have been made in the consolidated
financial statements which represent the expected future
payments based on the estimated ultimate cost for incidents,
less insured amounts, incurred through the balance sheet date
and are included in other current and other long-term
liabilities based on the expected payment dates.

Revenue Recognition

Room revenue and other revenues are recognized
when earned. Management and franchise fee revenues are
recognized when all material services or conditions relating to
the respective property or franchisee have been substantially
performed or satisfied by the Company. Such revenues, when
recognized, are included in management, franchise and other fees
on the accompanying consolidated financial statements. An
allowance for doubtful accounts is established based on our
periodic review of receivable balances and established criteria.

Gains and losses resulting from sales of hotels
are recorded in full when title is conveyed to the buyer and
when various criteria are met relating to the buyers
financial commitment and any subsequent involvement by the
Company with respect to the hotels being sold.

The Companys sales of hotels are sometimes
accompanied by a leaseback of the facilities under operating
lease arrangements. Such sales are recognized when the above
sales criteria are met and certain specific criteria are met
relating to the lease terms. Related profit is deferred and is
recognized as income over the remaining lease term.

Contractual Obligations



| |                                            
| | -------------------------------------------
| | Leases/ Management Agreement
    Guarantees

The Company leases various hotels under lease
agreements with initial terms expiring at various dates from
2005 through 2061. The Company has options to renew certain of
the leases for periods ranging from 1 to

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99 years. Rental payments are based on
minimum rentals plus a percentage of the hotel properties
revenues in excess of stipulated amounts (See Note 9).


Rental expense for all operating leases,
including those agreements with terms of less than one year, and
owners return for the Equity Inns management agreements
consist of the following for the years ended December 31,
2003, 2002 and 2001 (in thousands):

|                   |                |              |        |        |  |      |        |        |  |   |        |        | 
|------------------ | -------------- | ------------ | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                   |                |             
|                   |                | December 31,
|                   |                |             
|                   |                | 2003         |        | 2002   |  | 2001
|                   |                |              |        |        |  |     
|Rentals/guarantees |                | $            | 44,488 |        |  | $    | 59,967 |        |  | $ | 65,709 |       
|Contingent rentals |                |              | 1,305  |        |  |      | 1,501  |        |  |   | 5,738  |       
|                   |                |              |        |        |  |      |        |        |  |   |        |       
|                   | Rental expense |              | $      | 45,793 |  |      | $      | 61,468 |  |   | $      | 71,447 | 
|                   |                |              |        |        |  |      |        |        |  |   |        |       

On January 1, 2002, the Company converted
its leases on 18 AmeriSuites it leased from Equity Inns into
management agreements. These management agreements run for the
unexpired term of the leases they replaced and require Prime to
guarantee a certain minimum level of cash flow. The lease
agreements expire in 2007 and 2008 and will then be converted to
20 year franchise agreements provided that we are in
compliance with the cash flow guarantee requirements under the
current agreements.

In December 2003, we terminated our lease
agreement for 24 AmeriSuites hotels with HPT and entered into a
management agreement with HPT for the 24 AmeriSuites hotels and
12 full-service hotels to be re-branded under our Prime Hotels
& Resorts chain. The agreement became effective on
January 1, 2004 for the AmeriSuites hotels and
February 1, 2004 for the Prime Hotels & Resorts hotels.
The term is 15 years and we have two renewal options of
15 years each.

Under the agreement, HPT will receive an
owners priority return of $26 million per year. This
return is guaranteed by Prime under a limited guarantee which
caps the maximum cash outlay by Prime over the life of the
agreement at $30 million. Cash flow generated by the hotels
in excess of $26 million per year will be split 50/50
between HPT and Prime with Primes share counting as its
royalty and management fee. Also, as part of the agreement, HPT
will provide $25 million during the first two years to pay
for re-branding and other capital improvements on the 36 hotels.

Below is a schedule of the future guaranteed
minimum cash flow levels (in thousands):

|           |  |           |        |            |  |       |         |  |  |   |         | 
|---------- |  | --------- | ------ | ---------- |  | ----- | ------- |  |  | - | ------- | 
|           |  | Operating |        | Management |  |      
|           |  | Leases    |        | Agreements |  | Total
|           |  |           |        |            |  |      
|2004       |  | $         | 6,893  |            |  | $     | 45,578  |  |  | $ | 52,471  | 
|2005       |  |           | 6,801  |            |  |       | 46,661  |  |  |   | 53,462  | 
|2006       |  |           | 6,737  |            |  |       | 46,661  |  |  |   | 53,398  | 
|2007       |  |           | 6,740  |            |  |       | 46,661  |  |  |   | 53,401  | 
|2008       |  |           | 3,817  |            |  |       | 33,550  |  |  |   | 37,367  | 
|Thereafter |  |           | 37,536 |            |  |       | 260,000 |  |  |   | 297,536 | 
|           |  |           |        |            |  |       |         |  |  |   |         | 
|Total      |  | $         | 68,524 |            |  | $     | 479,111 |  |  | $ | 547,635 | 
|           |  |           |        |            |  |       |         |  |  |   |         | 

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| |     
| | ----
| | Debt

Debt consists of the following (in thousands):

|                                       |  |              |         |      |  |   |         |  
|-------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | -
|                                       |  |             
|                                       |  | December 31,
|                                       |  |             
|                                       |  | 2003         |         | 2002
|                                       |  |              |         |     
|8 3/8% Senior Subordinated Notes(a)    |  | $            | 178,725 |      |  | $ | 200,000 |  
|Revolving Credit Facility(b)           |  |              | 35,000  |      |  |   | 70,000  |  
|Mortgages and other notes payable(d)   |  |              | 14,877  |      |  |   | 15,069  |  
|                                       |  |              |         |      |  |   |         |  
|Total debt                             |  |              | 228,602 |      |  |   | 285,069 |  
|Less current maturities                |  |              | (1,067  | )    |  |   | (1,052  | )
|                                       |  |              |         |      |  |   |         |  
|Long-term debt, net of current portion |  | $            | 227,535 |      |  | $ | 284,017 |  
|                                       |  |              |         |      |  |   |         |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The 8 3/8% Notes are unsecured obligations
    of Prime and contain certain covenants including limitations on
    the incurrence of debt, dividend payments, certain investments,
    transactions with affiliates, asset sales and mergers and
    consolidations. The 8 3/8% Notes mature in April 2012 (See
    Note 7).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(b) | We had borrowings of $35.0 million under the
    Credit Facility at LIBOR +2.50%, or approximately 3.7%, as of
    December 31, 2003. The Credit Facility consists of a four
    year, $125 million revolving line of credit and is secured
    by the equity interests of certain of Primes subsidiaries.
    In addition, under certain circumstances the Company has the
    right to increase the Credit Facility by an aggregate amount up
    to $100 million either through a term loan or an increase
    in the revolving line of credit. The credit agreement contains
    loan covenants customary for a credit facility of this size and
    nature, including but not limited to, limitations on making
    capital expenditures, selling or transferring assets, making
    certain investments (including acquisitions), repurchasing
    shares and liens. In addition, we must maintain a debt to EBITDA
    ratio of 4.25 times and an EBITDA to interest ratio of 2.50
    times. We were in compliance with all covenants at
    December 31, 2003. However, there can be no assurance that
    we will continue to be in compliance with these covenants.
|   
|(c) | The Company has two mortgage notes payable that
    are secured by hotel properties with a book value of
    $33.0 million. At December 31, 2003 these notes bear
    interest at 6.7% and 8.6%, and mature in 2004 and 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Maturities of long-term debt subsequent to
December 31, 2003 are as follows (in thousands):

|           |  |   |         | 
|---------- |  | - | ------- | 
|2004       |  | $ | 1,067   | 
|2005       |  |   | 1,144   | 
|2006       |  |   | 35,250  | 
|2007       |  |   | 272     | 
|2008       |  |   | 294     | 
|Thereafter |  |   | 190,575 | 
|           |  |   |         | 
|Total      |  | $ | 228,602 | 
|           |  |   |         | 

Recently Issued Accounting
Pronouncements

In November of 2002, the FASB issued
Interpretation No. 45, (FIN45) Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. The
Interpretation elaborates on the disclosures to be made by a
guarantor in its financial statements about its obligations
under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. This Interpretation does
not prescribe a specific approach for subsequently measuring the
guarantors recognized liability over the term of the
related guarantee. The disclosure provisions of this
Interpretation are effective for the Companys
December 31, 2002 financial statements. The initial
recognition

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and initial measurement provisions of this
Interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The
adoption of FIN 45 did not have a material impact on the
Companys financial statements.


In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest Entities. This
Interpretation clarifies the application of existing accounting
pronouncements to certain entities in which equity investors do
not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial
support from other parties. In December of 2003, a revision was
issued (46R) to clarify some of the original provisions. The
provisions of this interpretation are immediately effective for
VIEs formed after January 31, 2003. The provisions of
the Interpretation are effective in the first quarter of 2004
for all variable interests in variable interest entities. The
Company does not believe that this Interpretation will have a
significant impact on the Companys financial statements.

In May 2003, FASB issued SFAS No. 150
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This
statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of
both liabilities and equity, and is 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. As a result of
further discussion by the FASB on October 8, 2003, the FASB
announced that minority interests in consolidated partnerships
with specified finite lives should be reclassified as
liabilities and presented at fair marker value unless the
interests are convertible into the equity of the parent. Fair
market value adjustments occurring after July 1, 2003
should be recorded as a component of interest expense. At their
October 29, 2003 meeting, the FASB agreed to indefinitely
defer the implementation of their announcement at the
October 8, 2003 meeting regarding the accounting treatment
for minority interests in finite life partnerships. Therefore,
until a final resolution is reached, the Company will not
implement this aspect of the standard. If the Company were to
adopt this standard under its current provisions, it would not
have a material impact on the Companys financial
statements.

In response to a FASB staff announcement in
November 2001, and in accordance with the Emerging Issues Task
Force (EITF) Abstract 01-14 Income Statement
Characterization of Reimbursements received for
Out-Of-Pocket Expenses incurred which was issued in
January 2002, the Company began recording the reimbursements of
costs incurred on behalf of managed hotel properties and
franchisees received as other revenues from managed and
franchised properties and the costs incurred on behalf of
managed hotel property owners and franchisees as other expenses
from managed and franchised properties in the first quarter of
2002. These costs relate primarily to payroll costs at managed
properties where the Company is the employer. Comparative
financial statements for the prior periods were reclassified to
conform with the presentation in the 2002 financial statements.
Since the reimbursements are made based upon the costs incurred
with no added margin, the adoption of this guidance has no
effect on the operating income, total or per Share net income,
cash flows or financial position of the Company.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

The Company is exposed to changes in interest
rates from its floating rate debt arrangements. At
December 31, 2003, the Company had $228.6 million of
debt outstanding of which $193.6 million bears interest at
fixed rates. The interest rate on the Companys Credit
Facility, under which $35 million was outstanding at
December 31, 2003, is variable at a rate of LIBOR + 2.50%.
A hypothetical 100 basis point adverse move (increase) on
short-term interest rates on the floating rate debt outstanding
at December 31, 2003 would adversely affect Primes
annual interest cost by approximately $0.4 million assuming
borrowed amounts under the Credit Facility remained at
$35 million.

28



---



##### Table of Contents



Summary of Indebtedness

Combined aggregate principal maturities of debt
as of December 31, 2003, are as follows (in thousands):

|           |  |        |         |          |  |              |        |       |  |   |        |  |  |   |         | 
|---------- |  | ------ | ------- | -------- |  | ------------ | ------ | ----- |  | - | ------ |  |  | - | ------- | 
|           |  | 8 3/8% |         | Credit   |  | Scheduled    |        |      
|           |  | Notes  |         | Facility |  | Amortization |        | Total
|           |  |        |         |          |  |              |        |      
|2004       |  | $      |        |          |  | $            |       |       |  | $ | 1,067  |  |  | $ | 1,067   | 
|2005       |  |        |        |          |  |              |       |       |  |   | 1,144  |  |  |   | 1,144   | 
|2006       |  |        |        |          |  |              | 35,000 |       |  |   | 250    |  |  |   | 35,250  | 
|2007       |  |        |        |          |  |              |       |       |  |   | 272    |  |  |   | 272     | 
|2008       |  |        |        |          |  |              |       |       |  |   | 294    |  |  |   | 294     | 
|Thereafter |  |        | 178,725 |          |  |              |       |       |  |   | 11,850 |  |  |   | 190,575 | 
|           |  |        |         |          |  |              |        |       |  |   |        |  |  |   |         | 
|           |  | $      | 178,725 |          |  | $            | 35,000 |       |  | $ | 14,877 |  |  | $ | 228,602 | 
|           |  |        |         |          |  |              |        |       |  |   |        |  |  |   |         | 






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

See Index to Financial Statements in Item 15.






|        |                                                                                              
|------- | ---------------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements With
    Accountants on Accounting and Financial
    Disclosures

None.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

As of the end of the period covered by this
Annual report on Form 10-K, the Company, under the
supervision and with the participation of management, including
the Chief executive Officer and the Chief Financial Officer,
evaluated the effectiveness of the Companys disclosure
controls and procedures (as defined in Rules 13a-14 and
15d-14 under the Exchange Act). Based upon that evaluation, the
Companys Chief Executive Officer and the Chief Financial
Officer have concluded that the Companys disclosure
controls and procedures are effective to timely alert them to
material information relating to the Company (including its
consolidated subsidiaries) required to be included in
Companys Exchange Act filings.

29



---



##### Table of Contents






PART III






|         |                                                    
|-------- | ---------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Company

MANAGEMENT

Directors and Executive Officers

Set forth below are the names, ages and positions
of the directors and executive officers of the Company:

|                         |  |     |    |           |  |                                                                              
|------------------------ |  | --- | -- | --------- |  | -----------------------------------------------------------------------------
|Name                     |  | Age |    | Positions
|                         |  |     |    |          
|A.F. Petrocelli          |  |     | 60 |           |  | President, Chief Executive Officer and Chairman
    of the Board of Directors
|Lawrence N. Friedland(1) |  |     | 81 |           |  | Director                                                                     
|Allen Kaplan(1)          |  |     | 54 |           |  | Director                                                                     
|Howard M. Lorber(1)      |  |     | 55 |           |  | Director                                                                     
|Richard Reitman(1)       |  |     | 66 |           |  | Director                                                                     
|Richard T. Szymanski     |  |     | 46 |           |  | Director, Senior Vice President and Chief
    Financial Officer              
|Stephen M. Kronick       |  |     | 49 |           |  | Senior Vice President/ Hotel Operations                                      
|Vito Stellato            |  |     | 51 |           |  | Senior Vice President/ Human Resources                                       
|Jeffrey T. Williams      |  |     | 57 |           |  | Senior Vice President/ Franchise Sales and
    Development                   
|John Capone              |  |     | 52 |           |  | Senior Vice President/ Hotel Operations                                      
|Maureen OHanlon         |  |     | 53 |           |  | Senior Vice President/ Sales and Marketing                                   
|Arthur Manso             |  |     | 51 |           |  | Senior Vice President/ Purchasing                                            
|Bryan Hayes              |  |     | 40 |           |  | Vice President/ Hotel Operations                                             



---



|    |                                                
|--- | -----------------------------------------------
|(1) | Member of the Compensation and Audit Committee.

The following is a biographical summary of the
experience of the directors and executive officers of the
Company:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A.F. Petrocelli has been a Director since
    1992 and was a member of the Compensation and Audit Committee
    from 1993 to 1998. Mr. Petrocelli has been Chairman of the
    Board of Directors, President and Chief Executive Officer of the
    Company since 1998. Mr. Petrocelli has been Chairman of the
    Board of Directors and Chief Executive Officer of United Capital
    Corp. for more than the past five years. He is also a director
    of Nathans Famous, Inc., Boyar Value Fund, Inc. and
    Philips International Realty Corp.                                                                                                                                          
|
| | Lawrence N. Friedland has been a Director of
    the Company and a member of the Compensation and Audit Committee
    since 1998. Mr. Friedland has been of counsel to the law
    firm of Olshan Grundman Frome Rosenzweig and Wolosky since 2001.
    Prior to that he had been a partner in the law firm of Hoffinger
    Friedland Dobrish & Stern, P.C. for more than the past
    25 years. He has been a director of the Apple Bank for
    Savings since 1990, a director of Lutron Electronics Co., Inc.
    since 1961, a member of the Advisory Committee of Brown Harris
    Stevens, LLC since 1995 and a general partner, manager or
    director of numerous real estate entities.
|
| | Allen S. Kaplan has been a Director of the
    Company since February 2001 and a member of the Compensation and
    Audit Committee since 2002. Mr. Kaplan has been Vice
    President and Chief Operating Officer of Team Systems, Inc. for
    more than the past five years. He also is currently Vice
    President of the Metropolitan Taxicab Board of Trade and a
    director of Ameritrans Capital Corp.                                                                                                                                                                                                                                                                                
|
| | Howard M. Lorber has been a Director of the
    Company and a member since 1994 and Chairman since 1998 of the
    Compensation and Audit Committee. Mr. Lorber has been
    Chairman of the Board and Chief Executive Officer of
    Nathans Famous, Inc. for more than the past five years and
    Chairman of the                                                                                                                                                                                                                                                                                                                                                                            

30



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##### Table of Contents



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Board of Directors and Chief Executive Officer of
    Hallman & Lorber Associates, Inc., for over five years. He
    has been a director, President and Chief Operating Officer of
    New Valley Corporation for more than five years. He has been a
    director of and member of the Audit Committee of United Capital
    Corp. for more than the past five years. Since 2001, he is a
    Director of and President and Chief Operating Officer of Vector
    Group Ltd. Mr. Lorber is also the Chairman of Ladenburg
    Thalmann Financial Services and serves as a member of the
    Compensation Committee of that company.
|
| | Richard Reitman, serves on the Compensation and
    Audit Committee and has been a director of the Company since May
    2003. He has been a partner in the certified public accounting
    firm of Reitman and Reitman since 1963. Mr. Reitman also
    serves on the Board of Directors for Kobrand Corporation, Maison
    Louis Jadot, Demaine Carneros, Ltd., St. Francis
    Winery & Vineyards, Inc. and L. & L. SAS.                                                                                                                                                                                                        
|
| | Richard T. Szymanski has been a Director of
    the Company since February 10, 2004, Senior Vice President
    and Chief Financial Office since August, 2003 and a Vice
    President for more than five years.                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | Stephen M. Kronick has been a Senior Vice
    President of the Company since 1999. Prior to that he held the
    position of Vice President of the Company for more than one year.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | Vito Stellato became a Senior Vice President of
    the Company in 2003. In 2002, he was a business consultant with
    Turtle Creek Consulting Group, LLC. From 1998 through 2001 he
    was the Senior Vice President of Human Resources for LaQuinta
    Inns, Inc.                                                                                                                                                                                                                                                                                                                                                              
|
| | Jeffrey T. Williams became a Senior Vice
    President of the Company in 2001. From 2000 until joining the
    Company, he held the position of Senior Vice President of Global
    Development for Meineke. In June 1998, he founded JTW Global
    Franchise Systems and serves as its President.                                                                                                                                                                                                                                                                                                                                 
|
| | John Capone has been a Senior Vice President of
    Hotel Operations since January 2004. Prior to that, he was a
    Vice President of Operations since February 2003 and a Regional
    Vice President of Operations. From April of 1999 to February
    2003, and Regional Vice President of Sales from March 1998 to
    April 1999.                                                                                                                                                                                                                                                                                             
|
| | Maureen OHanlon has been a Senior Vice
    President of the Company since May 2003. From 2001 to 2003 she
    held the position of Managing Partner of Marketing Arts Org.
    Prior to that she was a Senior Vice President of Carlson
    Companies from 1984 to 2001.                                                                                                                                                                                                                                                                                                                                                           
|
| | Arthur Manso has been a Senior Vice President of
    the Company since October 2003 and a Vice President of
    Purchasing from May 2002 to October 2003. Prior to that he was
    an Executive Director of Purchasing for Mirage Resorts, Inc.,
    Las Vegas, Nevada from 1998 to 2001. Between 2001 and 2002, he
    was an outside consultant.                                                                                                                                                                                                                                                                                  
|
| | Bryan Hayes has been a Vice President since
    January 2004. Prior to that, he was regional Vice President for
    AmeriSuites from August 1995 through January 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                              

There are incorporated in this Item 10 by
reference those portions of the Companys definitive Proxy
Statement, which the Company intends to file not later than
120 days after the end of the fiscal year covered by this
Form 10-K, appearing under the captions Beneficial
Ownership Reporting Compliance and Corporate
Governance.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

There are incorporated in this Item 11 by
reference those portions of the Companys definitive Proxy
Statement, which the Company intends to file not later than
120 days after the end of the fiscal year covered by this
Form 10-K, appearing under the captions Executive
Compensation, Compensation Pursuant to Plans,
Other Compensation, Compensation of
Directors, and Termination of Employment and Change
of Control Agreements.

31



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##### Table of Contents








|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

There are incorporated in this Item 12 by
reference those portions of the Companys definitive Proxy
Statement, which the Company intends to file not later than
120 days after the end of the fiscal year covered by this
Form 10-K, appearing under the captions Principal
Shareholders and Security Ownership of
Management.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

There are incorporated in this Item 13 by
reference those portions of the Companys definitive Proxy
Statement, which the Company intends to file not later than
120 days after the end of the fiscal year covered by this
Form 10-K, appearing under the caption Certain
Relationships and Related Transactions.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

There are incorporated in this Item 14 by
reference those portions of the Companys definitive Proxy
Statement, which the Company intends to file not later than
120 days after the end of the fiscal year covered by this
Form 10-K, appearing under the captions, Principal
Accountants Fees and Services.




PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K



| |         |                     
| | ------- | --------------------
| | (a)  1. | Financial Statements

The Financial Statements listed in the
accompanying index to financial statements are filed as part of
this Form 10-K.



| |    |         
| | -- | --------
| | 2. | Exhibits

| |   |     |  |                                                                                                                                                                                                                                                                                                                                                   
| | - | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2 | (a) |  | Reference is made to the Contract of Purchase and
    Sale between Hillsborough Associates, Meriden Hotel
    Associates, L.P., Wellesley I, L.P., Multi-Wellesley
    Limited Partnership and the Company, dated March 6, 1996,
    filed as an Exhibit to the Companys 8-K dated
    March 21, 1996, which is incorporated herein by reference.
| |   | (b) |  | Reference is made to Consent of the Holders
    Thereof to the Purchase by the Company of the Outstanding First
    Mortgage Notes filed as an Exhibit to the Companys 8-K,
    dated March 21, 1996, which is incorporated herein by
    reference.                                                                                             
| |   | (c) |  | Reference is made to the Agreement and Plan of
    Merger as of July 25, 1997 by and among Prime Hospitality
    Corp., PH Sub Corporation and Homegate Hospitality, Inc.
    filed as an Exhibit to the Companys Form S-4, dated
    October 24, 1997, which is incorporated herein by reference.                                               
| |   | (d) |  | Reference is made to the form of Amended and
    Restated Purchase and Sale Agreement between Prime Hospitality
    Corp., as seller and Equity Inns Partnership, L.P., as
    purchaser, dated December 2, 1997, filed as an Exhibit to
    the Companys Form 8-K dated December 11, 1997,
    which is incorporated herein by reference.       
| |   | (e) |  | Reference is made to the form of Purchase and
    Sale Agreement between Prime Hospitality Corp., as seller, and
    Equity Inns Partnership, L.P., as purchaser, dated June 26,
    1998, filed as an Exhibit to Companys Form 10-Q,
    dated June 30, 1998, which is incorporated herein by
    reference.                                    
| |   | (f) |  | Reference is made to the Purchase and Sale
    Agreement between Prime Hospitality Corp., as seller, and
    Marriott International, Inc. as purchaser, dated
    September 15, 1999 which is incorporated herein by
    reference.                                                                                                               
| |   | (g) |  | Reference is made to the First Amendment dated
    December 18, 1999, to Purchase and Sale Agreement between
    Prime Hospitality Corp. and Marriott International, Inc., dated
    September 15, 1999 which is incorporated herein by
    reference.                                                                                            

32



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##### Table of Contents



| |   |     |  |                                                                                                                                                                                                                                                                                                                                                                              
| | - | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | (h) |  | Reference is made to the Sale and Purchase
    Agreement between Prime Hospitality Inc. and Sholodge, Inc.,
    dated March 16, 2000 which is incorporated herein by
    reference.                                                                                                                                                                                          
| |   | (i) |  | First Amendment to Sale and Purchase Agreement
    dated July 9, 2000, by and between Sholodge, Inc. and Prime
    Hospitality Corp. filed as an Exhibit to the Companys
    Form 10-K, dated March 28, 2000, which is incorporated
    herein by reference.                                                                                                                
| |   | (j) |  | Lease Agreement Dated as of November 19,
    1997 by and between HPT Suite Properties Trust as Landlord,
    and Suite Tenant, Inc. as Tenant, filed as an Exhibit to
    the Companys Form 10-K, dated March 28, 2000,
    which is incorporated herein by reference.                                                                                                      
| |   | (k) |  | First Amendment to Lease Agreement entered
    March 5, 1999 by and between HPT Suite Properties
    Trust as landlord and Suite Tenant, Inc. filed as an
    Exhibit to the Companys. Form 10-K dated
    March 28, 2000, which is incorporated herein by reference.                                                                                                       
| |   | (l) |  | Second Amendment to Lease Agreement and First
    Amendment to Incidental Documents dated June 29, 1999 by
    and between Hospitality Properties Trust as landlord
    HPT Suites Properties Trust and Sholodge, Inc.,
    Suite Tenant, as tenant filed as an Exhibit to the
    Companys. Form 10-K, dated March 28, 2000, which
    is incorporated herein by reference.
| |   | (m) |  | Third Amendment to Lease Agreement dated
    March 3, 2000, by and between HPT Suite Properties
    Trust as Landlord, and Suite Tenant, Tenant, filed as an
    Exhibit to the Companys Form 10-K, dated
    March 28, 2000, which is incorporated herein by reference.                                                                                                    
| |   | (n) |  | Fourth Amendment to Lease Agreement and Amendment
    to Incidental Documents dated May 11, 2000 by and between
    HPT Suite Properties Trust as Landlord and
    Suite Tenant, Tenant, filed as an Exhibit to the
    Companys Form 10-K, dated March 28, 2000, which
    is incorporated herein by reference.                                                            
| |   | (o) |  | Consent to Assignment, Fifth Amendment to Lease
    Agreement and Amendment to Incidental Documents dated
    July 9, 2000 by and among HPT Suites Properties,
    Suite Tenant, Inc. and Glen Rock Holding Corp. filed
    as an Exhibit to the Companys Form 10-K, dated
    March 28, 2000, which is incorporated herein by reference.                                   
| |   | (p) |  | Operating Agreement of East Rutherford Group,
    L.L.C., dated as of December 19, 2002, by and among
    Prime-Meadowlands, L.L.C. and AFP Eighteen Corp.                                                                                                                                                                                                                   
| |   | (q) |  | Management Agreement for East Rutherford Sheraton
    dated December 19, 2002 by and between East Rutherford
    Group, L.L.C., Owner , and Prime Hospitality Corp., Manager                                                                                                                                                                                                 
| |   | (r) |  | Assignment of Membership Interest dated
    March 14, 2003 by and between Prime-Meadowlands, L.L.C. and
    Ark-Meadowlands, Inc.                                                                                                                                                                                                                                            
| |   | (s) |  | Agreement of Members of 3072929 Nova Scotia
    Company, dated as of January 8, 2003, by and among 3072929
    Nova Scotia Company, Quebec City, Inc., and AFP Nineteen
    Corp.                                                                                                                                                                                            
| |   | (t) |  | Assignment of Membership Interest dated
    March 26, 2003 by and between Quebec City, Inc. and Ark
    Quebec, Inc.                                                                                                                                                                                                                                                         
| |   | (u) |  | Management Agreement dated December 2003 by and
    between HPT TRS II, Inc. and Route 46 Management
    Associates Corp.                                                                                                                                                                                                                                                    
| | 3 | (a) |  | Reference is made to the Restated Certificate of
    Incorporation of the Company, dated June 5, 1992, filed as
    an Exhibit to the Companys Form 10-K dated
    September 25, 1992, which is incorporated herein by
    reference.                                                                                                                                       
| |   | (b) |  | Reference is made to the restated Certificate of
    Incorporation, As Amended, filed as an Exhibit to the
    Companys Form 10-QA, dated April 30, 1996, which is
    incorporated herein by reference.                                                                                                                                                                    
| |   | (c) |  | Reference is made to the Restated Bylaws of the
    Company filed as an Exhibit to the Companys
    Form 10-K, dated September 25, 1992, which is
    incorporated herein by reference.                                                                                                                                                                                     
| | 4 | (a) |  | Reference is made to a Form 8-A of the
    Company as filed on June 5, 1992 with the Securities and
    Exchange Commission, as amended by Amendment No. 1 and
    Amendment No. 2, which is incorporated herein by reference.                                                                                                                                               

33



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##### Table of Contents



| |    |     |  |                                                                                                                                                                                                                                                                                                  
| | -- | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | (b) |  | Reference is made to the 8 3/8% Senior
    Secured Subordinated Notes due 2012, dated April 21, 2002,
    filed as an exhibit to the Companys Form 10-Q, dated
    May 2002, which is incorporated herein by reference.                                                                         
| |    | (c) |  | Reference is made to Credit Agreement, dated as
    of July 22, 2002, among the Prime Hospitality Corp., the
    Lenders and Canadian Imperial Bank of Commerce (Agent) filed as
    an Exhibit to Form 10-Q dated August 14, 2002.                                                              
| | 10 | (a) |  | Reference is made to the 1992 Performance
    Incentive Stock Option Plan of the Company, dated as of
    July 31, 1992, filed as an Exhibit to the Companys
    Form 10-K dated September 25, 1992, which is
    incorporated herein by reference.                                             
| |    | (b) |  | Reference is made to the 1992 Stock Option Plan
    of the Company filed as an Exhibit to the Companys
    Form 10-K, dated September 25, 1992, which is
    incorporated herein by reference.                                                                                                  
| |    | (c) |  | Reference is made to an Amendment regarding the
    1995 Employee and Non-Employee Stock Option Plans, incorporated
    in the Companys proxy statement dated April 13, 1998,
    whereby 1.8 million shares were made available for
    distribution which is incorporated herein by reference.
| |    | (d) |  | Reference is made to Change of Control Agreement,
    dated May 14, 1998, between Richard T. Szymanski and
    the Company filed as an Exhibit to the Companys
    Form 10-K, dated March 26, 1999 which is incorporated
    herein by reference.                                               
| |    | (e) |  | Reference is made to Change of Control Agreement,
    dated May 14, 1998, between Douglas W. Vicari and the
    Company filed as an Exhibit to the Companys
    Form 10-K, dated March 26, 1999 which is incorporated
    herein by reference.                                                  
| |    | (f) |  | Reference is made to Employment Agreement, dated
    September 14, 1998, between Attilio F. Petrocelli and
    the Company which is incorporated herein by reference.                                                                                                                            
| |    | (g) |  | Reference is made to Change of Control Agreement,
    dated September 14, 1998, between Atillio F.
    Petrocelli and the Company filed as an Exhibit to the
    Companys Form 10-K, dated March 26, 1999 which
    is incorporated herein by reference.                                        
| |    | (h) |  | Reference is made to the Nonqualified Stock
    Option Agreement dated October 14, 1998 between
    A.F. Petrocelli and the Company which is incorporated
    herein by reference.                                                                                                               
| |    | (j) |  | Reference is made to the Change in Control
    Agreement, dated October 25, 1999, between Stephen Kronick
    and the Company which is incorporated herein by reference.                                                                                                                         
| |    | (k) |  | Reference is made to the Amendment to Change in
    Control Agreement, dated March 18, 1999, between
    A.F. Petrocelli and the Company which is incorporated
    herein by reference.                                                                                                          
| |    | (l) |  | Reference is made to the Nonqualified Stock
    Option Agreement dated October 23, 2001 between
    A.F. Petrocelli and the Company which is incorporated
    herein by reference.                                                                                                               

(21) Subsidiaries of the Company are as
follows:

|                                            |  |                 |          | 
|------------------------------------------- |  | --------------- | -------- | 
|                                            |  | Jurisdiction of
|Name                                        |  | Incorporation  
|                                            |  |                
|AmeriSuites Franchising, Inc.               |  |                 | Delaware | 
|AmeriSuites Vacation Club, Inc.             |  |                 | Delaware | 
|Budd Holding Corp.                          |  |                 | Delaware | 
|Caldwell Holding Corp.                      |  |                 | Delaware | 
|Clifton Holding Corp.                       |  |                 | Delaware | 
|Dynamic Marketing Group, Inc.               |  |                 | Delaware | 
|Edison Holding Corp.                        |  |                 | Nevada   | 
|Fairfield-Meridian Claims Service,
    Inc. |  |                 | Delaware | 
|Flanders Holding Corp.                      |  |                 | Delaware | 
|Glen Rock Holding Corp.                     |  |                 | Delaware | 

34



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##### Table of Contents



|                                               |  |                 |          | 
|---------------------------------------------- |  | --------------- | -------- | 
|                                               |  | Jurisdiction of
|Name                                           |  | Incorporation  
|                                               |  |                
|Glen Rock Liquor License, Inc.                 |  |                 | Missouri | 
|Haledon Holding Corp.                          |  |                 | Delaware | 
|KSA Management, Inc.                           |  |                 | Kansas   | 
|Landing Holding Corp.                          |  |                 | Delaware | 
|Mahwah Holding Corp.                           |  |                 | Delaware | 
|Market Segments, Incorporated                  |  |                 | Delaware | 
|Maywood Holding Corp.                          |  |                 | Delaware | 
|Oradell Holding Corp.                          |  |                 | Delaware | 
|Parsippany Leasing Corp.                       |  |                 | Delaware | 
|Prime Hospitality Franchising, Inc.            |  |                 | Delaware | 
|Prime Hospitality Management Company,
    Inc. |  |                 | Delaware | 
|Prime Hotels & Resorts, Inc.                   |  |                 | Delaware | 
|Republic Motor Inns, Inc.                      |  |                 | Virginia | 
|Ridgewood Holding Corp.                        |  |                 | Delaware | 
|Roxbury Holding Corp.                          |  |                 | Delaware | 
|Quebec City, Inc.                              |  |                 | Nevada   | 
|Secaucus Holding Corp.                         |  |                 | Delaware | 
|Totowa Holding Corp.                           |  |                 | Delaware | 
|Wayne Holding Corp.                            |  |                 | Delaware | 
|Wellesley Inn & Suites Franchising,
    Inc.   |  |                 | Delaware | 



| |      |                                 
| | ---- | --------------------------------
| | (23) | Consent of independent auditors.

|     |  |                                                                                 |  | 
|---- |  | ------------------------------------------------------------------------------- |  | 
|31.1 |  | Certification of CEO pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
|31.2 |  | Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|32.1 |  | Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|32.2 |  | Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

None

Certain instruments defining the rights of
holders of long-term debt of the Company and its subsidiaries
have not been filed in accordance with Item 601(b)(4)(iii)
of Regulation S-K. The Company hereby agrees to furnish a
copy of such instruments to the Commission upon request.

35



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##### Table of Contents



PRIME HOSPITALITY CORP. AND
SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS




(Item 15(a))

|                                           |                                                                                             |      |     |     | 
|------------------------------------------ | ------------------------------------------------------------------------------------------- | ---- | --- | --- | 
|                                           |                                                                                             | Page
|                                           |                                                                                             |     
|Report of Independent Auditors             |                                                                                             |      | F-2 |    
|                                          
|Consolidated Financial Statements:         |                                                                                             |      |     |    
|                                           | Balance Sheets at December 31, 2003 and 2002                                                |      |     | F-3 | 
|                                           | Statements of Operations for the Years Ended
    December 31, 2003, 2002 and 2001           |      |     | F-4 | 
|                                           | Statements of Stockholders Equity for the
    Years Ended December 31, 2003, 2002 and 2001 |      |     | F-5 | 
|                                           | Statements of Cash Flows for the Years Ended
    December 31, 2003, 2002 and 2001           |      |     | F-6 | 
|Notes to Consolidated Financial Statements |                                                                                             |      | F-7 |    

All schedules are omitted because of the absence
of conditions under which they are required or because the
required information is given in the consolidated financial
statements or notes thereto.

F-1



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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and

Stockholders of Prime Hospitality Corp.:


We have audited the accompanying consolidated
balance sheets of Prime Hospitality Corp. (a Delaware
corporation) and Subsidiaries (the Company) as of
December 31, 2003 and 2003, and the related consolidated
statements of operations, stockholders equity and cash
flows for each of the three years in the period ended
December 31, 2003. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits 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 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 financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Prime Hospitality Corp. and
Subsidiaries as of December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles
generally accepted in the United States.

As discussed in Note 1 to the consolidated
financial statements, effective January 1, 2002, the
Company adopted Statement of Financial Accounting Standard
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets.



| |                  
| | -----------------
| | ERNST & YOUNG LLP

New York, New York

February 10, 2004


F-2



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##### Table of Contents



PRIME HOSPITALITY CORP. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2003 and 2002


(In thousands, except per share
data)


|                                                                                                                                                                         |                                            |      |          |           |  |   |          |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ---- | -------- | --------- |  | - | -------- | --------- | 
|                                                                                                                                                                         |                                            | 2003 |          | 2002     
|                                                                                                                                                                         |                                            |      |          |          
|ASSETS                                                                                                                                                                   |                                            |      |          |           |  |   |          |          
|Current assets:                                                                                                                                                          |                                            |      |          |           |  |   |          |          
|Cash and cash equivalents                                                                                                                                                |                                            | $    | 12,901   |           |  | $ | 25,850   |          
|Accounts receivable (net of allowance of $1,463
    and $611 in 2003 and 2002, respectively)                                                                             |                                            |      | 18,165   |           |  |   | 18,178   |          
|Restricted cash                                                                                                                                                          |                                            |      | 2,272    |           |  |   | 5,140    |          
|Hotel inventories                                                                                                                                                        |                                            |      | 11,570   |           |  |   | 11,989   |          
|Income tax receivable                                                                                                                                                    |                                            |      | 568      |           |  |   | 10,923   |          
|Other current assets                                                                                                                                                     |                                            |      | 4,988    |           |  |   | 10,534   |          
|                                                                                                                                                                         |                                            |      |          |           |  |   |          |          
|                                                                                                                                                                         | Total current assets                       |      |          | 50,464    |  |   |          | 82,614    | 
|Property, equipment and leasehold improvements,
    net of accumulated depreciation and amortization                                                                     |                                            |      | 916,594  |           |  |   | 949,730  |          
|Assets held for sale                                                                                                                                                     |                                            |      | 8,787    |           |  |   | 8,787    |          
|Investments in unconsolidated joint ventures                                                                                                                             |                                            |      | 12,595   |           |  |   | 23,140   |          
|Mortgages and notes receivable, net of current
    portion                                                                                                               |                                            |      | 12,293   |           |  |   | 13,021   |          
|Other assets                                                                                                                                                             |                                            |      | 6,572    |           |  |   | 42,357   |          
|                                                                                                                                                                         |                                            |      |          |           |  |   |          |          
|                                                                                                                                                                         | Total assets                               |      | $        | 1,007,305 |  |   | $        | 1,119,649 | 
|                                                                                                                                                                         |                                            |      |          |           |  |   |          |          
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                                                                 |                                            |      |          |           |  |   |          |          
|Current liabilities:                                                                                                                                                     |                                            |      |          |           |  |   |          |          
|Accounts payable and accrued expenses                                                                                                                                    |                                            | $    | 21,577   |           |  | $ | 21,189   |          
|Current portion of debt                                                                                                                                                  |                                            |      | 1,067    |           |  |   | 1,052    |          
|Current portion of deferred income                                                                                                                                       |                                            |      | 3,115    |           |  |   | 3,527    |          
|Other current liabilities                                                                                                                                                |                                            |      | 19,411   |           |  |   | 20,985   |          
|                                                                                                                                                                         |                                            |      |          |           |  |   |          |          
|                                                                                                                                                                         | Total current liabilities                  |      |          | 45,170    |  |   |          | 46,753    | 
|Long-term debt, net of current portion                                                                                                                                   |                                            |      | 227,535  |           |  |   | 284,017  |          
|Deferred income, net of current portion                                                                                                                                  |                                            |      | 10,306   |           |  |   | 13,338   |          
|Deferred income taxes                                                                                                                                                    |                                            |      | 39,633   |           |  |   | 61,362   |          
|Other liabilities                                                                                                                                                        |                                            |      | 3,647    |           |  |   | 7,503    |          
|                                                                                                                                                                         |                                            |      |          |           |  |   |          |          
|                                                                                                                                                                         | Total liabilities                          |      |          | 326,291   |  |   |          | 412,973   | 
|Stockholders equity:                                                                                                                                                    |                                            |      |          |           |  |   |          |          
|Preferred stock, par value $.10 per share;
    20,000,000 shares authorized; none issued                                                                                 |                                            |      |         |           |  |   |         |          
|Common stock, par value $.01 per share;
    75,000,000 shares authorized; 56,632,904 and
    56,606,381 shares issued and outstanding in 2003 and 2002,
    respectively |                                            |      | 566      |           |  |   | 566      |          
|Capital in excess of par value                                                                                                                                           |                                            |      | 528,055  |           |  |   | 527,787  |          
|Retained earnings                                                                                                                                                        |                                            |      | 268,817  |           |  |   | 293,292  |          
|Accumulated other comprehensive income, net of
    taxes of $357                                                                                                         |                                            |      | 560      |           |  |   |         |          
|Treasury stock, at cost (11,880,878 and
    11,522,878 shares in 2003 and 2002, respectively)                                                                            |                                            |      | (116,984 | )         |  |   | (114,969 | )        
|                                                                                                                                                                         |                                            |      |          |           |  |   |          |          
|                                                                                                                                                                         | Total stockholders equity                 |      |          | 681,014   |  |   |          | 706,676   | 
|                                                                                                                                                                         |                                            |      |          |           |  |   |          |          
|                                                                                                                                                                         | Total liabilities and stockholders equity |      | $        | 1,007,305 |  |   | $        | 1,119,649 | 
|                                                                                                                                                                         |                                            |      |          |           |  |   |          |          

See Accompanying Notes to Consolidated Financial
Statements.

F-3



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##### Table of Contents



PRIME HOSPITALITY CORP. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
data)


|                                                                                                                           |                                                |                                                    |         |         |         |      |         |         |         |   |         |         |         | 
|-------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | -------------------------------------------------- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                                                                           |                                                |                                                   
|                                                                                                                           |                                                | Years Ended December 31                           
|                                                                                                                           |                                                |                                                   
|                                                                                                                           |                                                | 2003                                               |         | 2002    |         | 2001
|                                                                                                                           |                                                |                                                    |         |         |         |     
|Revenues:                                                                                                                  |                                                |                                                    |         |         |         |      |         |         |         |   |         |        
|                                                                                                                           | Hotel revenues                                 |                                                    | $       | 357,343 |         |      | $       | 374,063 |         |   | $       | 446,489 |        
|                                                                                                                           | Management, franchise and other fees (Note 17) |                                                    |         | 24,346  |         |      |         | 16,928  |         |   |         | 15,392  |        
|                                                                                                                           | Rental and other                               |                                                    |         | 1,951   |         |      |         | 2,474   |         |   |         | 2,704   |        
|                                                                                                                           |                                                |                                                    |         |         |         |      |         |         |         |   |         |        
|                                                                                                                           |                                                | Total revenue before cost reimbursements           |         |         | 383,640 |      |         |         | 393,465 |   |         |         | 464,585 | 
|                                                                                                                           | Cost reimbursements                            |                                                    |         | 22,052  |         |      |         | 18,920  |         |   |         | 17,637  |        
|                                                                                                                           |                                                |                                                    |         |         |         |      |         |         |         |   |         |        
|                                                                                                                           |                                                | Total revenues                                     |         |         | 405,692 |      |         |         | 412,385 |   |         |         | 482,222 | 
|Costs and expenses:                                                                                                        |                                                |                                                    |         |         |         |      |         |         |         |   |         |        
|                                                                                                                           | Hotel operating expenses                       |                                                    |         | 208,823 |         |      |         | 209,878 |         |   |         | 241,025 |        
|                                                                                                                           | Rent and other occupancy                       |                                                    |         | 77,014  |         |      |         | 79,185  |         |   |         | 83,392  |        
|                                                                                                                           | Brand and administrative                       |                                                    |         | 42,954  |         |      |         | 31,544  |         |   |         | 31,170  |        
|                                                                                                                           | Depreciation and amortization                  |                                                    |         | 39,345  |         |      |         | 39,301  |         |   |         | 37,281  |        
|                                                                                                                           | Asset impairment                               |                                                    |         | 1,000   |         |      |         |        |         |   |         |        |        
|                                                                                                                           |                                                |                                                    |         |         |         |      |         |         |         |   |         |        
|                                                                                                                           |                                                | Total costs and expenses before reimbursable costs |         |         | 369,136 |      |         |         | 359,908 |   |         |         | 392,868 | 
|Reimbursable costs                                                                                                         |                                                |                                                    | 22,052  |         |         |      | 18,920  |         |         |   | 17,637  |        
|                                                                                                                           |                                                |                                                    |         |         |         |      |         |         |         |   |         |        
|                                                                                                                           |                                                | Total costs and expenses                           |         |         | 391,188 |      |         |         | 378,828 |   |         |         | 410,505 | 
|Operating income                                                                                                           |                                                |                                                    | 14,504  |         |         |      | 33,557  |         |         |   | 71,717  |        
|Investment income                                                                                                          |                                                |                                                    | 838     |         |         |      | 2,863   |         |         |   | 2,244   |        
|Interest expense                                                                                                           |                                                |                                                    | (20,914 | )       |         |      | (27,583 | )       |         |   | (33,643 | )      
|Gains (losses) on retirement of debt                                                                                       |                                                |                                                    | 1,622   |         |         |      | (19,339 | )       |         |   | (123    | )      
|Other income (loss)                                                                                                        |                                                |                                                    | (35,706 | )       |         |      | 1,244   |         |         |   | 22,261  |        
|                                                                                                                           |                                                |                                                    |         |         |         |      |         |         |         |   |         |        
|Income (loss) before equity in earnings of
    unconsolidated joint ventures, income taxes and discontinued
    operations |                                                |                                                    | (39,656 | )       |         |      | (9,258  | )       |         |   | 62,456  |        
|Equity in earnings of unconsolidated joint
    ventures                                                                    |                                                |                                                    | 822     |         |         |      |        |         |         |   |        |        
|                                                                                                                           |                                                |                                                    |         |         |         |      |         |         |         |   |         |        
|Income (loss) before income taxes and
    discontinued operations                                                          |                                                |                                                    | (38,834 | )       |         |      | (9,258  | )       |         |   | 62,456  |        
|Provision (benefit) for income taxes                                                                                       |                                                |                                                    | (15,145 | )       |         |      | (3,610  | )       |         |   | 24,046  |        
|                                                                                                                           |                                                |                                                    |         |         |         |      |         |         |         |   |         |        
|Income (loss) before discontinued operations                                                                               |                                                |                                                    | (23,689 | )       |         |      | (5,648  | )       |         |   | 38,410  |        
|Discontinued operations:                                                                                                   |                                                |                                                    |         |         |         |      |         |         |         |   |         |        
|Income (loss) from discontinued operations,
    net of income taxes of $(111), $289 and $1,069, respectively               |                                                |                                                    | (174    | )       |         |      | 453     |         |         |   | 1,783   |        
|Gain (loss) on disposal, net of income taxes
    of $(392) and $849, Respectively                                          |                                                |                                                    | (612    | )       |         |      | 1,328   |         |         |   |        |        
|                                                                                                                           |                                                |                                                    |         |         |         |      |         |         |         |   |         |        
|Net income (loss)                                                                                                          |                                                | $                                                  | (24,475 | )       |         | $    | (3,867  | )       |         | $ | 40,193  |        
|                                                                                                                           |                                                |                                                    |         |         |         |      |         |         |         |   |         |        
|Earnings (loss) per common share:                                                                                          |                                                |                                                    |         |         |         |      |         |         |         |   |         |        
|Basic:                                                                                                                     |                                                |                                                    |         |         |         |      |         |         |         |   |         |        
|Income (loss) before discontinued operations                                                                               |                                                | $                                                  | (0.53   | )       |         | $    | (0.13   | )       |         | $ | 0.86    |        
|Income (loss) from discontinued operations,
    net of income taxes                                                        |                                                |                                                    | (0.02   | )       |         |      | 0.04    |         |         |   | 0.04    |        
|                                                                                                                           |                                                |                                                    |         |         |         |      |         |         |         |   |         |        
|Net income (loss)                                                                                                          |                                                | $                                                  | (0.55   | )       |         | $    | (0.09   | )       |         | $ | 0.90    |        
|                                                                                                                           |                                                |                                                    |         |         |         |      |         |         |         |   |         |        
|Diluted:                                                                                                                   |                                                |                                                    |         |         |         |      |         |         |         |   |         |        
|Income (loss) before discontinued operations                                                                               |                                                | $                                                  | (0.53   | )       |         | $    | (0.13   | )       |         | $ | 0.84    |        
|Income (loss) from discontinued operations,
    net of income taxes                                                        |                                                |                                                    | (0.02   | )       |         |      | 0.04    |         |         |   | 0.04    |        
|                                                                                                                           |                                                |                                                    |         |         |         |      |         |         |         |   |         |        
|Net income (loss)                                                                                                          |                                                | $                                                  | (0.55   | )       |         | $    | (0.09   | )       |         | $ | 0.88    |        
|                                                                                                                           |                                                |                                                    |         |         |         |      |         |         |         |   |         |        

See Accompanying Notes to Consolidated Financial
Statements.

F-4



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##### Table of Contents



PRIME HOSPITALITY CORP. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

(In thousands, except per share
data)


|                                                                        |  |              |            |            |  |           |     |               |  |                    |         |       |  |               |         |               |  |   |        |   |  |   |          |   |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------- |  | ------------ | ---------- | ---------- |  | --------- | --- | ------------- |  | ------------------ | ------- | ----- |  | ------------- | ------- | ------------- |  | - | ------ | - |  | - | -------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                        |  |              |            |            |  |           |     | Accumulated   |  |                    |         |       |  |              
|                                                                        |  | Common Stock |            | Capital in |  |           |     | Other         |  |                    |         |       |  |              
|                                                                        |  |              |            | Excess of  |  | Retained  |     | Comprehensive |  | Treasury           |         |       |  | Comprehensive
|                                                                        |  | Shares       |            | Amount     |  | Par Value |     | Earnings      |  | Loss, Net of Taxes |         | Stock |  | Total         |         | Income (loss)
|                                                                        |  |              |            |            |  |           |     |               |  |                    |         |       |  |               |         |              
|Balance December 31, 2000                                               |  |              | 44,845,384 |            |  |           | 560 |               |  |                    | 524,549 |       |  |               | 256,966 |               |  |   | (2,838 | ) |  |   | (111,137 | ) |  |   | 668,100 |   |  | $ |        |  
|Net income                                                              |  |              |           |            |  |           |    |               |  |                    |        |       |  |               | 40,193  |               |  |   |       |   |  |   |         |   |  |   | 40,193  |   |  |   | 40,193  |  
|Proceeds from exercise of stock options                                 |  |              | 245,305    |            |  |           | 2   |               |  |                    | 2,008   |       |  |               |        |               |  |   |       |   |  |   |         |   |  |   | 2,010   |   |  |   |        |  
|Realization of loss on sale of marketable
    securities                |  |              |           |            |  |           |    |               |  |                    |        |       |  |               |        |               |  |   | 2,837  |   |  |   |         |   |  |   | 2,837   |   |  |   | 2,837   |  
|Treasury stock purchases                                                |  |              | (376,200   | )          |  |           |    |               |  |                    |        |       |  |               |        |               |  |   |       |   |  |   | (3,710   | ) |  |   | (3,710  | ) |  |   |        |  
|Adjustment of amortization of pre fresh start tax
    basis differences |  |              |           |            |  |           |    |               |  |                    | (1,489  | )     |  |               |        |               |  |   |       |   |  |   |         |   |  |   | (1,489  | ) |  |   |         |  
|                                                                        |  |              |            |            |  |           |     |               |  |                    |         |       |  |               |         |               |  |   |        |   |  |   |          |   |  |   |         |   |  |   |         |  
|Comprehensive income                                                    |  |              |           |            |  |           |    |               |  |                    |        |       |  |               |        |               |  |   |       |   |  |   |         |   |  |   |        |   |  | $ | 43,030  |  
|                                                                        |  |              |            |            |  |           |     |               |  |                    |         |       |  |               |         |               |  |   |        |   |  |   |          |   |  |   |         |   |  |   |         |  
|Balance December 31, 2001                                               |  |              | 44,714,489 |            |  |           | 562 |               |  |                    | 525,068 |       |  |               | 297,159 |               |  |   | (1     | ) |  |   | (114,847 | ) |  |   | 707,941 |   |  |   |         |  
|                                                                        |  |              |            |            |  |           |     |               |  |                    |         |       |  |               |         |               |  |   |        |   |  |   |          |   |  |   |         |   |  |   |         |  
|Net loss                                                                |  |              |           |            |  |           |    |               |  |                    |        |       |  |               | (3,867  | )             |  |   |       |   |  |   |         |   |  |   | (3,867  | ) |  |   | (3,867  | )
|Proceeds from exercise of stock options                                 |  |              | 384,814    |            |  |           | 4   |               |  |                    | 2,719   |       |  |               |        |               |  |   |       |   |  |   |         |   |  |   | 2,723   |   |  |   |        |  
|Realization of loss on sale of marketable
    securities                |  |              |           |            |  |           |    |               |  |                    |        |       |  |               |        |               |  |   | 1      |   |  |   |         |   |  |   | 1       |   |  |   | 1       |  
|Treasury stock purchases                                                |  |              | (15,800    | )          |  |           |    |               |  |                    |        |       |  |               |        |               |  |   |       |   |  |   | (122     | ) |  |   | (122    | ) |  |   |        |  
|                                                                        |  |              |            |            |  |           |     |               |  |                    |         |       |  |               |         |               |  |   |        |   |  |   |          |   |  |   |         |   |  |   |         |  
|Comprehensive loss                                                      |  |              |           |            |  |           |    |               |  |                    |        |       |  |               |        |               |  |   |       |   |  |   |         |   |  |   |        |   |  | $ | (3,866  | )
|                                                                        |  |              |            |            |  |           |     |               |  |                    |         |       |  |               |         |               |  |   |        |   |  |   |          |   |  |   |         |   |  |   |         |  
|Balance December 31, 2002                                               |  |              | 45,083,503 |            |  |           | 566 |               |  |                    | 527,787 |       |  |               | 293,292 |               |  |   |       |   |  |   | (114,969 | ) |  |   | 706,676 |   |  |   |         |  
|                                                                        |  |              |            |            |  |           |     |               |  |                    |         |       |  |               |         |               |  |   |        |   |  |   |          |   |  |   |         |   |  |   |         |  
|Net loss                                                                |  |              |           |            |  |           |    |               |  |                    |        |       |  |               | (24,475 | )             |  |   |       |   |  |   |         |   |  |   | (24,475 | ) |  |   | (24,475 | )
|Proceeds from exercise of stock options                                 |  |              | 26,523     |            |  |           |    |               |  |                    | 227     |       |  |               |        |               |  |   |       |   |  |   |         |   |  |   | 227     |   |  |   |        |  
|Tax benefit from exercise of non-qualified stock
    options            |  |              |           |            |  |           |    |               |  |                    | 41      |       |  |               |        |               |  |   |       |   |  |   |         |   |  |   | 41      |   |  |   |        |  
|Treasury stock purchases                                                |  |              | (358,000   | )          |  |           |    |               |  |                    |        |       |  |               |        |               |  |   |       |   |  |   | (2,015   | ) |  |   | (2,015  | ) |  |   |        |  
|Unrealized gain on foreign currency translation                         |  |              |           |            |  |           |    |               |  |                    |        |       |  |               |        |               |  |   | 560    |   |  |   |         |   |  |   | 560     |   |  |   | 560     |  
|                                                                        |  |              |            |            |  |           |     |               |  |                    |         |       |  |               |         |               |  |   |        |   |  |   |          |   |  |   |         |   |  |   |         |  
|Comprehensive loss                                                      |  |              |           |            |  |           |    |               |  |                    |        |       |  |               |        |               |  |   |       |   |  |   |         |   |  |   |        |   |  | $ | (23,915 | )
|                                                                        |  |              |            |            |  |           |     |               |  |                    |         |       |  |               |         |               |  |   |        |   |  |   |          |   |  |   |         |   |  |   |         |  
|Balance December 31, 2003                                               |  |              | 44,752,026 |            |  | $         | 566 |               |  | $                  | 528,055 |       |  | $             | 268,817 |               |  | $ | 560    |   |  | $ | (116,984 | ) |  | $ | 681,014 |   |  |   |         |  
|                                                                        |  |              |            |            |  |           |     |               |  |                    |         |       |  |               |         |               |  |   |        |   |  |   |          |   |  |   |         |   |  |   |         |  

See Accompanying Notes to Consolidated Financial
Statements.

F-5



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##### Table of Contents



PRIME HOSPITALITY CORP. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                                                                                      |                                                                                     |                                                         |         |         |         |      |        |          |         |   |        |         |         |  
|------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ------------------------------------------------------- | ------- | ------- | ------- | ---- | ------ | -------- | ------- | - | ------ | ------- | ------- | -
|                                                                                      |                                                                                     |                                                        
|                                                                                      |                                                                                     | Years Ended December 31                                
|                                                                                      |                                                                                     |                                                        
|                                                                                      |                                                                                     | 2003                                                    |         | 2002    |         | 2001
|                                                                                      |                                                                                     |                                                         |         |         |         |     
|Cash flows from operating activities:                                                 |                                                                                     |                                                         |         |         |         |      |        |          |         |   |        |        
|Net income (loss)                                                                     |                                                                                     | $                                                       | (24,475 | )       |         | $    | (3,867 | )        |         | $ | 40,193 |        
|Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                                     |                                                         |         |         |         |      |        |          |         |   |        |        
|                                                                                      | Depreciation and amortization                                                       |                                                         |         | 39,620  |         |      |        | 39,301   |         |   |        | 38,411  |        
|                                                                                      | Asset impairment                                                                    |                                                         |         | 1,000   |         |      |        |         |         |   |        | 6,745   |        
|                                                                                      | Amortization of deferred financing costs                                            |                                                         |         | 1,255   |         |      |        | 2,235    |         |   |        | 3,018   |        
|                                                                                      | Income tax benefit                                                                  |                                                         |         | (15,648 | )       |      |        |         |         |   |        |        |        
|                                                                                      | (Gains) losses on retirement of debt                                                |                                                         |         | (1,622  | )       |      |        | 19,333   |         |   |        |        |        
|                                                                                      | Equity in earnings of unconsolidated joint
    ventures                             |                                                         |         | (822    | )       |      |        |         |         |   |        |        |        
|                                                                                      | Gains (losses) on disposals of discontinued
    operations                          |                                                         |         | (1,004  | )       |      |        | 2,177    |         |   |        |        |        
|                                                                                      | Net (gains) losses on sales of assets and
    lease terminations                    |                                                         |         | 37,715  |         |      |        | (8,464   | )       |   |        | (36,329 | )      
|                                                                                      | Net loss on sales of marketable securities                                          |                                                         |         |        |         |      |        |         |         |   |        | 4,346   |        
|                                                                                      | Amortization of deferred income                                                     |                                                         |         | (3,552  | )       |      |        | (7,792   | )       |   |        | (11,619 | )      
|                                                                                      | Deferred income taxes                                                               |                                                         |         |        |         |      |        | 6,594    |         |   |        | 27,218  |        
|Increase (decrease) from changes in other
    operating assets and liabilities:       |                                                                                     |                                                         |         |         |         |      |        |          |         |   |        |        
|                                                                                      | Receipt of income tax refund                                                        |                                                         |         | 10,355  |         |      |        |         |         |   |        |        |        
|                                                                                      | Accounts receivable                                                                 |                                                         |         | 12      |         |      |        | 1,308    |         |   |        | 8,430   |        
|                                                                                      | Other assets                                                                        |                                                         |         | 5,582   |         |      |        | 1,372    |         |   |        | (10,594 | )      
|                                                                                      | Other liabilities                                                                   |                                                         |         | (4,941  | )       |      |        | 1,847    |         |   |        | (6,608  | )      
|                                                                                      |                                                                                     |                                                         |         |         |         |      |        |          |         |   |        |        
|                                                                                      |                                                                                     | Net cash provided by operating activities               |         |         | 43,475  |      |        |          | 54,044  |   |        |         | 63,211  |  
|Cash flows from investing activities:                                                 |                                                                                     |                                                         |         |         |         |      |        |          |         |   |        |        
|                                                                                      | Net proceeds from mortgages and notes receivable                                    |                                                         |         | 1,338   |         |      |        | 445      |         |   |        | 1,757   |        
|                                                                                      | Disbursements for mortgages and notes receivable                                    |                                                         |         | (993    | )       |      |        | (1,399   | )       |   |        | (469    | )      
|                                                                                      | Proceeds from sales of property, equipment and
    leasehold improvements, net      |                                                         |         | 17,891  |         |      |        | 56,026   |         |   |        | 32,634  |        
|                                                                                      | Purchases of property, equipment and leasehold
    improvements                     |                                                         |         | (28,717 | )       |      |        | (28,513  | )       |   |        | (22,982 | )      
|                                                                                      | Construction of new hotels                                                          |                                                         |         |        |         |      |        | (5,084   | )       |   |        | (19,906 | )      
|                                                                                      | Investments in unconsolidated joint ventures                                        |                                                         |         | (6,580  | )       |      |        | (23,140  | )       |   |        |        |        
|                                                                                      | Proceeds from sale and financings of interests in
    unconsolidated joint ventures |                                                         |         | 18,312  |         |      |        |         |         |   |        |        |        
|                                                                                      | Distributions from joint ventures                                                   |                                                         |         | 539     |         |      |        |         |         |   |        |        |        
|                                                                                      | Decrease (increase) in restricted cash                                              |                                                         |         |        |         |      |        | (1,524   | )       |   |        | (3,616  | )      
|                                                                                      | Proceeds from sales of marketable securities                                        |                                                         |         |        |         |      |        |         |         |   |        | 3,629   |        
|                                                                                      | Other                                                                               |                                                         |         |        |         |      |        |         |         |   |        | (1,795  | )      
|                                                                                      |                                                                                     |                                                         |         |         |         |      |        |          |         |   |        |        
|                                                                                      |                                                                                     | Net cash (used in) provided by investing
    activities |         |         | 1,790   |      |        |          | (3,189  | ) |        |         | (10,748 | )
|Cash flows from financing activities:                                                 |                                                                                     |                                                         |         |         |         |      |        |          |         |   |        |        
|                                                                                      | Net proceeds from issuance of debt                                                  |                                                         |         | 13,000  |         |      |        | 303,586  |         |   |        | 12,626  |        
|                                                                                      | Payments of debt                                                                    |                                                         |         | (69,467 | )       |      |        | (344,962 | )       |   |        | (38,649 | )      
|                                                                                      | Premium on early redemption of debt                                                 |                                                         |         |        |         |      |        | (12,705  | )       |   |        |        |        
|                                                                                      | Proceeds from the exercise of stock options and
    warrants                        |                                                         |         | 268     |         |      |        | 2,723    |         |   |        | 2,010   |        
|                                                                                      | Purchase of treasury stock                                                          |                                                         |         | (2,015  | )       |      |        | (122     | )       |   |        | (3,710  | )      
|                                                                                      |                                                                                     |                                                         |         |         |         |      |        |          |         |   |        |        
|                                                                                      |                                                                                     | Net cash used in financing activities                   |         |         | (58,214 | )    |        |          | (51,480 | ) |        |         | (27,723 | )
|Net increase (decrease) in cash and cash
    equivalents                              |                                                                                     |                                                         | (12,949 | )       |         |      | (625   | )        |         |   | 24,740 |        
|Cash and cash equivalents at beginning of year                                        |                                                                                     |                                                         | 25,850  |         |         |      | 26,475 |          |         |   | 1,735  |        
|                                                                                      |                                                                                     |                                                         |         |         |         |      |        |          |         |   |        |        
|Cash and cash equivalents at end of year                                              |                                                                                     | $                                                       | 12,901  |         |         | $    | 25,850 |          |         | $ | 26,475 |        
|                                                                                      |                                                                                     |                                                         |         |         |         |      |        |          |         |   |        |        

See Accompanying Notes to Consolidated Financial
Statements.

F-6



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##### Table of Contents



PRIME HOSPITALITY CORP. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003, 2002 and
2001


Note 1  Business Operations
and Significant Accounting Policies

Business Activities

Prime Hospitality Corp. (Prime,
the Company or We) is an owner, manager
and franchisor of limited-service and full-service hotels. We
have 248 hotels in operation containing 32,240 rooms
located in 34 states and Canada (the Portfolio)
as of December 31, 2003. We control three hotel
brands  AmeriSuites®, Wellesley Inns &
Suites® and Prime Hotels and Resorts®  and
operate a portfolio of full-service hotels under franchise
agreements with national hotel chains. We operate and have
ownership or leasehold interests in 126 hotels (the
Owned Hotels), operate 42 hotels for real
estate investment trusts which have cash flow guarantees and
participations (Cash Flow Hotels), manage
24 hotels for third parties (the Managed
Hotels), and franchise 56 hotels which we do not operate
(the Franchised Hotels). The Portfolio is comprised
of 148 AmeriSuites hotels, 82 Wellesley Inns &
Suites hotels, one Prime Hotels and Resorts hotels and
17 non-proprietary brand hotels.

Basis of Presentation

The Company emerged from the Chapter 11
reorganization proceeding of its predecessor, Prime Motor Inns,
Inc. and certain of its subsidiaries (PMI), which
consummated its Plan of Reorganization
(the Plan) on July 31, 1992.

Pursuant to the American Institute of Certified
Public Accountants Statement of Position 90-7,
Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code (SOP 90-7), the
Company adopted fresh start reporting as of July 31, 1992.
Under fresh start reporting, the reorganization value of the
entity was allocated to the reorganized Companys assets on
the basis of the purchase method of accounting. The
reorganization value (the approximate fair value) of the assets
of the emerging entity was determined by consideration of many
factors and various valuation methods, including discounted cash
flows and price/earnings and other applicable ratios believed by
management to be representative of the Companys business
and industry. Liabilities were recorded at face values, which
approximated the present values of amounts to be paid,
determined at appropriate interest rates. Under fresh start
reporting, the consolidated balance sheet as of July 31,
1992 became the opening consolidated balance sheet of the
emerging Company.

Principles of Consolidation

The consolidated financial statements include the
accounts of the Company and all of our majority-owned
subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation. The
Companys investment in two less than majority owned joint
venture has been accounted for using the equity method.

Use of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Cash Equivalents

Cash equivalents are highly liquid, unrestricted
investments with a maturity of three months or less when
acquired. At December 31, 2003 and 2002, cash and cash
equivalents were comprised of approximately $12.9 million
and $25.9 million, respectively, of cash and money market
funds.

F-7



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##### Table of Contents



PRIME HOSPITALITY CORP. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Inventories

Inventories are comprised of primarily food and
beverage items, guest room supplies, linens, kitchen and other
operating supplies. Inventory is carried at the lower of cost
(first-in, first-out) or market. Potential losses from obsolete
and slow-moving inventory are provided for in the current period.

Property, Equipment and Leasehold
Improvements

Property, equipment and leasehold improvements
that the Company intends to continue to operate are stated at
their fair market value as of July 31, 1992 plus the cost
of acquisitions subsequent to that date less accumulated
depreciation and amortization from August 1, 1992.
Provision is made for depreciation and amortization using the
straight-line method over the estimated useful lives of the
assets.

Expenditures for maintenance and repairs are
expensed as incurred. Replacements and betterments are
capitalized.

Construction in progress represents costs
incurred in the development of hotels. Such costs include
construction costs and capitalized interest.

The Company reviews each of its assets held for
use for which indicators of impairment are present to determine
whether the carrying amount of the asset will be recovered. We
recognizes impairment if the future undiscounted cash flows
(before interest charges) are less than the carrying amount.

Assets held for sale are recorded at the lower of
carrying value or fair value less costs to sell. In 2003, we
recorded $1.0 million in impairment charges.

Long-Lived Assets

In October 2001, the Financial Accounting
Standards Board (FASB) issued Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, SFAS 144, which supersedes FASB Statement
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of.
However it retains the fundamental provisions of that statement
related to the recognition and measurement of the impairment of
long-lived assets to be held and used. In addition,
the Statement provides more guidance on estimating cash flows
when performing a recoverability test, requires that a
long-lived asset or asset group to be disposed of other than by
sale (e.g. abandoned) be classified as held and
used until it is disposed of, and establishes more
restrictive criteria to classify an asset or asset group as
held for sale. SFAS 144 superseded APB
Opinion 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring
Transactions. SFAS 144 extended the reporting of a
discontinued operation to a component of an entity.
Therefore, the operations of assets held for sale or assets sold
are required to be presented as discontinued operations in the
our statement of operations.

We adopted this pronouncement on January 1,
2002. This required a reclassification of certain revenues and
expenses to discontinued operations for sold properties where we
did not retain management. This adoption had no impact on the
Companys net income or financial position.

Investments in Unconsolidated Joint
Ventures

We account for our investments in unconsolidated
joint ventures under the equity method of accounting, as we
exercise significant influence, but do not control these
entities. These investments are recorded initially at cost, as
investments in unconsolidated joint ventures, and subsequently
adjusted for equity in earnings (loss) and cash
contributions and distributions. Any difference between the
carrying amount of these investments on our balance sheet and
the underlying equity in net assets is amortized as an
adjustment to equity in earnings (loss) of unconsolidated
joint ventures over the lesser of the joint venture term or
40 years. As of December 31, 2003, investments in
unconsolidated joint ventures consisted of the Primes 40%
ownership interest in two hotels.

F-8



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##### Table of Contents



PRIME HOSPITALITY CORP. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Foreign Currency Translation

Balance sheet accounts are translated at the
exchange rates in effect at each period end and income and
expense accounts are translated at the average rates of exchange
prevailing during the year. The national currencies of foreign
operations are generally the functional currencies. Gains and
losses from foreign exchange and the effect of exchange rate
changes on intercompany transactions of a long-term investment
nature are generally included as a separate component of
stockholders equity. Gains and losses from foreign
exchange rate changes related to intercompany receivables and
payables that are not of a long-term investment nature are
reported currently in costs and expenses. The Quebec Venture
translated balance sheet reflects a $2.3 million unrealized
gain on currency translation. Primes share of unrealized
gain is recorded as other comprehensive income, net of tax, of
$560,000 for 2003.

Mortgages and Notes Receivable

Mortgages and notes receivable are reflected at
fair value as of July 31, 1992, plus the cost of advances
since that date. The amount of interest income recognized on
mortgages and notes receivable is generally based on the stated
interest rate and the carrying value of the notes. Interest
income on delinquent notes receivable is generally recognized
when cash is received.

The Company measures impairment of its mortgages
and notes receivable based on the present value of expected
future cash flows discounted at the effective interest rate.
Impairment can also be measured based on observable market price
or the fair value of collateral, if the mortgages and notes
receivable are collateral dependent. If the measure of the
impaired mortgage or note receivable is less than the recorded
investment, the we will establish a valuation allowance, or
adjust existing valuation allowances, with a corresponding
charge or credit to operations. Based upon our evaluation, we
determined that no impairment of the mortgage and notes
receivable had occurred.

Other Assets

Other assets consist primarily of deferred
issuance costs related to the Companys debt obligations.
Deferred issuance costs are amortized over the respective terms
of the loans. In 2002, other assets included security deposits
under the our operating lease agreements.

Insurance Programs

We use an incurred loss retrospective insurance
plan for general and auto liability and workers
compensation. Predetermined loss limits have been arranged with
insurance companies to limit the Companys per occurrence
and aggregate cash outlay.

We maintain a self-insurance program for major
medical and hospitalization coverage for employees and
dependents, which is partially funded by payroll deductions.
Payments for major medical and hospitalization below specified
aggregate annual amounts are self-insured by the Company. Claims
for benefits in excess of these amounts are covered by insurance
purchased by the Company.

Provisions have been made in the consolidated
financial statements which represent the expected future
payments based on the estimated ultimate cost for incidents,
less insured amounts, incurred through the balance sheet date
and are included in other current and other long-term
liabilities based on the expected payment dates.

Revenue Recognition

Room revenue and other revenues are recognized
when earned. Management and franchise fee revenues are
recognized when all material services or conditions relating to
the respective property or franchisee have been substantially
performed or satisfied by the Company. Such revenues, when
recognized, are included in management, franchise and other fees
on the accompanying consolidated statements of operations. An
allowance for doubtful accounts is established based on our
periodic review of receivable balances and established criteria.

F-9



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##### Table of Contents



PRIME HOSPITALITY CORP. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Gains and losses resulting from sales of hotels
are recorded in full when title is conveyed to the buyer and
when various criteria are met relating to the buyers
financial commitment and any subsequent involvement by the
Company with respect to the hotels being sold.

The Companys sales of hotels are sometimes
accompanied by a leaseback of the facilities under operating
lease arrangements. Such sales are recognized when the above
sales criteria are met and certain specific criteria are met
relating to the lease terms. Related profit is deferred and is
recognized as income over the remaining lease term.

Advertising Costs

The Company expenses all costs, including
production costs, of print, radio, television and other
advertisements as incurred. Advertising expenses included in
brand and administrative expenses were $6.9 million,
$6.7 million and $7.3 million for the years ended
December 31, 2003, 2002 and 2001, respectively.

Income Taxes

We file a consolidated Federal income tax return.
Tax benefits associated with net operating loss carryforwards
and other temporary differences that existed at the time fresh
start reporting was adopted are reflected as a contribution to
stockholders equity in the period in which they are
realized.

Deferred income tax assets and liabilities are
recorded to reflect the tax consequences on future years of
temporary differences of revenue and expense items for financial
statement and income tax purposes.

Pre-Opening Costs

All pre-opening costs are being expensed as
incurred.

Deferred Income

Deferred income consists of gains on properties
which were sold and where Prime has continuing involvement with
regard to minimum cash flow returns to the buyers either in the
form of a lease or management agreement. Deferred income is
amortized over the life of the respective agreements, either as
a reduction of rent or other funding expense or as an addition
to management, franchise and other fees when such fees are below
market levels.

Accounting for Stock-Based
Compensation

In December 2002, the Financial Accounting
Standards Board issued Statement No. 148 to amend
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. In addition, Statement No. 148 amends the
disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee
compensation and the effect of the method used on reported
results. However, the Company has continued to account for
options in accordance with the provision of APB Opinion
No. 25, Accounting for Stock Issues to
Employees and related interpretations. Accordingly, no
compensation expense has been recognized for stock option plans
(See Note 11).

F-10



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##### Table of Contents



PRIME HOSPITALITY CORP. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table sets forth the Companys
pro forma information for its common stockholders for the years
ended December 31 (in thousands except earnings per share
data):

|                                                                                             |         |      |         |      |   |      |        |      |   |   |        |     | 
|-------------------------------------------------------------------------------------------- | ------- | ---- | ------- | ---- | - | ---- | ------ | ---- | - | - | ------ | --- | 
|                                                                                             |         | 2003 |         | 2002 |   | 2001
|                                                                                             |         |      |         |      |   |     
|Net income (loss) as reported                                                                |         | $    | (24,475 | )    |   | $    | (3,867 | )    |   | $ | 40,193 |    
|Add: Stock option expense included in net income
    (loss)                                  |         |      |        |      |   |      |       |      |   |   |       |    
|Less: Stock option expense determined under
    fair value recognition method for all awards |         |      | (3,745  | )    |   |      | (3,815 | )    |   |   | (2,493 | )  
|                                                                                             |         |      |         |      |   |      |        |      |   |   |        |    
|Pro forma net income (loss)                                                                  |         | $    | (28,220 | )    |   | $    | (7,682 | )    |   | $ | 37,700 |    
|                                                                                             |         |      |         |      |   |      |        |      |   |   |        |    
|Net income (loss) per share as reported:                                                     |         |      |         |      |   |      |        |      |   |   |        |    
|                                                                                             | Basic   |      | $       | (.55 | ) |      | $      | (.09 | ) |   | $      | .90 | 
|                                                                                             |         |      |         |      |   |      |        |      |   |   |        |    
|                                                                                             | Diluted |      | $       | (.55 | ) |      | $      | (.09 | ) |   | $      | .88 | 
|                                                                                             |         |      |         |      |   |      |        |      |   |   |        |    
|Pro forma net income (loss) per share:                                                       |         |      |         |      |   |      |        |      |   |   |        |    
|                                                                                             | Basic   |      | $       | (.63 | ) |      | $      | (.17 | ) |   | $      | .84 | 
|                                                                                             |         |      |         |      |   |      |        |      |   |   |        |    
|                                                                                             | Diluted |      | $       | (.63 | ) |      | $      | (.17 | ) |   | $      | .82 | 
|                                                                                             |         |      |         |      |   |      |        |      |   |   |        |    

The fair value for those options was estimated at
the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for 2003, 2002
and 2001, respectively: risk-free interest rate of 4.93%, 5.00%
and 5.05%; dividend yields of 0% for 2003, 2002, and 2001;
volatility factors of the expected market price of the
Companys common stock of 42.7% in 2003, 46.6% in 2002 and
46.1% in 2001, and a weighted-average expected life of the
option of 4.7 years.

For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over
the options vesting period.

Gains and Losses from Extinguishment of
Debt

In April 2002, the Financial Accounting Standards
Board issued Statement No. 145 which rescinded Statement
No. 4, Reporting Gains and Losses from Extinguishment
of Debt. The Statement requires, among other things, the
reporting of gains and losses from the early extinguishments of
debt as an addition to or a reduction of interest expense. The
Company adopted Statement No. 145 on January 1, 2003
and reclassified prior years extraordinary gains and losses from
early extinguishments of debt to continuing operations.

Recently Issued Accounting
Pronouncements

In November of 2002, the FASB issued
Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others. The Interpretation elaborates on the disclosures to be
made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also
clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. This
Interpretation does not prescribe a specific approach for
subsequently measuring the guarantors recognized liability
over the term of the related guarantee. The disclosure
provisions of this Interpretation became effective for the
Companys December 31, 2002 financial statements. The
initial recognition and initial measurement provisions of this
Interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The
adoption of FIN 45 did not have a material impact on the
Companys financial statements.

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest Entities. This
Interpretation clarifies the application of existing accounting
pronouncements to certain entities in which equity investors

F-11



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##### Table of Contents



PRIME HOSPITALITY CORP. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support from other parties. In December
2003, a revision was issued (46R) to clarify some of the
original provisions. The provisions of this interpretation are
immediately effective for VIEs formed after
January 31, 2003. The provisions of the Interpretation are
effective in the first quarter of 2004 for all variable
interests in variable interest entities. The Company does not
believe that this Interpretation will have a significant impact
on the Companys financial statements.

In May 2003, FASB issued SFAS No. 150
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This
statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of
both liabilities and equity, and is 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. As a result of
further discussion by the FASB on October 8, 2003, the FASB
announced that minority interests in consolidated partnerships
with specified finite lives should be reclassified as
liabilities and presented at fair market value unless the
interests are convertible into the equity of the parent. Fair
market value adjustments occurring after July 1, 2003
should be recorded as a component of interest expense. At their
October 29, 2003 meeting, the FASB agreed to indefinitely
defer the implementation of their announcement at the
October 8, 2003 meeting regarding the accounting treatment
for minority interests in finite life partnerships. Therefore,
until a final resolution is reached, the Company will not
implement this aspect of the standard. If the Company were to
adopt this standard under its current provisions, it would not
have a material impact on the Companys financial
statements.

In response to a FASB staff announcement in
November 2001, and in accordance with the Emerging Issues Task
Force (EITF) Abstract 01-14 Income Statement
Characterization of Reimbursements received for
Out-Of-Pocket Expenses incurred which was issued in
January 2002, the Company began recording the reimbursements of
costs incurred on behalf of managed hotel properties and
franchisees received as other revenues from managed and
franchised properties and the costs incurred on behalf of
managed hotel property owners and franchisees as other expenses
from managed and franchised properties in the first quarter of
2002. These costs relate primarily to payroll costs at managed
properties where the Company is the employer. Comparative
financial statements for the prior periods were reclassified to
conform with the presentation in the 2002 financial statements.
Since the reimbursements are made based upon the costs incurred
with no added margin, the adoption of this guidance has no
effect on the operating income, total or per Share net income,
cash flows or financial position of the Company.

Reclassifications

Certain reclassifications have been made to the
December 31, 2002 and 2001 consolidated financial
statements to conform them to the December 31, 2003
presentation.

Note 2  Hotel Acquisitions/
Unconsolidated Joint Ventures

Prime is a partner in two unconsolidated joint
ventures, East Rutherford Group LLC and Nova Scotia Company.

In December 2002, East Rutherford Group, L.L.C.,
(Meadowlands Venture) an entity in which Prime held
a 50% interest, acquired the Sheraton Meadowlands Hotel and
Conference Center in East Rutherford, NJ. The hotel is managed
by Prime and will continue to operate under the Sheraton brand
name.

In January 2003, Nova Scotia Company,
(Quebec Venture) an entity in which Prime held a 50%
interest, acquired the Quebec City Holiday Inn Select. The hotel
is managed by Prime and will continue to operate under the
Holiday Inn brand name.

Primes partner in both acquisitions is
United Capital Corp., an entity in which A.F. Petrocelli,
Primes chairman and chief executive officer, has a
controlling ownership interest. Under the operating agreement,
all significant operating and capital decisions are made jointly
and operating profits and losses are allocated based on
ownership interest.

F-12



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##### Table of Contents



PRIME HOSPITALITY CORP. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In March 2003, Ark-Meadowlands, Inc., an
unrelated third party, purchased a 20% interest at cost in East
Rutherford Group, LLC and ArkQuebec, Inc., an unrelated third
party, purchased a 20% interest at cost in Nova Scotia Company.
The purchase reduced Prime and UCCs ownership interest to
40% each in both entities.

In April 2003, the Meadowlands Venture entered
into a $25.0 million mortgage loan secured by the hotel.
The loan bears interest at LIBOR +2.75% and is due in April
2006. The proceeds of the loan were distributed to the partners
based on their ownership interest with Prime receiving
approximates $10.0 million. Under a guaranty agreement,
Prime and UCC jointly and severally guaranteed $4.0 million
which will be reduced by scheduled principal payments. In July
2003, the Quebec Venture obtained an $8.2 million CDN
first mortgage loan at a fixed rate of 6.26% due in 2008. The
loan is recourse to the hotel only. The proceeds of the loan
were distributed to the partners based on their ownership
interests. Prime received $2.5 million of the loan
proceeds. Based on the guaranteed amount and other facts and
circumstances, including an analysis of the underlying
collateral, management has determined that the fair value of the
Meadowlands Venture obligation was not material.

Condensed financial information for the joint
ventures at December 31, 2003 and for the year then ended
are as follows:

|                                  |                             |             |        |         |  |       |        |        |  |   |        |        | 
|--------------------------------- | --------------------------- | ----------- | ------ | ------- |  | ----- | ------ | ------ |  | - | ------ | ------ | 
|                                  |                             | Meadowlands |        | Quebec  |  |      
|                                  |                             | Venture     |        | Venture |  | Total
|                                  |                             |             |        |         |  |      
|Condensed Balance Sheet           |                             |             |        |         |  |       |        |        |  |   |        |       
|Cash and cash equivalents         |                             | $           | 846    |         |  | $     | 538    |        |  | $ | 1,384  |       
|                                  | Other current assets        |             |        | 1,419   |  |       |        | 601    |  |   |        | 2,020  | 
|                                  | Fixed assets                |             |        | 45,799  |  |       |        | 14,900 |  |   |        | 60,699 | 
|                                  | Other assets                |             |        | 244     |  |       |        | 52     |  |   |        | 296    | 
|                                  |                             |             |        |         |  |       |        |        |  |   |        |       
|                                  | Total Assets                |             | $      | 48,308  |  |       | $      | 16,091 |  |   | $      | 64,399 | 
|                                  |                             |             |        |         |  |       |        |        |  |   |        |       
|                                  | Current liabilities         |             | $      | 1,611   |  |       | $      | 495    |  |   | $      | 2,106  | 
|                                  | Mortgage payable            |             |        | 24,663  |  |       |        | 6,205  |  |   |        | 30,868 | 
|                                  | Equity                      |             |        | 22,034  |  |       |        | 9,391  |  |   |        | 31,425 | 
|                                  |                             |             |        |         |  |       |        |        |  |   |        |       
|                                  |                             | $           | 48,308 |         |  | $     | 16,091 |        |  | $ | 64,399 |       
|                                  |                             |             |        |         |  |       |        |        |  |   |        |       
|Primes equity interest           |                             | $           | 8,828  |         |  | $     | 3,767  |        |  | $ | 12,595 |       
|                                 
|Condensed Statement of Operations |                             |             |        |         |  |       |        |        |  |   |        |       
|                                  | Revenues                    |             | $      | 18,839  |  |       | $      | 5,270  |  |   | $      | 24,109 | 
|                                  | Operating expenses          |             |        | 15,821  |  |       |        | 3,588  |  |   |        | 19,409 | 
|                                  |                             |             |        |         |  |       |        |        |  |   |        |       
|                                  | Operating income            |             |        | 3,018   |  |       |        | 1,682  |  |   |        | 4,700  | 
|                                  | Depreciation                |             |        | 1,329   |  |       |        | 454    |  |   |        | 1,783  | 
|                                  | Interest expense            |             |        | 779     |  |       |        | 179    |  |   |        | 958    | 
|                                  |                             |             |        |         |  |       |        |        |  |   |        |       
|                                  | Net income                  |             | $      | 910     |  |       | $      | 1,049  |  |   | $      | 1,959  | 
|                                  |                             |             |        |         |  |       |        |        |  |   |        |       
|                                  | Primes share of net income |             | $      | 392     |  |       | $      | 430    |  |   | $      | 822    | 
|                                  |                             |             |        |         |  |       |        |        |  |   |        |       

Note 3  Hotel
Dispositions

Sale/ Leaseback Transactions

In January 1998, the Company completed the
sale/leaseback of eight full-service hotels to MeriStar
Hospitality Corp. (MeriStar) for total consideration
of $138.4 million. The Company was operating the hotels
under an operating lease agreement, which had a term of ten
years. The transaction generated a net gain of approximately
$64.9 million,

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##### Table of Contents



PRIME HOSPITALITY CORP. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

which was deferred and was being recognized as a
reduction of rent expense over the life of the lease. In 2001,
MeriStar and Prime terminated the leases. The Company received a
net termination fee of $1.0 million and recognized the
remaining unamortized portion of the deferred gain of
$36 million into income. Such amounts are included in other
income in the accompanying consolidated financial statement.

In 1997 and 1998, the Company entered into two
separate transactions with Equity Inns, Inc. (Equity
Inns) for the sale and leaseback of 19 AmeriSuites
hotels. The transactions generated gross proceeds of
$184 million and all 19 hotels were operated by Prime
under lease agreements with Equity Inns through December 2001.
Effective January 1, 2002, the leases were converted into
management agreements and Equity Inns also signed franchise
agreements with Prime to license the AmeriSuites name. Both the
management and franchise agreements expire on various dates in
2007 and 2008.

The management agreements have terms similar to
the lease agreements and provide for a subsidiary of Prime to
share in the cash flow above and to fund deficits below certain
thresholds. The agreements also require the Prime subsidiary to
guarantee a minimum return to Equity Inns equal to the minimum
rents under the prior lease agreements (approximately
$20.7 million in aggregate in 2002). The Prime
subsidiarys obligations under the management agreements
are supported by a guarantee by Prime of approximately
$4.0 million (See Note 9).

The sales of the hotels in 1997 and 1998
generated gains of $36.0 million. Such gains were deferred
and amortized over the life of the initial lease
(ten years). As of December 31, 2003, approximately
$13.1 million remained in deferred income. This amount will
continue to be amortized over the remaining life of the
management agreement due to Primes continuing involvement
under the management agreement.

Other Dispositions

During 2003, the Company sold one AmeriSuites and
one Wellesley Inn for total proceeds of $17.4 million. The
Company retained the franchise rights to the hotels under
20-year franchise agreements and signed a management agreement
on the AmeriSuites hotel.

In 2002, the Company sold three AmeriSuites,
three Wellesley Inns and a full-service hotel for gross proceeds
of $60.0 million. The Company retained the franchise rights
to the AmeriSuites and Wellesley Inns under 20-year franchise
agreements. The Company also entered into agreements to manage
two of the AmeriSuites hotels which were sold. The gains on the
sales of the hotels are recorded in discontinued operations, net
of tax, except for the two hotels managed by Prime which
are recorded in other income.

During 2001, the Company sold one AmeriSuites
hotel for $14.0 million, four Wellesley Inns for
$15.4 million and two parcels of land for
$5.1 million. The Company recognized a net gain of
$3.1 million in these dispositions. The net gain is
included in other income. The Company retained the franchise
rights on the AmeriSuites and Wellesley Inns properties pursuant
to 20-year franchise agreements. The Company also entered into
an agreement to manage the AmeriSuites property it sold.

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##### Table of Contents



PRIME HOSPITALITY CORP. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 4  Property, Equipment
and Leasehold Improvements

Property, equipment and leasehold improvements
consist of the following (in thousands):

|                               |                                                          |              |         |          |           |             |         |          |           |  |  |          |  | 
|------------------------------ | -------------------------------------------------------- | ------------ | ------- | -------- | --------- | ----------- | ------- | -------- | --------- |  |  | -------- |  | 
|                               |                                                          |              |         |         
|                               |                                                          | December 31, |         |         
|                               |                                                          |              |         | Years of
|                               |                                                          | 2003         |         | 2002     |           | Useful Life
|                               |                                                          |              |         |          |           |            
|Land and land leased to others |                                                          | $            | 138,169 |          |           | $           | 136,926 |          |           |  |  |         
|                               | Buildings and improvement                                |              |         | 824,503  |           |             |         | 833,560  |           |  |  | 20 to 40 | 
|                               | Furniture, fixtures and autos                            |              |         | 184,920  |           |             |         | 174,498  |           |  |  | 3 to 10  | 
|                               | Leasehold improvements                                   |              |         |         |           |             |         | 3,414    |           |  |  | 3 to 40  | 
|                               | Construction in progress                                 |              |         | 4,804    |           |             |         | 1,956    |           |  |  |          | 
|                               |                                                          |              |         |          |           |             |         |          |           |  |  |         
|                               |                                                          | Sub-total    |         |          | 1,152,396 |             |         |          | 1,150,354 |  |  |          |  | 
|                               | Less accumulated depreciation and amortization           |              |         | (235,802 | )         |             |         | (200,624 | )         |  |  |          | 
|                               |                                                          |              |         |          |           |             |         |          |           |  |  |         
|                               | Total property, equipment and leasehold
    improvements |              | $       | 916,594  |           |             | $       | 949,730  |           |  |  |          | 
|                               |                                                          |              |         |          |           |             |         |          |           |  |  |         

At December 31, 2003, the Prime is the
lessor of land and certain restaurant facilities primarily in
Company-owned hotels with an approximate aggregate book value of
$21.1 million pursuant to noncancelable operating leases
expiring on various dates through 2018. Minimum future rent
under such leases for each of the next 5 years subsequent
to December 31, 2003, and thereafter are as follows:

|           |  |   |       | 
|---------- |  | - | ----- | 
|2004       |  |   | 1,183 | 
|2005       |  |   | 1,190 | 
|2006       |  |   | 1,207 | 
|2007       |  |   | 1,213 | 
|2008       |  |   | 1,113 | 
|Thereafter |  |   | 2,339 | 
|           |  |   |       | 
|Total      |  | $ | 8,245 | 
|           |  |   |       | 

Depreciation and amortization expense on
property, equipment and leasehold improvements, including
amounts for discontinued operations, was $39.4 million,
$40.0 million and $38.4 million for the years ended
December 31, 2003, 2002 and 2001, respectively.

During the years ended December 31, 2003,
2002 and 2001, the Company capitalized $0 million,
$1.3 million and $1.6 million, respectively, of
interest related to borrowings used to finance hotel
construction.

Note 5  Assets Held for
Sale

As of December 31, 2003, assets held for
sale consist of land parcels which the Company no longer intends
to develop. These parcels are being actively marketed for sale
and it is our intention to dispose of these assets in the next
year.

During 2001, we recorded a valuation allowance of
$6.7 million against the land parcels held for sale. The
adjustment represented the difference between the carrying cost
of the assets and the fair market value, less the costs to sell
the assets

F-15



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##### Table of Contents



PRIME HOSPITALITY CORP. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and is recorded in other income in our
consolidated statement of operations. Management estimated the
fair market value based on comparative land sales in their
respective markets.

Note 6  Mortgages and Notes
Receivable

Mortgages and notes receivable are comprised of
the following (in thousands):

|                                    |                                      |              |        |        |  |   |        |        | 
|----------------------------------- | ------------------------------------ | ------------ | ------ | ------ |  | - | ------ | ------ | 
|                                    |                                      |             
|                                    |                                      | December 31,
|                                    |                                      |             
|                                    |                                      | 2003         |        | 2002  
|                                    |                                      |              |        |       
|Properties leased by the Company(a) |                                      | $            | 8,551  |        |  | $ | 9,113  |       
|Other(b)                            |                                      |              | 4,276  |        |  |   | 4,355  |       
|                                    |                                      |              |        |        |  |   |        |       
|                                    | Total mortgages and notes receivable |              |        | 12,827 |  |   |        | 13,468 | 
|Less current portion                |                                      |              | (534   | )      |  |   | (447   | )     
|                                    |                                      |              |        |        |  |   |        |       
|Long-term portion                   |                                      | $            | 12,293 |        |  | $ | 13,021 |       
|                                    |                                      |              |        |        |  |   |        |       



---



|    |                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | At December 31, 2003, the Company is the
    holder of mortgage notes receivable with a book value of
    $8.9 million secured by the Companys leasehold
    positions in three hotels. These notes bear interest at rates
    ranging from 8.5% to 13.0% and mature on various dates from 2008
    through 2015. The mortgages were derived from the sales of hotel
    properties.
|   
|(b) | Other notes receivable consist primarily of
    mezzanine loans issued to franchisees, secured by hotel
    properties managed by the Company and development loans to
    franchisees. Other notes receivable mature through 2012 and bear
    interest at an approximate effective rate of 8.3 %.                                                                                  

Note 7  Debt

Debt consists of the following (in thousands):

|                                       |  |              |         |      |  |   |         |  
|-------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | -
|                                       |  |             
|                                       |  | December 31,
|                                       |  |             
|                                       |  | 2003         |         | 2002
|                                       |  |              |         |     
|8 3/8% Senior Subordinated Notes(a)    |  | $            | 178,725 |      |  | $ | 200,000 |  
|Revolving Credit Facility(b)           |  |              | 35,000  |      |  |   | 70,000  |  
|Mortgages and other notes payable(d)   |  |              | 14,877  |      |  |   | 15,069  |  
|                                       |  |              |         |      |  |   |         |  
|Total debt                             |  |              | 228,602 |      |  |   | 285,069 |  
|Less current maturities                |  |              | (1,067  | )    |  |   | (1,052  | )
|                                       |  |              |         |      |  |   |         |  
|Long-term debt, net of current portion |  | $            | 227,535 |      |  | $ | 284,017 |  
|                                       |  |              |         |      |  |   |         |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | On April 29, 2002, we completed the issuance
    of $200 million of 8 3/8% Senior Subordinated Notes
    (the 8 3/8 Notes). We used the proceeds of the
    issuance of the 8 3/8% Notes, together with available cash,
    to redeem all of our $190.0 million of outstanding
    9 3/4% Notes. The redemption price was $1,050 per $1,000
    principal amount of the 9 3/4% Notes plus accrued and
    unpaid interest (See Note 16). The 8 3/8% Notes are
    unsecured obligations of Prime and contain certain covenants
    including limitations on the incurrence of debt, dividend
    payments, certain investments, transactions with affiliates,
    asset sales and mergers and consolidations. The 8 3/8%
    Notes mature in April 2012.
|   
|(b) | In July, 2002, we retired our $125 million
    revolving credit facility which was to expire in December 2002
    and entered into a new $125 million credit facility (the
    Credit Facility) with a syndicate of financial
    institutions which is available until August 2006. We had
    borrowings of $35.0 million under the Credit Facility at
    LIBOR +2.50%, or approximately 3.7%, as of
    December 31, 2003. The Credit Facility consists of a four
    year, $125 million revolving line of credit and is secured
    by the equity interests of certain of Primes subsidiaries.
    The credit agreement contains loan                                                                                                             

F-16



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##### Table of Contents



PRIME HOSPITALITY CORP. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | covenants customary for a credit facility of this
    size and nature, including but not limited to, limitations on
    making capital expenditures, selling or transferring assets,
    making certain investments (including acquisitions),
    repurchasing shares and liens. In addition, we must maintain a
    debt to EBITDA ratio of 4.25 times and an EBITDA to
    interest ratio of 2.50 times. We were in compliance with
    all covenants at December 31, 2003. However, there can be
    no assurance that we will continue to be in compliance with
    these covenants.
|   
|(c) | In August 2002, Prime redeemed all of its
    $103.5 million of outstanding 9 1/4% Notes. The
    redemption price was 103.083% of the principal amount of the
    9 1/4% Notes, plus accrued and unpaid interest (See
    Note 16). Prime funded the redemption with borrowings under
    the Credit Facility plus cash on hand.                                                                                                                                                                                                                                                       
|   
|(d) | The Company has two mortgage notes payable that
    are collateralized by hotel properties with a book value of
    $33.0 million. At December 31, 2003 these notes bear
    interest at 6.7% and 8.6%, and mature in 2004 and 2009.                                                                                                                                                                                                                                                                                                                                                    

Maturities of long-term debt subsequent to
December 31, 2003 are as follows (in thousands):

|           |  |   |         | 
|---------- |  | - | ------- | 
|2004       |  | $ | 1,067   | 
|2005       |  |   | 1,144   | 
|2006       |  |   | 35,250  | 
|2007       |  |   | 272     | 
|2008       |  |   | 294     | 
|Thereafter |  |   | 190,575 | 
|           |  |   |         | 
|Total      |  | $ | 228,602 | 
|           |  |   |         | 

Note 8  Other Current Assets/
Liabilities

Other current assets consist of the following (in
thousands):

|                   |                            |              |       |       |  |   |       |        | 
|------------------ | -------------------------- | ------------ | ----- | ----- |  | - | ----- | ------ | 
|                   |                            |             
|                   |                            | December 31,
|                   |                            |             
|                   |                            | 2003         |       | 2002 
|                   |                            |              |       |      
|Deferred tax asset |                            | $            | 3,102 |       |  | $ | 3,940 |       
|Prepaid expenses   |                            |              | 1,269 |       |  |   | 1,403 |       
|Other              |                            |              | 617   |       |  |   | 5,191 |       
|                   |                            |              |       |       |  |   |       |       
|                   | Total other current assets |              | $     | 4,988 |  |   | $     | 10,534 | 
|                   |                            |              |       |       |  |   |       |       

Other current liabilities consist of the
following (in thousands):

|                                     |                                 |              |       |        |  |   |       |        | 
|------------------------------------ | ------------------------------- | ------------ | ----- | ------ |  | - | ----- | ------ | 
|                                     |                                 |             
|                                     |                                 | December 31,
|                                     |                                 |             
|                                     |                                 | 2003         |       | 2002  
|                                     |                                 |              |       |       
|Interest payable                     |                                 | $            | 2,957 |        |  | $ | 2,550 |       
|Accrued payroll and related benefits |                                 |              | 5,594 |        |  |   | 5,544 |       
|Accrued sales and use taxes          |                                 |              | 2,346 |        |  |   | 2,333 |       
|Insurance reserves                   |                                 |              | 5,719 |        |  |   | 4,709 |       
|Other                                |                                 |              | 2,795 |        |  |   | 5,849 |       
|                                     |                                 |              |       |        |  |   |       |       
|                                     | Total other current liabilities |              | $     | 19,411 |  |   | $     | 20,985 | 
|                                     |                                 |              |       |        |  |   |       |       

F-17



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##### Table of Contents



PRIME HOSPITALITY CORP. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 9  Commitments and
Contingencies

Leases

We lease various hotels under lease agreements
with initial terms expiring at various dates from 2005 through
2061. We have options to renew certain of the leases for periods
ranging from 1 to 99 years. Rental payments are based
on minimum rentals plus a percentage of the hotel
properties revenues in excess of stipulated amounts.

Prime operated one full-service hotel owned by
Winston Hotels (Winston). The lease was with a
subsidiary of Prime and was due to expire in 2008. The lease was
terminated and a provision for $425,000 reflecting the costs of
termination was established at December 31, 2003.

On January 1, 2002, we converted our leases
on 18 AmeriSuites we leased from Equity Inns into
management agreements. These management agreements run for the
unexpired term of the leases they replaced and require Prime to
guarantee a certain minimum level of cash flow
(See Note 3). The agreements expire in 2007 and 2008
and will then be converted to 20 year franchise agreements
provided that we are in compliance with the cash flow guarantee
requirements under the current agreements.

On April 3, 2003, a wholly owned subsidiary
of the Company terminated lease agreements on three hotels owned
by ShoLodge, Inc. (ShoLodge) due to operating
shortfalls which approximated $1.1 million in the past
twelve months. In accordance with the lease termination, Prime
will forfeit its rights to receive a $3.1 million payment
in 2011 which was due at the end of the lease as compensation
for executing the lease agreement. ShoLodge has assumed
management of the hotels and is operating the hotels under new
ten-year franchise agreements with Prime, under the AmeriSuites
flag. These franchise agreements permit ShoLodge to terminate
the agreements without termination fees upon proper notice. The
results of operations for these hotels are reflected in
discontinued operations, net of tax, in the accompanying
financial statements. In addition, a loss of $1.5 million,
net of tax, was recorded in the three months ended
March 31, 2003 in gain (loss) on disposal from
discontinued operations for the net assets associated with the
lease.

In July 2003, a subsidiary of the Company did not
make its scheduled July 1 rent payment of approximately
$2.0 million on 24 AmeriSuites hotels and received a
default notice from HPT. Over the previous twelve months, cash
flow was negatively impacted by $11.5 million as rent
payments exceeded operating cash flow by $9.0 million and
approximately $2.5 million was required to be sent aside
for capital improvements. In December 2003, we terminated our
lease agreement for 24 AmeriSuites hotels with HPT and
entered into a management agreement with HPT for the
24 AmeriSuites hotels and 12 full-service hotels to be
re-branded under our Prime Hotels & Resorts chain. We
recorded a $33.7 million loss due to the write-off of
assets associated with the HPT lease agreement. The management
agreement became effective on January 1, 2004 for the
AmeriSuites hotels and February 1, 2004 for the Prime
Hotels & Resorts hotels. The term is 15 years and
we have two renewal options of 15 years each.

Under the agreement, HPT will receive an
owners priority return of $26 million per year. This
return is guaranteed by Prime under a limited guarantee which
caps the maximum cash outlay by Prime over the life of the
agreement at $30 million. Cash flow generated by the hotels
in excess of $26 million per year will be split 50/50
between HPT and Prime with Primes share counting as its
royalty and management fee. Also, as part of the agreement, HPT
will provide $25 million during the first two years to
pay for re-branding and other capital improvements on the
36 hotels.

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##### Table of Contents



PRIME HOSPITALITY CORP. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Below is a schedule of the future guaranteed
minimum cash flow levels (in thousands):

|           |  |           |        |            |  |       |         |  |  |   |         | 
|---------- |  | --------- | ------ | ---------- |  | ----- | ------- |  |  | - | ------- | 
|           |  | Operating |        | Management |  |      
|           |  | Leases    |        | Agreements |  | Total
|           |  |           |        |            |  |      
|2004       |  | $         | 6,893  |            |  | $     | 45,578  |  |  | $ | 52,471  | 
|2005       |  |           | 6,801  |            |  |       | 46,661  |  |  |   | 53,462  | 
|2006       |  |           | 6,737  |            |  |       | 46,661  |  |  |   | 53,398  | 
|2007       |  |           | 6,740  |            |  |       | 46,661  |  |  |   | 53,401  | 
|2008       |  |           | 3,817  |            |  |       | 33,550  |  |  |   | 37,367  | 
|Thereafter |  |           | 37,536 |            |  |       | 260,000 |  |  |   | 297,536 | 
|           |  |           |        |            |  |       |         |  |  |   |         | 
|Total      |  | $         | 68,524 |            |  | $     | 479,111 |  |  | $ | 547,635 | 
|           |  |           |        |            |  |       |         |  |  |   |         | 

Rental expense for all operating leases,
including those agreements with terms of less than one year, and
owners return for the Equity Inns management agreements
consist of the following for the years ended December 31,
2003, 2002 and 2001 (in thousands):

|                   |                |              |        |        |  |      |        |        |  |   |        |        | 
|------------------ | -------------- | ------------ | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                   |                |             
|                   |                | December 31,
|                   |                |             
|                   |                | 2003         |        | 2002   |  | 2001
|                   |                |              |        |        |  |     
|Rentals            |                | $            | 44,488 |        |  | $    | 59,967 |        |  | $ | 65,709 |       
|Contingent rentals |                |              | 1,305  |        |  |      | 1,501  |        |  |   | 5,738  |       
|                   |                |              |        |        |  |      |        |        |  |   |        |       
|                   | Rental expense |              | $      | 45,793 |  |      | $      | 61,468 |  |   | $      | 71,447 | 
|                   |                |              |        |        |  |      |        |        |  |   |        |       

Such amounts are included in occupancy and other
operating expenses in the accompanying consolidated financial
statements.

Employee Benefits

The Company does not provide any material post
employment benefits.

Litigation

Currently and from time to time we are involved
in litigation arising in the ordinary course of its business. We
do not believe that we are involved in any litigation, that is
likely, individually or in the aggregate, to have a material
adverse effect on our financial condition or results of
operations or cash flows.

On August 18, 1999, plaintiff Nick Pourzal,
a former employee of Prime, filed a complaint against the
Company in the United States District Court for the Virgin
Islands. The complaint alleges that the Company contracted in
1978 to pay plaintiff ten percent of the pre-tax earnings on any
use or sale of a 16.354-acre property on St. Thomas,
U.S. Virgin Islands known as the Gilbert Land,
and that the Company breached this contract by making commercial
use of the Gilbert Land without paying the plaintiff. On
January 13, 2003, plaintiff filed a motion for leave to
file a second amended compliant, to add claims for
(i) conspiracy to violate the Virgin Islands Plant Closing
Act, (ii) prima facie tort and (iii) to confirm an
arbitration award relating to the Companys termination of
plaintiffs employment in 1999. The complaint seeks
compensatory, incidental and consequential damages, interest and
costs, a declaratory judgment that the Company is liable for
payment of ten percent of pre-tax earnings on use or sale of the
Gilbert Land, and attorneys fees and expenses. We believe
that the plantiffs action is without merit and intend to
vigorously defend this case.

In August 2002, we paid $8.9 million from
cash on hand to Sholodge due in connection with a damage award
decision by the American Arbitration Association rendered on
June 26, 2002.

On June 13, 2003, Southeast Texas Inns, Inc.
(Southeast Texas Inns) filed a Complaint against the
Company, May-Ridge, L.P. (May-Ridge) and Ridgewood
Holdings Corp. (Ridgewood), which is now pending
before the

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##### Table of Contents



PRIME HOSPITALITY CORP. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

United States District Court for the Middle
District of Tennessee. The Complaint alleges that May-Ridge has
defaulted under a Lease Agreement, dated as of July 9,
2000, with Southeast Texas Inns pursuant to which May-Ridge
leased three properties located in Texas (the Three
Properties) that were operated as AmeriSuites Hotels. On
April 2, 2003, Southeast Texas Inns, as landlord,
terminated the Lease Agreement for default and May-Ridge
surrendered the three properties to Southeast Texas Inns. In the
Complaint, Southeast Texas Inns seeks actual and liquidated
damages in an amount in excess of $10 million against
May-Ridge and Ridgewood, which is the sole general partner of
May-Ridge. Southeast Texas Inns also seeks to hold Prime jointly
liable for all damages under the Lease Agreement, to which the
Company is not a party. We filed a motion to dismiss the
Complaint against the Company on August 19, 2003, which was
granted subject to no new evidence being brought by Southeast
Texas Inns.

Note 10  Income Taxes
(Benefits)

The provision (benefit) for income taxes
(including amounts applicable to extraordinary items) consisted
of the following for the years ended December 31, 2003,
2002 and 2001 (in thousands):

|          |         |              |         |         |         |      |        |        |        |   |        |        |        | 
|--------- | ------- | ------------ | ------- | ------- | ------- | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|          |         |             
|          |         | December 31,
|          |         |             
|          |         | 2003         |         | 2002    |         | 2001
|          |         |              |         |         |         |     
|Current:  |         |              |         |         |         |      |        |        |        |   |        |       
|          | Federal |              | $       |        |         |      | $      | (9,627 | )      |   | $      | (1,200 | )     
|          | State   |              |         | 954     |         |      |        | 561    |        |   |        | (903   | )     
|          |         |              |         |         |         |      |        |        |        |   |        |       
|          |         | $            | 954     |         |         |      | (9,066 | )      |        |   | (2,103 | )     
|Deferred: |         |              |         |         |         |      |        |        |        |   |        |       
|          | Federal |              |         | (13,481 | )       |      |        | 7,507  |        |   |        | 22,494 |       
|          | State   |              |         | (3,121  | )       |      |        | (913   | )      |   |        | 4,724  |       
|          |         |              |         |         |         |      |        |        |        |   |        |       
|          |         | $            | (16,602 | )       |         | $    | 6,594  |        |        | $ | 27,218 |       
|          |         |              |         |         |         |      |        |        |        |   |        |       
|          |         | Total        |         | $       | (15,648 | )    |        | $      | (2,472 | ) |        | $      | 25,115 | 
|          |         |              |         |         |         |      |        |        |        |   |        |       

Income taxes are provided at the applicable
federal and state statutory rates. The tax effects of the
changes in the temporary differences in the areas listed below
resulted in deferred income tax provisions for the years ended
December 31, 2003, 2002 and 2001 (in thousands):

|                                                        |       |              |         |         |   |      |       |       |  |   |        |        | 
|------------------------------------------------------- | ----- | ------------ | ------- | ------- | - | ---- | ----- | ----- |  | - | ------ | ------ | 
|                                                        |       |             
|                                                        |       | December 31,
|                                                        |       |             
|                                                        |       | 2003         |         | 2002    |   | 2001
|                                                        |       |              |         |         |   |     
|Net operating loss carry forward                        |       | $            | (14,369 | )       |   | $    |      |       |  | $ |       |       
|Amortization of deferred gains                          |       |              | 1,180   |         |   |      | 1,507 |       |  |   | 16,928 |       
|Change in accounting method for depreciation            |       |              |        |         |   |      |      |       |  |   | 10,675 |       
|Depreciation                                            |       |              | 3,872   |         |   |      | 352   |       |  |   | (350   | )     
|Property valuation reserves                             |       |              | (74     | )       |   |      | 223   |       |  |   | (1,131 | )     
|Property sales                                          |       |              | (3,394  | )       |   |      | 2,826 |       |  |   | (546   | )     
|State income tax, net of federal income tax
    benefit |       |              | (2,029  | )       |   |      | (593  | )     |  |   | 3,070  |       
|Arbitration settlement                                  |       |              |        |         |   |      | 1,748 |       |  |   |       |       
|Employment credit carry forward                         |       |              | (336    | )       |   |      |      |       |  |   |       |       
|Rewards program reserve                                 |       |              | (266    | )       |   |      |      |       |  |   |       |       
|Impairment reserve                                      |       |              | (373    | )       |   |      |      |       |  |   |       |       
|Other                                                   |       |              | (813    | )       |   |      | 531   |       |  |   | (1,428 | )     
|                                                        |       |              |         |         |   |      |       |       |  |   |        |       
|                                                        | Total |              | $       | (16,602 | ) |      | $     | 6,594 |  |   | $      | 27,218 | 
|                                                        |       |              |         |         |   |      |       |       |  |   |        |       

F-20



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##### Table of Contents



PRIME HOSPITALITY CORP. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following is a reconciliation of the
statutory Federal tax (benefit) rate to the Companys
effective income tax rate:

|                                                          |                                     |              |       |       |    |      |       |       |    |  |      |      |  
|--------------------------------------------------------- | ----------------------------------- | ------------ | ----- | ----- | -- | ---- | ----- | ----- | -- |  | ---- | ---- | -
|                                                          |                                     |             
|                                                          |                                     | December 31,
|                                                          |                                     |             
|                                                          |                                     | 2003         |       | 2002  |    | 2001
|                                                          |                                     |              |       |       |    |     
|Statutory Federal tax (benefit) rate                      |                                     |              | (35.0 | )%    |    |      | (35.0 | )%    |    |  | 35.0 | %   
|State income taxes, net of Federal tax
    (benefit) rate |                                     |              | (3.5  | )%    |    |      | (3.6  | )%    |    |  | 3.8  | %   
|Other, net                                                |                                     |              | (0.5  | )%    |    |      | (0.4  | )%    |    |  | (0.3 | )%  
|                                                          |                                     |              |       |       |    |      |       |       |    |  |      |     
|                                                          | Effective income tax (benefit) rate |              |       | (39.0 | )% |      |       | (39.0 | )% |  |      | 38.5 | %
|                                                          |                                     |              |       |       |    |      |       |       |    |  |      |     

At December 31, 2003, the Company has net
operating loss carry forwards of approximately
$91.0 million which expire in the years 2006 through 2023
and are available to offset future Federal taxable income.
Included in the net operating loss carry forwards at
December 31, 2003, the Company has approximately
$52.4 million relating to PMI, which expires in the year
2006 and is subject to an annual utilization limitation of
$8.7 million under the Internal Revenue Code due to a
change in ownership of the Company upon consummation of the Plan.

The Company has not recognized the future tax
benefits associated with the PMI net operating loss
carryforwards. Accordingly, the Company has provided a valuation
allowance of approximately $18.3 million against the
deferred tax asset at December 31, 2003. To the extent any
available carry forwards or other tax benefits related to PMI
are utilized, the amount of tax benefit realized will be treated
as a contribution to stockholders equity and will have no
effect on the income tax provision for financial reporting
purposes.

At December 31, 2003, the Company had
deferred tax liabilities of $61.7 million relating to the
differences in the methods of accounting for the Companys
fixed assets.

Note 11  Common Stock and
Common Stock Equivalents

Common Stock

During 2003, 2002 and 2001, we repurchased
approximately 358,000, 15,800 and 376,200 shares of our common
stock at average cost of $5.60, $7.72 and $9.86 per share,
respectively. The Revolving Credit Facility contains covenants
which limit the purchase of these shares to $25.0 million
per year.

Stock Options

We have adopted various stock option and
performance incentive plans under which options to purchase
shares of common stock may be granted to directors, officers or
key employees under terms determined by the Board of Directors.
At December 31, 2003, a total of 6.5 million options
were outstanding with another 2.4 million options available
to be issued. At December 31, 2003, the weighted average
contractual life remaining related to these options outstanding
is approximately 6.5 years and the weighted average
exercise price of the options outstanding is $8.34.

In October 2001, the Company granted options to
purchase 3,000,000 shares of common stock to the Companys
president and CEO. These options vest ratably over a three year
period. The options are priced at $9.12 per share, which
reflects the market value at the date of grant, and expire in
2011. At December 31, 2003, all of these options were
outstanding.

In October 1998, the Board of Directors granted
options to purchase 1,750,000 shares of common stock to the
Companys president and CEO. These options vest ratably
over a five-year period with respect to 1,000,000 of the
options. The additional 750,000 options vest as certain
performance criteria are met or, if the criteria are not met,
the options vest eight years after the original grant date. At
December 31, 2003, 1,750,000 options were outstanding under
this plan. The options are priced at $5.91 per share, which
reflects the market value at the date of grant, and expire in
2008.

F-21



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##### Table of Contents



PRIME HOSPITALITY CORP. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Under the 1995 Employee Stock Option Plan,
options to purchase shares of common stock may be granted at the
fair market value of the common stock at the date of grant.
Options can generally be exercised during a participants
employment with the Company in equal annual installments over a
three-year period from the date of grant and expire ten years
from the date of grant. During 2003, 2002 and 2001,
respectively, options to purchase 285,000, 242,000, and 268,000
shares of common stock, respectively, were granted under this
plan. At December 31, 2003, 1,332,000 options were
outstanding under this plan. The options are priced from $4.72
to $11.25, with a weighted average price of $9.33, and expire
from 2005 to 2013.

Under the 1995 Non-Employee Director Stock Option
Plan, options to purchase 10,000 shares of common stock are
automatically granted to each non-employee director at the fair
market value of the common stock at the date of grant. All
options are fully vested and exercisable one year after the date
of grant and expire ten years after the date of grant, or
earlier if the non-employee director ceases to be a director.
During 2003, 2002 and 2001, options to purchase 40,000, 90,000
and 0 shares of common stock, respectively, were granted
under this plan. At December 31, 2003, 420,000 options were
outstanding under this plan. The options are priced from $6.35
to $12.49 and expire from 2005 to 2013.

Effective January 1, 1996, the Company
adopted the provisions of FASB 123, Accounting for
Stock-Based Compensation. As permitted by the Statement, the
Company has chosen to continue to account for stock-based
compensation using the intrinsic value method. Accordingly, no
compensation expense has been recognized for its stock-based
compensation plans.

The following is a summary of the stock options
outstanding:

|                                 |           |           |           |              |   |               |                |                |  |  |      |      | 
|-------------------------------- | --------- | --------- | --------- | ------------ | - | ------------- | -------------- | -------------- |  |  | ---- | ---- | 
|                                 |           |           |           |              |   | Weighted     
|                                 |           | Number of |           | Option Price |   | Average Price
|                                 |           | Shares    |           | Per Share    |   | Per Share    
|                                 |           |           |           |              |   |              
|Outstanding at December 31, 2000 |           |           | 3,847,000 |              |   |               |                |                |  |  | 7.82 |     
|                                 | Granted   |           |           | 3,268,000    |   |               |                | $8.60 - $ 9.12 |  |  |      | 9.09 | 
|                                 | Exercised |           |           | (245,000     | ) |               |                | $4.72 - $11.25 |  |  |      | 8.23 | 
|                                 | Canceled  |           |           | (263,000     | ) |               |                | $4.72 - $11.25 |  |  |      | 9.53 | 
|                                 |           |           |           |              |   |               |                |                |  |  |      |     
|Outstanding at December 31, 2001 |           |           | 6,607,000 |              |   |               |                |                |  |  | 8.36 |     
|                                 | Granted   |           |           | 332,000      |   |               |                | $8.45 - $12.49 |  |  |      | 7.88 | 
|                                 | Exercised |           |           | (385,000     | ) |               |                | $4.72 - $12.49 |  |  |      | 8.24 | 
|                                 | Canceled  |           |           | (202,000     | ) |               |                | $4.72 - $11.25 |  |  |      | 9.18 | 
|                                 |           |           |           |              |   |               |                |                |  |  |      |     
|Outstanding at December 31, 2002 |           |           | 6,352,000 |              |   |               | $5.91 - $12.49 |                |  |  | 8.35 |     
|                                 | Granted   |           |           | 325,000      |   |               |                | $6.35 - $10.52 |  |  |      | 8.81 | 
|                                 | Exercised |           |           | (27,000      | ) |               |                | $4.72 - $ 9.16 |  |  |      | 8.50 | 
|                                 | Canceled  |           |           | (148,000     | ) |               |                | $4.72 - $12.49 |  |  |      | 9.63 | 
|                                 |           |           |           |              |   |               |                |                |  |  |      |     
|Outstanding at December 31, 2003 |           |           | 6,502,000 |              |   |               | $4.72 - $12.49 |                |  |  | 8.34 |     
|                                 |           |           |           |              |   |               |                |                |  |  |      |     
|Exercisable at December 31, 2001 |           |           | 1,860,000 |              |   |               | $4.72 - $11.25 |                |  |  | 8.31 |     
|                                 |           |           |           |              |   |               |                |                |  |  |      |     
|Exercisable at December 31, 2002 |           |           | 2,845,000 |              |   |               | $5.91 - $12.05 |                |  |  | 8.50 |     
|                                 |           |           |           |              |   |               |                |                |  |  |      |     
|Exercisable at December 31, 2003 |           |           | 4,224,000 |              |   |               | $4.72 - $12.49 |                |  |  | 8.55 |     
|                                 |           |           |           |              |   |               |                |                |  |  |      |     

F-22



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##### Table of Contents



PRIME HOSPITALITY CORP. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 12  Earnings (Loss)
Per Share

|                                           |                             |                     |         |           |   |        |        |        |  |   |       |       |  
|------------------------------------------ | --------------------------- | ------------------- | ------- | --------- | - | ------ | ------ | ------ |  | - | ----- | ----- | -
|                                           |                             |                    
|                                           |                             | For the Year Ended,
|                                           |                             | December 31, 2003  
|                                           |                             |                    
|                                           |                             |                     |         | Per-Share
|                                           |                             | Income              |         | Shares    |   | Amount
|                                           |                             |                     |         |           |   |       
|Basic Earnings (loss) per Share:           |                             |                     |         |           |   |        |        |        |  |   |       |      
|                                           | Net income (loss)           |                     | $       | (24,475   | ) |        |        | 44,783 |  |   | $     | (0.55 | )
|Diluted Earnings (loss) per Share:         |                             |                     |         |           |   |        |        |        |  |   |       |      
|                                           | Common stock equivalents(a) |                     |         |          |   |        |        |       |  |   |       |      |  
|                                           |                             |                     |         |           |   |        |        |        |  |   |       |      
|Net income (loss) plus assumed conversions |                             | $                   | (24,475 | )         |   |        | 44,783 |        |  | $ | (0.55 | )    
|                                           |                             |                     |         |           |   |        |        |        |  |   |       |      

|                                           |                          |                     |        |           |   |        |        |        |  |   |      |      |  
|------------------------------------------ | ------------------------ | ------------------- | ------ | --------- | - | ------ | ------ | ------ |  | - | ---- | ---- | -
|                                           |                          |                    
|                                           |                          | For the Year Ended,
|                                           |                          | December 31, 2002  
|                                           |                          |                    
|                                           |                          |                     |        | Per-Share
|                                           |                          | Income              |        | Shares    |   | Amount
|                                           |                          |                     |        |           |   |       
|Basic Earnings (loss) per Share:           |                          |                     |        |           |   |        |        |        |  |   |      |     
|                                           | Net income (loss)        |                     | $      | (3,867    | ) |        |        | 45,051 |  |   | $    | (.09 | )
|Diluted Earnings per Share:                |                          |                     |        |           |   |        |        |        |  |   |      |     
|                                           | Common stock equivalents |                     |        |          |   |        |        |       |  |   |      |     |  
|                                           |                          |                     |        |           |   |        |        |        |  |   |      |     
|Net income (loss) plus assumed conversions |                          | $                   | (3,867 | )         |   |        | 45,051 |        |  | $ | (.09 | )   
|                                           |                          |                     |        |           |   |        |        |        |  |   |      |     

|                                    |                          |                     |        |           |  |        |        |        |  |   |      |      |  
|----------------------------------- | ------------------------ | ------------------- | ------ | --------- |  | ------ | ------ | ------ |  | - | ---- | ---- | -
|                                    |                          |                    
|                                    |                          | For the Year Ended,
|                                    |                          | December 31, 2001  
|                                    |                          |                    
|                                    |                          |                     |        | Per-Share
|                                    |                          | Income              |        | Shares    |  | Amount
|                                    |                          |                     |        |           |  |       
|Basic Earnings per Share:           |                          |                     |        |           |  |        |        |        |  |   |      |     
|                                    | Net income               |                     | $      | 40,193    |  |        |        | 44,740 |  |   | $    | 0.90 |  
|Diluted Earnings per Share:         |                          |                     |        |           |  |        |        |        |  |   |      |     
|                                    | Common stock equivalents |                     |        |          |  |        |        | 1,138  |  |   |      | (.02 | )
|                                    |                          |                     |        |           |  |        |        |        |  |   |      |     
|Net income plus assumed conversions |                          | $                   | 40,193 |           |  |        | 45,878 |        |  | $ | 0.88 |     
|                                    |                          |                     |        |           |  |        |        |        |  |   |      |     



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Basic earnings per common share were computed by
    dividing net income by the weighted average number of shares of
    common stock outstanding during the year. Dilutive earnings per
    share is computed by dividing net income by the weighted average
    number of shares of common stock outstanding during the year
    adjusted for the incremented shares attributed to dilutive
    outstanding options which represents common stock equivalents.
    Common stock equivalents outstanding for 2003 and 2002 were
    anti-dilutive and were not included in the calculation of
    diluted earnings per share.

F-23



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##### Table of Contents



PRIME HOSPITALITY CORP. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 13  Hotel
Revenues

Hotel revenues consist of lodging revenues (which
consist primarily of room, telephone, movies and vending
revenues) and food and beverage revenues. For the years ended
December 31, 2003, 2002 and 2001 hotel revenues were
comprised of the following:

|                           |                      |              |         |         |  |      |         |         |  |   |         |         | 
|-------------------------- | -------------------- | ------------ | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                           |                      |             
|                           |                      | December 31,
|                           |                      |             
|                           |                      | 2003         |         | 2002    |  | 2001
|                           |                      |              |         |         |  |     
|Lodging revenues           |                      | $            | 337,687 |         |  | $    | 353,724 |         |  | $ | 418,558 |        
|Food and beverage revenues |                      |              | 19,656  |         |  |      | 20,339  |         |  |   | 27,931  |        
|                           |                      |              |         |         |  |      |         |         |  |   |         |        
|                           | Total hotel revenues |              | $       | 357,343 |  |      | $       | 374,063 |  |   | $       | 446,489 | 
|                           |                      |              |         |         |  |      |         |         |  |   |         |        

Note 14  Other Income
(Loss)

Other income consists of items which are not
considered part of the Companys recurring operations and
is composed of the following for the years ended
December 31, 2003, 2002 and 2001 (in thousands):

|                                                                         |       |              |         |         |   |      |        |       |  |   |        |        | 
|------------------------------------------------------------------------ | ----- | ------------ | ------- | ------- | - | ---- | ------ | ----- |  | - | ------ | ------ | 
|                                                                         |       |             
|                                                                         |       | December 31,
|                                                                         |       |             
|                                                                         |       | 2003         |         | 2002    |   | 2001
|                                                                         |       |              |         |         |   |     
|Gains (losses) on property sales and lease
    terminations (See Note 9) |       | $            | (35,706 | )       |   | $    | 5,744  |       |  | $ | 36,329 |       
|Valuation reserves   non-hotel
    assets                               |       |              |        |         |   |      |       |       |  |   | (6,745 | )     
|Loss on the sale of marketable securities                                |       |              |        |         |   |      |       |       |  |   | (4,346 | )     
|Contract termination litigation                                          |       |              |        |         |   |      | (4,500 | )     |  |   |       |       
|Other                                                                    |       |              |        |         |   |      |       |       |  |   | (2,977 | )     
|                                                                         |       |              |         |         |   |      |        |       |  |   |        |       
|                                                                         | Total |              | $       | (35,706 | ) |      | $      | 1,224 |  |   | $      | 22,261 | 
|                                                                         |       |              |         |         |   |      |        |       |  |   |        |       

Note 15  Other Comprehensive
Income

For the years ended December 31, 2003, 2002
and 2001, comprehensive income consisted of the following (in
thousands):

|                                                                                                                                         |       |              |         |         |   |      |        |        |   |   |        |        | 
|---------------------------------------------------------------------------------------------------------------------------------------- | ----- | ------------ | ------- | ------- | - | ---- | ------ | ------ | - | - | ------ | ------ | 
|                                                                                                                                         |       |             
|                                                                                                                                         |       | December 31,
|                                                                                                                                         |       |             
|                                                                                                                                         |       | 2003         |         | 2002    |   | 2001
|                                                                                                                                         |       |              |         |         |   |     
|Net income (loss)                                                                                                                        |       | $            | (24,475 | )       |   | $    | (3,867 | )      |   | $ | 40,193 |       
|Unrealized (loss) gain on marketable
    securities, (net of income taxes of $0, $0 and $1,814,
    respectively for 2003, 2002 and 2001 |       |              |        |         |   |      | 1      |        |   |   | 2,837  |       
|Unrealized gain on foreign currency translation,
    net of taxes of $357                                                                |       |              | 560     |         |   |      |       |        |   |   |       |       
|                                                                                                                                         |       |              |         |         |   |      |        |        |   |   |        |       
|                                                                                                                                         | Total |              | $       | (23,915 | ) |      | $      | (3,866 | ) |   | $      | 43,030 | 
|                                                                                                                                         |       |              |         |         |   |      |        |        |   |   |        |       

Note 16  Financial Instruments
and Concentration of Credit Risk

The fair values of non-current financial assets
and liabilities and other financial instruments are shown below
(in thousands). The fair values of current assets and current
liabilities approximate their reported carrying amounts.

|                              |  |              |         |            |  |          |         |            |  |   |         |  |  |   |         | 
|----------------------------- |  | ------------ | ------- | ---------- |  | -------- | ------- | ---------- |  | - | ------- |  |  | - | ------- | 
|                              |  |             
|                              |  | December 31,
|                              |  |             
|                              |  |              |         |           
|                              |  | 2003         |         | 2002      
|                              |  |              |         |           
|                              |  | Carrying     |         |            |  | Carrying |         |           
|                              |  | Amount       |         | Fair Value |  | Amount   |         | Fair Value
|                              |  |              |         |            |  |          |         |           
|Mortgage and notes receivable |  | $            | 12,293  |            |  | $        | 12,293  |            |  | $ | 13,021  |  |  | $ | 13,021  | 
|Long-term debt                |  | $            | 227,535 |            |  | $        | 237,774 |            |  | $ | 284,017 |  |  | $ | 277,267 | 

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##### Table of Contents



PRIME HOSPITALITY CORP. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The fair value for mortgages and notes receivable
is based on discounted cash flows and other methods applicable
to the industry. Valuations for long-term debt are based on
quoted market prices or current rates available to the Company
for debt of the same maturities.

The Companys mortgages and other notes
receivable (See Note 6) are derived primarily from and are
secured by hotel properties, which constitutes a concentration
of credit risk. These notes are subject to many of the same
risks as the Companys operating hotel assets. A
significant portion of the collateral is located in the
Northeastern United States.

Note 17  Related Party
Transactions

The following summarizes significant financial
information with respect to transactions with present officers,
directors, their relatives and certain entities they control or
in which they have a beneficial interest for the years ended
December 31, 2003, 2002 and 2001 (in thousands):

|                                     |  |              |     |      |  |      |     |   |  |   |     | 
|------------------------------------ |  | ------------ | --- | ---- |  | ---- | --- | - |  | - | --- | 
|                                     |  |             
|                                     |  | December 31,
|                                     |  |             
|                                     |  | 2003         |     | 2002 |  | 2001
|                                     |  |              |     |      |  |     
|Management and other fee income      |  | $            | 531 |      |  | $    | 117 |   |  | $ | 121 | 
|Equity in earnings of joint ventures |  |              | 822 |      |  |      | (2  | ) |  |   |    | 

The management and other fee income above relates
to two hotels we manage for an entity controlled by our
Companys chairman and chief executive officer, and the two
unconsolidated joint ventures.

As disclosed in Note 2, we have a 40%
interest in two hotels with United Capital Corp., an entity
controlled by the Companys chairman and chief executive
officer, who also holds a 40% interest.

Note 18  Supplemental
Cash Flow Information

Cash paid for interest was $19.5 million,
$28.5 million and $32.3 million for the years ended
December 31, 2003, 2002 and 2001, respectively.

Cash paid for income taxes was $0.5 million,
$0.6 million and $12.5 million for the years ended
December 31, 2003, 2002 and 2001, respectively.

Note 19  Geographic and
Business Information

Our hotels primarily operate in three major
lodging industry segments: the all-suites segment, under our
AmeriSuites brand; the limited-service segment, primarily under
our Wellesley Inns & Suites brand and the full-service
segment under major national franchises. The AmeriSuites are
upscale, all-suite limited service hotels containing
approximately 128 suites and are located in 32 states
throughout the United States. The Wellesley Inns & Suites
hotels compete in the mid-price segment, and are primarily
located in the Northeast, Texas and Florida regions of the
United States. A Wellesley Inn & Suites hotel has between
100 to 130 rooms and suites. Full-service hotels compete
primarily in the upscale segment, with food and beverage service
and banquet facilities under franchise agreements with national
hotel brands. Our full-service hotels are primarily located in
the northeastern region of the United States.

We evaluate the performance of each segment based
primarily on operating earnings before depreciation and
amortization generated by our Owned Hotels. Interest expense is
primarily related to debt incurred by the Company through our
corporate obligations and collateralized by certain of our hotel
properties. The hotel operations are included in the
consolidated Federal income tax return of the Company and the
taxes are allocated based upon the relative contribution to the
Companys consolidated taxable income/losses and changes in
temporary differences. Other income consists of property
transactions, which are not part of the recurring operation of
the Company. The allocation of interest expense, taxes and other
income, are not evaluated at the segment level.

F-25



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##### Table of Contents



PRIME HOSPITALITY CORP. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table presents revenues and other
financial information by business segment for the years ended
December 31, 2003, 2002 and 2001 (in thousands):

|                                     |  |            |         |         |  |         |         |            |  |              |        |  |  |   |        |  |  |   |           | 
|------------------------------------ |  | ---------- | ------- | ------- |  | ------- | ------- | ---------- |  | ------------ | ------ |  |  | - | ------ |  |  | - | --------- | 
|                                     |  |            |         | Limited |  | Full    |         | Corporate/ |  |             
|December 31, 2003                    |  | All-Suites |         | Service |  | Service |         | Other      |  | Consolidated
|                                     |  |            |         |         |  |         |         |            |  |             
|Revenues before cost reimbursements  |  | $          | 212,287 |         |  | $       | 91,533  |            |  | $            | 53,525 |  |  | $ | 26,295 |  |  | $ | 383,640   | 
|Operating income before depreciation |  |            | 24,174  |         |  |         | 12,733  |            |  |              | 11,671 |  |  |   | 5,271  |  |  |   | 53,849    | 
|Depreciation and amortization        |  |            | 18,540  |         |  |         | 13,694  |            |  |              | 4,465  |  |  |   | 2,646  |  |  |   | 39,345    | 
|Capital expenditures                 |  |            | 7,161   |         |  |         | 8,341   |            |  |              | 1,143  |  |  |   | 12,072 |  |  |   | 28,717    | 
|Total Assets                         |  |            | 495,858 |         |  |         | 343,494 |            |  |              | 75,208 |  |  |   | 92,745 |  |  |   | 1,007,305 | 

|                                     |  |            |         |         |  |         |         |            |  |              |        |  |  |   |         |  |  |   |           | 
|------------------------------------ |  | ---------- | ------- | ------- |  | ------- | ------- | ---------- |  | ------------ | ------ |  |  | - | ------- |  |  | - | --------- | 
|                                     |  |            |         | Limited |  | Full    |         | Corporate/ |  |             
|December 31, 2002                    |  | All-Suites |         | Service |  | Service |         | Other      |  | Consolidated
|                                     |  |            |         |         |  |         |         |            |  |             
|Revenues before cost reimbursements  |  | $          | 225,610 |         |  | $       | 73,241  |            |  | $            | 75,229 |  |  | $ | 19,385  |  |  | $ | 393,465   | 
|Operating income before depreciation |  |            | 30,169  |         |  |         | 13,862  |            |  |              | 18,393 |  |  |   | 10,434  |  |  |   | 72,858    | 
|Depreciation and amortization        |  |            | 19,050  |         |  |         | 12,565  |            |  |              | 5,900  |  |  |   | 1,786   |  |  |   | 39,301    | 
|Capital expenditures                 |  |            | 13,876  |         |  |         | 3,363   |            |  |              | 2,355  |  |  |   | 14,003  |  |  |   | 33,597    | 
|Total Assets                         |  |            | 547,566 |         |  |         | 339,540 |            |  |              | 92,999 |  |  |   | 139,544 |  |  |   | 1,119,649 | 

|                                     |  |            |         |         |  |         |         |            |  |              |         |  |  |   |        |   |  |   |           | 
|------------------------------------ |  | ---------- | ------- | ------- |  | ------- | ------- | ---------- |  | ------------ | ------- |  |  | - | ------ | - |  | - | --------- | 
|                                     |  |            |         | Limited |  | Full    |         | Corporate/ |  |             
|December 31, 2001                    |  | All-Suites |         | Service |  | Service |         | Other      |  | Consolidated
|                                     |  |            |         |         |  |         |         |            |  |             
|Revenues before cost reimbursements  |  | $          | 249,285 |         |  | $       | 87,439  |            |  | $            | 109,768 |  |  | $ | 18,093 |   |  | $ | 464,585   | 
|Operating income before depreciation |  |            | 64,811  |         |  |         | 28,372  |            |  |              | 24,903  |  |  |   | (9,088 | ) |  |   | 108,998   | 
|Depreciation and amortization        |  |            | 18,692  |         |  |         | 11,385  |            |  |              | 5,662   |  |  |   | 1,542  |   |  |   | 37,281    | 
|Capital expenditures                 |  |            | 26,458  |         |  |         | 10,109  |            |  |              | 3,389   |  |  |   | 2,932  |   |  |   | 42,888    | 
|Total Assets                         |  |            | 597,780 |         |  |         | 363,802 |            |  |              | 107,828 |  |  |   | 87,360 |   |  |   | 1,156,770 | 

F-26



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##### Table of Contents






SIGNATURES

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



| |                        
| | -----------------------
| | PRIME HOSPITALITY CORP.



| |     |                    
| | --- | -------------------
| | By: | /s/ A.F. PETROCELLI

| |                                          
| | -----------------------------------------
| |                                          
| | A.F. Petrocelli                          
| | Chairman of the Board of Directors,      
| | President and Chief Executive
    Officer

DATE: March 12, 2004

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities indicated on March 28, 2003.

|                                         |  |                                                                           |  | 
|---------------------------------------- |  | ------------------------------------------------------------------------- |  | 
|                                         |  |                                                                          
|Signature                                |  | Title                                                                    
|                                         |  |                                                                          
|                                        
|/s/ A.F. PETROCELLIA.F. Petrocelli       |  | Chairman of Board of Directors, President and
    Chief Executive Officer
|                                        
|/s/ RICHARD SZYMANSKIRichard Szymanski   |  | Director, Senior Vice President and
    Chief Financial Officer          
|                                        
|/s/ LAWRENCE FRIEDLANDLawrence Friedland |  | Director                                                                 
|                                        
|/s/ ALLEN KAPLANAllen Kaplan             |  | Director                                                                 
|                                        
|/s/ HOWARD M. LORBERHoward M. Lorber     |  | Director                                                                 
|                                        
|/s/ RICHARD REITMANRichard Reitman       |  | Director                                                                 

F-27