<PAGE>

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                       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, 2001

                                       OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

           FOR THE TRANSITION PERIOD FROM             TO

                           COMMISSION FILE NO. 1-6869
                            ------------------------

                            PRIME HOSPITALITY CORP.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<Table>
<S>                                            <C>
                   DELAWARE                                      22-2640625
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)
</Table>

                               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:

<Table>
<Caption>
                                                           NAME OF EACH EXCHANGE
             TITLE OF EACH CLASS                            ON WHICH REGISTERED
             -------------------                           ---------------------
<S>                                            <C>
    PAR VALUE $.01 PER SHARE, COMMON STOCK                NEW YORK STOCK EXCHANGE
     9 1/4% FIRST MORTGAGE NOTES DUE 2006                 NEW YORK STOCK EXCHANGE
</Table>

     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 [ ]

     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]

     The aggregate market value of the registrant's common stock held by
non-affiliates on March 15, 2002 based on the last sale price as reported by the
National Quotation Bureau, Inc. on that date was approximately $578,561,695.

     The Registrant had 44,884,538 shares of Common Stock outstanding as of
March 15, 2002.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Proxy Statement prepared for the 2002 annual meeting of
shareholders are incorporated by reference into Part III of this report.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

     References in this report to 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
and other income. 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

     Prime is an owner, manager and franchisor of hotels, with 233 hotels in
operation containing 29,641 rooms located in 33 states (the "Portfolio") as of
December 31, 2001. Prime controls two hotel brands -- AmeriSuites(R) and
Wellesley Inns & Suites(R) -- and operates a portfolio of upscale, full-service
hotels under franchise agreements with national hotel chains. The Company owns
and operates 131 hotels (the "Owned Hotels"), operates 28 hotels under lease
agreements primarily with real estate investment trusts (the "Leased Hotels"),
manages 38 hotels for third parties (the "Managed Hotels"), and franchises 36
hotels which it does not operate (the "Franchised Hotels"). The Portfolio is
comprised of 139 AmeriSuites hotels, 74 Wellesley Inns & Suites hotels and 20
non-proprietary brand hotels.

     The Company's growth has been focused on the development of its proprietary
AmeriSuites and Wellesley Inns & Suites brands. Through the development of its
proprietary brands, Prime has transformed itself from an owner/operator into a
more diversified company with ownership, franchise and management interests and
has positioned itself to generate additional revenues with minimal capital
investment. Prime's strategy is also focused on growing the operating profits of
its Portfolio. With nearly 200 hotels under management, Prime believes it
possesses the hotel management expertise to maximize the profitability and value
of its hotel assets.

     Prime's hotels can be categorized into three types: AmeriSuites, Wellesley
Inns & Suites and non-proprietary brands.

     AmeriSuites:  As of December 31, 2001, there were 139 AmeriSuites in
operation. Prime owns and operates 65 of these hotels, operates and leases 27
hotels from third parties and franchises the operation of the remaining 47
hotels, 25 of which are operated by Prime. As of December 31, 2001, there were
also eight AmeriSuites under construction (one of which opened in February
2002), with an additional 57 signed franchise agreements for new AmeriSuites to
be built. AmeriSuites are upscale, all-suite hotels containing approximately 128
suites and are located in 31 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 2001, AmeriSuites contributed approximately 54.4% of the Company's
Hotel EBITDA.

     Wellesley Inns & Suites:  As of December 31, 2001, there were 74 Wellesley
Inns & Suites in operation. Prime owns and operates 55 of these hotels and
franchises 19 hotels, five of which are managed by Prime. There are also 10
signed franchise agreements for new Wellesley Inns & Suites to be built.
Wellesley Inns & Suites are mid-price limited service hotels containing between
100-130 rooms and are located in 22 states primarily in the Southeast, Northeast
and Southwest. In 2001, Wellesley Inns & Suites contributed approximately 24.4%
of the Company's Hotel EBITDA.

                                        1
<PAGE>

     Non-Proprietary Brands:  As of December 31, 2001, there were 20 hotels
operated under national franchises. Prime owns 11 of these hotels (one of which
was sold in January 2002), leases one hotel and manages eight of these hotels
for third parties. The non-proprietary branded hotels operate primarily in the
upscale full-service segment under national franchises such as Hilton, Radisson,
Sheraton, Holiday Inn and Ramada and generally provide food and beverage service
and banquet facilities. The hotels are primarily located in the Northeast. In
2001, the non-proprietary brand hotels contributed approximately 21.2% of the
Company's Hotel EBITDA.

ASSET DIVESTITURES/FINANCIAL CONDITION

     The Company has undertaken a strategic initiative to dispose of hotel real
estate and to utilize proceeds to repurchase stock, retire debt or invest in the
growth of its brands to transform itself from an owner/operator to a franchisor
and manager. During the past three years, the Company sold approximately $350
million of assets. During 2001, the Company sold $34.5 million of assets
including one AmeriSuites and four Wellesley Inns. In January 2002, Prime
generated an additional $15 million in proceeds from the sale of a full-service
hotel and a Wellesley Inn. The Company retained the franchise rights on all the
sold AmeriSuites and Wellesley Inns, generally under 20 year franchise
agreements.

     Prime utilized the proceeds from asset sales along with its cash flow from
operations to reduce its debt balance since the beginning of the year by $25.7
million to $320 million as of December 31, 2001. Prime also repurchased 376,200
of its outstanding shares in 2001 at a total average cost of $9.86 per share.

     As of December 31, 2001, Prime's debt to EBITDA ratio was 2.8 times, and
its debt to book capitalization percentage was 31%.

INDUSTRY OVERVIEW

     In 2001, the combination of the soft economy and the September 11th
terrorist attacks resulted in a decline in the demand for hotel rooms of 3.4%.
This resulted in a decrease in overall occupancy levels from 63.7% in 2000 to
60.1% in 2001. In addition, due to the decline in travel, average daily rate
("ADR") decreased by 1.4% from $86.04 in 2000 to $84.85 in 2001, resulting in a
revenue per available room ("REVPAR") decrease of 6.9%. Historical performance,
however, may not be indicative of future results.

     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.

<Table>
<Caption>
                                                                     % CHANGE IN:
                                ---------------------------------------------------------------------------------------
                                        ROOM SUPPLY                   ROOM DEMAND                     REVPAR
                                ---------------------------   ---------------------------   ---------------------------
                                2001 V.   2000 V.   1999 V.   2001 V.   2000 V.   1999 V.   2001 V.   2000 V.   1999 V.
                                 2000      1999      1998      2000      1999      1998      2000      1999      1998
                                -------   -------   -------   -------   -------   -------   -------   -------   -------
<S>                             <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
United States.................    2.4%      3.1%      4.2%     -3.4%      3.7%      3.3%      -6.9%     5.5%      3.1%

BY REGION:
Middle Atlantic...............    2.3       2.8       2.9      -3.7       3.2       2.2      -10.8      7.6       4.0
South Atlantic................    2.6       3.3       4.6      -3.3       3.0       3.8       -5.5      3.5       3.1
West South Central............    3.5       3.9       5.4       0.0       5.4       3.1       -3.5      5.3       0.3

BY SERVICE (PRICE LEVEL):
Upscale.......................    3.7       4.0       4.8      -1.7       4.3       3.6       -6.4      4.2       1.3
Mid-Price.....................    3.1       3.9       5.8      -2.5       4.6       4.5       -4.9      5.8       2.9
</Table>

                                        2
<PAGE>

PRIME'S LODGING OPERATIONS

     The following table sets forth information with respect to the Portfolio as
of December 31, 2001 and 2000:

<Table>
<Caption>
                                                DECEMBER 31,      DECEMBER 31,
                                                    2001              2000             CHANGE
                                               ---------------   ---------------   ---------------
                                                  NUMBER OF         NUMBER OF         NUMBER OF
                                               ---------------   ---------------   ---------------
                                               HOTELS   ROOMS    HOTELS   ROOMS    HOTELS   ROOMS
                                               ------   ------   ------   ------   ------   ------
<S>                                            <C>      <C>      <C>      <C>      <C>      <C>
AMERISUITES
  Owned......................................    65      8,384     65      8,409     --        (25)
  Leased.....................................    27      3,293     46      5,710    (19)    (2,417)
  Managed....................................    25      3,222      4        542     21      2,680
  Franchised.................................    22      2,735     18      2,205      4        530
                                                ---     ------    ---     ------    ---     ------
          Total..............................   139     17,634    133     16,866      6        768
                                                ===     ======    ===     ======    ===     ======
WELLESLEY INNS & SUITES
  Owned......................................    55      6,480     58      6,747     (3)      (267)
  Leased.....................................    --         --     --         --     --         --
  Managed....................................     5        558      5        463     --         95
  Franchised.................................    14      1,279      7        673      7        606
                                                ---     ------    ---     ------    ---     ------
          Total..............................    74      8,317     70      7,883      4        434
                                                ===     ======    ===     ======    ===     ======
NON-PROPRIETARY BRANDS
  Owned......................................    11      2,195     12      2,303     (1)      (108)
  Leased.....................................     1        160      9      1,464     (8)    (1,304)
  Managed....................................     8      1,335     15      2,234     (7)      (899)
  Franchised.................................    --         --     --         --     --         --
                                                ---     ------    ---     ------    ---     ------
          Total..............................    20      3,690     36      6,001    (16)    (2,311)
                                                ===     ======    ===     ======    ===     ======
TOTAL PORTFOLIO
  Owned......................................   131     17,059    135     17,459     (4)      (400)
  Leased.....................................    28      3,453     55      7,174    (27)    (3,721)
  Managed....................................    38      5,115     24      3,239     14      1,876
  Franchised.................................    36      4,014     25      2,878     11      1,136
                                                ---     ------    ---     ------    ---     ------
          Total..............................   233     29,641    239     30,750     (6)    (1,109)
                                                ===     ======    ===     ======    ===     ======
</Table>

---------------

(1) The Owned Hotels represent those hotels in which the Company owns
    significant economic interests. The Company owns the land and building on
    all but 11 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) On January 1, 2002, the Company converted 19 hotels owned by Equity Inns,
    Inc. from lease agreements to management agreements. For purposes of this
    schedule and other disclosures throughout this document, the conversion is
    assumed to have taken place as of December 31, 2001.

(3) In addition to the above, as of December 31, 2001, there was one owned
    AmeriSuites and seven franchised AmeriSuites under construction. In February
    2002, one of the franchised hotels was opened.

(4) Subsequent to December 31, 2001, the Company sold one full service hotel and
    no longer maintains an interest in this property.

                                        3
<PAGE>

     The following table sets forth the location of the Portfolio as of December
31, 2001:

<Table>
<Caption>
                                OWNED            LEASED          MANAGED         FRANCHISED          TOTAL
                           ---------------   --------------   --------------   --------------   ---------------
                           HOTELS   ROOMS    HOTELS   ROOMS   HOTELS   ROOMS   HOTELS   ROOMS   HOTELS   ROOMS
                           ------   ------   ------   -----   ------   -----   ------   -----   ------   ------
<S>                        <C>      <C>      <C>      <C>     <C>      <C>     <C>      <C>     <C>      <C>
Alabama..................     1        128     --        --      1       128     --        --      2        256
Arizona..................     6        780      2       247      2       245     --        --     10      1,272
Arkansas.................     1        130     --        --     --        --     --        --      1        130
California...............     1        128     --        --      1        96      2       256      4        480
Colorado.................     5        662      1       126     --        --     --        --      6        788
Connecticut..............     3        389     --        --     --        --      1       103      4        492
Florida..................    21      2,494      2       190      6       639      8       867     37      4,190
Georgia..................     9      1,120      4       498      1       189      2       216     16      2,023
Idaho....................     1        128     --        --     --        --     --        --      1        128
Illinois.................     5        649     --        --      3       330      4       625     12      1,604
Indiana..................     2        260      2       257      1       126     --        --      5        643
Kansas...................     3        374      1       135      1       126     --        --      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.................     4        518     --        --     --        --     --        --      4        518
Minnesota................     1        125     --        --      1       128     --        --      2        253
Missouri.................    --         --      1       135     --        --     --        --      1        135
Nevada...................     1        125     --        --      1       202     --        --      2        327
New Jersey...............    12      2,082      1       160      6     1,165      3       315     22      3,722
New Mexico...............     2        237      1       125      1       128     --        --      4        490
New York.................     6        769     --        --     --        --      2       163      8        932
North Carolina...........     5        648      2       235      1        75     --        --      8        958
Ohio.....................     4        460      1       125      3       379     --        --      8        964
Oklahoma.................     2        256     --        --     --        --      1       128      3        384
Oregon...................     1        137     --        --     --        --     --        --      1        137
Pennsylvania.............     3        528     --        --      1       104     --        --      4        632
South Carolina...........     4        455     --        --     --        --     --        --      4        455
Tennessee................     4        503      1       100      3       366      2       131     10      1,100
Texas....................    18      2,206      8       985      1       149      6       718     33      4,058
Virginia.................     2        256      1       135      1       126      4       362      8        879
                            ---     ------     --     -----     --     -----     --     -----    ---     ------
          Total..........   131     17,059     28     3,453     38     5,115     36     4,014    233     29,641
                            ===     ======     ==     =====     ==     =====     ==     =====    ===     ======
</Table>

                                        4
<PAGE>

     The following table sets forth, for the years ended December 31, 2001 and
2000, operating data by product type for the comparable hotels in the Portfolio
as of December 31, 2001.

<Table>
<Caption>
                                                                     TOTAL PORTFOLIO
                                                             --------------------------------
                                                             OCCUPANCY       ADR       REVPAR
                                                             ---------     -------     ------
<S>                                                          <C>           <C>         <C>
OWNED & LEASED
  2001.....................................................    63.3%       $ 76.79     $48.64
  2000.....................................................    67.4%       $ 78.32     $52.75
  Change...................................................    (4.1) pts.     (2.0)%     (7.8)%

AMERISUITES
  2001.....................................................    65.1%       $ 79.97     $52.08
  2000.....................................................    68.9%       $ 81.83     $56.34
  Change...................................................    (3.8) pts.     (2.3)%     (7.6)%

WELLESLEY INNS & SUITES
  2001.....................................................    61.8%       $ 60.38     $37.29
  2000.....................................................    64.8%       $ 60.46     $39.18
  Change...................................................    (3.0) pts.     (0.1)%     (4.8)%

NON-PROPRIETARY BRANDS
  2001.....................................................    65.9%       $109.99     $72.45
  2000.....................................................    72.9%       $111.83     $81.55
  Change...................................................    (7.0) pts.     (1.6)%    (11.2)%
</Table>

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, Hilton Garden Inns, Hampton Inns & Suites and Holiday
Inn. While the majority of the current AmeriSuites hotels were developed with
Prime's capital, the Company intends to develop AmeriSuites on a more limited
scale with the bulk of new development capital coming from franchisees. The
average age of the AmeriSuites hotels is approximately 4.9 years. The Company is
committed to the expansion of the AmeriSuites brand due to its attractive
investment returns, rapid stabilization, broad customer appeal and positioning
in the all-suites segment.

     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.
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. Since 1997, the Company has utilized a central reservation system for
the AmeriSuites brand developed and operated by Pegasus Solutions.

                                        5
<PAGE>

WELLESLEY INNS & SUITES

     The Wellesley Inns & Suites brand is comprised of 33 Wellesley Inns and 41
Wellesley Inns & Suites which, in addition to Wellesley Inn features, also
contain suite rooms. The Company intends to develop this brand primarily through
franchisees and believes that conversion opportunities from other brands exist
in this segment. In the past year, five 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 Inn & Suites, La Quinta
Inn & Suites, Holiday Inn Express and Comfort Inn & Suites. The average age of
the chain's hotels is 9.6 years. The target customer is the transient business
traveler, although approximately 25% of the customers stay on an extended basis.

     Of the Company's 33 Wellesley Inns, 16 are located in Florida and the
remainder in the Middle Atlantic and 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.

     The Company's 41 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 the same central
reservation system utilized by AmeriSuites.

NON-PROPRIETARY BRANDS

     The Company's non-proprietary brand hotels primarily operate in the upscale
full-service segment. The full-service hotels provide food and beverage outlets,
contain meeting and banquet facilities and are operated under franchise
agreements primarily with Hilton, Radisson, 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 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 300 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.

     The Company intends to divest certain of its remaining owned
non-proprietary brand hotels. Prime also intends to pursue opportunities to
manage hotels in this segment.

BRAND INFRASTRUCTURE

     As Prime continues to evolve into a franchisor, it has undertaken a number
of brand initiatives. These include the following:

          Brand Advertising -- Prime increased its national brand advertising
     expenditures by 16% in 2001 to $7.3 million. Historically, the Company's
     efforts have focused primarily on print advertising both on a regional
     level and in national publications such as USA Today. In 2001, Prime
     expanded its program to

                                        6
<PAGE>

     include national cable television advertisements for its AmeriSuites chain
     and national radio promotions for its Wellesley Inns and Suites brand.

          National Accounts -- The Company continues to add to the number of
     national companies listing AmeriSuites and Wellesley Inns & Suites as
     preferred hotel providers. Prime now has over 200 national accounts which
     include leading companies throughout the country.

          Rewards Programs -- On September 1, 2001, Prime implemented a new
     expanded rewards program, covering both its brands, designed to enhance its
     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 and Delta with each stay.
     Technology features such as paperless redemptions and online customer
     statements and profiles have also been incorporated into the new program.
     Prime has increased its membership from approximately 90,000 members as of
     September 1, 2001 to approximately 150,000 members as of February 28, 2002.

          E-Commerce -- Customers can book hotel rooms through the Company's
     proprietary websites (www.amerisuites.com and www.wellesleyonline.com)
     which were upgraded with enhanced reservation features during 2001. The
     brands' hotel rooms can also be booked through popular travel web sites
     such as TravelScape, Expedia, Travelocity and HRN and excess room inventory
     is distributed through Priceline and Hot Wire. In the future, the Company
     plans to continue to increase its distribution channels, create web based
     marketing alliances and develop business to business booking and marketing
     relationships.

          E-Folio -- In 2000, Prime introduced a new E-folio program in
     partnership with IBM and Multi-Systems, Inc., its front desk systems
     provider. The system is a paperless method of collecting and distributing
     hotel data from corporate travelers to their home offices for immediate
     expense report generation.

     Management believes that the growing brand infrastructure, consisting of
elements such as an improved frequent stay program, increased advertising and
marketing programs, e-commerce initiatives and the heightened visibility from
the increase in the chains' number of hotels, will enable its brands to compete
effectively with older, more established chains.

FRANCHISING

     Prime intends to grow its brands primarily through franchising. The Company
began its franchise sales efforts in mid-1998 when it obtained the necessary
statutory approvals to begin franchising its AmeriSuites and Wellesley brands.
Prime currently has a franchise sales team of seven professionals which include
a senior vice president and six regional vice presidents. In addition to their
direct sales effort, the franchise sales team also develops the franchise
marketing programs which include advertising in industry and business
publications, attending various trade shows and producing brochures and other
collateral material. Prime has also formed a franchise services team which has
developed a variety of programs to guide its franchisees through the various
phases of opening and operating a hotel. These include training, pre-opening,
construction management and purchasing services. Prime also offers its
franchisees an internet based communications system which provides brand
updates, operating standards and manuals and other important communications.

                                        7
<PAGE>

     The following table illustrates the number of franchise agreements executed
by Prime through February 28, 2002 since it began its franchising efforts in
June 1998.

<Table>
<Caption>
                                                                      WELLESLEY INNS
                                                        AMERISUITES      & SUITES      TOTAL
                                                        -----------   --------------   -----
<S>                                                     <C>           <C>              <C>
1998..................................................       2               1           3
1999..................................................      49               1          50
2000..................................................      19               2          21
2001..................................................       6               9          15
2002 (through February 28)............................       1               1           2
                                                            --              --          --
     Total............................................      77              14          91
Less:
  Opened -- Franchised................................      14               4          18
  Under Construction..................................       6              --           6
                                                            --              --          --
Remaining Pipeline....................................      57              10          67
                                                            ==              ==          ==
</Table>

     Prime's AmeriSuites and Wellesley 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. Prime also offers additional services including purchasing
and design services. The standard monthly fees as a percentage of room sales are
as follows:

<Table>
<Caption>
                                                         ROYALTY   MARKETING   RESERVATION
                                                           FEE        FEE          FEE
                                                         -------   ---------   -----------
<S>                                                      <C>       <C>         <C>
AmeriSuites............................................    5.0%       2.0%        1.55%
Wellesley Inns & Suites................................    4.5%       1.5%        1.55%
</Table>

CORPORATE DEVELOPMENT

     While the Company has developed the majority of its existing AmeriSuites
and Wellesley Inns & Suites, it intends to rely on franchisees for the majority
of future development of its hotels.

     During 2001, Prime opened one owned AmeriSuites hotel located in the
Detroit market. Prime currently has one owned AmeriSuites hotel under
construction in Fremont, CA. Prime intends to focus any future 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. The Company intends to fund new development primarily from
internally generated cash flow.

     The Company's Wellesley Inns & Suites development effort will focus on the
conversion of other limited-service hotels to its brands. During 2001, the
Company converted two of its Owned hotels from Howard Johnson's to Wellesley
Inns.

OPERATIONS

     As a leading domestic hotel operating company, the Company believes that it
enjoys a number of operating advantages over other lodging companies. With
almost 200 hotels under management covering a number of price points and broad
geographic regions, the Company has the critical mass to support operating,
marketing and financial systems. The Company believes that its broad array of
central services permits on-site hotel general managers to effectively focus on
providing guest services, resulting in economies of scale.

     The Company's operating strategy combines operating service and guidance
from its 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. The Company's operating objective is to
exceed guest expectations by providing quality services and comfortable

                                        8
<PAGE>

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 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, food and beverage
and human resources departments, each staffed full-time by specialized
professionals. The Company's training efforts focus on sales, housekeeping, food
service, front desk services and leadership. The Company believes these efforts
increase employee effectiveness, reduce turnover and improve the level of guest
services.

     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. The Company focuses 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.

     The Company's brand advertising programs are developed at the central
office. As the chains have grown, the Company has increased its brand marketing
expenditures. The Company has also upgraded its rewards program targeted for
frequent travelers during 2001.

     Financial Reporting and Control.  The Company's 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.  The Company's 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, the Company directs
safety/risk management activities, benefit programs and provides central legal
services.

CAPITAL IMPROVEMENTS

     The Company continuously refurbishes its Owned Hotels in order to maintain
consistent quality standards. The Company generally spends between 3% to 6% of
hotel revenue on capital improvements at its Owned Hotels and typically
refurbishes each hotel approximately every five years. The Company believes that
its Owned Hotels are in generally good physical condition, with over half of the
Owned Hotels being five years
                                        9
<PAGE>

old or less. The Company recommends refurbishment and repair projects on its
Managed Hotels and Leased Hotels, although spending amounts vary based on the
plans of such hotels' owners and the Company's role as the franchisor.

LEASED HOTELS

     The Company operates 28 hotels under lease agreements, primarily with
REITs. These are comprised of 24 AmeriSuites owned by Hospitality Properties
Trust (HPT), three AmeriSuites owned by Sholodge, Inc. ("Sholodge"), and one
full-service hotel owned by Winston Hotels ("Winston"). The leases have terms
ranging from 10 to 13 years expiring from 2007 to 2013 with certain renewal
options. The 27 hotels leased from HPT and Sholodge provide for a fixed annual
minimum rent plus eight percent of revenue in excess of a base year. The hotel
leased from Winston provides for rent equal to the greater of base rent, which
increases annually by the inflation rate, or percentage rent based on a
percentage of room, food and beverage and other revenue. The Company has
notified Winston that it will no longer fund any operating losses under the
lease and the Company is currently in default under the lease.

MANAGED HOTELS

     The Company provides hotel management services to third party hotel owners
of 38 Managed Hotels which includes 19 leased hotels which converted to managed
hotels on January 1, 2002 (see below). Management fees are based on fixed
percentages of the property's total revenues and incentive payments based on
certain measures of hotel income. Additional fees are also generated from the
rendering of specific services such as accounting, construction, design and
purchasing. The Company's fixed management fee percentages are generally 3.0% 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 2002 to 2014. The Company intends to pursue new management
opportunities to capitalize on its present management infrastructure,
particularly in the full-service hotel segment.

     On January 1, 2002, the Company converted its 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.

AGREEMENTS AS FRANCHISEE

     The Company has entered into franchise licensing agreements with third
party franchisors, primarily on its full-service hotels which agreements
typically have a ten year term and allow the Company to benefit from franchise
brand recognition and loyalty. The franchise agreements require the Company 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. The Company believes it currently enjoys generally good
relationships with its franchisors.

WORKING CAPITAL

     The Company believes that its operating cash flow is sufficient to cover
its current operational and capital needs. The Company also intends to generate
proceeds from asset sales, to be utilized for brand growth, repayment of debt
and/or the repurchase of its common shares. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

                                        10
<PAGE>

SEASONALITY

     The impact of seasonality on the Company as a whole is relatively modest
due to the seasonal balance achieved from the geographical location of the
Company's hotel properties. The second and third quarters of the year are
generally the strongest due to business travel patterns.

COMPETITION

     The Company operates hotel properties in areas that contain numerous other
hotels, the majority of which are affiliated with national or regional brands.
The Company competes with other hotels primarily on the basis of price, physical
facilities and customer service.

EMPLOYEES

     As of December 31, 2001, the Company employed approximately 6,350
employees. Certain of the Company's employees are covered by collective
bargaining agreements. The Company believes that relations with its 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.

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, a former employee of the Company, filed a
complaint against the Company in the United States District Court for the Virgin
Islands (the "Court"). 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. 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 plaintiff's action is without merit and intends to vigorously defend
this case.

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, 2001.

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company's common stock, par value $.01 per share, trades on the New
York Stock Exchange (the "NYSE") under the symbol "PDQ." As of March 15, 2002
there were 44,884,538 shares of common stock outstanding.

                                        11
<PAGE>

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

<Table>
<Caption>
                                                               HIGH     LOW
                                                              ------   ------
<S>                                                           <C>      <C>
Year Ended December 31, 2001
First Quarter...............................................  $14.00   $10.50
Second Quarter..............................................   12.16     9.43
Third Quarter...............................................   12.30     7.86
Fourth Quarter..............................................   11.50     8.60

Year Ended December 31, 2000
First Quarter...............................................    8.81     7.25
Second Quarter..............................................    9.94     7.38
Third Quarter...............................................   10.94     9.00
Fourth Quarter..............................................  $11.63   $ 9.00
</Table>

     As of March 15, 2002, the closing sales price of the common stock on the
NYSE was $12.89 per share, and there were approximately 1,643 holders of record
of common stock.

     The Company has not declared any cash dividends on its common stock during
the two prior fiscal years and does not currently anticipate paying any
dividends on the common stock in the foreseeable future. The Company currently
anticipates that it will retain any future earnings for use in its business. In
addition, the Company is 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, 2001. This data should be read in conjunction with the Consolidated
Financial Statements, related notes and other financial information included
herein.

<Table>
<Caption>
                                                   AS OF AND FOR THE YEAR ENDED DECEMBER 31,
                                         --------------------------------------------------------------
                                            2001         2000         1999         1998         1997
                                         ----------   ----------   ----------   ----------   ----------
                                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                      <C>          <C>          <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA:
  Total revenues.......................  $  485,408   $  558,243   $  552,732   $  469,405   $  340,961
  Income from continuing operations
     before the cumulative effect of
     change in accounting principle and
     extraordinary items...............      40,269       62,814       40,197       53,847       25,931
  Cumulative effect of a change in
     accounting principle (net of
     income taxes)(a)..................          --           --       (5,315)          --           --
  Extraordinary items-gains/(losses) on
     discharge of indebtedness (net of
     income taxes).....................         (76)        (314)          --           --           --
  Net income...........................      40,193       62,500       34,882       53,847       25,931
  Pro-forma effect of change in
     accounting principle (net of
     income taxes)(b)..................          --           --           --       (3,788)        (255)
  Pro-forma net income after
     taxes(b)..........................  $   40,193   $   62,500   $   34,882   $   50,059   $   25,676
NET INCOME PER COMMON SHARE:
  Basic................................  $      .90   $     1.37   $      .68   $     1.04   $      .56
  Diluted..............................  $      .88   $     1.34   $      .67   $     1.00   $      .54
</Table>

                                        12
<PAGE>

<Table>
<Caption>
                                                   AS OF AND FOR THE YEAR ENDED DECEMBER 31,
                                         --------------------------------------------------------------
                                            2001         2000         1999         1998         1997
                                         ----------   ----------   ----------   ----------   ----------
                                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                      <C>          <C>          <C>          <C>          <C>
PRO-FORMA NET INCOME PER COMMON
  SHARE(b):
  Basic................................          --           --           --   $      .97   $      .55
  Diluted..............................          --           --           --   $      .94   $      .53
BALANCE SHEET DATA:
  Total assets.........................  $1,156,770   $1,165,872   $1,328,779   $1,408,398   $1,196,666
  Long-term debt, net of current
     portion...........................     309,736      340,987      543,485      582,031      554,500
  Stockholders' equity.................     707,941      668,100      632,000      641,045      524,413
</Table>

---------------
(a) 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.

(b) Pro-forma amounts reflect the effect on net income and earnings per share
    had the Company written off pre-opening costs pursuant to SOP-98-5 in 1997
    and 1998.

     Unaudited selected consolidated quarterly financial data for the years
ending December 31, 2001 and 2000 follow (in thousands, except per share
amounts):

<Table>
<Caption>
                                                 MARCH 31,   JUNE 30,   SEPTEMBER 30,   DECEMBER 31,
THREE MONTHS ENDED                                 2001        2001         2001            2001
------------------                               ---------   --------   -------------   ------------
<S>                                              <C>         <C>        <C>             <C>
Total revenue..................................  $131,742    $134,196     $117,899        $101,571
Operating income...............................    23,951      26,770       15,827           8,068
Income before extraordinary items (net of
  taxes).......................................     9,606      20,732        5,135           4,797
Extraordinary items (net of taxes).............        --        (110)          34              --
Net income.....................................     9,606      20,622        5,168           4,797

Earnings per common share:

Basic:
Income before extraordinary items (net of
  taxes).......................................  $   0.21    $   0.46     $   0.12        $   0.11
Extraordinary items (net of taxes).............        --          --           --              --
Earnings per share.............................  $   0.21    $   0.46     $   0.12        $   0.11
Diluted:
Income before extraordinary items (net of
  taxes).......................................  $   0.21    $   0.45     $   0.11        $   0.10
Extraordinary items (net of taxes).............        --          --           --              --
Earnings per share.............................  $   0.21    $   0.45     $   0.11        $   0.10
</Table>

                                        13
<PAGE>

<Table>
<Caption>
                                                 MARCH 31,   JUNE 30,   SEPTEMBER 30,   DECEMBER 31,
THREE MONTHS ENDED                                 2000        2000         2000            2000
------------------                               ---------   --------   -------------   ------------
<S>                                              <C>         <C>        <C>             <C>
Total revenue..................................  $137,891    $140,641     $145,544        $134,167
Operating income...............................    29,772      36,751       31,897          30,041
Income before extraordinary items (net of
  taxes).......................................    10,757      24,397       15,653          12,007
Extraordinary items (net of taxes).............      (302)         --           --             (12)
Net income.....................................    10,455      24,397       15,653          11,995

Earnings per common share:

Basic:
Income before extraordinary items (net of
  taxes).......................................  $   0.22    $   0.54     $   0.35        $   0.27
Extraordinary items (net of taxes).............        --          --           --              --

Earnings per share.............................  $   0.22    $   0.54     $   0.35        $   0.27
Diluted:
Income before extraordinary items (net of
  taxes).......................................  $   0.22    $   0.53     $   0.34        $   0.26
Extraordinary items (net of taxes).............        --          --           --              --
Earnings per share.............................  $   0.22    $   0.53     $   0.34        $   0.26
</Table>

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

     Prime is an owner, manager and franchisor of hotels, with 233 hotels in
operation containing 29,641 rooms located in 33 states (the "Portfolio") as of
December 31, 2001. Prime controls two hotel brands -- AmeriSuites(R) and
Wellesley Inns & Suites(R) -- and operates a portfolio of upscale, full-service
hotels under franchise agreements with national hotel chains. The Company owns
and operates 131 hotels (the "Owned Hotels"), operates 28 hotels under lease
agreements primarily with real estate investment trusts (the "Leased Hotels"),
manages 38 hotels for third parties (the "Managed Hotels"), and franchises 36
hotels which it does not operate (the "Franchised Hotels"). The Portfolio is
comprised of 139 AmeriSuites hotels, 74 Wellesley Inns & Suites hotels and 20
non-proprietary brand hotels.

     The Company's strategy is to develop its proprietary AmeriSuites and
Wellesley Inns & Suites brands. Through the development of its proprietary
brands, the Company is in the process of transforming itself from an
owner/operator into a franchisor and manager and has positioned itself to
generate additional revenues with minimal capital investment. Prime's strategy
is also focused on growing the operating profits of its Portfolio. With nearly
200 hotels in operation, Prime believes it possesses the hotel management
expertise to maximize the profitability and value of its hotel assets.

     Operating results for 2001 were impacted by the weakness in the economy
which had a significant negative impact on business travel and the demand for
hotel rooms beginning in the second quarter of 2001. Results were further
impacted by the September 11th terrorist attacks which disrupted airline service
and raised concerns about safety. As a result, for the year ended December 31,
2001, revenues from comparable Owned and Leased hotels declined by 7.9% and
gross operating profits on these hotels declined by 15.7%. Overall, for the year
ended December 31, 2001, revenue declined by 13.0% to $485.4 million and EBITDA
decreased by 33.5% to $113.0 million due to the results of the comparable Owned
and Leased hotels and the effect of asset sales and lease terminations.

     For 2001, net income was $40.2 million or $.88 per diluted share. Excluding
the impact of gains on asset sales and lease terminations and provisions for
valuation reserves (all of which are included in the caption, other income, net
on the income statement), net income was $26.6 million or $.58 per share.

                                        14
<PAGE>

     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.

     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 the Company believes 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, the Company disclaims 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, 2001 COMPARED TO THE
  YEAR ENDED DECEMBER 31, 2000

     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, 2001 decreased by $68.7 million, or
12.8%, from $538.4 million in 2000 to $469.7 million in 2001. The decrease was
due primarily to a 7.9% 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 non-proprietary brand hotels which are
primarily upscale full-service hotels.

                                        15
<PAGE>

     The following table illustrates the REVPAR ("Revenue Per Available Room")
change, by segment in 2001 for the Owned and Leased hotels, which were operated
for comparable periods in 2001 and 2000.

<Table>
<Caption>
                                                           YEAR ENDED DECEMBER 31,
                                                         ----------------------------
                                                          2001      2000     % CHANGE
                                                         -------   -------   --------
<S>                                                      <C>       <C>       <C>
AMERISUITES
  Occupancy............................................     64.3%     68.3%    (4.0)pts.
  ADR..................................................  $ 78.42   $ 80.20     (2.2)%
  REVPAR...............................................  $ 50.42   $ 54.78     (7.9)%

WELLESLEY INNS & SUITES
  Occupancy............................................     60.6%     63.6%    (3.0)pts.
  ADR..................................................  $ 60.11   $ 60.29     (0.3)%
  REVPAR...............................................  $ 36.44   $ 38.35     (5.0)%

NON-PROPRIETARY BRANDS
  Occupancy............................................     66.6%     73.4%    (6.8)pts.
  ADR..................................................  $110.91   $112.90     (1.8)%
  REVPAR...............................................  $ 73.87   $ 82.87    (10.9)%

TOTAL
  Occupancy............................................     63.3%     67.4%    (4.1)pts.
  ADR..................................................  $ 76.79   $ 78.32     (2.0)%
  REVPAR...............................................  $ 48.61   $ 52.79     (7.9)%
</Table>

     The REVPAR decreases reflect the weak economy compounded by the effects of
the September 11th terrorist attacks. The decline was comprised of a decrease in
occupancy of 4.1 percentage points and a decrease in average daily rate ("ADR")
of 2.0%.

     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 decreased by $2.5 million, or
16.1%, from $15.5 million in 2000 to $13.0 million in 2001. The decrease was
primarily due to decreased base and incentive management fees associated with
the Managed Hotels and partially offset by an increase in franchise royalty fees
derived from hotels sold to franchisees and new hotel openings.

     Rental and other consists of rental income, interest on mortgages and notes
receivable and other miscellaneous operating income. Rental and other decreased
by $1.6 million from $4.3 million in 2000 to $2.7 million in 2001. This decrease
is primarily due to the settlement of various cash flow mortgages and notes
receivable in 2000.

     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 $20.2
million during 2001 to $255.4 million as a result of the decrease in hotel
revenue. Hotel operating expenses, as a percentage of hotel revenues, increased
from 51.2% in 2000 to 54.4% in 2001 due to the decline in revenues at our
hotels.

     Rent and other occupancy expenses consist primarily of rent expense,
property insurance and real estate and other taxes. Rent and other occupancy
expenses increased by $4.1 million, or 4.7%, from $84.1 million in 2000 to $88.2
million in 2001 due primarily to the impact of operating 27 leased properties
for a full year in 2001 versus six months in 2000.

     General and administrative expenses consist primarily of centralized
management expenses such as operations management, sales and marketing, finance
and hotel support services associated with operating the hotels and general
corporate expenses. General and administrative expenses increased by $344,000,
or 1.2%, from $28.4 million in 2000 to $28.8 million in 2001, due primarily to
increased brand advertising, which rose
                                        16
<PAGE>

from $6.3 million in 2000 to $7.3 million in 2001 partially offset by decreases
due to cost containment programs. As a percentage of total revenues, general and
administrative expenses increased from 5.1% in 2000 to 5.9% in 2001.

     Depreciation and amortization expense decreased by $3.2 million, or 7.7%,
from $41.6 million in 2000 to $38.4 million in 2001. This decrease was primarily
due to the disposal of five hotel properties during 2001 and the full year
effect of the properties sold in 2000.

     Investment income increased by $308,000, or 15.9%, from $1.9 million in
2000 to $2.2 million in 2001 primarily due to higher cash balances and interest
earned on security deposits on the leased hotels acquired from Sholodge in July
2000.

     Interest expense decreased by $7.7 million, or 18.6%, from $41.3 million in
2000 to $33.6 million in 2001, primarily due to the paydowns of debt resulting
from asset sales and operating cash flows. The Company capitalized $1.6 million
and $2.3 million of interest in 2001 and 2000, respectively. Excluding the
impact of capitalized interest and the amortization of deferred loan fees, cash
interest expense declined by $10.7 million, or 24.9%, from $43.0 million in 2000
to $32.3 million in 2001.

     Other income consists of property transactions and other items, which are
not part of the Company's recurring operations. 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 $36.2 million, partially offset by losses of
$4.2 million on the sale of marketable securities and valuation adjustments
relating primarily to vacant land parcels of $6.7 million. Other income in 2000
consisted of net gains on disposition of property of $13.9 million.

  RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE
  YEAR ENDED DECEMBER 31, 1999

     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, 2001 increased by $5.7 million, or
1.1%, from $532.7 million in 1999 to $538.4 million in 2000. The increase was
due primarily to incremental revenues of $49.7 million from new and converted
hotels added during 1999 and 2000. The new hotels consist primarily of the
leasehold interests on 27 Sumner Suites hotels acquired from Sholodge in July
2000 and subsequently converted to AmeriSuites in November 2000. In addition,
Prime realized growth in revenues at comparable Owned and Leased Hotels of $11.6
million. These increases were offset by a decrease in revenues of $55.6 million
related to properties sold during the year.

     The following table illustrates the REVPAR growth, by segment in 2000 for
the Owned hotels, which were operated for comparable periods in 2000 and 1999.

<Table>
<Caption>
                                                           YEAR ENDED DECEMBER 31,
                                                         ----------------------------
                                                          2000      1999     % CHANGE
                                                         -------   -------   --------
<S>                                                      <C>       <C>       <C>
AMERISUITES
  Occupancy............................................     67.7%     65.3%    2.4pts.
  ADR..................................................  $ 81.61   $ 81.78     (.2)%
  REVPAR...............................................  $ 55.27   $ 53.40     3.5%

WELLESLEY INNS & SUITES
  Occupancy............................................     66.5%     63.6%    2.9pts.
  ADR..................................................  $ 60.77   $ 60.16     1.0%
  REVPAR...............................................  $ 40.44   $ 38.27     5.7%

NON-PROPRIETARY BRANDS
  Occupancy............................................     72.9%     71.4%    1.5pts.
  ADR..................................................  $111.83   $106.68     4.8%
  REVPAR...............................................  $ 81.55   $ 76.12     7.1%
</Table>

                                        17
<PAGE>

<Table>
<Caption>
                                                           YEAR ENDED DECEMBER 31,
                                                         ----------------------------
                                                          2000      1999     % CHANGE
                                                         -------   -------   --------
<S>                                                      <C>       <C>       <C>
TOTAL
  Occupancy............................................     68.2%     65.7%    2.5pts.
  ADR..................................................  $ 82.06   $ 81.21     1.0%
  REVPAR...............................................  $ 55.99   $ 53.36     4.9%
</Table>

     The REVPAR increases reflect the results of continued favorable industry
trends in the full-service segment, which is concentrated in the Northeast, and
growing recognition of AmeriSuites as a leading brand in the fast-growing
all-suites segment. The limited-service segment also reflected strong growth
over the prior year due primarily to 38 properties converted from HomeGates to
Wellesley Inns & Suites in the fourth quarter of 1999. The improvements in
REVPAR at comparable Owned Hotels were generated by increases in ADR, which rose
by 1.0%, and an increase in occupancy, which rose by 2.5 pts or 3.8%.

     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 $1.9 million, or
13.9%, from $13.6 million in 1999 to $15.5 million in 2000. The increase was
primarily due to increased base and incentive management fees associated with
the Managed Hotels and franchise royalty fees derived from hotels sold to
franchisees and new hotel openings.

     Rental and other consists of rental income, interest on mortgages and notes
receivable and other miscellaneous operating income. Rental and other decreased
by $2.0 million from $6.3 million in 1999 to $4.3 million in 2000. This decrease
is primarily due to the settlement of various cash flow mortgages and notes
receivable in 1999 and 2000.

     Hotel operating expenses which consist of all direct costs related to the
operation of the Company's properties (lodging, food & beverage, administration,
selling and advertising, utilities and repairs and maintenance) remained the
same at $276.0 million. Hotel operating expenses, as a percentage of hotel
revenues, decreased slightly from 51.7% in 1999 to 51.2% in 2000 due to the
strong REVPAR increases at the hotels.

     Rent and other occupancy expenses consist primarily of rent expense,
property insurance and real estate and other taxes. Rent and other occupancy
expenses increased by $13.2 million, or 18.7%, from $70.9 million in 1999 to
$84.1 million in 2000, primarily due to the addition of the 27 leased hotels
acquired from Sholodge in July 2000.

     General and administrative expenses consist primarily of centralized
management expenses such as operations management, sales and marketing, finance
and hotel support services associated with operating the hotels and general
corporate expenses. General and administrative expenses decreased by $770,000,
or 2.6%, from $29.2 million in 1999 to $28.4 million in 2000. As a percentage of
total revenues, general and administrative expenses decreased slightly from 5.3%
in 1999 to 5.1% in 2000.

     Depreciation and amortization expense decreased by $4.2 million, or 9.2%,
from $45.8 million in 1999 to $41.6 million in 2000. This decrease was primarily
due to the disposal of 22 hotel properties during 2000.

     Valuation and other charges in 1999 consisted of a $7.1 million valuation
allowance related to five HomeGate properties, a $22.0 million valuation
allowance related to the Frenchman's Reef hotel and $1.4 million for severance
charges related to a restructuring of the Company's corporate and regional
offices.

     Investment income increased by $323,000, or 20.0%, from $1.6 million in
1999 to $1.9 million in 2000 primarily due to higher cash balances during the
year and interest earned on security deposits on the leased hotels acquired from
Sholodge.

     Interest expense decreased by $2.3 million, or 5.3%, from $43.6 million in
1999 to $41.3 million in 2000, primarily due to the paydowns of debt resulting
from asset sales and operating cash flows. The Company capitalized $2.3 million
and $11.0 million of interest in 2000 and 1999, respectively. Excluding the
impact of

                                        18
<PAGE>

capitalized interest and the amortization of deferred loan fees, cash interest
expense declined by $10.9 million, or 21.2%, from $51.5 million in 1999 to $40.6
million in 2000.

     Other income consists of property transactions and other items, which are
not part of the Company's recurring operations. Other income in 2000 consisted
of $13.9 million of net gains related to the disposition of properties. Other
income in 1999 consisted of a $4.0 million fee for the termination of a hotel
sale agreement, net gains on disposition of property of $8.0 million and losses
of $4.8 million on the sales of marketable securities.

     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.

LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 2001, the Company had cash, cash equivalents and current
marketable securities of $30.1 million. In addition, at December 31, 2001, the
Company had $114.4 million available to it under its Revolving Credit Facility
(as defined in the Notes to the Consolidated Financial Statements). The Company
expects to utilize its free cash flow to pay down debt, repurchase its shares
and/or invest in its brands.

     The Company's major sources of cash for 2001 were cash flows from
operations of $63.2 million, net proceeds from the sales of hotels of $32.5
million, and borrowings of $12.6 million. The Company's major uses of cash
during the period were debt repayments of $38.6 million, capital expenditures of
$42.9 and repurchases of its common stock totaling $3.7 million.

     Sources of Capital.  The Company has undertaken a strategic initiative to
dispose of certain hotel real estate while retaining the franchise rights and to
invest the proceeds in the reduction of debt, the growth of its proprietary
brands and/or the repurchase of the Company's common stock. During 2001, the
Company sold assets for gross proceeds of $34.5 million. These were comprised of
the sale of an AmeriSuites hotel for $14.0 million, four Wellesley Inns for
$15.4 million and two land parcels for $5.1 million. In January 2002, the
Company sold a full-service hotel and a Wellesley Inn for $15.0 million.

     The Company has a revolving credit facility with borrowing capacity of $125
million, which bears interest at LIBOR plus 2.0% (the "Facility"). In December
2001, the Company exercised its option and extended the maturity of the Facility
to December 2002. Borrowings under the Facility are secured by first liens on
certain of the Company's hotels with recourse to the Company. Additional
properties may be added subject to the approval of the lenders. Availability
under the Facility is subject to a borrowing base test and certain other
covenants. During 2001, the Company borrowed and repaid $13.0 million and had no
amounts outstanding at December 31, 2001, with further availability of $114.4
million under its borrowing base test.

     The Facility contains covenants requiring the Company to maintain certain
financial ratios and limitations on the incurrence of debt, liens, dividend
payments, stock repurchases, certain investments, transactions with affiliates,
asset sales, mergers and consolidations and any change of control of the
Company. In October 1999, the Facility was amended to allow an additional $100.0
million of share repurchases to be funded by 50% of the proceeds from asset
sales. In April 2000, the Revolving Credit Facility was amended to allow for
additional retirements of other debt owed by the Company.

     Uses of Capital.  The Company utilized the proceeds from asset sales, along
with its cash flow from operations, to reduce its debt balance during the year
by $25.7 million to $320.0 million at December 31, 2001. This reduction of debt
was primarily comprised of gross payments of $15.6 million of mortgage debt on
assets sold, and the retirement of $10.0 million of the Company's 9  3/4% Senior
Subordinated Notes due 2007. In 2002, the Company retired $9.2 million of
mortgage debt, which comprised all of its debt maturities in 2002. The Company
now has no significant maturities until 2006.

     The Company also purchased approximately 376,200 shares of its common stock
during 2001 for $3.6 million at an average cost of $9.86 per share. The Facility
limits the purchase of these shares to 50% of

                                        19
<PAGE>

the proceeds from asset sales not to exceed $100 million. As of February 28,
2002, the Company had repurchased $34.7 million of its shares under this
covenant and has $65.3 million of availability based on the proceeds from asset
sales.

     The Company intends to continue the growth of its brands primarily through
franchising and, therefore, its corporate development will be limited. The
Company spent $20.9 million during 2001 on new construction, opening one new
AmeriSuites and converting two hotels to Wellesley Inns. The Company currently
has one AmeriSuites hotel under construction and anticipates spending $5.0
million to complete this project in 2002. In addition, in 2001 the Company also
spent $22.0 million on maintenance capital at its Owned Hotels and corporate
offices and expects to spend a similar amount in 2002. The Company plans to fund
its corporate development and capital improvements with internally generated
cash flow.

SIGNIFICANT 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 judgements 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
judgements 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 more
significant judgements and estimates used in the preparation of its consolidated
financial statements.

     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.

     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.

     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 incurred through the balance sheet date and are included in other
current liabilities.

     Long-Lived Assets.  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

                                        20
<PAGE>

made for depreciation and amortization using the straight-line method over the
estimated useful lives of the assets.

     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.

     Assets held for sale are recorded at the lower of carrying value or fair
value less costs to sell (See Note 3).

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company is exposed to changes in interest rates primarily from its
floating rate debt arrangements. At December 31, 2001, 2000 and 1999 a
hypothetical 100 basis point adverse move (increase) in interest rates along the
entire rate curve would have an adverse affect on the Company's annual interest
cost by approximately $93,000, $175,000 and $1.9 million annually.

     The Company has changed its method of disclosure to the above from the
December 31, 1999 Form 10-K filed March 28, 2000, due to the $125.0 million
reduction in its variable debt balance and the termination of its interest rate
protection agreement in October 2000.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     See Index to Financial Statements included in Item 14.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

     None.

                                    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:

<Table>
<Caption>
NAME                                        AGE                        POSITIONS
----                                        ---                        ---------
<S>                                         <C>   <C>
A.F. Petrocelli...........................  58    President, Chief Executive Officer and Chairman of
                                                  the Board of Directors
Lawrence N. Friedland(1)..................  79    Director
Howard M. Lorber(1).......................  53    Director
Herbert Lust, II(1).......................  75    Director
Jack H. Nusbaum...........................  61    Director
Allen Kaplan..............................  52    Director
Douglas W. Vicari.........................  42    Director, Senior Vice President and Chief Financial
                                                    Officer
Carl J. Garraffo..........................  44    Senior Vice President/Human Resources
Dennis R. Hill............................  57    Senior Vice President/Hotel Operations
Stephen M. Kronick........................  47    Senior Vice President/Hotel Operations
</Table>

                                        21
<PAGE>

<Table>
<Caption>
NAME                                        AGE                        POSITIONS
----                                        ---                        ---------
<S>                                         <C>   <C>
Chester Reed..............................  48    Senior Vice President/Hotel Operations
Terry P. O'Leary..........................  46    Senior Vice President/Business Development
Jeffrey T. Williams.......................  55    Senior Vice President/Franchise Sales and
                                                  Development
Richard T. Szymanski......................  44    Vice President/Finance
</Table>

---------------
(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.

          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
     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.

          Herbert Lust, II has been a Director since 1992 and a member of the
     Compensation and Audit Committee of the Company since 1993. Mr. Lust has
     been a private investor and President of Private Water Supply Inc. for more
     than the past five years. Mr. Lust is a director of BRT Realty Trust.

          Jack H. Nusbaum has been a Director since 1994. Mr. Nusbaum is the
     Chairman of the law firm of Willkie Farr & Gallagher, where he has been a
     partner for more than twenty-five years. He also is a director of W.R.
     Berkley Corporation, Neuberger Berman, Inc., Strategic Distribution, Inc.
     and The Topps Company, Inc.

          Allen S. Kaplan has been a Director of the Company since February
     2001. 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.

          Douglas W. Vicari has been a Director of the Company since 1999 and
     Senior Vice President and Chief Financial Officer of the Company since
     1998. Prior to that he had been a Vice President and Treasurer of the
     Company for more than five years.

          Carl J. Garraffo has been a Senior Vice President of the Company since
     2000. Prior to that he held the position of Corporate Director of Human
     Resources for the Lennar Corporation for more than three years.

                                        22
<PAGE>

          Dennis R. Hill has been a Senior Vice President of the Company since
     2001. From 1998 until joining the Company he held the position of President
     of ROI Hotel Training Systems. Prior to that he held the position of Vice
     President of Operations at LaQuinta Inns, Inc. 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 two years.

          Chester Reed became a Senior Vice President of the Company in 2002.
     From 2000 until joining the Company he served as President and Chief
     Operating Officer of Presidian Destinations, Ltd. From 1999 until 2000 he
     served as Vice President of Operations for Bristol Hotel & Resorts. Prior
     to that he served as a Regional Manager for LaQuinta Inns, Inc. for more
     than two years.

          Terry P. O'Leary has been a Senior Vice President of the Company since
     1998. Prior to that he held the position of Vice President of the Company
     for more than three years.

          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. Prior to that he
     held the position of Senior Vice President and Managing Director of
     International development for Cendant Corporation (HFS, Inc.) for more than
     two years.

          Richard T. Szymanski has been a Vice President of the Company for more
     than five years.

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".

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."

                                    PART IV

ITEM 14.  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.

                                        23
<PAGE>

     2.  Exhibits

<Table>
<C>        <S>
     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 Amended and Restated
           Purchase and Sale Agreement between Prime Hospitality Corp.,
           as seller, and American General Hospitality Operating
           Partnership, L.P., as purchaser, dated January 7, 1998 filed
           as an Exhibit to the Company's Form 8-K dated January 7,
           1998, which is incorporated herein by reference.
      (f)  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.
      (g)  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.
      (h)  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.
      (i)  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.
      (j)  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.
      (k)  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.
      (l)  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.
      (m)  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.
      (n)  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.
</Table>

                                        24
<PAGE>
<Table>
<C>        <S>
      (o)  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.
      (p)  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.
     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.
      (b)  Reference is made to an Indenture, dated January 23, 1996,
           between the Company and the Trustee related to 9 1/4% First
           Mortgage Notes due 2006, filed as an Exhibit to the
           Company's Form 10-K dated March 21, 1996, which is
           incorporated herein by reference.
      (c)  Reference is made to the Senior Secured Revolving Credit
           Agreement, dated as of June 26, 1996, among the Company and
           the Lenders Party hereto, and Credit Lyonnais New York
           Branch, as Documentation Agent, and Bankers Trust Company,
           as Agent, filed as an Exhibit to the Company's Amendment No.
           1 to Form S-3 dated July 26, 1996, which is incorporated
           herein by reference.
      (d)  Reference is made to the 9 3/4% Senior Secured Subordinated
           Notes due 2007, dated March 21, 1997, filed as an exhibit to
           the Company's Form S-4, dated April 2, 1997, which is
           incorporated herein by reference.
      (e)  Reference is made to the Amended and Restated Senior Secured
           Revolving Credit Agreement, dated as of December 17, 1997,
           among Prime Hospitality Corp., and The Lenders Party hereto,
           and Societe Generale, Southwest Agency, as Documentation
           Agent, and Credit Lyonnais New York Branch, as Syndication
           Agent, and Bankers Trust Company, as Agents filed as an
           Exhibit to the Company's Form 10-K, dated December 31, 1997,
           which is incorporated herein by reference.
      (f)  Reference is made to the Second Amendment to the Senior
           Secured Revolving Credit Agreement, dated September 30,
           1998, among Prime Hospitality Corp., Societe Generale
           Southwest Agency, as Documentation Agent, Credit Lyonnais
           New York Bank, as Syndication Agent and Bankers Trust
           Company as Agent for Lenders filed as an Exhibit to the
           Company's Form 10-Q dated November 6, 1998, which is
           incorporated herein by reference.
      (g)  Reference is made to the Third Amendment to the Senior
           Secured Revolving Credit Agreement, dated October 27, 1999,
           among Prime Hospitality Corp., Societe Generale Southwest
           Agency, as Documentation Agent, Credit Lyonnais New York
           Bank, as Syndication Agent and Bankers Trust Company as
           Agent for Lenders filed as an exhibit to the Company's Form
           10-K dated December 31, 1999, which is incorporated herein
           by reference.
</Table>

                                        25
<PAGE>

<Table>
<S>        <C>
       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, 2002 between A.F.
           Petrocelli and the Company which is filed herein.
</Table>

     (b) Reports on Form 8-K

     None

     (21) Subsidiaries of the Company are as follows:

<Table>
<Caption>
                                                              JURISDICTION OF
NAME                                                           INCORPORATION
----                                                          ---------------
<S>                                                           <C>
Alpine Holding Corp. .......................................    Delaware
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
Fairfield Holding Corp. ....................................    Delaware
Flanders Holding Corp. .....................................    Delaware
Glen Rock Holding Corp. ....................................    Delaware
</Table>

                                        26
<PAGE>

<Table>
<Caption>
                                                              JURISDICTION OF
NAME                                                           INCORPORATION
----                                                          ---------------
<S>                                                           <C>
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
Republic Motor Inns, Inc. ..................................    Virginia
Ridgewood Holding Corp. ....................................    Delaware
Roxbury Holding Corp. ......................................    Delaware
S.W. Beverage Management Corp. .............................     Texas
Secaucus Holding Corp. .....................................    Delaware
Wayne Holding Corp. ........................................    Delaware
Wellesley Inn & Suites Franchising, Inc. ...................    Delaware
</Table>

     (23) Consent of independent auditors.

     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.

                                        27
<PAGE>

                    PRIME HOSPITALITY CORP. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

(ITEM 14(A))

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Auditors..............................  F-2

Consolidated Financial Statements:
  Balance Sheets at December 31, 2001 and 2000..............  F-3
  Statements of Income for the Years Ended December 31,
     2001, 2000 and 1999....................................  F-4
  Statements of Stockholders' Equity for the Years Ended
     December 31, 2001, 2000 and 1999.......................  F-5
  Statements of Cash Flows for the Years Ended December 31,
     2001, 2000 and 1999....................................  F-6

Notes to Consolidated Financial Statements..................  F-7
</Table>

     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
<PAGE>

                         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, 2001 and 2000, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 2001. 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, 2001 and 2000, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.

As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities", which required the expensing of unamortized pre-opening costs in
1999.

                                          ERNST & YOUNG LLP

New York, New York
February 6, 2002

                                       F-2
<PAGE>

                    PRIME HOSPITALITY CORP. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2001 AND 2000

<Table>
<Caption>
                                                                 2001         2000
                                                              ----------   ----------
                                                                  (IN THOUSANDS,
                                                              EXCEPT PER SHARE DATA)
<S>                                                           <C>          <C>
ASSETS
Current assets:
Cash and cash equivalents...................................  $   30,091   $    1,735
Marketable securities available for sale....................          --        3,325
Accounts receivable, net of allowance of $1,065 and $1,067
  in 2001 and 2000, respectively............................      19,486       27,916
Current portion of mortgages and notes receivable...........         460        3,306
Other current assets........................................      34,371       23,777
                                                              ----------   ----------
          Total current assets..............................      84,408       60,059
Property, equipment and leasehold improvements, net of
  accumulated depreciation and amortization.................     989,009    1,015,997
Assets held for sale........................................      32,106       32,517
Mortgages and notes receivable, net of current portion......      11,953       11,991
Other assets................................................      39,294       45,308
                                                              ----------   ----------
          Total Assets......................................  $1,156,770   $1,165,872
                                                              ==========   ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt.....................................  $   10,296   $    4,702
Current portion of deferred income..........................       4,022       10,322
Other current liabilities...................................      51,123       50,412
                                                              ----------   ----------
          Total current liabilities.........................      65,441       65,436
Long-term debt, net of current portion......................     309,736      340,987
Deferred income, net of current portion.....................      18,468       60,950
Deferred income taxes.......................................      44,620       17,848
Other liabilities...........................................      10,564       12,551
                                                              ----------   ----------
          Total Liabilities.................................     448,829      497,772
Commitments and contingencies...............................          --           --
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; 56,221,567 and 55,972,932 shares issued and
  outstanding in 2001 and 2000, respectively................         562          560
Capital in excess of par value..............................     525,068      524,549
Retained earnings...........................................     297,159      256,966
Accumulated other comprehensive loss, net of taxes..........          (1)      (2,838)
Treasury stock, at cost (11,507,078 and 11,130,878 shares in
  2001 and 2000, respectively)..............................    (114,847)    (111,137)
                                                              ----------   ----------
          Total Stockholders' Equity........................     707,941      668,100
                                                              ----------   ----------
          Total Liabilities and Stockholders' Equity........  $1,156,770   $1,165,872
                                                              ==========   ==========
</Table>

          See Accompanying Notes to Consolidated Financial Statements.
                                       F-3
<PAGE>

                    PRIME HOSPITALITY CORP. AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME

<Table>
<Caption>
                                                                     YEARS ENDED DECEMBER 31,
                                                              ---------------------------------------
                                                                 2001          2000          1999
                                                              -----------   -----------   -----------
                                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                           <C>           <C>           <C>
Revenues:
  Hotel revenues............................................   $469,711      $538,410      $532,746
  Management, franchise and other fees (Note 17)............     12,996        15,529        13,637
  Rental and other..........................................      2,701         4,304         6,349
                                                               --------      --------      --------
          Total revenues....................................    485,408       558,243       552,732
Costs and expenses:
Hotel operating expenses....................................    255,392       275,641       275,643
Rent and other occupancy....................................     88,215        84,100        70,862
General and administrative..................................     28,774        28,430        29,200
Depreciation and amortization...............................     38,411        41,611        45,835
Valuation and other charges.................................         --            --        30,456
                                                               --------      --------      --------
          Total costs and expenses..........................    410,792       429,782       451,996
Operating income............................................     74,616       128,461       100,736
Investment income...........................................      2,244         1,936         1,613
Interest expense............................................    (33,643)      (41,325)      (43,634)
Other income, net...........................................     22,261        13,901         7,182
                                                               --------      --------      --------
Income before income taxes, the cumulative effect of a
  change in accounting principle and extraordinary items....     65,478       102,973        65,897
Provision for income taxes..................................     25,209        40,159        25,700
                                                               --------      --------      --------
Income before the cumulative effect of a change in
  accounting principle and extraordinary items..............     40,269        62,814        40,197
Cumulative effect of a change in accounting principle (net
  of income taxes of $3,398)................................         --            --        (5,315)
Extraordinary item (net of income tax benefits of $47 and
  $201 in 2001 and 2000, respectively)......................        (76)         (314)           --
                                                               --------      --------      --------
Net income..................................................   $ 40,193      $ 62,500      $ 34,882
                                                               ========      ========      ========
Basic earnings per Common Share:
Income before the cumulative effect of a change in
  accounting principle and extraordinary items..............   $   0.90      $   1.37      $   0.79
Cumulative effect of a change in accounting principle.......         --            --         (0.11)
Extraordinary item..........................................         --            --            --
                                                               --------      --------      --------
Net income per common share.................................   $   0.90      $   1.37      $   0.68
                                                               ========      ========      ========
Diluted earnings per Common Share:
Income before the cumulative effect of a change in
  accounting principle and extraordinary items..............   $   0.88      $   1.34      $   0.77
Cumulative effect of a change in accounting principle.......         --            --         (0.10)
Extraordinary item..........................................         --            --            --
                                                               --------      --------      --------
Net income per common share.................................   $   0.88      $   1.34      $   0.67
                                                               ========      ========      ========
</Table>

          See Accompanying Notes to Consolidated Financial Statements.
                                       F-4
<PAGE>

                    PRIME HOSPITALITY CORP. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<Table>
<Caption>

                                 COMMON STOCK       CAPITAL IN
                              -------------------   EXCESS OF    RETAINED
                                SHARES     AMOUNT   PAR VALUE    EARNINGS
                              ----------   ------   ----------   --------
                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                           <C>          <C>      <C>          <C>
Balance December 31, 1998...  53,731,814    $552     $511,981    $159,584
Net income..................          --      --           --      34,882
Utilization of net operating
  loss carryforwards........          --      --        3,425          --
Amortization of pre-fresh
  start tax basis
  differences...............          --      --          484          --
Proceeds from exercise of
  stock options.............     545,087       5        3,944          --
Unrealized gain marketable
  securities available for
  sale (net of income
  taxes)....................          --      --           --          --
Treasury stock purchases....  (5,793,139)     --           --          --
Comprehensive income........          --      --           --          --
                              ----------    ----     --------    --------
Balance December 31, 1999...  48,483,762     557      519,834     194,466
Net income..................          --      --           --      62,500
Utilization of net operating
  loss carryforwards........          --      --        3,057          --
Proceeds from exercise of
  stock options.............     228,922       3        1,658          --
Unrealized loss marketable
  securities available for
  sale (net of income
  taxes)....................          --      --           --          --
Treasury stock purchases....  (3,867,300)     --           --          --
Comprehensive income........          --      --           --          --
                              ----------    ----     --------    --------
Balance December 31, 2000...  44,845,384     560      524,549     256,966
Net income..................          --      --           --      40,193
Proceeds from exercise of
  stock options.............     245,305       2        2,008          --
Unrealized gain marketable
  securities available for
  sale (net of income
  taxes)....................          --      --           --          --
Treasury stock purchases....    (376,200)     --           --          --
Amortization of pre-fresh
  start tax basis...........          --      --       (1,489)         --
Comprehensive income........          --      --           --          --
                              ----------    ----     --------    --------
Balance December 31, 2001...  44,714,489    $562     $525,068    $297,159
                              ==========    ====     ========    ========

<Caption>
                                 ACCUMULATED
                                    OTHER
                                COMPREHENSIVE      TREASURY               COMPREHENSIVE
                              LOSS, NET OF TAXES     STOCK      TOTAL        INCOME
                              ------------------   ---------   --------   -------------
                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                           <C>                  <C>         <C>        <C>
Balance December 31, 1998...       $(4,993)        $ (26,079)  $641,045      $    --
Net income..................            --                --     34,882       34,882
Utilization of net operating
  loss carryforwards........            --                --      3,425           --
Amortization of pre-fresh
  start tax basis
  differences...............            --                --        484           --
Proceeds from exercise of
  stock options.............            --                --      3,949           --
Unrealized gain marketable
  securities available for
  sale (net of income
  taxes)....................         2,299                --      2,299        2,299
Treasury stock purchases....            --           (54,084)   (54,084)          --
                                                                             -------
Comprehensive income........            --                --         --      $37,181
                                   -------         ---------   --------      =======
Balance December 31, 1999...        (2,694)          (80,163)   632,000      $    --
Net income..................            --                --     62,500       62,500
Utilization of net operating
  loss carryforwards........            --                --      3,057           --
Proceeds from exercise of
  stock options.............            --                --      1,661           --
Unrealized loss marketable
  securities available for
  sale (net of income
  taxes)....................          (144)               --       (144)        (144)
Treasury stock purchases....            --           (30,974)   (30,974)          --
                                                                             -------
Comprehensive income........            --                --         --      $62,356
                                   -------         ---------   --------      =======
Balance December 31, 2000...        (2,838)         (111,137)   668,100      $    --
Net income..................            --                --     40,193       40,193
Proceeds from exercise of
  stock options.............            --                --      2,010           --
Unrealized gain marketable
  securities available for
  sale (net of income
  taxes)....................         2,837                --      2,837        2,837
Treasury stock purchases....            --            (3,710)    (3,710)          --
Amortization of pre-fresh
  start tax basis...........            --                --     (1,489)          --
Comprehensive income........            --                --         --      $43,030
                                   -------         ---------   --------      =======
Balance December 31, 2001...       $    (1)        $(114,847)  $707,941
                                   =======         =========   ========
</Table>

          See Accompanying Notes to Consolidated Financial Statements.
                                       F-5
<PAGE>

                    PRIME HOSPITALITY CORP. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                 YEARS ENDED DECEMBER 31,
                                                              -------------------------------
                                                                2001       2000        1999
                                                              --------   ---------   --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>        <C>         <C>
Cash flows from operating activities:
Net income..................................................  $ 40,193   $  62,500   $ 34,882
Adjustments to reconcile net income to net cash provided by
  operating activities:
  Depreciation and amortization.............................    38,411      41,611     45,835
  Valuation adjustment on properties held for sale..........        --          --     29,045
  Valuation adjustments on non-hotel properties.............     6,745          --         --
  Amortization of deferred financing costs..................     3,018       2,921      3,113
  Utilization of net operating loss carryforwards...........        --       3,057      3,425
  Extraordinary items.......................................        --         514         --
  Amortization of pre-fresh start tax basis differences.....        --          --        484
  Net gains on sales of assets and lease terminations.......   (36,329)    (13,901)    (7,993)
  Net loss on sales of marketable securities................     4,346          --      4,811
  Cumulative effect of a change in accounting principle.....        --          --      8,713
  Amortization of deferred income...........................   (11,619)     (9,984)   (10,028)
  Deferred income taxes.....................................    27,218      20,744     (7,860)
Increase/(decrease) from changes in other operating assets
  and liabilities:
  Accounts receivable.......................................     8,430      (6,537)      (564)
  Other current assets......................................   (10,594)       (866)     9,306
  Other assets and liabilities..............................    (6,608)    (22,226)   (13,377)
                                                              --------   ---------   --------
     Net cash provided by operating activities..............    63,211      77,833     99,792
Cash flows from investing activities:
  Net proceeds from mortgages and notes receivable..........     1,757       1,387        785
  Disbursements for mortgages and notes receivable..........      (469)       (668)    (1,771)
  Proceeds from sales of property, equipment and leasehold
     improvements, net......................................    32,634     183,497     86,660
  Purchases of property, equipment and leasehold
     improvements...........................................   (22,982)    (19,702)   (20,384)
  Construction of new hotels................................   (19,906)    (19,312)   (88,013)
  Decrease/(increase) in restricted cash....................        --         400      8,580
  Proceeds from insurance settlement........................        --          --      4,706
  Proceeds from sales of marketable securities..............     3,629          --      7,725
  Security deposits on leased hotels........................        --     (16,500)        --
  Purchase of marketable securities.........................        --          --     (4,702)
  Other.....................................................    (1,795)        (20)      (176)
                                                              --------   ---------   --------
     Net cash (used in) provided by investing activities....    (7,132)    129,082     (6,590)
                                                              --------   ---------   --------
Cash flows from financing activities:
  Net proceeds from issuance of debt........................    12,626      30,820     22,352
  Payments of debt..........................................   (38,649)   (213,927)   (70,713)
  Proceeds from the exercise of stock options and
     warrants...............................................     2,010       1,661      3,949
  Purchase of treasury stock................................    (3,710)    (30,974)   (54,084)
                                                              --------   ---------   --------
     Net cash (used in) financing activities................   (27,723)   (212,420)   (98,496)
                                                              --------   ---------   --------
Net increase/(decrease) in cash and cash equivalents........    28,356      (5,505)    (5,294)
Cash and cash equivalents at beginning of year..............     1,735       7,240     12,534
                                                              --------   ---------   --------
Cash and cash equivalents at end of year....................  $ 30,091   $   1,735   $  7,240
                                                              ========   =========   ========
</Table>

          See Accompanying Notes to Consolidated Financial Statements.
                                       F-6
<PAGE>

                    PRIME HOSPITALITY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2001, 2000 AND 1999

NOTE 1 -- BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

BUSINESS ACTIVITIES

     Prime Hospitality Corp. ("Prime or the Company") is an owner, manager and
franchisor of hotels, with 233 hotels in operation containing 29,641 rooms
located in 33 states (the "Portfolio") as of December 31, 2001. Prime controls
two hotel brands -- AmeriSuites(R) and Wellesley Inn & Suites(R) -- as well as a
portfolio of upscale, full-service hotels operated under franchise agreements
with national hotel chains. The Portfolio is comprised of 131 Owned and operated
hotels (the "Owned Hotels"), 28 hotels operated under lease agreements with real
estate investment trusts (the "Leased Hotels"), 38 hotels managed for third
parties (the "Managed Hotels"), and 36 franchised hotels which Prime does not
operate (the "Franchised Hotels"). There are 139 AmeriSuites hotels, 74
Wellesley Inns & Suites hotels and 20 non-proprietary brand hotels in the
Portfolio as of December 31, 2001.

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 its majority-owned subsidiaries. All material intercompany accounts
and transactions have been eliminated in consolidation.

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, 2001 and 2000,
cash and cash equivalents were comprised of approximately $28.0 million and $0.2
million, respectively, of cash, and $2.0 million and $1.5 million, respectively,
of commercial paper and other cash equivalents.

                                       F-7
<PAGE>
                    PRIME HOSPITALITY CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

MARKETABLE SECURITIES

     Marketable securities consist of equity securities, which are available for
sale. Marketable securities are valued at current market value. The differences
between the historical cost of the marketable securities available for sale and
the current market value are reflected in stockholders' equity, as accumulated
other comprehensive losses, net of income taxes. Realized gains and losses are
determined using the cost basis of the security recorded at the time of
purchase. At December 31, 2000, the Company had marketable securities available
for sale of $3.3 million, with an original cost basis of $8.0 million.

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.

     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.

     Assets held for sale are recorded at the lower of carrying value or fair
value less costs to sell (See Note 3).

MORTGAGES AND NOTES RECEIVABLE

     Mortgages and notes receivable are reflected at their fair value as of July
31, 1992, adjusted for payments and other 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 cash flow mortgages and 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 Company will establish a valuation
allowance, or adjust existing valuation allowances, with a corresponding charge
or credit to operations. Based upon its evaluation, the Company determined that
no impairment of the mortgage and notes receivable had occurred as of December
31, 2001, 2000 and 1999.

OTHER ASSETS

     Other assets consist primarily of deferred issuance costs related to the
Company's debt obligations and security deposits. Deferred issuance costs are
amortized over the respective terms of the loans.

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

                                       F-8
<PAGE>
                    PRIME HOSPITALITY CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 incurred through the balance sheet date and are included in other
current liabilities.

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.

     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.

INCOME TAXES

     The Company files a consolidated Federal income tax return. In accordance
with SOP 90-7, income taxes have been provided at statutory rates in effect
during the period. 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

     In January 1999, the Company adopted Statement of Position 98-5, "Reporting
on the Costs of Start-Up Activities," ("SOP 98-5"). The Company recorded a $5.3
million charge, net of income taxes, for the cumulative effect of a change in
accounting principle to write off the unamortized pre-opening costs that
remained on the balance sheet at the date of adoption. Additionally, subsequent
to the adoption of this new standard, all future pre-opening costs are being
expensed as incurred.

     Prior to the Company's adoption of SOP 98-5, non-capital expenditures
incurred before the opening of new or renovated hotels, such as payroll and
operating supplies, were deferred and expensed within one year after opening.

DEFERRED INCOME

     Deferred income consists of gains on properties which were sold and where
the Company 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.

                                       F-9
<PAGE>
                    PRIME HOSPITALITY CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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" 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". The Company's
management does not anticipate that the adoption of this Statement will have an
effect on the earnings or the financial position of the Company.

RECLASSIFICATIONS

     Certain reclassifications have been made to the December 31, 2000 and 1999
consolidated financial statements to conform them to the December 31, 2001
presentation.

NOTE 2 -- HOTEL ACQUISITIONS

     On July 10, 2000, the Company acquired the leasehold interests on 24 Sumner
Suites hotels owned by Hospitality Properties Trust ("HPT") from Sholodge, Inc.
("Sholodge") and entered into lease agreements on three additional Sumner Suites
hotels owned by Sholodge for $1.6 million. On November 1, 2000, the Company
converted all 27 hotels to its AmeriSuites brand. The leases provide for a fixed
annual minimum rent of approximately $27 million plus 8% of revenues in excess
of base levels. The leases with HPT and Sholodge expire in 2013 and 2011,
respectively, and are renewable at the Company's option for various periods
through 2048 and 2061, respectively. Under the terms of the lease with HPT, the
Company posted a $16.5 million cash deposit which will be returned to the
Company at the earliest of the end of the lease term or when the hotels achieve
a 1.3 to 1.0 cash flow coverage. The Company also received the rights to $28.5
million of other security deposits due upon the expiration of the leases. These
other security deposits are recorded at their present value on the Company's
financial statements and are being accreted over the term of the lease.

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"), formally known
as American General Hospitality, Inc., 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, 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, net in the
accompanying consolidated financial statement.

     The Company also had a contract to sell and lease back nine additional
full-service hotels from MeriStar not later than March 31, 1999. MeriStar was
unable to fulfill its contractual obligation and the Company received a $4.0
million contract termination fee in 1999. Such amount is included in other
income, net in the accompanying consolidated financial statements.

     In 1997 and 1998, the Company entered into two separate transactions with
Equity Inns, Inc. ("Equity Inns") for the sale and lease back 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

                                       F-10
<PAGE>
                    PRIME HOSPITALITY CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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 $20.1
million in aggregate in 2001). The Prime subsidiary's obligations under the
management agreement are supported by a guarantee by Prime of $3.4 million.

     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, 2001, approximately $22.0 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 regarding
the cash flow guarantees under the management agreement.

OTHER DISPOSITIONS

     During 2001, the Company sold one AmeriSuites hotel for $14.0 million, four
Wellesley Inns hotels 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, net. 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.

     During 2000, the Company also sold five AmeriSuites hotels for $56.0
million, ten Wellesley Inns for $45.0 million, one full-service hotel for $18.2
million and five land parcels for $4.8 million. In addition, the Company sold
its Frenchman's Reef hotel in St. Thomas, U.S.V.I. ("Frenchman's Reef") for
$73.0 million. During 1999, the Company had reduced the carrying value of this
asset by $24.5 million to reflect the estimated fair value less the costs to
sell the hotel.

     In February 2000, the Company's five remaining HomeGate hotels and the
Company's rights to the HomeGate brand name were also sold for approximately
$17.7 million, including the assumption of debt by the purchaser of
approximately $17.4 million related to these properties. During 1999, the
Company had reduced the carrying value of the assets by $2.5 million to reflect
the estimated fair value less the costs to sell the hotels.

     Asset sales generated net gains of approximately $13.9 million during 2000,
which are included in other income, net in the accompanying consolidated
financial statements. The Company also retained the franchise rights on the
AmeriSuites and Wellesley Inns under 20-year franchise agreements. In addition,
the Company entered into management agreements on one of the sold AmeriSuites
and four of the sold Wellesley Inns.

     During 1999, the Company sold eight AmeriSuites, one HomeGate hotel, an
apartment building and three vacant land sites for total proceeds of $86.7
million. The transaction generated net gains of $8.0 million. The Company
retained the franchise rights on the AmeriSuites sales under franchise
agreements generally ranging from ten to twenty years.

     In addition to the hotels sold in 2000 and 2001, the Company has four
hotels that are currently being marketed for sale with a carrying value of $22.2
million as of December 31, 2001. These hotels consist of three Wellesley Inns
and one full-service hotel which contributed $2.4 million and $1.4 million,
respectively of operating income for the year ended December 31, 2001. In
addition, land parcels with a carrying value of $9.9 million are also for sale.
During 2001, the Company recorded a valuation allowance of $6.7 million against
various 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 and is recorded in other income, net in

                                       F-11
<PAGE>
                    PRIME HOSPITALITY CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company's consolidated statement of income. Management estimated the fair market
value based on comparative land sales in their respective markets. The Company
completed the sale of the full-service hotel and one of the Wellesley Inns in
January 2002. The realized gross proceeds of approximately $15.4 million on
these sales resulted in gains of approximately $700,000. The Company anticipates
the sale of the remaining two properties to be completed during 2002. The
Company has discontinued depreciating these assets while they are held for sale.

NOTE 4 -- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

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

<Table>
<Caption>
                                                         DECEMBER 31,
                                                    -----------------------    YEARS OF
                                                       2001         2000      USEFUL LIFE
                                                    ----------   ----------   -----------
<S>                                                 <C>          <C>          <C>
Land and land leased to others(a).................  $  140,497   $  157,698
Hotels............................................     764,372      767,243    20 to 40
Furniture, fixtures and autos.....................     169,745      165,748     3 to 10
Leasehold improvements............................      78,776       61,165     3 to 40
Construction in progress..........................      11,151        6,097
                                                    ----------   ----------
  Sub-total.......................................   1,164,541    1,157,951
Less accumulated depreciation and amortization....    (175,532)    (141,954)
                                                    ----------   ----------
Total property, equipment and leasehold
  improvements....................................  $  989,009   $1,015,997
                                                    ==========   ==========
</Table>

---------------
(a) Included in land at December 31, 2001 and 2000, was $3.8 million and $7.8
    million, respectively, of land associated with hotels under construction.

     At December 31, 2001, the Company is the lessor of land and certain
restaurant facilities in Company-owned hotels with an approximate aggregate book
value of $6.8 million pursuant to noncancelable operating leases expiring on
various dates through 2010. Minimum future rent under such leases for each of
the next 5 years subsequent to December 31, 2001, and thereafter are as follows:

<Table>
<S>                                                           <C>
2002........................................................  $  754
2003........................................................     646
2004........................................................      38
2005........................................................      39
2006........................................................      42
Thereafter..................................................     167
                                                              ------
Total.......................................................  $1,686
                                                              ======
</Table>

     Depreciation and amortization expense on property, equipment and leasehold
improvements was $38.4 million, $41.4 million and $45.4 million for the years
ended December 31, 2001, 2000 and 1999, respectively.

     During the years ended December 31, 2001, 2000 and 1999, the Company
capitalized $1.6 million, $2.3 million and $11.0 million, respectively, of
interest related to borrowings used to finance hotel construction.

     In order to facilitate future tax-deferred exchanges of hotel properties,
the Company entered into arrangements with an unaffiliated third party under
Section 1031 of the Internal Revenue Code of 1986, as amended. At December 31,
2001, the Company had loans of approximately $138.3 million to such third party,

                                       F-12
<PAGE>
                    PRIME HOSPITALITY CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

which represented the total costs to construct and furnish 15 AmeriSuites
hotels. These loans are classified as property, equipment and leasehold
improvements in the Company's accompanying financial statements.

NOTE 5 -- MORTGAGES AND NOTES RECEIVABLE

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

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2001      2000
                                                              -------   -------
<S>                                                           <C>       <C>
Properties operated by the Company(a).......................  $ 9,491   $ 9,870
Other(b)....................................................    2,922     5,427
                                                              -------   -------
          Total mortgage and notes receivable...............   12,413    15,297
Less current portion........................................     (460)   (3,306)
                                                              -------   -------
Long-term portion...........................................  $11,953   $11,991
                                                              =======   =======
</Table>

---------------
(a) At December 31, 2001, the Company is the holder of mortgage notes receivable
    with a book value of $9.5 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, as well as loans secured by hotel properties not currently
    managed by the Company. Other notes receivable mature through 2011 and bear
    interest at an approximate effective rate of 8.3%.

NOTE 6 -- DEBT

     Debt consists of the following (in thousands):

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2001       2000
                                                              --------   --------
<S>                                                           <C>        <C>
9.75% Senior Subordinated Notes(a)..........................  $190,000   $200,000
Revolving Credit Facility(b)................................        --         --
9.25% First Mortgage Notes(c)...............................   103,970    104,070
Mortgages and other notes payable(d)........................    26,062     41,619
                                                              --------   --------
Total debt..................................................   320,032    345,689
Less current maturities.....................................   (10,296)    (4,702)
                                                              --------   --------
Long-term debt, net of current portion......................  $309,736   $340,987
                                                              ========   ========
</Table>

---------------
(a) In March 1997, the Company issued $200.0 million 9.75% Senior Subordinated
    Notes due 2007 ("Senior Subordinated Notes") in reliance upon Rule 144A
    under the Securities Act of 1933, as amended. Interest on the notes is paid
    semi-annually on April 1 and October 1. The notes are unsecured obligations
    of the Company and contain certain covenants including limitations on the
    incurrence of debt, dividend payments, certain investments, and transactions
    with affiliates, asset sales and mergers and consolidations. These notes are
    redeemable, in whole or in part, at the option of the Company on or after
    April 1, 2002 at premiums to principal, which decline on each anniversary
    date. As of December 31, 2001, the Company had repurchased and retired $10.0
    million of these notes.

(b) The Company established a revolving credit facility (the "Revolving Credit
    Facility") in 1996 with a group of financial institutions providing for
    availability of funds up to the lesser of $100.0 million or a borrowing base
    determined under the agreement. In December 1997, the Revolving Credit
    Facility was
                                       F-13
<PAGE>
                    PRIME HOSPITALITY CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

    amended and the availability of funds was increased to $200.0 million.
    Pursuant to the terms of the agreements, the aggregate amount of the
    Revolving Credit Facility was reduced to $175.0 million in December 2000 and
    was further reduced to $125.0 million in December 2001. The Revolving Credit
    Facility is secured by first liens on certain of the Company's hotels with
    recourse to the Company. Availability under the facility is subject to a
    borrowing base test and certain other covenants. The Revolving Credit
    Facility bears interest at LIBOR plus 2.0%, which is paid monthly. Under its
    terms, the Facility was to expire in December 2001 with a one-year renewal
    option. In December 2001, the Company exercised its option and the Facility
    is now available through December 2002. The Revolving Credit Facility
    contains covenants requiring the Company to maintain certain financial
    ratios and limitations on the incurrence of debt, liens, dividend payments,
    stock repurchases, certain investments, transactions with affiliates, asset
    sales, mergers and consolidations and any change of control of the Company.
    In October 1999, the Revolving Credit Facility was amended to allow an
    additional $100 million of share repurchases. The purchases of these
    additional shares are limited to 50% of the proceeds from asset sales. In
    April 2000, the Revolving Credit Facility was amended to allow for
    additional retirements of other debt owed by the Company.

    During 2001, the Company had gross borrowings and subsequent repayments of
    $13.0 million under the Revolving Credit Facility. As of December 31, 2001,
    the Company had no outstanding borrowings under this facility and had
    additional borrowing capacity of $114.4 million under its borrowing base
    test.

(c) During 1996, the Company issued $120 million of 9.25% First Mortgage Notes
    due 2006. Interest on the notes is payable semi-annually on January 15 and
    July 15. At December 31, 2001, the notes are secured by first liens on 17
    hotels with net book value of $109.4 million and contain certain covenants
    including limitations on the incurrence of debt, dividend payments, certain
    investments, and transactions with affiliates, asset sales and mergers and
    consolidations. These notes are redeemable, in whole or in part, at the
    option of the Company after January 15, 2001 at premiums to principal, which
    decline on each anniversary date. As of December 31, 2001, the Company had
    repurchased and retired $16.0 million of these notes.

(d) The Company has mortgage and other notes payable of approximately $26.1
    million that are secured by mortgage notes receivable and hotel properties
    with a book value of $61.3 million. Principal and interest on these
    mortgages and notes are generally paid monthly. At December 31, 2001 these
    notes bear interest at rates ranging from 6.7% to 8.6%, with a weighted
    average interest rate of 6.8%, and mature from 2002 through 2009. In
    February 2002, the Company repaid $9.2 million on these mortgages.

    In October 1999, the Company entered into an interest rate protection
    agreement with a major financial institution, which reduced the Company's
    exposure to fluctuations in interest rates by effectively fixing interest
    rates on $40.0 million of variable interest rate debt. Under this agreement,
    on a monthly basis the Company paid a fixed rate of interest of 6.03% and
    received a floating interest rate payment equal to the 30 day LIBOR rate on
    a $40.0 million notional principal amount. Due to the Company's limited
    exposure to interest rate fluctuations (approximately $9.3 million of
    floating rate debt at December 31, 2001), the agreement was subsequently
    terminated in October 2000 and all unamortized costs were recognized in the
    Company's consolidated financial statements.

                                       F-14
<PAGE>
                    PRIME HOSPITALITY CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Maturities of long-term debt subsequent to December 31, 2001 are as follows
(in thousands):

<Table>
<S>                                                           <C>
2002........................................................  $ 10,296
2003........................................................     1,052
2004........................................................     1,122
2005........................................................       925
2006........................................................   104,220
Thereafter..................................................   202,417
                                                              --------
Total.......................................................  $320,032
                                                              ========
</Table>

NOTE 7 -- OTHER CURRENT ASSETS/LIABILITIES

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

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2001      2000
                                                              -------   -------
<S>                                                           <C>       <C>
Hotel inventories...........................................  $12,959   $13,589
Prepaid federal income tax..................................   12,416        --
Deferred tax asset..........................................    5,591     6,037
Accrued interest receivable.................................      139       455
Prepaid expenses............................................    1,725     2,298
Other.......................................................    1,541     1,398
                                                              -------   -------
          Total current assets..............................  $34,371   $23,777
                                                              =======   =======
</Table>

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

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2001      2000
                                                              -------   -------
<S>                                                           <C>       <C>
Accounts payable............................................  $ 5,579   $ 6,019
Construction payables.......................................      879       554
Interest payable............................................    9,130     9,174
Accrued payroll and related benefits........................    4,680     4,698
Accrued expenses............................................   16,589    22,366
Accrued sales and use taxes.................................    2,585     3,563
Insurance reserves..........................................    4,694     3,385
Other.......................................................    6,987       653
                                                              -------   -------
          Total current liabilities.........................  $51,123   $50,412
                                                              =======   =======
</Table>

NOTE 8 -- COMMITMENTS AND CONTINGENCIES

LEASES

     The Company leases various hotels under lease agreements with initial terms
expiring at various dates from 2003 through 2061. The Company has 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.

                                       F-15
<PAGE>
                    PRIME HOSPITALITY CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company operates 28 hotels under lease agreements, primarily with Real
Estate Investment Trusts ("REITs"). These are comprised of 24 AmeriSuites owned
by Hospitality Properties Trust (HPT), three AmeriSuites owned by Sholodge and
one full-service hotel owned by Winston Hotels ("Winston"). The leases are with
subsidiaries of Prime and have terms ranging from 10 to 13 years expiring from
2007 to 2013 with certain renewal options. The 27 hotels leased from HPT and
Sholodge provide for a fixed annual minimum rent plus eight percent of revenue
in excess of a base year. The hotel leased from Winston provides for rent equal
to the greater of base rent, which increases annually by the inflation rate, or
percentage rent based on a percentage of room, food and beverage and other
revenue.

     In September 2001, Prime notified Winston that it would no longer fund rent
payments in the event that the hotel's cash flow is insufficient to cover the
rent. Winston has notified Prime that it is in default under its lease. Prime's
obligations under the lease are limited to its security deposit which
approximates $500,000.

     All of the lease agreements related to the 27 AmeriSuites hotels maintain
restrictions which prevent the Company from operating an AmeriSuites hotel or
similar type of hotel with a restricted area.

     On January 1, 2002, the Company converted its leases on 19 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 (See Note 3).

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

<Table>
<Caption>
                                                      OPERATING   MANAGEMENT
                                                       LEASES     AGREEMENTS    TOTAL
                                                      ---------   ----------   --------
<S>                                                   <C>         <C>          <C>
2002................................................  $ 35,647     $ 20,140    $ 55,787
2003................................................    35,628       20,140      55,768
2004................................................    35,381       20,140      55,521
2005................................................    35,289       20,140      55,429
2006................................................    35,224       20,140      55,364
Thereafter..........................................   227,437       25,416     252,853
                                                      --------     --------    --------
Total...............................................  $404,606     $126,116    $530,722
                                                      ========     ========    ========
</Table>

     Rental expense for all operating leases, including those with terms of less
than one year, consist of the following for the years ended December 31, 2001,
2000 and 1999 (in thousands):

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                          ---------------------------
                                                           2001      2000      1999
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
Rentals.................................................  $65,709   $56,878   $43,397
Contingent rentals......................................    5,738    14,859    12,826
                                                          -------   -------   -------
          Rental expense................................  $71,447   $71,737   $56,223
                                                          =======   =======   =======
</Table>

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

                                       F-16
<PAGE>
                    PRIME HOSPITALITY CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

EMPLOYEE BENEFITS

     The Company does not provide any material post employment benefits.

LITIGATION

     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, a former employee of the Company, filed a
complaint against the Company in the United States District Court for the Virgin
Islands (the "Court"). 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. 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
the plaintiff's action is without merit and intends to vigorously defend this
case.

NOTE 9 -- INCOME TAXES

     The provision for income taxes (including amounts applicable to
extraordinary items) consisted of the following for the years ended December 31,
2001, 2000 and 1999 (in thousands):

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                          ---------------------------
                                                           2001      2000      1999
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
Current:
  Federal...............................................  $(1,153)  $15,114   $24,362
  State.................................................     (903)    4,100     5,800
                                                          -------   -------   -------
                                                           (2,056)   19,214    30,162
Deferred:
  Federal...............................................   22,494    18,144    (6,560)
  State.................................................    4,724     2,600    (1,300)
                                                          -------   -------   -------
                                                           27,218    20,744    (7,860)
                                                          -------   -------   -------
          Total.........................................  $25,162   $39,958   $22,302
                                                          =======   =======   =======
</Table>

                                       F-17
<PAGE>
                    PRIME HOSPITALITY CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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, 2001, 2000 and 1999 (in thousands):

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                         ----------------------------
                                                          2001      2000       1999
                                                         -------   -------   --------
<S>                                                      <C>       <C>       <C>
Utilization of net operating loss......................       --   $ 3,057   $  3,057
Amortization of deferred gains.........................   16,928     3,495      3,510
Amortization of pre-fresh start basis
  differences -- properties and notes..................       --        --        432
Change in accounting method for depreciation...........   10,675        --         --
Depreciation...........................................     (350)     (268)       863
Property valuation reserves............................   (1,131)     (875)   (10,166)
Property sales.........................................     (546)   14,895     (3,005)
State income tax, net of federal income tax benefit....    3,070     1,690       (845)
Other..................................................   (1,428)   (1,250)    (1,706)
                                                         -------   -------   --------
          Total........................................  $27,218   $20,744   $ (7,860)
                                                         =======   =======   ========
</Table>

     The following is a reconciliation of the statutory Federal tax rate to the
Company's effective income tax rate:

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                              ------------------
                                                              2001   2000   1999
                                                              ----   ----   ----
<S>                                                           <C>    <C>    <C>
Statutory Federal tax rate..................................  35.0%  35.0%  35.0%
State income taxes, net of Federal tax benefit..............   3.8%   4.3%   5.1%
Other, net..................................................   (.3)% (0.3)% (1.1)%
                                                              ----   ----   ----
          Effective income tax rate.........................  38.5%  39.0%  39.0%
                                                              ====   ====   ====
</Table>

     At December 31, 2001, the Company had available federal net operating loss
carry forwards related to PMI of approximately $52.4 million, which will expire
in 2006. This amount 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
net operating loss carryforwards. Accordingly, the Company has provided a
valuation allowance of approximately $19.3 million against the deferred tax
asset at December 31, 2001. 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. For the
years ended December 31, 2001, 2000 and 1999, the Company recognized $0, $3.1
million and $3.1 million per year, respectively, of such benefits as a
contribution to stockholders' equity and a corresponding reduction of the
valuation allowance associated with the net operating losses.

     Additionally, the Company recognized $484,000 as a contribution to
stockholders' equity for the year ended December 31, 1999 which represents the
amortization of pre-fresh start tax basis differences related to properties and
notes receivable.

     At December 31, 2001, the Company had deferred tax liabilities of $40.1
million relating to the differences in the methods of accounting for the
Company's fixed assets.

                                       F-18
<PAGE>
                    PRIME HOSPITALITY CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10 -- COMMON STOCK AND COMMON STOCK EQUIVALENTS

COMMON STOCK

     During 2001, the Company repurchased approximately 376,200 shares of its
common stock for $3.7 million at average cost of $9.86 per share. In 2000, the
Company repurchased 3.9 million shares of its common stock for $31.0 million for
a total average cost of $8.00. The Revolving Credit Facility limits the purchase
of these shares to 50% of the proceeds from asset sales not to exceed $100
million. Through February 6, 2002, the Company has repurchased $34.7 million of
its shares under this covenant and has $65.3 million of availability based on
the proceeds from asset sales.

STOCK OPTIONS

     The Company has 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, 2001, a total of 6.6 million options were outstanding
with another 2.7 million options available to be issued. At December 31, 2001,
the weighted average contractual life remaining related to these plans is
approximately 8.2 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, 2001, 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, 2001, 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.

     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 2001, 2000 and 1999, respectively, options to purchase 268,000, 454,000
and 544,000 shares of common stock, respectively, were granted under this plan.
At December 31, 2001, 1,527,000 options were outstanding under this plan. The
options are priced from $4.72 to $11.25 and expire from 2005 to 2011.

     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 will be fully vested and exercisable one year after the date of grant
and will expire ten years after the date of grant, or earlier if the
non-employee director ceases to be a director. During 1998 options to purchase
190,000 shares of common stock were granted under this plan. At December 31,
2001, 330,000 options were outstanding under this plan. The options are priced
from $9.31 to $10.00 and expire from 2005 to 2008.

     Under the Company's 1992 Stock Option and Performance Incentive Plans,
options to purchase 81,000 shares of common stock were outstanding at December
31, 2000. The unexercised options relating to this plan expired on December 31,
2001.

     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

                                       F-19
<PAGE>
                    PRIME HOSPITALITY CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

stock-based compensation using the intrinsic value method. Accordingly, no
compensation expense has been recognized for its stock-based compensation plans
other than for performance-based awards, which was not significant. Had the fair
value method of accounting been applied to the Company's stock plans, which
requires recognition of compensation cost ratably over the vesting period of the
underlying equity instruments, net income would have been $37.7 million or $.82
per share in 2001, $57.2 million, or $1.22 per share in 2000 and $32.0 million,
or $.61 per share in 1999. This pro forma impact only takes into account options
granted since January 1, 1998 and is likely to increase in future years as
additional options are granted and amortized ratably over the vesting period.
The weighted average fair value of options granted during 2001, 2000 and 1999
was $4.83, $4.44 and $5.92, respectively.

     The fair value was estimated using the Black-Scholes option-pricing model
based on the weighted average market price at grant date of $9.09 in 2001, $9.16
in 2000, and $11.25 in 1999 and the following weighted average assumptions:
risk-free interest rate of 5.05% in 2001 and 5.05% in 2000 and 6.23% in 1999,
volatility of 46.1% in 2001 and 39.5% for 2000 and 42.3% in 1999, and dividend
yield of 0.0% for 2001, 2000 and 1999.

     The following is a summary of the stock options outstanding:

<Table>
<Caption>
                                                           NUMBER OF     OPTION PRICE
                                                             SHARES        PER SHARE
                                                           ----------   ---------------
<S>                                                        <C>          <C>
Outstanding at December 31, 1998.........................   5,359,000
  Granted................................................     544,000   $11.25 - $11.25
  Exercised..............................................    (549,000)  $ 3.20 - $10.00
  Canceled...............................................  (1,365,000)  $ 3.63 - $20.16
                                                           ----------
Outstanding at December 31, 1999.........................   3,989,000
  Granted................................................     454,000   $ 9.16 - $10.41
  Exercised..............................................    (229,000)  $ 4.72 - $10.00
  Canceled...............................................    (367,000)  $ 4.72 - $11.25
                                                           ----------
Outstanding at December 31, 2000.........................   3,847,000
  Granted................................................   3,268,000   $ 8.60 - $ 9.12
  Exercised..............................................    (245,000)  $ 4.72 - $11.25
  Canceled...............................................    (263,000)  $ 4.72 - $11.25
                                                           ----------
  Outstanding at December 31, 2001.......................   6,607,000   $ 4.72 - $13.78
                                                           ==========
Exercisable at December 31, 1999.........................   1,410,000   $ 4.72 - $13.78
                                                           ==========
Exercisable at December 31, 2000.........................   1,705,000   $ 4.72 - $13.78
                                                           ==========
Exercisable at December 31, 2001.........................   1,860,000   $ 4.72 - $11.25
                                                           ==========
</Table>

                                       F-20
<PAGE>
                    PRIME HOSPITALITY CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 11 -- EARNINGS PER SHARE

<Table>
<Caption>
                                                               FOR THE YEAR ENDED,
                                                                DECEMBER 31, 2001
                                                           ----------------------------
                                                                              PER-SHARE
                                                           INCOME    SHARES    AMOUNT
                                                           -------   ------   ---------
<S>                                                        <C>       <C>      <C>
Basic Earnings per Share:
  Net income.............................................  $40,193   44,740     $.90
Diluted Earnings per Share:
  Common stock equivalents...............................       --    1,138       --
                                                           -------   ------     ----
Net income plus assumed conversions......................  $40,193   45,878     $.88
                                                           =======   ======     ====
</Table>

<Table>
<Caption>
                                                               FOR THE YEAR ENDED,
                                                                DECEMBER 31, 2000
                                                           ----------------------------
                                                                              PER-SHARE
                                                           INCOME    SHARES    AMOUNT
                                                           -------   ------   ---------
<S>                                                        <C>       <C>      <C>
Basic Earnings per Share:
  Net income.............................................  $62,500   45,718     $1.37
Diluted Earnings per Share:
  Common stock equivalents...............................       --      806        --
                                                           -------   ------     -----
Net income plus assumed conversions......................  $62,500   46,524     $1.34
                                                           =======   ======     =====
</Table>

<Table>
<Caption>
                                                               FOR THE YEAR ENDED,
                                                                DECEMBER 31, 1999
                                                           ----------------------------
                                                                              PER-SHARE
                                                           INCOME    SHARES    AMOUNT
                                                           -------   ------   ---------
<S>                                                        <C>       <C>      <C>
Basic Earnings per Share:
  Net income.............................................  $34,882   50,966     $.68
Diluted Earnings per Share:
  Common stock equivalents...............................       --    1,028       --
                                                           -------   ------     ----
Net income plus assumed conversions......................  $34,882   51,994     $.67
                                                           =======   ======     ====
</Table>

     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 outstanding options which represents
common stock equivalents.

NOTE 12 -- HOTEL REVENUES

     Hotel revenues consist of lodging revenues (which consist primarily of
room, telephone and vending revenues) and food and beverage revenues. For the
years ended December 31, 2001, 2000 and 1999 hotel revenues were comprised of
the following:

<Table>
<Caption>
                                                                DECEMBER 31,
                                                       ------------------------------
                                                         2001       2000       1999
                                                       --------   --------   --------
<S>                                                    <C>        <C>        <C>
Lodging revenues.....................................  $439,638   $491,042   $477,329
Food and Beverage revenues...........................    30,073     47,368     55,417
                                                       --------   --------   --------
          Total Hotel Revenues.......................  $469,711   $538,410   $532,746
                                                       ========   ========   ========
</Table>

                                       F-21
<PAGE>
                    PRIME HOSPITALITY CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 13 -- VALUATION AND OTHER CHARGES -- OPERATING HOTELS

     Valuation and other charges in 1999 consist of a $29.1 million valuation
allowance related to certain non-prototype HomeGate properties and the
Frenchman's Reef hotel and $1.4 million for severance charges. Both the Homegate
properties and the Frenchman's Reef hotel were subsequently sold in 2000.

NOTE 14 -- OTHER INCOME, NET

     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, 2001, 2000 and 1999 (in thousands):

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                          ---------------------------
                                                           2001      2000      1999
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
Gains on property sales and lease terminations..........  $36,329   $13,901   $ 7,993
Valuation reserves -- non-hotel assets..................   (6,745)       --        --
Loss on the sale of marketable securities...............   (4,346)       --    (4,811)
Contract termination fee................................       --        --     4,000
Other...................................................   (2,977)       --        --
                                                          -------   -------   -------
          Total.........................................  $22,261   $13,901   $ 7,182
                                                          =======   =======   =======
</Table>

NOTE 15 -- OTHER COMPREHENSIVE INCOME

     For the years ended December 31, 2001, 2000 and 1999, comprehensive income
consisted of the following (in thousands):

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                          ---------------------------
                                                           2001      2000      1999
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
Net income..............................................  $40,193   $62,500   $34,882
Unrealized (loss) gain on marketable securities, (net of
  income taxes of $1,814, $92, and $(1,338),
  respectively for 2001, 2000 and 1999).................    2,837      (144)    2,299
                                                          -------   -------   -------
          Total.........................................  $43,030   $62,356   $37,181
                                                          =======   =======   =======
</Table>

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.

<Table>
<Caption>
                                                           DECEMBER 31,
                                             -----------------------------------------
                                                    2001                  2000
                                             -------------------   -------------------
                                             CARRYING     FAIR     CARRYING     FAIR
                                              AMOUNT     VALUE      AMOUNT     VALUE
                                             --------   --------   --------   --------
<S>                                          <C>        <C>        <C>        <C>
Mortgage and notes receivable..............  $ 11,953   $ 11,953   $ 11,991   $ 11,991
Long-term debt.............................   309,736    311,296    340,987    337,987
</Table>

     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.

                                       F-22
<PAGE>
                    PRIME HOSPITALITY CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company's mortgages and other notes receivable (See Note 5) 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, 2001, 2000 and 1999 (in thousands):

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                              ------------------
                                                              2001   2000   1999
                                                              ----   ----   ----
<S>                                                           <C>    <C>    <C>
Management and other fee income.............................  $121   $165   $136
</Table>

     The amounts above relate to two hotels managed by the Company for an entity
controlled by the Company's Chairman and Chief Executive Officer.

NOTE 18 -- SUPPLEMENTAL CASH FLOW INFORMATION

     The following summarizes non-cash investing and financing activities for
the years ended December 31, 2001, 2000 and 1999 (in thousands):

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                              -----------------------
                                                              2001    2000      1999
                                                              ----   -------   ------
<S>                                                           <C>    <C>       <C>
Marketable securities exchanged in connection with the
  acquisition of hotels.....................................   --    $ 1,652   $   --
Hotels received in settlements of mortgage notes
  receivable................................................   --         --    2,800
Hotels sold in exchange for assumption of debt..............   --     17,364       --
Note receivable and equity interests received from the sale
  of hotels.................................................   --      3,348       --
</Table>

     Cash paid for interest was $32.3 million, $43.0 million and $51.5 million
for the years ended December 31, 2001, 2000 and 1999, respectively.

     Cash paid for income taxes was $12.5 million, $21.0 million and $31.0
million for the years ended December 31, 2001, 2000 and 1999, respectively.

NOTE 19 -- GEOGRAPHIC AND BUSINESS INFORMATION

     The Company's hotels primarily operate in three major lodging industry
segments: the all-suites segment, under its AmeriSuites brand; the
limited-service segment, primarily under its 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 31 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 140 rooms and suites. Non-proprietary brand
hotels compete primarily in the upscale full-service segment, with food and
beverage service and banquet facilities under franchise agreements with national
hotel brands. The Company's full-service hotels are primarily located in the
northeastern region of the United States.

     The Company evaluates the performance of its segments based primarily on
earnings before interest, taxes and depreciation and amortization ("EBITDA")
generated by the operations of its Owned Hotels. Interest expense is primarily
related to debt incurred by the Company through its corporate obligations and
collateralized by certain of its hotel properties. The Company's taxes are
included in the consolidated Federal

                                       F-23
<PAGE>
                    PRIME HOSPITALITY CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

income tax return of the Company and are allocated based upon the relative
contribution to the Company's consolidated taxable income/losses and changes in
temporary differences. Other income, net consist of property transactions, which
are not part of the recurring operation of the Company. The allocation of
interest expense, taxes and other income, net are not evaluated at the segment
level and therefore, would be necessary in order to reconcile EBITDA to
consolidated net income on the consolidated financial statements.

     The following table presents revenues and other financial information by
business segment for the years ended December 31, 2001, 2000 and 1999 (in
thousands):

<Table>
<Caption>
                                              LIMITED      FULL     CORPORATE/
DECEMBER 31, 2001                ALL-SUITES   SERVICE    SERVICE      OTHER      CONSOLIDATED
-----------------                ----------   --------   --------   ----------   ------------
<S>                              <C>          <C>        <C>        <C>          <C>
Revenues.......................   $261,479    $ 92,052   $116,180   $  15,697     $  485,408
EBITDA(1)......................     66,620      29,881     26,047      (9,521)       113,027
Depreciation and
  amortization.................     19,270      11,936      5,663       1,542         38,411
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
</Table>

<Table>
<Caption>
                                              LIMITED      FULL     CORPORATE/
DECEMBER 31, 2000                ALL-SUITES   SERVICE    SERVICE      OTHER      CONSOLIDATED
-----------------                ----------   --------   --------   ----------   ------------
<S>                              <C>          <C>        <C>        <C>          <C>
Revenues.......................   $257,975    $109,255   $171,180   $  19,833     $  558,243
EBITDA(1)......................     80,183      42,397     40,954       6,537        170,071
Depreciation and
  amortization.................     19,855      12,939      7,641       1,175         41,610
Capital expenditures...........     20,039       8,351      6,381       4,243         39,014
Total Assets...................    600,196     372,997    115,771      70,876      1,159,840
</Table>

<Table>
<Caption>
                                              LIMITED      FULL     CORPORATE/
DECEMBER 31, 1999                ALL-SUITES   SERVICE    SERVICE      OTHER      CONSOLIDATED
-----------------                ----------   --------   --------   ----------   ------------
<S>                              <C>          <C>        <C>        <C>          <C>
Revenues.......................   $238,656    $105,437   $188,653   $  19,986     $  552,732
EBITDA(1)......................     87,714      41,925     41,200       6,188        177,027
Depreciation and
  amortization.................     20,876      13,898     10,125         936         45,835
Capital expenditures...........     54,084      41,871     11,239       1,203        108,397
Total Assets...................    590,579     429,395    196,123     112,682      1,328,779
</Table>

---------------
(1) EBITDA represents earnings before interest, income taxes, depreciation and
    amortization from the hotels.

                                       F-24
<PAGE>

                                   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:
                                            ------------------------------------
                                            A.F. Petrocelli,
                                            Chairman of the Board of Directors,
                                            President and Chief Executive
                                              Officer
DATE: March xx, 2002

     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 xx, 2002.

<Table>
<Caption>
                     SIGNATURE                                             TITLE
                     ---------                                             -----
<C>                                                  <S>
                                                     Chairman of Board of Directors, President and
---------------------------------------------------    Chief Executive Officer
                  A.F. Petrocelli

                                                     Director, Senior Vice President and Chief
---------------------------------------------------    Financial Officer
                  Douglas Vicari

                                                     Director
---------------------------------------------------
                Lawrence Friedland

                                                     Director
---------------------------------------------------
                 Howard M. Lorber

                                                     Director
---------------------------------------------------
                 Herbert Lust, II

                                                     Director
---------------------------------------------------
                  Jack H. Nusbaum
</Table>

                                       F-25